ICHRA: A more flexible way to offer employee health benefits

For many business owners, offering health insurance has become increasingly difficult. Traditional group plans can be expensive, unpredictable and complicated to administer. Annual premium increases make budgeting difficult, while a single group plan rarely meets the needs of every employee.

An Individual Coverage Health Reimbursement Arrangement—commonly called an ICHRA—offers employers another way to provide meaningful health benefits without purchasing one traditional group health plan for everyone.

What is an ICHRA?

An ICHRA is an employer-funded health reimbursement arrangement. Instead of selecting one group plan for the entire workforce, the employer establishes a healthcare allowance. Eligible employees obtain their own qualifying individual health insurance and submit approved expenses for reimbursement.

Depending on how the arrangement is designed, ICHRA funds may reimburse individual health insurance premiums, deductibles, copayments, coinsurance and other qualified medical expenses.

When an ICHRA is properly established and the applicable rules are followed, reimbursements are generally tax-free to employees. Employer contributions are also generally deductible as a business expense. Employers should confirm their particular tax treatment with a qualified tax professional.

An ICHRA may be offered by an employer of any size. Unlike some other reimbursement arrangements, federal rules do not impose a general annual contribution ceiling. The employer decides how much to make available, subject to the rules governing employee classes and equal terms.

How does an ICHRA work?

1. The employer establishes a budget

The business decides how much it can sustainably contribute toward employee healthcare. This defined contribution gives the employer a clearer benefits budget than an open-ended promise to absorb a percentage of future group-plan increases.

2. Employees select individual coverage

Employees choose qualifying individual health insurance based on their own circumstances. Depending on availability and eligibility, coverage may be purchased through the Health Insurance Marketplace or directly from an insurance company. Medicare coverage may also satisfy the coverage requirement for an eligible employee.

3. Employees verify coverage

Employees must be enrolled in qualifying individual health insurance or eligible Medicare coverage for each month they receive reimbursements. The plan administrator must follow the applicable substantiation requirements.

4. Eligible expenses are reimbursed

After the required documentation is provided, employees receive reimbursement for approved expenses up to the available allowance. An ICHRA is not unrestricted cash. Reimbursements must follow the written plan terms and federal rules.

Why are employers considering ICHRAs?

More predictable costs

With a traditional group plan, the employer may face a sharp increase at renewal. An ICHRA allows the business to establish a defined contribution, giving it greater control over its budget and making future benefit expenses easier to forecast.

More choice for employees

Employees do not all have the same healthcare needs. One person may prioritize a lower monthly premium. Another may need a particular provider network, prescription formulary or family-coverage structure. An ICHRA allows employees to select individual coverage based on their circumstances instead of requiring everyone to accept the same plan.

No general federal contribution ceiling

The employer determines the amount it wants to make available. Contribution amounts must still comply with applicable nondiscrimination, employee-class and plan-design requirements.

Potential tax advantages

A properly designed ICHRA can be more tax-efficient than giving employees a taxable raise and expecting them to purchase coverage independently. The details matter, so the arrangement should be formally established and correctly administered.

A benefit that can grow with the company

Because employers of any size may establish an ICHRA, it can be considered by a small company offering health benefits for the first time or a larger organization exploring an alternative to traditional group coverage.

Can employers offer different benefits to different employees?

Federal regulations allow employers to divide workers into certain approved classes. Examples can include full-time employees, part-time employees, salaried employees, hourly employees, seasonal employees, employees in different geographic rating areas and certain other defined categories.

A business may offer a traditional group plan to one permitted class and an ICHRA to another. However, it generally cannot give employees within the same class a choice between the group plan and the ICHRA.

The arrangement must also generally be offered on the same terms to everyone within a class. Amounts may vary based on age and the number of covered dependents when the arrangement follows federal guidelines. Employers cannot simply invent classes to give selected individuals different benefits.

How does an ICHRA affect Marketplace subsidies?

This is one of the most important issues for employees to understand. An ICHRA offer can affect eligibility for a Marketplace premium tax credit.

If the ICHRA is considered affordable under federal rules, an employee generally cannot reject it and receive a Marketplace premium tax credit instead. If it is considered unaffordable, the employee may be able to opt out of the ICHRA and qualify for a tax credit, depending on household income and other eligibility requirements.

ICHRA versus traditional group health insurance

With traditional group insurance, the employer selects a plan or limited menu of plans and employees decide whether to enroll. With an ICHRA, the employer defines its contribution while employees select their own qualifying individual coverage.

An ICHRA may be worth exploring when a business:

• Wants more control over its healthcare budget.
• Has experienced repeated group-plan rate increases.
• Has employees living in different geographic areas.
• Struggles to find one plan that works for everyone.
• Wants to offer health benefits for the first time.
• Needs a solution for a permitted class of employees.
• Wants employees to have more control over their coverage.

It is not automatically the best answer for every company. Available individual plans, employee ages, household circumstances, provider networks, prescriptions and subsidy eligibility can all affect the decision.

Questions to ask before choosing an ICHRA

1. What can the business sustainably contribute each month?
2. What individual plans are available where employees live?
3. Could employees lose valuable Marketplace premium tax credits?
4. Should the arrangement reimburse premiums only or additional medical expenses?
5. Will different permitted employee classes receive different benefits?
6. How will coverage and expenses be documented?
7. How will the plan meet notice, reporting and administration requirements?
8. Who will help employees understand and compare their coverage choices?

The success of an ICHRA depends on more than setting an allowance. Employees need clear communication and practical guidance so they understand what is being offered and how to use it.

Is an ICHRA right for your business?

An ICHRA can give an employer something that has become increasingly difficult to find in health insurance: control. The employer controls the contribution, while employees gain more control over the insurance they select.

The numbers still need to work for both sides. A careful comparison should include the current group-plan cost, individual-market options, potential tax credits, employee demographics, provider access, prescriptions and administrative requirements.

A Better Way Insurance Agency can help you examine those factors and decide whether an ICHRA deserves a closer look.