Health benefits have traditionally been seen as one-size-fits-all, but nowadays, employees expect customization and flexibility. That mindset gave way to the popularity of the health reimbursement arrangement (HRAs), and more specifically, the individual coverage health reimbursement arrangement (ICHRA).
Since 2020, the ICHRA has been a way for employers to offer affordable and personalized health coverage as an alternative to a traditional group health plan. This modern model of employer-sponsored health insurance is a good fit for many organizations trying to control costs but still provide great employee health benefits.
But all health benefits have pros and cons and the ICHRA is no exception. We’ll review the benefits and drawbacks of the ICHRA so you can have a better idea if it’s the right choice for you and your employees.
What is an ICHRA?
An ICHRA is an IRS-approved, employer-funded health benefit that allows organizations of any size to provide tax-free reimbursements to employees for their individual health insurance premiums and other qualified healthcare expenses. By offering an ICHRA, employers can forgo offering a traditional group health plan—employees can choose their own qualified health plan on the individual markets that work for them.
Like other types of HRAs, the way an ICHRA works is simple in its plan design. Employers choose an allowance amount for employees to use on a monthly basis for medical expenses. Employees submit proof they incurred an eligible expense and if the expense is approved, they are reimbursed up to their HRA allowance amount.
ICHRAs are also tax-advantaged for both employers and employees. They are tax-deductible and free of payroll tax for employers. For employees, they’re income tax-free as long as they purchase individual health insurance coverage that meets minimum essential coverage (MEC).
The best part about an ICHRA is that they allow for employee personalization. Employees aren’t subject to one-size-fits-all health insurance chosen by their employers. Instead, employees are given control of their healthcare decisions which can be empowering for employees.
What are the pros of an ICHRA?
ICHRAs have many positive benefits that make them attractive to employers of all sizes and business needs. When determining if an ICHRA is suitable for you, let’s look at three of their key advantages below.
1. There are no contribution limits or participation requirements
Unlike the qualified small employer HRA (QSEHRA), the ICHRA doesn’t come with an annual reimbursement limit. Businesses can offer as much allowance amount to their employees as they choose. There are no minimum contribution limits either, so smaller companies on a fixed budget can pick an allowance that works for their organization.
There are also no minimum participation requirements with the ICHRA. Most group health plan coverage requires employers to maintain a participation rate of around 70%. But with an ICHRA, if an eligible employee decides not to use the benefit, there’s no negative impact on the cost of coverage or added penalty for the employer.
2. You can separate by employee classes
Similar to the integrated HRA and excepted benefit HRA, employers can offer different monthly allowance amounts to different employee classes with an ICHRA. Setting employee classes allows for greater personalization and customization of allowance amounts for your employees. Offering a different monthly allowance to different classes of employees can also help you better prioritize your health benefit budget.
ICHRAs have 11 employee class options available for employers based on legitimate job-based criteria, like full-time or part-time employees, hourly workers, seasonal employees, temporary employees, or geographic location. It’s important to remember that people in different classes of employees can have different allowances, but everyone within the same class of employees must receive the same amount of allowance.
3. They satisfy the employer mandate
If you have more than 50 full-time employees, the Affordable Care Act’s (ACA) employer mandate considers you an applicable large employer (ALE), and you’re required to offer health insurance to your full-time workers. The ICHRA fulfills the employer mandate, as long as the employer provides “affordable coverage” to at least 95% of their full-time salaried workers.
The allowance must be greater than or equal to the minimum affordable allowance to be considered affordable. If the allowance is less than that, the ICHRA is deemed unaffordable, and the employer may be subject to penalties according to the employer shared responsibility provisions. Affordability calculations are critical when considering an ICHRA.
For 2022, an ICHRA is affordable if an employee pays (after the employer reimbursement) less than 9.61% of 1/12 of their household income for the lowest-cost silver plan in their area through the health insurance exchange.
What are the cons of an ICHRA?
While we’ve covered many pros of individual coverage HRAs so far, considering the cons can help businesses determine if the health benefit is truly right for them. Let’s look at a few cons of the ICHRA that employers should consider before deciding.
1. They may come with a learning curve
For companies transitioning from group health insurance to offering an ICHRA for the first time, your full-time employees and hourly workers that are used to a group health medical plan may experience an unwelcome learning curve.
At first, they can be confused about how to submit eligible healthcare expenses or how employers provide reimbursements to employees. They’ll also have to shop for their own ICHRA-qualified plans, which might be an employee’s first time shopping on the individual markets.
Many employees may find this switch from their familiar group health insurance frustrating, making them initially unwilling to use their new ICHRA benefit. In turn, this can cause some employers to be hesitant about switching to a new health benefit for fear of a drop in employee morale.
2. Group plans and health sharing plans are excluded
To participate in ICHRA, employees have to purchase individual health insurance coverage or be enrolled in Medicare Part A and B or Part C. Uninsured employees, employees on a spouse’s group medical plan, or employees with a health sharing plan, like Medi-Share and ministries, are excluded from an ICHRA.
However, if you’re offering a traditional group health plan, you can offer an ICHRA to your employees that don’t qualify for your group medical plan to provide them with a separate personalized health benefit.
3. Premium tax credit coordination is challenging
ICHRAs can be tricky if you have many employees who qualify for premium tax credits to reduce their monthly premium. Employees can choose whether to opt-out of the ICHRA and use their premium tax credit or waive their credit and participate in the ICHRA. But making that decision depends mainly on affordability.
If your ICHRA is considered affordable, employees can opt-out of their ICHRA benefit, but they won’t be able to claim their premium tax credit. In this situation, it’s best for your employees to opt-in to the ICHRA benefit. But if your ICHRA is considered unaffordable, employees can waive their ICHRA benefit and receive their premium tax credit.
Is the ICHRA right for my organization?
After checking out its pros and cons, you may still be on the fence about offering an ICHRA. Determining if an ICHRA is right for your organization depends on a few key factors.
Look at your company size and group health insurance policy
If you’re an ALE frustrated with the constant premium increases of group health insurance, you can cancel your group health insurance and use an ICHRA to lower your monthly premium costs while still satisfying the employer mandate.
For employers that choose to keep their group health insurance, an ICHRA can help if you’re having trouble meeting your carriers’ minimum participation rate. Offering an ICHRA to specific classes of employees that don’t or can’t usually enroll in your group health plan, such as part-time employees, will increase your percentage of participating employees to meet your carrier’s requirements.
Consider your workforce
If you’re a remote employer finding it challenging to offer quality group health coverage across multiple states, an ICHRA is also right for you. You can offer traditional group coverage to employees in a specific geographic location and an ICHRA to those in other states that don’t have good group health insurance options.
Your employees on the ICHRA can choose their own individual health insurance policies and receive quality health coverage like your staff on the group medical plan keeping your employees happy and improving retention.
Get an HRA Administrator
ICHRAs can seem daunting if you’re considering them for the first time. But if you’re worried about administering an ICHRA, don’t be. Unlike group health insurance, ICHRAs don't require businesses to act as a middleman between insurance companies and employees, making them easy to work with for all employers.
With an HRA software solution like PeopleKeep, you can manage your ICHRA in minutes per month while we provide you with compliance management, document review and storage, and award-winning customer support so you can focus on running your business.
There are always pros and cons when offering medical coverage to your employees. While they may not work for every employer, an ICHRA can make your employee benefits package more attractive by allowing them to choose their own individual policies and healthcare needs. In today’s tough job market, an ICHRA can be the boost employers need to help them retain and attract top talent.
If you’re ready to offer an ICHRA to your employees, PeopleKeep can help. Reach out to our personalized benefits advisors, and we’ll get you set up with a customizable ICHRA for your organization today.
This article was originally published on February 12, 2019. It was last updated on May 23, 2022.