Pros and cons of the individual coverage HRA

Many see health benefits as one-size-fits-all, but nowadays, employees expect customization and flexibility. That mindset helped boost the popularity of health reimbursement arrangements (HRAs), and more specifically, the individual coverage HRA (ICHRA).

The ICHRA has been a way for employers to offer affordable and personalized health coverage as a viable alternative to a traditional group health plan since 2020. This modern model of employer-sponsored health benefits is a good fit for many organizations trying to control healthcare costs while providing a great benefit their employees love.

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. It allows organizations of any size to reimburse employees tax-free 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 that works best for them on the individual market.

Like other types of HRAs, an ICHRA is simple in its plan design. Employers choose an allowance amount for employees to use on a monthly basis for out-of-pocket medical expenses. Employees submit proof of an eligible expense, and then the employer approves it and reimburses them up to their available HRA allowance.

ICHRAs are also tax-advantaged for both employers and employees. They’re 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 it allows for employee personalization. Employees aren't subject to one-size-fits-all health insurance chosen by their employers. Instead, it empowers employees to control their healthcare decisions.

What are the pros of an ICHRA?

The ICHRA is a popular option among employers for several reasons. Let's look at three of their key benefits below.

1. There are no contribution limits or participation requirements

Unlike the qualified small employer HRA (QSEHRA), the ICHRA has no annual reimbursement limit. Businesses can offer as much of an allowance amount to their employees as they choose. There are no minimum monthly contribution limits either, so smaller companies on a fixed budget can pick an allowance that works for their organization. However, ICHRA allowances must be considered affordable to satisfy the employer mandate (more on that below).

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 customize allowances and eligibility by using employee classes

Similar to the integrated HRA (also known as a group coverage HRA) and excepted benefit HRA (EBHRA), employers can offer different monthly allowances to different employee classes with an ICHRA. Setting employee classes allows for greater personalization and customization of tax-free reimbursement 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 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.

You can also use employee classes to customize benefit eligibility. For example, you could offer an ICHRA to only full-time employees or only part-time employees. You can also offer a traditional group health plan to classes of employees you don’t offer an ICHRA to (such as offering a group plan to full-time employees and an ICHRA to part-time workers). However, you can’t give employees a choice between the plans.

If you administer your ICHRA through PeopleKeep, only full-time, part-time, salaried, hourly, seasonal, and state-based employee classes are available.

3. They can satisfy the employer mandate

If you have more than 50 full-time equivalent employees (FTEs), the Affordable Care Act's (ACA) employer mandate considers you an applicable large employer (ALE), and you're required to offer health insurance to 95% of 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 count as 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 (ESRP). Affordability calculations are critical when considering an ICHRA.

For 2025, an ICHRA is affordable if an employee pays (after the employer reimbursement) less than 9.02% of 1/12 of their annual household income each month for the lowest-cost silver plan in their area through the health insurance exchange. This is up from 8.39% in 2024.

You can calculate ICHRA affordability using the IRS-established safe harbors.

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 downsides 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 employees who are used to a group health insurance plan may experience an unwelcome learning curve.

At first, they may 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 individual health insurance plan, which might be an employee's first time shopping on the Health Insurance Marketplace.

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 hesitate to switch to a new health benefit for fear of a drop in employee morale.

But with effective communication and the right education, you can get your employees used to an ICHRA in no time.

2. An ICHRA excludes group plans and health sharing plans

To participate in ICHRA, employees need individual health insurance coverage or Medicare Part A and B or Part C. Uninsured employees, employees on a spouse's or parent’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 who 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 premiums. 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.

1. 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 benefit costs while still satisfying the employer mandate.

If you have fewer than 50 FTEs and have employees with different types of health plans, a QSEHRA or a health stipend might be a better fit.

2. 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.

3. Work with a benefits administration software provider

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 each month while we provide you with compliance management, cloud-based document storage, and award-winning customer support so you can focus on running your business. Our team of experts reviews employee reimbursement requests for you so you can rest easy knowing your reimbursements are compliant with federal law.

Conclusion

There are always pros and cons when offering medical coverage to your employees. While they may not work for every organization or business owner, an ICHRA is an affordable alternative to traditional group health insurance. It can make your employee benefits package more attractive by giving employees the freedom to choose their own individual policies and healthcare needs. In today's tough labor market, an ICHRA can be the boost employers need to help them retain and attract top talent.

Ready to offer an ICHRA to your employees? PeopleKeep can help. Schedule a call with a personalized benefits advisor now!

This article was originally published on February 12, 2019. It was last updated on October 17, 2023.