Wondering what an ICHRA is and how it works? Here's what to know about the new reimbursement model that’s redefining employer-sponsored benefits.
As of January 1, 2020, there’s a new, more efficient way to offer benefits that brings a streamlined and budget-friendly approach to health benefits for companies and more personalization and portability for employees. The new tax-friendly option is called an Individual Coverage Health Reimbursement Arrangement (ICHRA) and represents a superior model to traditional employer-sponsored group plans, which are often too expensive, too unpredictable, and too one-size-fits-all.
The White House predicts that 800,000 business will benefit from this new model of employer-sponsored health insurance over the next five years.
An estimated 11 million workers will use this HRA to purchase a plan in the individual marketplace—a key factor for creating a stronger market and controlling skyrocketing healthcare costs by encouraging healthy individuals back into the insurance pool.
As this 401-k style of benefits continues to gain traction, it’s important to understand how it works and how it will benefit you or your clients.
Here’s what you need to know about ICHRA (pronounced “ick-rah”).
What is an ICHRA?
An individual coverage HRA is a new type of health reimbursement arrangement that allows employers to reimburse employees for health insurance premiums and medical expenses tax-free. That means that employers can make reimbursements without having to pay payroll taxes and employees don’t have to pay income tax. In addition, reimbursements made by the company count as a tax deduction. An ICHRA provides employees with greater choice and control over their healthcare, allowing them to choose their own plan.
While health reimbursement arrangements are nothing new, ICHRA is different from traditional HRAs in that it can reimburse for individual insurance premiums and can work with individual insurance plans instead of having to be integrated with a group health plan.
ICHRA is available to companies of all sizes; employees just need to have individual health insurance coverage to qualify. Note that major medical plans, student insurance, catastrophic plans in some cases, and Medicare Part A+B or Part C are eligible for reimbursement while STLDIs, sharing ministries, association health plans, fixed indemnity plans, excepted benefits coverage only, TRICARE, and employees on their spouse’s group plan are not.
There are no contribution limits on monthly reimbursement rates (the sky’s the limit!), but there are some built-in guard rails in terms of minimum contributions. For Applicable Large Employers (over 50 employees), they must offer an ICHRA reimbursement amount that is considered “affordable.” According to the IRS, an ICHRA is affordable if the remaining amount an employee has to pay for a self-only silver plan on the exchange is less than 9.78% of the employee’s household income (rate applies to 2020). This online ICHRA Affordability Calculator will do the algebra for you.
For a smaller employer, any amount can be offered. If it’s affordable, the employees are not eligible for tax credits. If it’s unaffordable, employees can choose either the ICHRA or tax credits.
ICHRA can satisfy the employer mandate; employers that have been stuck using complicated group plans to meet the mandate have a new, much simpler option with ICHRA.
How does an ICHRA work?
With an ICHRA, the employer decides how much money to contribute each month, designs the HRA plan according to different employee classes, provides their employees with helpful information about how the HRA works, and outsources administrative functions like insurance coverage verification, onboarding, compliance, and reporting. Then, the employer has predictable costs for their employees’ coverage, can remove the headaches of selecting and managing a group plan, and is effectively out of the health insurance business.
ICHRA gives employers the ability to design and customize a plan that’s tailor-made for their organization. While there’s a great amount of flexibility, plans have to be offered fairly to groups (i.e., “classes”) of employees. Most of the rules and regulations around ICHRA are meant to prevent discrimination, which is a good thing.
The hallmark feature of ICHRA that makes it so customizable is the employee classes, which really helps employers make the most of their healthcare spend by allowing them to scale their benefits across classes and concentrate their healthcare spend on the employees who matter most. For example, different amounts could be offered per month for full time vs part time employees. Another example is an ICHRA could be offered to remote workers while the employees at headquarters could have a traditional group plan.
Here is a list of the classes.
- Full-Time Employees
- Part-Time Employees
- Seasonal Employees
- Employees covered by a collective bargaining agreement
- Employees who have not satisfied a waiting period for coverage
- Salaried Employees
- Non-Salaried Employees
- Temporary employees of staffing firms
- Non-Resident aliens with no US-based income
- Employees in the same geographic rating area
- Any combination of two or more classes from above.
In addition to scaling benefits by class, employers can also choose to vary reimbursement rates by family size, employee age, or both.
Is an ICHRA right for you (or your clients?)
If group plans are too pricey to be feasible for you, if they can’t accommodate the group plan increases year over year, if you only want to offer some of their employees benefits, if you're worried about minimum participation requirements, or you're just plain stressed over choosing and administering a one-size-fits-all plan for a diverse workforce, an ICHRA is a great step forward for you. And remember, certain market indicators (like individual premium costs and carrier competition) show that some cities are primed for this fundamental shift in benefits more than others.
As always, our ICHRA experts are on hand to help any time. Chat with us on our website!