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ichra vs hra

ICHRA vs. HRA: What's the difference?

Wondering what the difference is between ICHRA vs HRA? If you are interested in either one of these tax-advantages tools for your employer sponsored health benefits, it is important to understand the differences. Let us jump in! 

ICHRA vs HRA 

Let us compare individual coverage HRAs (ICHRAs) and health reimbursement arrangements (HRAs). 

We will start by defining each one.  

What Is a Health Reimbursement Arrangement (HRA)? 

A health reimbursement arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses and in some cases, insurance premiums.

Employers are allowed to claim a tax deduction for the reimbursements they make through these plans, and reimbursement dollars received by employees are tax-free. 

Many employers prefer to offer health insurance HRAs like the qualified small employer HRA (QSEHRA) or the individual coverage HRA (ICHRA) as an alternative to group health insurance because of the budget control, tax advantages, and flexibility HRAs offer.

However, some types of HRAs can be integrated with a group health insurance plan as a supplemental benefit in lieu of an HSA or offered as an alternative benefit for a select group of employees who may not qualify for your group health insurance plan. 

→ Check out our Health Reimbursement Arrangement Guide here. 

HRAs are a fantastic opportunity for employees to save, manage and spend employer-provided healthcare funds. It is also an excellent tool for employers to control healthcare costs while still helping employees afford the care they need.

What is an Individual Coverage HRA (ICHRA)? 

Individual coverage HRA (ICHRA) is a formal group health plan that allows organizations of all sizes to reimburse their employees, tax-free, for their individual health insurance premiums and other qualifying medical expenses. ICHRA is new, having only been available since January 2020.

Previously, HRAs could not be used to pay for individual health insurance premiums.

But as of January 2020, the government now allows employers to offer their employees a new type of HRA called an individual coverage HRA—instead of group health insurance. 

Ask our experts which option is best for your business

ICHRA is an evolution of another type of HRA, called a QSEHRA, that was created in 2017. Both allow employers to reimburse employees tax-free for individual health insurance, but ICHRA represents a “super-charged” version of QSEHRA with higher limits and greater design flexibility that will appeal to more employers. 

→ Check out our Individual Coverage HRA Guide here. 

Spoiler alert: an ICHRA is a type of HRA. In fact, HRA is an umbrella term for a whole flurry of tax-advantaged medical accounts made to help employees afford healthcare. 

HRA Types

Other types of HRAs include: 

Integrated HRAs are “integrated” with a traditional group health insurance plan and used to help reimburse out-of-pocket medical expenses not paid for by the group health plan. Typical examples would be co-pays, co-insurance, deductible payments, etc. An excepted benefit HRA is a type of Integrated HRA. 

Standalone HRAs are not required to be tied to a group plan. They have a complicated history and can be even more complicated to implement based on tangled federal and state insurance regulations. 

Retiree HRA: For former employees of a firm, an employer could use a Retiree HRA to help pay for retired members’ insurance premiums and medical expenses. 

Medicare HRA: For employers with less than 19 employees, employers could elect to reimburse a portion of an employee’s Medicare supplement premiums. 

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA): 

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a health coverage subsidy plan for employees working for businesses that employ less than 50 full-time workers.

Also known as a small business HRA, a QSEHRA can be used to offset health insurance coverage or repay medical expenses that would be otherwise uncovered. 

Employees can use these HRAs to buy their own comprehensive individual health insurance with pretax dollars either on or off the Affordable Care Act's (ACA) health insurance marketplace. Individual coverage HRAs can also reimburse employees for qualified health expenses such as copayments and deductibles. 

Whether or not your ICHRA makes you eligible for a premium tax credit to help pay for health insurance coverage under the ACA depends on whether your employer's ICHRA meets minimum standards for so-called "affordability," and whether you choose to opt-in or opt-out of the coverage. 

What do ICHRA and HRAs have in common? 

  • They both can be used to reimburse medical expenses tax free 
  • They both can be used with a group plan.  
  • Employers select an amount that they want to reimburse employees on a tax-exempt basis 
  • Employees must have individual health insurance coverage to qualify and cannot be eligible for employer-sponsored plan.  

What is the difference between an ICHRA and an HRA?  

  • Traditional HRAs are integrated with a traditional health insurance plan. Which means they can be designed to cover deductibles, coinsurance, copays, uninsured medical expenses, or specific expenses.
  • A health reimbursement arrangement (HRA) is a tax-advantage arrangement that reimburses for qualified health care costs.  
  • Individual coverage health reimbursement arrangement (ICHRA) work very similarly to traditional HRAs. Employers select an amount that they want to reimburse employees on a tax-exempt basis, based on an annual maximum set by the employer.  
  • For employers with 50 or more employees, they must offer "affordable" reimbursement amounts.  
  • Employees must have individual health insurance coverage to qualify and cannot be eligible for employer-sponsored plan.  
  • Employees can use funds to pay for individual health insurance costs (including premiums) and related medical expenses.  
  • An individual’s eligibility for an HRA is tied primarily to whether the individual works for an employer that offers an HRA as a benefit; however, depending on the kind of HRA, the individual also may need to be covered by a particular type of insurance to be eligible for reimbursement from the HRA.
  • Employers offer ICHRAs to their employees, who then generally use the ICHRA funds to purchase individual market health insurance policies. For example, an employer could offer this type of HRA to an employee who then receives reimbursement from the HRA to cover his or her premiums for insurance offered on the ACA (Affordable Care Act) individual market exchange. The remaining balances not used for premiums to cover other qualified medical expenses that incurs while enrolled in individual coverage.  

What are the advantages of ICHRA that regular HRAs do not offer? 

Here are a few advantages that are unique to ICHRA: 

  • With ICHRA coverage, instead of the employer choosing one health policy for everyone, each employee can shop for their preferred health insurance policy.  
  • If an employee already has qualifying individual health insurance, they can even keep their existing policy when they leave the organization, they can take their individual policy with them, since it is not tied to their employment. 
  • An ICHRA can be offered in several different ways to fit the needs of your organization.  
  • you can offer different benefits and allowance amounts to different employees based on job-based criteria  
  • in addition to offering different benefits based on the employee’s age and family status. 
  • Unlike other HRAs, the ICHRA has no minimum or maximum employer contribution limits, so you can offer your employees as little or as much as you choose.  
  • There are no participation requirements to offer an ICHRA, so you do not need to have a certain number of employees enrolled in the benefit to offer it. 

Why are HRAs great for employers? 

Pairing a high deductible health plan with an HRA has several advantages for an employer, including the following: 

  • You reduce your health insurance premium when you replace your low deductible health plan with a high deductible plan. 
  • If your employees incur fewer medical expenses than the amount you deposit in their respective HRA, your savings can be even greater. 
  • You have an opportunity to reduce costs at renewal, since employees will have an incentive to make more informed decisions about their health care. 
  • Reimbursements are tax deductible. 
  • You do not need to pre-fund your HRA account. Reimbursements may be made from your business’ general account when medical expenses are incurred, which allows for greater control of cash flow. 
  • If an employee's employment is terminated, you can retain ownership of the funds.

Which HRA is right for me?

Well, that depends. It is a great plan if your employees live in an area with a well-developed individual health insurance market with lots of options. If you live in an area with few individual insurance options, your employees might wish they had more options. It is also a good plan if you are an employer looking to control costs while still offering a valuable, personalized benefit. 

How do I set up an HRA?  

Ready to get started with an HRA? Setting up an HRA is easy, especially if you have a skilled administrator like Take Command. Now that you have read the basics of HRAs, here are the basic steps for setting it up. 

  1. Pick an HRA Type 

An employer will choose a plan that best fits the organization depending on several factors. For example, a QSEHRA is only available for employers with less than 50 full-time employees. An ICHRA can scale for any size of employer. 

  1. Select a Start Date 

Once an employer decides to offer an HRA, they just need to pick a start date. They do not have to be tired to open enrollment. The implementation triggers a special enrollment period so employees can find plans on the individual market outside of open enrollment dates. 

  1. Design the Plan 

To design the HRA plan, the employer will need to determine eligible employees. For an ICHRA, the employer will need to set up classes based on employee types like employment status or geography. Then the employer will determine the allowance for each class. For both ICHRA and QSEHRA, allowances may also be based on age or the number of dependents. 

  1. Draft Legal Documents 

Like any benefits offering, there needs to be an established legal plan that includes formal plans and a summary plan description that includes HRA policies, reimbursement amounts, and structure. This is important since failure to comply with the IRS and Department of Labor rules will result in hefty penalties. 

  1. Educate Employees 

Employees must know how to use the HRA. From the reimbursement process to how premium tax credits work with the HRA, there is a lot of ground to cover. Educating the employees on how it works can be a daunting process, but with Take Command, we help with the ins and outs of the new HRA. 

  1. Assist with Getting Insurance 

Since employees will be getting individual insurance from the marketplace, it is important to offer support in this area. While federal rules prohibit employers from being involved in the actual decision-making for provider or policy, the employer can provide additional decision-making tools and information through the complicated process. 

Still need help with ICHRA vs. HRA? 

Reach out to our team of experts and we will walk you through it. Chat with us on the bottom righthand of your screen or email support@takecommandhealth.com

→ Check out our complete list of ICHRA Eligible Expenses 

→ Read all about ICHRA Plan FAQs

→ Read all about our ICHRA administration platform

→ Wondering which health insurance is right for your business? This post is for you.  Ask our experts how to get started today (it's easy!)

 

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