How to decide between a group plan and an HRA and how to switch

Thinking about dropping your traditional employer sponsored group plan has many benefits, from easing the administrative burden to preventing the inevitable price creep for group plans. It will save you time, money, and headaches. With customizable health reimbursement arrangements getting better and better each year, you may be ready to make the switch to these tax-advantaged options, but perhaps you’re confused as to where to start. Let's go through the key differences between group coverage and HRAs, how to make the decision on which benefits option is best for your company, and the necessary, tactical steps to take when you're ready to make the switch. We’re here to help!

What’s the difference between group coverage and an HRA?

Let's start with the basics before we dig in to the good stuff.

What is group coverage or employer sponsored health insurance? 

Most people think of the model of small-group insurance (sometimes referred to as “fully funded”) because it’s the model of insurance with which most people have experience. While it is the standard-bearer of employer-sponsored benefits, small-group insurance remains difficult to understand both for employers and employees alike. Costs fluctuate from year to year and plans offer little flexibility. 

What are Health Reimbursement Arrangements (HRAs?)

In general, HRA is an umbrella term for any legal arrangement between an employer and their employees to reimburse for medical expenses and/or insurance premiums on a tax-free basis. These are sometimes referred to as “401(K)-style” insurance. Under this arrangement, employees purchase their own health insurance on the open market and then submit claims to their employer to get reimbursed for the cost of their premium and if allowed, all qualified medical expenses.

What are the different types of HRAs?

QSEHRA: the qualified small employer HRA is designed for small businesses with 1-50 employees, who do not offer group coverage. This HRA includes a contribution limit on reimbursements.

ICHRA: the individual coverage HRA is basically a “super-charged” version of the QSEHRA. It works for businesses of any size and does not include contribution limits. 

Pros and Cons: deciding between group coverage and an HRA

Key advantages of group insurance:

• well known
• tax-free
• solid product options
• proven to be an effective retention strategy

Key advantages of the ICHRA include:

• Customizable classes
• No reimbursement limits
• Works for businesses of any size
• Can reimburse both premiums and expenses
• Can be offered alongside a group plan 

Key advantages of the QSEHRA include:

• Optimized benefits
• Tax efficiency
• Flexible design (vary by family size or age)
• Budget control (choose the budget that works best for you
• Works for small businesses with less than 50 employees
• Can reimburse for premiums and expenses
• Note the reimbursement limits

HRA key benefits vs. traditional group health plans

1. Transfers employer responsibility for health risks.
2. Transfers health decision making from employer to employee. 
3. More personalized plan choices for employees. No employee is locked into a plan that might not be a good fit for them. They can also take their plan with them if they leave.
4. Simpler and more flexible plan design options.
5. Greater budget control.
6. No participation concerns.

Which HRA is best for my company? 

Health reimbursement arrangements (HRAs) have been around for years now, but they keep getting better and better. So now the choice comes down to a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) or Individual Coverage Health Reimbursement Arrangement (ICHRA). There are benefits to both, so how do you decide between two good things? 

Let’s compare the two by asking and then answering a good variety of questions you may have!

How big is your company?

• QSEHRA is capped at 50 employees
• ICHRA can be used in the smallest business (your nanny!) to the largest and those in between

How much do you want to offer?

You get to pick your contribution amount, but there are a couple of things to keep in mind here.

• QSEHRA: For 2023, businesses with less than 50 employees can contribute a maximum of $5,850 for individual employees (this adds up to $487.50 per month) and a contribution of $11,800 for employees with a family (this adds up to $983.33 per month).
• ICHRA: No maximum limits with ICHRAs means employers can fully reimburse healthcare costs if they choose

You can vary the amounts you offer based on certain criteria (age, family size). ICHRA allows for greater variety across classes while QSEHRA does not.

What type of insurance do your employees have?

Employees need to secure their own insurance to participate in each HRA, but the requirements are slightly different. For QSEHRA, the health insurance must meet Minimum Essential Coverage which can be insurance purchased from the marketplace, a spouse's plan, a parent's plan, medicare, tricare, or cobra.  ICHRA is more limiting, the insurance must be purchased from the individual market (the metal level insurances) or Medicare Part A +B or Part C , spouse's plans don't integrate with ICHRA.

Do you want to include all of your employees or just a few?

• QSEHRA is available to all full time employees. Part time employees can participate but you must offer the HRA on the same terms
• ICHRA classes allow for greater flexibility, however the terms must be the same within each class

Do you have a group plan in place? Do you want to keep it?

• If yes, QSEHRA is not for you. Employees cannot participate in both a group plan and the HRA. However, this restriction does not apply to life insurance and disability.

Pro-Tip: If your business currently has a group health plan and wants to change to a QSEHRA, you can cancel the group plan at anytime. You don’t have to wait until the end of the year or an enrollment period. This differs from the ICHRA, which cannot be changed during the plan year. 

• You can offer some employees ICHRA and some a group plan, however not within the same class

Do your employees have premium tax credits? 

• Can have QSEHRA and PTC but the amount is reduced. Important note: Employees with tax-credits can’t opt-out of the QSEHRA and still receive credits. Their eligibility for tax credits is based on the reimbursement amount offered to them, not actually received.
• Cannot have ICHRA and PTC. You can opt-out of an ICHRA IF PTCs are more favorable, IF the ICHRA is deemed unaffordable, and IF you are eligible for the PTC to begin with.

How to cancel a group plan and start an HRA

1. Communicate with your employees

Change of any kind can be stressful, especially for long-time employees who have enjoyed their traditional group plan for years. Explaining HRAs and their benefits will help smooth the transition. Equip your employees with as much information as possible as early as possible to understand this new model of benefits and how these changes will affect them. Most likely, they haven't heard of it before but avoiding any surprises will help them welcome their new benefit.

It's also important to remind them that once the group plan is cancelled, they'll have a 60 day Special Enrollment Period to choose a new insurance plan on the individual market. If they wait any longer, they'll have to wait until open enrollment to choose another plan, and will be left with a scarcer selection of options that meet the requirements (like faith-based plans or short term plans). 

2. Read the fine print

Most group health insurance plans are unilateral contracts, meaning that you can cancel a group plan at any time during the year. Some carriers request 30 days' notice, but that's not always the case. Occasionally, there are financial penalties for canceling early.

It's always smart to engage your insurance broker or even call a customer service representative at your insurance provider to make sure you understand the necessary steps to cancel. Some will require an old-fashioned written letter or fax and many won't accept a simple email as a sufficient way to cancel, meaning you could be on the hook for next month's premium. 

3. Choose an HRA

The two main types of HRA are the qualified small employer HRA and the individual coverage HRA. Take Command Health can help you know which one might work best for your business, but these questions might help you decide for yourself.

How big is your company? QSEHRA is capped at 50 employees; ICHRA can be used in the smallest business (your nanny!) to the largest and those in between.

How much do you want to offer? QSEHRAs have a maximum annual allowance of $5,300 for employees with individual insurance plans and $10,700 for employees with married and family insurance plans. No maximum limits with ICHRAs means employers can fully reimburse healthcare costs if they choose You can vary the amounts you offer based on certain criteria (age, family size). ICHRA allows for greater variety across classes while QSEHRA does not.

What type of insurance do your employees have? Employees need to secure their own insurance to participate in each HRA, but the requirements are slightly different. For QSEHRA, the health insurance must meet Minimum Essential Coverage which can be insurance purchased from the marketplace, a spouse's plan, a parent's plan, medicare, tricare, or cobra.  

ICHRA is more limiting, the insurance must be purchased from the individual market(the metal level insurances) or Medicare Part A +B or Part C , spouse's plans don't integrate with ICHRA.

Do you want to include all of your employees or just a few? QSEHRA is available to all full time employees. Part time employees can participate but you must offer the HRA on the same terms

ICHRA classes allow for greater flexibility, however the terms must be the same within each class

Do you have a group plan in place? Do you want to keep it? If yes, QSEHRA is not for you. Employees cannot participate in both a group plan and the HRA. However, this restriction does not apply to life insurance and disability. You can offer some employees ICHRA and some a group plan, however not within the same class

Pro-Tip: If your business currently has a group health plan and wants to change to a QSEHRA, you can cancel the group plan at any time. You don’t have to wait until the end of the year or an enrollment period. This differs from the ICHRA, which cannot be changed during the plan year. 

Leave the heavy lifting to Take Command 

Once you’ve determined the HRA that works best for your business and employees, let Take Command get you set up! Our online QSEHRA and  ICHRA Administration tools are user-friendly and we’re here to help you every step of the way.