ICHRA Overview for Employers

Individual Coverage Health Reimbursement Arrangement is the foundation of an ACA-compliant, defined contribution approach to employee health benefits.  

In 2020, the US Department of Labor, Health and Human Services, and Treasury enacted ICHRA as a new way for large employers to satisfy ACA mandates without purchasing group health insurance. The legislative intent was to give average employers a more affordable way to offer employee health benefits.

Since an ICHRA strategy can be configured to address unique employee benefit needs for any employer regardless of size, it works as good or better than traditional group health insurance in almost every situation. More employers are looking to ICHRA as the new best practice in employee health benefits.

At a minimum every employer is suited to at least evaluating an ICHRA strategy as an alternative to traditional group health insurance.

There are three primary considerations for most employers when comparing ICHRA vs traditional group health insurance for employee health benefits.  

1.   Affordable Care Act (ACA) compliance: A properly executed ICHRA strategy fully satisfies all ACA requirements for minimum essential coverage and affordability.

2.   Attract, Retain and Reward:

ICHRA is the foundation for better employee benefits that reward every employee. Whereas group health insurance benefits only the sickest but offers no benefit to healthy employees.   

3.   Cost:

Compared to group health insurance, using a bare bones ICHRA approach will always produce the lowest possible cost for an employer to comply with ACA mandates and avoid penalties.     

But ICHRA is best used as part of an employee benefits strategy. Using the ICHRA to pay for qualified health benefits that are good for every employee and individual insurance for those who need it. This combined approach is beneficial to more employees and costs considerably less than high deductible group health insurance.

Yes! The government created the Individual Coverage HRA specifically to help average employers provide competitive employee health benefits. Due to the high cost of premiums for traditional group health insurance, most average businesses struggle to provide employee health benefits that satisfy the ACA mandates.  

In contrast, a properly structured ICHRA based strategy is 100% ACA compliant and generally costs significantly less than traditional group health insurance. Lastly an ICHRA can be used to provide real first dollar health benefits for every employee not just the sickest employees like it is with group health insurance.

Hiring and retaining employees is critical, yet most average employers just can’t afford traditional group health insurance premiums in order to offer that as a benefit. Despite this being unaffordable to the employer, many are required by the ACA to meet minimum coverage mandates or risk paying a penalty. Prior to ICHRA, the only option to comply with ACA was to purchase group health insurance and stomach the cost.  

Since 2010, many employers have simply stopped offering coverage altogether and risked substantial fines under ACA. Between 2010 and 2018 the percentage of firms offering coverage declined from 59% to 47% at firms with 3-9 workers, from 76% to 64% at firms with 10-24 workers, from 92% to 71% at firms with 25-49 workers, and from 95% to 91% at firms with 50-199 workers. (Kaiser Family Foundation Employer Health Benefits Survey, 2018)

In contrast: The new ICHRA rules will provide nearly 800,000 businesses with a better way to satisfy ACA mandates with better health benefits and a better way for employees and their families to obtain coverage that best suits their needs. 

While ICHRA was originally intended to help small and medium sized businesses provide better and more affordable employee health benefits, there are a number of good reasons why large employers are making the switch from group insurance to an ICHRA approach.

Large employer plans are getting blown up by unpredictable large claims driving up rates. A single bad illness can force higher premiums for years into the future. ACA mandates and minimum participation requirements have forced employers to ‘own’ and insure their employee health risks. Large employers have been forced into high maintenance and risky self-funded arrangements as the last-ditch effort to minimize the financial impact of individual employee health risks.

In an effort to control plan costs, many larger employers have even been convinced by insurance brokers and Third Party Administrators to restrict access to certain healthcare and steer employees’ choices in healthcare – a risky and desperate attempt to contain the cost of group health insurance.

ICHRA eliminates the employer’s exposure to individual employee health risk and large claims. It also does away with the need to constrict group health benefits just to contain the cost and the humiliation of calling high deductible health insurance a good health benefit. ICHRA also eliminates the risk of employees seeking injunctive relief over the actions and restrictions imposed by a self-funded group health plan.

An Individual Coverage HRA allows an employer to use pre-tax funds to reimburse an employee’s individual health insurance premiums and pay for employees’ Qualified Medical Expenses. Offering an ICHRA eliminates the overhead and hassles of traditional group insurance renewals. It also eliminates the risk of high claims driving up the premiums for employers and employees.

With ICHRA, employers get to budget how much to offer to contribute to each employee per year. This makes an employer’s annual cost highly predictable and budget friendly unlike group health insurance. Employees can choose to be reimbursed for individual health insurance premiums or Medicare premiums for each month the employee is eligible. Unused ICHRA funds can be rolled over by the employer from year to year. 

Individual health insurance must be offered on or off an Exchange and cannot be short-term insurance, or dental, vision, or similar exceptions. Any employer seeking to offer an Individual Coverage HRA should review the HRA rules and seek competent advice from an advisor like Scoop Health on meeting the conditions of the ICHRA rules.

With traditional group health insurance, the employer is essentially in the group health insurance business and large claims will drive up premium expenses for years in the future. ICHRA eliminates these and the many other problems that come with traditional group insurance.

Group health insurance discriminates against healthy employees. It’s only a benefit to the sickest employees and leaves the vast majority of healthy employees feeling shortchanged. ICHRA is individualized so that each employee can shop for and choose the most appropriate benefit for their situation. ICHRA is more beneficial to more employees. Which translates to employers getting a better return on their investment in employee health benefits.

Low wage employees are often unable or unwilling to help with the cost of health insurance premiums. This undermines ‘participation requirements’ of most group health insurance companies. In contrast, an ICHRA approach has no such participation requirements and employees are free to make appropriate choices and not stuck with a one size fits all solution like it is with group health insurance.

An ICHRA strategy can also use employer’s pre-tax dollars to pay for first dollar health benefits for every employee. In fact, this part of an ICHRA strategy actually benefits low wage employees significantly more than the highly compensated.

Yes! Employers who offer group health insurance are plagued by shock claims that result in rising premiums and deductibles. As premiums continue to rise, employers shift risk to employees by increasing deductibles, limiting choices with network restrictions, and passing more of the cost onto employees.

In contrast: When an employer switches to an ICHRA approach all claims risk is gone and annual contribution rates are determined by the employer not by an insurance company. Employees have more choices and are no longer bound by an employer’s choice of group health insurance plans.

No, an ICHRA approach is arguably more beneficial to employees. With traditional group health insurance, only the sickest employees (statistically 10-15%) receive any benefit. The remaining healthy employees get little to no benefit at all. This combined with ultra-high deductibles undermines the core reason that employers provide employee health benefits.  

In contrast: An ICHRA strategy allows an employer to pay for every employee to have real first dollar health benefits. Unlike group health insurance, an ICHRA approach can provide health benefits that every employee can use, not just the sickest. The ICHRA approach also allows the employer to choose how much they want to contribute towards the employee’s choice of individual health insurance or other health solution such as medical cost sharing. This allows every employee to make their own individual decision about what health benefits are right for their situation, medical needs, and finances.            

ICHRA first became available to employers as of January 1, 2020.  However, the COVID lockdowns of March 2020 halted the government’s projected uptake of 800,000 businesses. Faster adoption of the ICHRA approach has also been impaired by the fact that most businesses seek guidance about group health benefits from a health insurance broker. Since ICHRA eliminates group health insurance it also eliminates compensation for insurance brokers. Consequently, a large majority of businesses are totally unaware of ICHRA as an alternative to group health insurance. In fact, many businesses are skeptical about ICHRA.  

Switching to an ICHRA approach for your group health benefits involves a big shift in mindset and approach to providing better employee health benefits.  

ICHRA allows for a ‘Special Enrollment Period’ so switching to an ICHRA can be done anytime. Experts like Scoop Health suggest that the best time to start planning to replace group health insurance with an ICHRA approach is immediately following the health insurance open enrollment. This will give you the largest possible ‘window’ to design and implement the very best employee benefits for your employees and your business.  

The downside: Taking employees through a second benefits enrollment process in the same year is one of the biggest concerns employers have when considering the switch to an ICHRA approach. However this concern is quickly offset because employees actually appreciate getting better health benefits and greater choices. Additionally, our team is there to support you both through the transition process as well as going forward with employee communication and guidance.

The upside: Once an employer has made the switch to an ICHRA approach, the renewal hassles go away. ICHRA does have a renewal process each year however it’s simple and painless, employers are in control of costs and the benefits offered by the ICHRA. And if for some reason you ever feel that ICHRA is no longer right, employers are always free to return to traditional group health insurance.

Group health insurance coverage and cost can vary widely from location to location. This adds considerable complexity to an employer’s group health plan and leaves average employers at the mercy of insurance brokers for answers.

Because ICHRA uses an individual contribution approach employees are free to select health benefits that suit them where they are located. An ICHRA approach allows an employer to adjust contribution amounts based on employee classes, age and location. At the same time employers can use the ICHRA approach can be used to pay for certain ‘qualified health benefits’ that every employee can use.  

ICHRA eliminates the time and headaches of annual employee health benefits redesign, group insurance quoting, and change management that comes with traditional group health insurance. 

With ICHRA there is no group health insurance to manage and employers are no longer exposed to individual employee health risk. Instead, multi-location employers can budget annual contribution amounts that appropriately reward employees, reduce HR overhead, and stay out of the group health insurance business. 

It’s important to note that only employers with least 50 full-time equivalent employees in the prior year are subject to the ACA Employer Mandate that requires an employer to provide employees with affordable and minimum essential coverage.

The Individual Coverage HRA is structured to provide every employee with a contribution offer that meets (or exceeds) the definition for minimum affordable coverage, thus eliminating ACA penalty risk. The ICHRA approach can also use pre-tax funds to pay for certain ‘qualified health benefits’ for every employee to use as needed. ICHRA funds can be used by employees to pay for individual health insurance premiums.

Affordability under the ACA is determined using the premium tax credit rule. This is used to benchmark the minimum contribution the employer can offer to employees to be considered affordable.  In so doing any Applicable Large Employer can avoid ACA penalties when offering an Individual Coverage HRA approach as long as the Individual Coverage HRA is affordable. 

The Internal Revenue Service provides more information on how the employer mandates apply to Individual Coverage HRA. For more information on the employer mandate, see IRS.gov.

Using an ICHRA approach allows employers to contribute as much or as little as they want to employees’ health benefits.  However for an ICHRA strategy to be ACA compliant it needs to pay for minimum essential health benefits and make a contribution offer so employees can buy affordable insurance coverage.  

ICHRA contributions are made by employers with pre-tax dollars much like group health insurance premiums. Some employers hire a TPA to administer reimbursements of employees’ qualified health care costs that are eligible for reimbursement with funds from the ICHRA plan.  

It’s important to note that an ICHRA is a self funded plan covered by ERISA and as such it must be offered on the same terms to all eligible employees. The only exception is that employers can vary the contribution offered in the Individual Coverage HRA based on the employee’s classification such as age, location, salary vs hourly, etc.

When you offer an Individual Coverage HRA, it must be offered under the same terms to all eligible individuals in a class of employees.  The only exception is that the amounts offered may be increased based on the age of the employee or for employees with dependents.  There can also be adjustments made based on geographic differences in market rates.  

ICHRA and Group Health Insurance cannot be offered at the same time to the same group of employees.  However, an employer can offer an Individual Coverage HRA to certain classes of employees and a traditional group health plan to another class of employees.

Employers can make ICHRA variations based on the following:

·   Full-time

·   Part-time

·   Employees working in the same geographic area

·   Seasonal workers

·   Employees under a collective bargaining agreement

·   Employees who are ineligible

·   Salaried employees

·   Hourly workers

·   Temporary employees

·   A group comprised of these classes.

When offering traditional group insurance to some and ICHRA to others based on: full-time versus part-time; salaried versus non-salaried; or geography then, the minimum class size is:

·   Ten employees, for employers under 100 employees

·   Ten percent for an employers 100 to 200 employees 

·   Twenty employees, for employers of 200+ employees

Also, ICHRA has a New Hire Rule that allows employers to offer new employees an Individual Coverage HRA, while grandfathering existing employees in a traditional group health plan.

Individual Coverage HRAs have tax advantages because the reimbursements to employees are not considered taxable wages.  Individual Coverage HRA extends the tax advantage used for traditional group health insurance premiums to ICHRA reimbursements of individual health insurance premiums.

ICHRA has no minimum participation requirement as with group health insurance. Employers have more flexibility to design a better employee benefits strategy that works for more employees and costs less.  

For a company with 50 or more full-time equivalent employees (FTEs), the ICHRA contribution offer must include minimum essential health benefits and pass affordability testing to be ACA compliant. Whereas with a traditional group health insurance approach, employers often end up spending a lot more just to meet participation requirements.

In conjunction with an ICHRA strategy some employers will also offer their employees an alternative to traditional insurance called medical cost sharing. A lower cost medical cost sharing membership is more appealing to most healthy employees. As a result it can generate substantial savings for the employer depending on the percentage of employees who choose cost sharing over individual health insurance. Using the cost sharing alternative results in substantially lower cost for employees which leads to higher adoption and satisfaction scores. Note: The reimbursement to cover an employees medical cost sharing membership is not made with pre-tax funds or through the ICHRA; it must be reimbursed with after tax funds.  Notwithstanding this approach can produce 20-40% savings over traditional group insurance.   

If ICHRA sounds like the solution you’ve been dreaming about, you might wonder why your insurance broker hasn’t mentioned it. The truth is, brokers often focus on selling group plans because that’s what they’re accustomed to. They may not be equipped to guide you through innovative solutions like ICHRA.

We understand that is feels like the same game every year with group health insurance. At the eleventh hour, your broker comes back with another blistering renewal increase. It’s nearly always too late to shop around for something better. Your broker suggests cutting the benefits to reduce the rate increase. So you bite the bullet, bump up the deductible, and renew for another year, hoping for a better break next time. The insurance company pays the broker, and the cycle continues.

That’s where we come in. We specialize in helping businesses like yours evaluate and implement ICHRA as a replacement for traditional group health insurance. We’ll guide you through every step of the process, ensuring it’s the right fit for your team and your bottom line.