An individual coverage health reimbursement arrangement (ICHRA) is a type of employer-funded health care account that provides an alternative to traditional group health plan coverage. Employers of all sizes may use ICHRAs to reimburse employees’ premiums for individual health insurance policies on a tax-free basis.
ICHRAs have several advantages over traditional group health plan coverage, but they are not the right fit for every employer. Before deciding whether to offer an ICHRA, employers should understand the benefits and drawbacks to this type of health care account.
ICHRA Pros
1. Cost control
With an ICHRA, employers define how much they contribute each year, giving them more control over their health care spending by eliminating risk and avoiding renewal rate surprises. Employers can increase their contribution levels from year to year to keep pace with inflation, but there are no minimum or maximum contribution amounts for an ICHRA.
2. Flexibility
Employers can decide which classes of employees are eligible for ICHRA and how much is contributed for each employee class. Employers may also continue to offer a traditional group health plan if the ICHRA and the traditional group health plan are offered to different classes of employees.
3. Tax advantages
Employers may take a federal income tax deduction for contributions, the value of the coverage is not taxable to covered employees, and reimbursements for medical care expenses are excludable from employees’ taxable income.
4. Compliance with the ACA’s pay-or-play rules
The ACA employer shared responsibility rules require applicable large employers to offer health coverage that is affordable and provides minimum value to their full-time employees or risk paying a penalty.
5. Advantages for employees
Offering an ICHRA to part-time or seasonal employees may give employers an advantage when it comes to attracting and retaining valuable talent. It may also be a good fit for providing benefits to remote workers who are outside of the employer’s area.
ICHRA Cons
1. Unfamiliarity
Because ICHRAs are a relatively new strategy for providing health benefits, most employers need to invest time and resources to understand how they work. Employers also need to decide whether to handle the ICHRA’s administration internally or outsource it, establish eligibility rules and contribution amounts, and provide clear explanations of the ICHRA and how it functions to its workforce.
2. Administrative burden
Administering an ICHRA can be challenging. Many employers hire a third-party administrator to manage the benefit’s day-to-day administration, which adds to the employer’s overall cost.
3. Compliance requirements
ICHRAs are subject to their own strict legal rules, including substantiation and notice requirements. They are also a group health plan that is subject to ERISA, which means that employers with ICHRAs must comply with ERISA’s reporting and disclosure rules and its fiduciary responsibilities.
4. Impact on premium tax credit
ICHRAs can prevent eligible employees from receiving ACA premium tax credits, which reduce premiums for health insurance purchased through an Exchange.
5. Disadvantages for employees
Employees may be skeptical of ICHRAs because they require employees to purchase individual health insurance policies. With individual health insurance policies, employees bear the risk of rising insurance premiums from year to year.
Is an ICHRA right for my employees?
Before you offer an ICHRA, employers should take time to understand the benefits and drawbacks to both their business and to their employees.
