Editor’s Note: This is the first installment of a two-part series. Click here to read the second installment in the series.  

The Individual Coverage Health Reimbursement Arrangement (ICHRA) represents a big shift in the way health insurance is delivered.  

For many businesses, an ICHRA will provide a welcome alternative to traditional group health benefits. It enables employers of all sizes to reimburse their employees tax-free for health insurance premiums and qualified medical expenses.  

As of January 1, 2020, employers can take advantage of new regulations, which expand the usability of Health Reimbursement Arrangements (HRAs), a type of account-based plan employers can use to reimburse employees for individual health insurance premiums and medical care expenses.  

Now, employers can provide their employees money in a tax-advantaged arrangement that they can use toward the purchase of an individual health insurance policy. In most cases, the ICHRA rule will increase employee options for health insurance coverage, allowing workers to shop for a policy in the individual market and select coverage that best suits their needs.  

The Individual Coverage Health Reimbursement Arrangement (ICHRA) represents a modern model of employer-sponsored health insurance and is available to all businesses, regardless of size. ICHRAs provide the following:

• Greater cost control. Employers can confidently set their health plan budget year after year, while providing employees coverage no matter what their needs.  

• Smarter individual choices. Employees can shop the open insurance market, allowing them to compare and select what best suits their individual needs.  

• Easy administration. Leveraging an ICHRA-specific technology solution can lift the administration burden by eliminating reoccurring tasks and simplifying the process of employee management.

What Is an ICHRA?

An ICHRA is an employer-funded, tax-free health benefit used to reimburse employees for individual health insurance premiums and other medical expenses.  

By offering an ICHRA, employers can define contribution limits and embed more flexibility in plan design to better fit employees’ unique needs. The employer establishes the reimbursement allowance per employee.  

Employees select and purchase an individual health insurance policy from the individual market that works best for them. Employees pay their individual premiums and/or medical expenses (depending on how the employer designs the ICHRA, then submit receipts for reimbursement from the employer. Employees provide proof of coverage, and the employer reimburses them up to the pre-set contribution allowance.

ICHRAs are centered on a reimbursement model (sometimes referred to as a defined contribution approach) under which employers have greater control over costs and employees have more options to choose from. This is very different than the group insurance market model (sometimes referred to as a defined benefit approach) where employers select a one-size-fits-most group plan and employees are limited to options selected by the employer.  

ICHRAs have changed the HRA landscape by opening the doors to businesses that were previously unable to offer an HRA.

• Employers of all sizes may offer an ICHRA.  
• Applicable Large Employees (ALEs) are able to meet the employer mandate.  
• The employer sets contribution allowances subject to certain nondiscrimination requirements, with no caps on amounts set.  
• Employers may offer both an ICHRA and a group health insurance plan, however not to the same class of employees.  
• Employers define benefit eligibility and may set different contribution allowances based on 11 employee classes.

A Brief History of ICHRA

Health Reimbursement Arrangements (HRAs), commonly used with group health plans, flourished in the early 2000s. It was common for small employers to use HRAs to reimburse employees for the cost of individual health insurance.  

In 2013, an interpretation of the Affordable Care Act (ACA) changed all of that. The interpretation essentially prevented businesses from offering HRAs that integrated with individual health insurance, except under extremely limited circumstances. In 2016, Congress passed the 21st Century Cures Act, creating the Qualified Small Employer HRA (QSEHRA).  

Offered exclusively to groups with fewer than 50 full-time employees, the QSEHRA was an exception to the IRS Notice and provided some relief to small businesses. As a result, thousands of businesses were once again able to provide health benefits to their employees.

In October 2018, the U.S. Department of Labor, Health and Human Services proposed new regulations to expand the usability of HRAs. The rules were finalized in June 2019.  

The new rules state that, if certain guidelines are followed, HRAs may integrate with individual health insurance for any size business. Due to the ruling, Individual Coverage Health Reimbursement Arrangements, or ICHRAs, were created.

Is an ICHRA Right for Your Business?

In today’s competitive climate, compensation, perks, and benefits are important incentives for attracting and retaining top talent. Having the option to offer a robust benefits package is one lever that can be pulled to provide a competitive advantage and stand out from the competition.  

Traditionally, employers were given two choices when it came to health insurance plans: offer a “one-size-fits-most” or offer nothing at all. The Individual Coverage Health Reimbursement Arrangement changes all that.  

Now, employers can use pre-tax dollars to create the perfect health plan that pays for part of or all of an employee’s individual health insurance policy premium. In addition, an ICHRA provides additional benefits to both employers and employees.  

For Employers

• Opens the door to the individual health insurance marketplace for employers, eliminating the guesswork of which plans will meet the needs of all (or most) employees.  
• Enables cost predictability. Employers have complete control over the contribution amounts, subject to the requirement that coverage be provided on the same terms to all employees within a class.  
• Allows businesses to focus on what they do best—serve their customers—and not on navigating and managing the complex world of health benefit design and administration.  
• Removes some of the burdens of managing a health plan and underlying health risks off of the employer.  
• This reduces the administrative stress of handling renewals, and there are no participation minimums to worry about.  
• If an employee does not buy insurance or does not use all the money, the employer keeps the money.

For Employees  

• Presents more options, therefore more freedom to choose individual coverage that better suits employees’ specific needs.  
• Provides tax advantages because the reimbursements do not count toward the employees’ taxable wages.  
• Provides coverage portability. Employees can take their insurance with them if they leave the company.
• Creates psychological benefits when employees see their employer taking care of them by offering funds to help pay for health insurance coverage.

Looking for more exclusive content? Check out what’s trending on the Mployer Advisor blog, and be sure to check out the latest episode of Mployer Advisor’s new podcast, “This Week in Benefits.”  

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