What we’re seeing in health care comes down to an equation:
160 million Americans receive health insurance from their employer
+ Employer group health insurance plans are going up 4% to 6% per year
+ Healthcare costs for employees have gone up 215% over the past 20 years
= Businesses are paying more for health care, and their employees are getting less out of it.
It’s time for a major change in health insurance.
Fortunately, recent changes to IRS regulations created an opportunity for employers to provide better quality health care at a lower price point.
The introduction of the Individual Coverage Health Reimbursement Arrangement or ICHRA (pronounced ICK-hra) in 2020 created a game-changer in the employer/employee/insurer relationship. This guide will walk through all the details of how ICHRA benefits employees.
Let’s dig into what this new option actually looks like. ICHRA allows employers of any size to give tax-free money to their employees for health insurance. Employees can use this money to buy any health insurance that they want – provided that it meets minimum standards set by the Affordable Care Act (ACA). The money can also be used to reimburse out-of-pocket medical expenses, like copays and deductibles.
Put simply, ICHRA is a type of health reimbursement arrangement (HRA). Employers set a maximum dollar amount to reimburse employees for health insurance premiums and qualified medical expenses.
Tax-free really is as good as it sounds. ICHRAs do not count toward employees’ taxable wages, and ICHRA dollars can cover an employee’s premiums and qualified out-of-pocket medical expenses.
On the other side, some businesses that don’t want to go through the hassle of offering health care might offer a bonus or pay bump so that their employees can go buy health insurance on their own. But unlike an ICHRA, these funds are treated as taxable income.
If you’re an employer who runs a business, nonprofit, government entity, or religious organization with at least one W-2 employee, you can offer an ICHRA as either a stand-alone benefit or alongside a group health plan.
Venteur helps employers set their budgets and design their HRAs. Our proprietary AI-driven technology guides employees through this decision-making process and helps them choose the best plan for their unique needs. We take care of everything else, like payments, liaising with health insurance companies, and compliance paperwork.
It’s that simple.
Since their inception, HRAs have become a popular option for giving employees health insurance diversity. How we got to the creation of ICHRA is a story about government policy. But we’ll keep it simple here.
The Employee Retirement Income Security Act (ERISA) and the Health Insurance Portability and Accountability Act (HIPAA) helped lay the foundation for HRAs. HRAs must comply with ERISA standards regarding quality of care and the fiduciary responsibility of the employer to the employee regarding benefits.
HRA administration also falls under HIPAA compliance, which can be complex and cumbersome to follow. It’s worth talking with a third-party administrator (Like us!) to walk you through compliance as it relates to HRAs.
HRAs are set in two categories: integrated and stand-alone. The integration component refers to a group health insurance plan and what expenses the employee can use the HRA for their health insurance.
The key point is that most HRAs are integrated because it provides more flexibility for employers and more options for employees.
Here are the different types of HRAs:
These began in the 1960s, as additional payments like deductibles and coinsurance were introduced in health plans. It was codified as an HRA in the 1990s. Typically, standard HRAs have no reimbursement limits and they can cover expenses but not premiums.
For small businesses (defined as 1 to 49 employees) who don’t offer a group health plan, QSEHRA is designed to offer reimbursement on medical care expenses for eligible employees and any covered dependents. Those in a QSEHRA must be in a minimum essential coverage plan.
The US government introduced ICHRA starting in 2020 to provide more flexibility than the group HRA and QSEHRA. It covers employees for individual health insurance, Medicare Parts A and B, or C. ICHRA covers both premium and qualified expenses and offers more flexibility than other HRAs.
The EBHRA permits employers to reimburse additional medical care expenses as defined by employers. There’s a cap on how much and what it can be used for. For this reason, it works best as a supplement HRA to another group health plan option.
A cafeteria plan is formally not an HRA, but it is something employees should know about. As part of Section 125 of the U.S. Tax Code (you’ll sometimes hear cafeteria plans called Sec. 125 plans), this plan allows employees to exchange a taxable benefit, usually their salary, for a nontaxable benefit, their health insurance premiums.
Employers may not allow salary reduction through a cafeteria plan to pay for a portion of Marketplace plan premiums that aren’t covered by ICHRA. However, employers may allow salary reduction to pay for portions of the premium not covered by an ICHRA for non-Marketplace plans.
In simple terms: if an employee participates in ICHRA, wants coverage outside of Healthcare.gov or Medicare, and wants to lower their taxable income, adding a cafeteria plan is a good idea.
(If we have a chart of the different types of HRAs, we can put that here. Something like this: https://gusto.com/blog/health-insurance/individual-coverage-hra-ichra)
Of course, you’re probably wondering just how much ICHRAs benefit workers and if there’s anything hidden in the small print. The truth is, employees benefit significantly from ICHRAs, as do you, the employer.
Don’t believe us? Here are the top eight reasons why ICHRA is good for your employees.
With the creation of ICHRA, the U.S. government hoped that it would “increase employee options and empower more people to shop for health plans in the individual market. The final rule [that created ICHRA] should spur a more competitive individual market that drives health insurers to deliver better coverage options to consumers.”
Employees sure do have more options. During this past open enrollment period, the average consumer has 60 health care plans to choose from. On the flip side, most traditional group health plans only allow employers to offer a handful of options when it comes to health insurance. In fact, the Kaiser Family Foundation found that close to half of small-to-medium businesses (SMBs) only offered one type of group health plan.
ICHRAs change that dynamic for employees, enabling each employee to choose what they want when it comes to health insurance. Period.
More options mean more opportunities. That’s a win-win.
Costs, costs, costs. Bills, bills, bills. This is the name of the game in health care.
All those costs get passed onto employers and group plans, which in turn pass it along to employees. Over the last 20 years, the Kaiser Family Foundation found that the average cost of health care for a family of four has increased by 215%. One in ten American adults – or about 23 million people – have medical debt. And 3 million of them owe more than $10,000.
ICHRAs alleviate that pain point for employees and consistently save employers 20-30% on cost. ICHRA is a set amount set by the employer, so employees know exactly how much they’ll get to cover expenses. Should employees pick insurance that costs more than the allowance, they pay the difference. They can make that choice.
By switching to ICHRA, employers are “jumping into a bigger risk pool.” With group plans in a small business, a few employees getting sick can mean a high premium for all enrolled employees. Because premiums are set by a risk assessment of those covered, a greater risk pool plus government incentives equal lower costs.
Employees should feel free to jump right in.
Interested in seeing how much your business can save on health insurance? Get in touch with Venteur.
With the “Great Resignation” not letting up anytime soon, we’ll continue to see a substantial uptick in remote workers. Health insurance has to account for that.
One of the interesting ICHRA benefits for employees is the class feature. Instead of employers having separate provider contracts or having to provide national coverage (and thus increasing their costs), an employer can offer a group plan for local employees and ICHRA for out-of-state or regional workers.
And ICHRAs allow employers to create different allowances for different states. If you have top talent living in California and another group in Texas, for instance, you can have different allowance levels in proportion to health costs for each respective state.
That level of flexibility is exceptional for both employers and employees.
Much of the struggle for top talent comes from tough choices: employees either remain full-time to keep coverage, find another job, or go freelance and pay for insurance out of pocket. Lots of people who would want to either work part-time or on a contract basis would do it… if not for health insurance.
And as employers know, health insurance can entice workers to be at a company in a full-time capacity, but it’s quite expensive to extend health insurance to part-time workers. So, you end up with dissatisfied employees who are only there for the benefits.
NOTE: We’ll get to this later, but this is one of what is called “an unintended consequence” of tying health care to employment. It stifles innovation and also encourages quitting without quitting. In the knowledge economy, you can’t have quitters who won’t … quit. Yeah, not a good situation.
For each class, employers must provide the same quality of insurance options for employees in that class. It doesn’t mean that you have to offer the same insurance for everyone, like in a group plan. Quite the opposite: you can now tailor insurance for full-time employees versus part-time employees, for example. That means part-time employees could qualify for an ICHRA. So could contract workers.
ANOTHER NOTE: If you offer both a group plan and ICHRA, will you be subject to minimum class size requirements. That means you have to offer ICHRA to a set number of employees in that particular class to be compliant. For example, if you’re a company of 100 and you want to offer ICHRA to your part-time employees, the minimum size requirement is 10. That doesn’t mean 10 have to take ICHRA, it just means you need to offer the same level of ICHRA to 10 part-time employees. Talk with your administrator or reach out to us to help you with your compliance needs.
Health insurance is seen as a critical part of the compensation package. But as we mentioned before, it is becoming increasingly expensive.
With ICHRA, employers and employees can unlock cost savings and:
The first option is straightforward: you earn more, but you will have a higher taxable income come tax time. Depending on how employees file, it could be worth it to have more in salary.
The Section 125 option refers to the IRS code that creates what is known as a cafeteria plan. The employee can convert a taxable benefit (salary) into a nontaxable benefit (health insurance premiums). So, it reduces gross income, which lowers the employee’s tax burden.
This plan does work in tandem with ICHRA and is ideal for an employee who wants a non-Marketplace or an alternative plan.
ICHRA is just one type of health reimbursement arrangement that is available for companies and employees, as covered in the above section on types of HRAs. HRAs are becoming more popular because of the increased flexibility in health insurance versus a traditional group health insurance plan. But no HRA is the same and each provides specific benefits for employees.
HRAs have been around for decades and have spawned into a tree of reimbursements. Congress first established QSEHRA and, while it’s been successful, it does come with limitations. EBHRAs cover certain benefits like copays and deductibles.
ICHRA, on the other hand, has more flexibility for both SMBs and corporations. Plus, employees can be reimbursed for insurance premiums.
We believe that ICHRA is an upgrade to the other HRAs because ICHRA has more options for employees, regardless of the size of the company or employee location. That’s why it’s becoming such a popular option for health group plans.
This may be the most surprising part of what is happening within health care: there is a move toward portable benefits, where benefits are tied to the employee rather than the employer. This is one of the biggest advantages of ICHRAs and a harbinger of where health care is headed.
A move to portable benefits is a major shift in how we think about health care.
The biggest knock on health care is the entanglement of benefits with employers. That’s starting to change. Like retirement savings moving from a defined benefit (pension plans) to a defined contribution (401K plans and the like), the same thing is happening with health care. Under an ICHRA, the employee owns their health plan policy rather than the employer.
As the New York EDC states, portable benefits “not only would promote equal access to the resources already enjoyed by traditional workers, but, at the same time, it would encourage innovation and create a more dynamic labor market.”
That goal is something to get behind as we move forward.
A real perk of ICHRA is that employers can offer more flexible benefits to employees. This is largely through classification groups, or classes.
As a way to promote equity among employees regarding health plans, ICHRA separates employees into groups based on job-based criteria. These groups matter if an employer offers a traditional group health insurance plan along with ICHRA.
Classes are based on job details, like hours worked or location. It’s important to note that ICHRA doesn’t classify people based on health needs like pre-existing conditions.
You are a larger company headquartered in California with a large workforce that’s now remote. Previously, it was difficult to offer group health to your remote workers. That’s because, unless you offer a national group health plan, which can be more expensive for you, your remote workers would have to pay more due to possibly being “out of network.”
Now, you decide to offer ICHRA. Your employees have the option to buy the best health plan in their respective markets. This approach saves you money because you don’t have to buy an expensive multi-state, national group health plan.
The best part? Your employees can tap into the best local health providers in their community.
As you can see, employees have a lot to gain from ICHRA. And so do employers, by the way.
Want to see what a health plan might look like for your team? Learn more about our platform to find out.
To get a complete picture of ICHRA, you need to know about the Premium Tax Credit (PTC).
Since its inception in 2014 with the ACA, the PTC has been one tool used to increase enrollment in health insurance coverage. The IRS estimates that more than 10.5 million people claimed the PTC for their health care coverage in 2020 alone.
In preparing your ICHRA for your employees, you’ll need to know the parameters of PTC and how it plays with ICHRA. By law, PTC is not available to employees who use ICHRA in purchasing their health care coverage.
But (there’s always a but) if the ICHRA their employer offers is deemed unaffordable, employees can opt-out of ICHRA and take the PTC.
We’ll go more into detail about what that looks like for your employees and your ICHRA.
NOTE: Other health care tax credits do exist, including the Small Business Tax credit for SMB owners. Our focus is on the Premium Tax Credit and ICHRA. If you have questions about the other tax credits and how they can affect your group plan offerings, get in touch with us.
Established by the ACA, the PTC allows eligible individuals and families to offset their premium payments on either the federal or state Marketplace plans — and only on those Marketplace plans. The PTC can be used on bronze, silver, gold, and platinum plans, but not catastrophic coverage.
To qualify, you must meet income guidelines, file a joint return if married, not be claimed by another person, and be a legal U.S. resident.
The ACA mandated that households who make between 100% to 400% of the Federal Poverty Level (the 2022 level for a family of three is $23,030) qualify for the PTC. The American Rescue Plan Act (ARPA) expanded the PTC for more qualifying households. Those with household income over 400% of the federal poverty line have their upper premium contribution capped at 8.5% of household income.
One perk of the PTC is that households can claim it before filing their tax returns. Based on the information provided in the Marketplace application, individuals will receive the PTC that the government would pay the insurer, who then would credit your premiums. Individuals can claim none, some, or all of the tax credit for their premium payments.
However, employees will need to reconcile the PTC on their federal tax returns. If you underestimated your expected income and took too much of the PTC, you will have to repay some or all of it back. On the other hand, if you used too little of the PTC, the government will refund you the difference.
Because of the pandemic, ARPA suspended repayment of the PTC for 2020 only. Repayments have started up again.
As we mentioned earlier, an employee cannot claim the PTC if they also use ICHRA. For 2022, ICHRA is considered affordable if the remaining amount an employee must pay for a self-only, lowest-cost silver plan on the Marketplace does not exceed 9.61%.
If your company’s ICHRA is deemed unaffordable, then the employee can opt-out of ICHRA and claim the PTC.
Here’s a way of determining if your ICHRA is deemed affordable from Healthcare.gov:
Yes, we know: There’s a lot of math here and it can be confusing. But the key component is ensuring you have an affordable ICHRA. And if not, knowing what options your employees have in pursuing affordable health care.
No problem. Reach out for a quote. We’ll help you build a health plan that saves you money while meeting these affordability requirements.
We’re ready to help you offer health insurance options that your employees really want.