How does an individual health coverage HRA work?

by Amy

An “Individual Coverage Health Reimbursement Arrangement” (ICHRA) is the newest standalone HRA that enables employers of all sizes to reimburse their employees tax-free for health insurance premiums and medical expenses.

In contrast to a group plan that often comes with annual premium increases, participation rate worries, stress over choosing and administering a one-size-fits-all plan for a diverse employee population, and management of underlying health risks of employees, the new reimbursement model (sometimes called defined contribution) allows employers to choose which employees qualify, set their monthly budget, and allow workers to choose the plan they want.

An apt analogy for the impact of the ICHRA is how 401k and 403b plans revolutionized retirement savings for both employers and employees.

These retirement vehicles gave employers more predictable costs and gave employees greater control over how to invest their retirement savings.

Where did it come from?

In October 2017, President Trump issued an Executive Order (E.O. 13813) asking the Departments of the Treasury, Health and Human Services, and Labor to expand the usability of Health Reimbursement Arrangements (HRAs). The new rules creating the ICHRA were released in June 2019.

Although ICHRA is new, it represents an evolution of another HRA called a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) that was created by the Obama Administration in 2016 via the 21st Century Cures Act. The ICHRA rules went into effect January 2020, with higher limits and greater design flexibility over QSEHRAs, helping it appeal to more employers.

How does ICHRA work?

As the name implies, ICHRA is based on reimbursing employees for insurance rather than buying it for them. At a high-level, the way ICHRA works is very simple:

  • Employers design their plan, including defining which employees are eligible and establishing reimbursement amounts (there’s no maximum limit)
  • Employees purchase the individual plans they want
  • Employees submit claims for reimbursement
  • Employers reimburse employees for valid claims
  • Employers outsource administrative functions like verifying coverage and compliance.

What are "employee classes" and how do they work?

The hallmark characteristic of ICHRA is the ability to scale benefits across classes of employees, meaning employers can concentrate their health benefits spend on the employees that matter most to their business.

The ICHRA classes are as follows:

  • Full-time employees
  • Part-time employees
  • Seasonal employees
  • Employees covered under a collective bargaining agreement
  • Employees in a waiting period
  • Foreign employees who work abroad
  • Employees working in the same geographic location (same insurance rating area, state, or multi-state region)
  • Salaried workers
  • Non-salaried workers (such as hourly workers)
  • Temporary employees of staffing firms
  • A combination of two or more of the above

The most popular choice for early adopters of ICHRA is to keep the design simple, varying reimbursements within each class based on either age or number of dependents.

Example: An employer can opt to offer a $200 per month ICHRA for part-time workers, $400 for remote workers that might be in more expensive markets, and a traditional group plan for full time workers at headquarters.

Example: Using the new hire rule, an employer can offer new employees an ICHRA while grandfathering existing employees into a traditional group health plan.

How does ICHRA benefit employers?

  1. Transfers employer responsibility for health risks
  2. Simpler and more flexible plan design options
  3. Greater budget control
  4. No participation concerns
  5. Helps with employee recruitment and retention

How does ICHRA benefit employees?

  1. More personalized plan choice
  2. Plan portability (they can take their health plan with them if they switch jobs)
  3. Since HRAs are tax-free, workers won’t have to pay any income or payroll taxes on the funds
  4. More responsibility over their healthcare spend
  5. May represent the first employer assistance they have when funding a health plan

ICHRA Affordability and Premium Tax Credit Interaction

Large employers (ALEs with more than 50 employees) that are subject to the corporate mandate to provide insurance can design their HRA to satisfy the mandate and avoid any penalties. The catch is the HRA must be designed to be “affordable,” meaning the remaining amount an employee must pay for a self-only silver plan on the exchange does not exceed 9.78% of their household income in 2020. For 2021, that affordability threshold increases to 9.83%.  If the math is intimidating, just use our simple Affordability Calculator to do the calculations for you (you're welcome). 

Similarly, employees purchasing their own insurance from the individual marketplace will want to know if they can accept premium tax credits (PTC) to help pay for their coverage. If an HRA is considered “affordable”, then they are not eligible for tax credits (PTC). However, if an ICHRA is “unaffordable” then employees can choose between tax credits or the ICHRA. Once a year, employees have the option to “opt out” of receiving reimbursements through ICHRA in order to claim PTCs.

What comes next for ICHRA

The federal government estimates that in five years, 800,000 employers will offer individual coverage HRAs. Almost 90 percent of these employers will have fewer than 20 employees. An estimated 11 million workers will use this HRA to purchase a plan in the individual market—a critical factor for creating a stronger market.

Some locations are better primed for the new HRA than others, depending on factors like the stability of the local individual insurance market, the disparity in pricing between group and individual plans, carrier competition, and more. 

How could ICHRA impact the health insurance market?

In theory, a widespread adoption of ICHRA would prompt more healthy individuals to join the individual market risk pool, which would bring prices down.

As more individuals receive this benefit, they will essentially be taking the responsibility of their healthcare spend over from their employer, meaning they will be motivated to spend their healthcare dollars wisely—a key pillar to a more efficient, consumer-driven healthcare system.

From a small business standpoint, between 2010 and 2018, the proportion of workers at firms with three to 49 workers covered by an employer plan fell by more than 25%. The rise in ICHRAs should help reverse the decline by offering employers another way to provide their workers with health benefits.

Learn more about ICHRA

Our team of experts is on hand to help you better understand the new reimbursement model and how it would work for your company or client. Chat with us online any time. 

For additional resources, check out our wildly popular ICHRA FAQ page or check out the first research of its kind research that Take Command Health has published on the early adopters of the new individual coverage HRA and the cities primed for the adoption of ICHRA

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