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Robert Bloink and William H. Byrnes

Life Health > Health Insurance

Reimbursement Powers This Health Coverage Solution

By Robert Bloink By William H. Byrnes

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What You Need to Know

  • Many small businesses struggle with the complexities surrounding employer-sponsored health insurance.
  • One option is to offer individual coverage health reimbursement arrangements to various employee classes in lieu of a group plan.
  • If an individual ceases to be enrolled in individual coverage, the arrangement must stop reimbursing medical expenses.

Many small-business owners have long struggled with the complexities involved in providing employer-sponsored health insurance coverage. The options and requirements have only become more complex over the years.

Employers with a diverse workforce must address vastly different sets of expectations and needs, and budgeting for the costs associated with various health insurance options can also be challenging. Individual coverage health reimbursement arrangements can provide a powerful solution. 

Rather than attempt to offer multiple health coverage options at various price points, business owners can control costs while allowing their employees to take ownership of highly personal health-related choices by offering ICHRAs to various classes of employees in lieu of a traditional group health insurance option.

Understanding the Alternative Benefit

ICHRAs are a relatively new option, becoming available in 2020.

The employer funds the employee’s individual coverage health reimbursement arrangement with a set amount that fully or partially reimburses the employee for health insurance costs. Employees then turn to the health care marketplace to purchase individual health insurance. 

All individuals enrolled in the ICHRA must purchase individual coverage. If an individual ceases to be enrolled in individual coverage, the ICHRA must stop reimbursing medical expenses (on a prospective basis only). Individuals still within the grace period with respect to paying their premiums for individual coverage are considered enrolled in individual coverage. 

Employers are permitted to rely upon employee certification as long as they don’t have knowledge to the contrary.

The employer can’t offer the ICHRA coverage option to one class of employees if it offers group health coverage to others in the same class of employees. Further, the health reimbursement arrangement must be offered on the same terms to members of employees within a given class of employees where consistent definitions are used to determine employee classifications.  

Permissible classes of employees include part-time employees, full-time employees, seasonal workers, hourly workers, salaried workers, new hires and workers employed or not employed through a temporary staffing agency. In response to concerns that the ICHRA option could allow employers to push sicker workers into the individual markets by manipulating the “class of employees” requirement, the agencies imposed strict limits on the class sizes in certain situations. 

While these restrictions may be detailed, there are no limits to the amount that the employer can reimburse under the ICHRA structure. Further, employers can choose whether to reimburse insurance premiums, only qualified medical expenses or both.

The affordability elements of the employer mandate rules through the Affordable Care Act must continue to be satisfied by employers who offer ICHRAs. This means that the employer must calculate whether its reimbursement to each employee satisfies the mandate. While the Internal Revenue Service has released a safe harbor that employers can rely upon, the cost of the ICHRA will generally vary depending upon location.

In the end, the employer shifts the risk of health insurance premiums to the employee and is able to more predictably anticipate the cost of providing employees with a health coverage benefit.

When the Arrangement Might be the Right Fit

Smaller employers who want to provide health insurance as a benefit will likely find that the lower, more predictable costs of the individual coverage health reimbursement arrangement offer the best of both worlds, allowing the employer to supply a valuable employment benefit at a stable price point. That’s true even if the business owner is not subject to the ACA employer mandate.

Large employers who are subject to the employer mandate may wish to consider the benefits of the ICHRA structure for part-time/seasonal employees, or for employees working in a certain location. Under the ICHRA rules, employers are permitted to maintain traditional group health coverage for certain classes of employees while providing an ICHRA to other defined classes, so long as the class meets any requirements as to class size.

For example, if an employer is primarily located in one geographic area and has a group of employees working in a higher-cost area, the employer might benefit from offering employees in the high-cost location the ICHRA instead of group coverage. Similarly, many group plans use a local network that may not be available to employees working in a second location. The ICHRA allows employees to purchase health coverage that is accessible to them.

Employers with a large group of part-time employees may benefit from providing these employees with an ICHRA option — even though they are not required to do so under the ACA — as a retention tool. 

Conclusion

In the right situation, the ICHRA can provide a powerful option to both control costs and offer employees the flexibility to choose their own health coverage. Of course, employers must pay close attention to the details to avoid running afoul of the IRS rules that govern Individual coverage health reimbursement arrangements.

Robert Bloink

William H. Byrnes

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