ICHRAs: A Powerful Alternative to Employer Provided Health Insurance

by Prof. Robert Bloink and Prof. William H. Byrnes

Alternative funding solutions have become incredibly popular among employers seeking to offer health insurance coverage to employees. Traditional health insurance rates have skyrocketed in recent years. Self-funding can create a number of challenges that are often unattractive to business owners. Over the years, however, alternative solutions have emerged so that employers are no longer obligated to choose between self-funding and fully insured status. Individual coverage health reimbursement arrangements (ICHRAs) are among those funding alternatives. Exploring innovative and evolving options like ICHRAs may be the key to giving employers the ability to stabilize employee health expenses while offering employees a powerful health benefit.

ICHRAs: The Basics

In the past, employers were prohibited from reimbursing employees for their own health insurance premiums via the HRA structure. QSEHRAs are only available to the smallest employers. Now, ICHRAs provide all employers with a new option.

Employers who offer ICHRAs funds the employee’s ICHRA with a set amount that fully or partially reimburses the employee for their health insurance costs. Employees then turn to the healthcare marketplace to purchase their own individual health insurance. There is not a cap on the amount the employer can contribute.

ICHRAs can lose their tax-preferred status if the employer doesn’t follow a detailed set of rules. All individuals enrolled in the ICHRA must actually purchase individual health insurance coverage. If an individual ceases to be enrolled in individual coverage, the ICHRA can no longer reimburse their medical expenses (on a prospective basis only). Individuals who are still within any grace period with respect to paying their premiums for individual coverage are treated as though they are still enrolled in individual coverage. Employers can rely upon employee certification as long as they don’t have knowledge that the employee is not actually enrolled.

The employer cannot 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 HRA 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.

Employers who are classified as large employers for ACA purposes must also continue to comply with the employer mandate requirements, including with respect to the affordability of the employee’s required contribution. Affordability is generally calculated in the same way as with respect to group health plans, using the lowest-cost Silver plan in the marketplace after the ICHRA benefit is subtracted.

When the ICHRA doesn’t cover the entire amount of the premium, the employee must cover the difference. However, the employer can only allow the employee to fund the remaining premium costs with pre-tax salary reductions if the plan is purchased outside of the official health insurance exchange.

A Valuable Alternative Health Insurance Option

While self-funding can be an attractive option to business owners, it also comes with challenges. For one, stop loss insurance is necessary to protect the employer from large claims. Stop loss insurance can be prohibitively expensive in today’s environment. Employers who self-insure are also faced with significant administrative challenges in managing their benefits.

ICHRAs are much more streamlined and stable. The employer gets to determine how much they wish to contribute to the employee’s ICHRA. Thus, the employer is able to control costs and maintain stability. Further, the employer is no longer exposed to the possibility of incurring large claims, meaning that stop loss insurance is not necessary.

The employer also won’t have to worry about renegotiating health insurance contracts. The employer simply decides how much to contribute to the employee’s ICHRA, and the employee’s health insurance purchase is then completely separate from the business’ finances.

Conclusion

Employers today have a variety of options for helping employees pay, and save, for health-related expenses. In the right situation, the ICHRA option can be an extremely valuable alternative to self-funding or purchasing traditional group coverage.

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