Exploring ICHRAs: A new health insurance option
Looking to maximize your employees’ health benefits and help combat rising costs? An ICHRA could be an answer.
- Individual Coverage Health Reimbursement Arrangements (ICHRAs) offer a modern alternative to traditional group health plans by allowing employers to set a fixed monthly “allowance” that can help protect employees from annual premium increases.
- This employer-funded model empowers employees to use the set allowance of tax-free funds to pay for their choice of an Affordable Care Act (ACA)-compliant plan that covers their specific medical needs.
- They can be a strategic tool for small businesses to attract and retain talent by offering high-quality benefits that compete with larger corporations.
- While ICHRAs offer many potential benefits to both employers and employees, they may not be the right fit for every scenario and pros and cons should be carefully considered.
As business owners look for smarter ways to oversee talent attraction and retention, they are exploring competitive benefits — from health care to 401(k) plans — that help them manage rising costs. For many, Individual Coverage Health Reimbursement Arrangements (ICHRAs) offer a modern, flexible alternative to traditional health plans. These employer-funded, tax-advantaged arrangements give employees the freedom to pick their own individual health insurance, while helping employers set more predictable budgets.
Relatively new on the scene, ICHRAs were first introduced in 2020 and are growing in popularity, with most of the uptake among small businesses. They’re continuing to gain attention because they align with how modern workforces want to shop for health care: in a way that’s personalized and adaptable.
What is ICHRA health insurance?
An ICHRA is an employer-funded, tax-advantaged benefit that reimburses employees for their individual health insurance premiums and other eligible medical expenses.
Unlike traditional group insurance, with an ICHRA the employer doesn’t buy a single plan for all their employees. Instead, often working with an ICHRA administrator to simplify the process, they decide how much to contribute to a monthly “allowance” for insurance premiums and qualified medical expenses — leaving it up to their employees to pick a coverage option that fits their own needs. Note that there is no annual minimum or maximum contribution. However, businesses required to satisfy Affordable Care Act (ACA) mandates will need to offer a coverage amount that makes care “affordable.”
When employees submit proof of medical expenses to the employer, reimbursements are made tax-free up to the employer-chosen contribution amount — which can help both employers and employees save.
Employers of any size can use ICHRAs, which can make them especially appealing for small and mid-sized businesses that want to compete with the benefits larger companies can offer, without financially overcommitting, while also allowing applicable large employers (ALEs)Opens overlay to satisfy ACA affordability requirementsOpens overlay.
Pros and cons of ICHRAs
Advantages for employers
- Predictable costs: Employers determine their budget and then set a monthly allowance for employees, adding more predictability to costs. However, as health premiums fluctuate and vary by market, employers subject to ACA affordability requirements may need to increase their contributions to remain compliant. If employers are not subject to these requirements and choose to limit their contributions to control costs, it could result in employees bearing additional expenses.
- Flexibility: Plans can be tailored by employee classesOpens overlay (e.g., part-time, seasonal, regional).
- Recruitment and retention: Offering employees more choice in their health plan can help make small or mid-sized businesses more competitive in today’s hiring landscape.
Advantages for employees
- Personal choice: Employees choose from ACA-compliant plans that meet their needs, selecting from a variety of options — such as Preferred Provider Organizations (PPOs), Health Maintenance Organizations (HMOs) or lower-cost Exclusive Provider Organizations (EPOs) –– based on covered services and in-network providers.
- Portability: Plans belong to the employee, not the company. This also means that an employee who leaves their employer is able to keep their plan.
- Diversity of coverage options: Employees can match their plans to their family size, health care needs or doctor and hospital preferences.
Potential drawbacks
- Potential confusion: An ICHRA may require additional education for your employees, so they can research and enroll in their own plans. Working with an ICHRA administrator can make it easier to help employees navigate their options.
- Network limits: Some individual plans have narrower provider networks than group offerings, and the availability of appealing plans can vary significantly from state to state.
- Subsidy complications: An ICHRA offer counts as an official offer of coverage by the IRS, and may affect eligibility for premium tax credits unless the arrangement is deemed unaffordable.
ICHRA vs. traditional group plans
Historically, many small businesses have relied on traditional group health insurance. Often sold as a fully insured, one-size-fits-all model, these plans provide a consistent benefits package but lack customization for individual employees and control over costs for business owners. Premiums often increase annually, and as a result, employers are left to either absorb the cost hikes or pass them on to their employees.
ICHRAs flip that model:
- Flexibility and customization: With an ICHRA, employees pick their own plan, which allows them to customize their health benefits to fit their specific health needs and preferences. With traditional group insurance, it’s one-size fits all.
- Predictable costs: Costs can stay more predictable for employers with ICHRAs because they set the contribution amount. However, if health insurance premiums rise, some of those increases may fall back on employees or employers themselves, if they are subject to ACA affordability requirements.
- Participation: Traditional group plans generally require a participation minimum, but there is no participant minimum required with an ICHRA.
For small and mid-sized businesses, the biggest difference comes down to control. Instead of being locked into a single group plan, employers can define their own ICHRA plan by setting a budget and empowering their employees to make choices and take ownership of their coverage.
ICHRAs vs. QSEHRAs
Small business owners may have also heard of Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). While both QSEHRAs and ICHRAs reimburse employees for individual coverage, there are important differences.
- Employer size: Unlike QSEHRAs, which are available only to businesses with fewer than 50 full-time equivalent employees, ICHRAs can be offered by employers of any size.
- Contribution limits: QSEHRAs have annual reimbursement caps set by the IRS. For the most current limits, see the IRS websiteOpens overlay. ICHRAs have no minimum or maximum contribution limit, giving employers more flexibility in budgeting; however, ALEs must still meet ACA affordability requirements.
- Administration: Both arrangements require employers to provide written notice and follow reimbursement guidelines, but ICHRAs offer more ability to define employee classes and tailor contributions accordingly.
While QSEHRAs can be a good fit for very small employers who want a lightweight, capped benefit, ICHRAs can offer many small and mid-sized businesses a more flexible solution.
Considering the future of ICHRAs
ICHRAs are still fairly new, but they’re quickly gaining momentum as employers and employees alike look for alternatives to traditional plans. It’s an emerging option in the benefits space that could signal a shift in how businesses approach health care coverage.
This shift could offer small and mid-sized businesses the potential for greater control over costs and an adaptable way to offer competitive benefits. For employees, it could offer the potential for more choice, portability and the ability to find coverage that better fits their needs.
As health care costs continue to rise and workforces demand more flexibility, ICHRAs are emerging as a promising approach that could help align benefits with business goals, support employee well-being and help companies adapt in a changing market.
Learn more about how small and mid-sized businesses are navigating health insurance with research from Morgan Health and stories from business owners.