ICHRAs: A choice for small employers

The individual coverage health reimbursement arrangement market represents only about 500,000 lives today — about 1%-2% of the total commercial share — but that percentage could increase to 5%-8% by 2030, an analyst said during a Society for Insurance Research webinar.

Jeffrey Sisk, senior competitive intelligence analyst at GuideWell, discussed the ICHRA market and its potential for growth.

“ICHRAs have definitely been a hot topic since they were created in 2020,” he said. 

An ICHRA is a benefit that allows employers to reimburse employees for medical expenses instead of offering a traditional group health plan.

Small employers with five or fewer workers represent the biggest users of ICHRAs, he said, representing about 64% of all firms offering an ICHRA option in 2023. Of those firms, 83% did not previously provide health coverage for their workers. Those employers have experienced rising employee health care costs or double-digit increases in health insurance premiums or have “a unique employee base that could benefit from an ICHRA model,” such as seasonal workers.

Sisk said some workers like the ICHRA option given its choice and flexibility if they change employers. In addition, many workers tend to choose richer benefit options — such as gold-level or silver-level Affordable Care Act plans — that more closely resemble traditional group health coverage.

Employees see several benefits from an ICHRA, Sisk said. “Some may prefer it over traditional group coverage, but it varies greatly from person to person. There’s the flexibility to choose your own plan, your own doctors. Employees can own their plan and take those plans with them if they leave the company.”

One significant difference between an ICHRA and traditional group coverage, he noted, is that while in some cases the ICHRA model provides savings to the employer as opposed to traditional group coverage, but a greater portion of the cost of care shifts to the employee. “Employees can view this as negative and burdensome,” he said.

ICHRAs were introduced in 2020, in the wake of the 21st Century Cures Act enacted by Congress in 2016. The act was created to aid small employers with providing coverage to their workers and included the provision for Qualified Small Employer HRAs. However, the strict limits on the number of employees and reimbursement amounts limited QSEHRAs and left large employers out of their benefits. In mid-2019, the Trump administration released new rules for HRAs to increase flexibility for employers to use the ACA individual marketplace.

Like a 401(k)

Sisk described the difference between ICHRAs and traditional group coverage as similar to the difference between a 401(k) plan and a pension.

In traditional group coverage, health plans submit bids to compete and work directly with the employer or work alongside brokers to promote plan offerings. The broker works with the employer to select available plan options. The employer then offers a choice of plans to workers and pays a portion of the premium. Workers select plans and pay the remainder of the premium with pretax dollars. 

Under the ICHRA model, employers typically use an ICHRA administrator to facilitate ICHRAs. Employees receive varying amounts of employer contributions. Workers can choose a plan using suggestions from an ICHRA administrator or work with a broker. Or workers can buy coverage directly from a plan. 

ICHRAs are not limited to small employers, Sisk said. 

Large employers can use an ICHRA to satisfy the ACA’s employer mandate if the ICHRA benefit is substantial enough to make an individual health insurance plan affordable. According to the IRS, an ICHRA is affordable if the remaining amount an employee must pay for a self-only silver plan on the exchange is less than 8.39% of the employee’s household income, leading to the employee receiving no marketplace subsidies.

An employer cannot offer an employee a choice between a group health plan and an ICHRA; it must be one or the other. An employer can offer both a group health plan and an ICHRA, but they must be offered to different classes of employees so that no employee has an option to choose between the group plan and the ICHRA.

Sisk said ICHRAs have significant benefits, but as a new offering, they must overcome a learning curve in today’s market. Employers benefit in the following ways:

» Cost control. ICHRAs allow employers to set a budget for health care expenses while offering flexibility to employees, helping manage and predict costs more effectively.

» Minimal administrative burden. Compared to traditional group health plans, ICHRAs typically involve fewer administrative responsibilities.

» Help attracting talent. Offering a customizable health care benefit can make a company more attractive to potential hires, especially in a competitive job market.

» Tax benefits. Employers can enjoy tax advantages through ICHRAs, as contributions made to the plan are tax deductible, potentially reducing overall business tax liabilities.

» Compliance simplicity. ICHRAs may simplify compliance with health care regulations, reducing the risk of penalties for noncompliance.

» Tailored benefit packages. Employers can tailor benefit packages to meet the needs of their workforce.

The major benefit that an ICHRA offers an employee is the ability to own their plan and keep it if they change employers, Sisk said. Other benefits to workers include:

» The flexibility for the employee to choose a plan that includes their own doctors.

» The ability to add vision and dental coverage.

» The ability to choose the plan that works best for them.

» Other health care expenses along with plan premiums may be reimbursed. 

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].