More employers are opting to fund accounts that their employees can draw on to purchase their own health insurance, either on an Affordable Care Act exchange or on the open individual market, according to a new report.
Individual Coverage Health Reimbursement Arrangements (ICHRAs) offer employees a set budget for premiums, allowing them to pick the health care plan that works best for them.
Some companies have been exploring these arrangements in lieu of providing their group health benefits, in order to save money and reduce the administrative burden, according to the “2022 ICHRA Report” by PeopleKeep, a human resources software company.
The average amount employers funded ICHRAs with was $981 per employee in the year ended June 30, 2022, according to the report. That is twice as much that’s needed to purchase the average lowest-cost gold plan on the marketplace.
But these plans have their drawbacks and are not for all employers. So, it’s important to understand how they work and their limitations.
The ICHRA explained
ICHRAs, created by regulations promulgated by the IRS in 2019, allow employers subject to ACA coverage requirements to forgo purchasing insurance for employees and instead provide extra funds for them to purchase their own health insurance coverage. Here are some ICHRA basics:
- Regulations allow for employers to offer ICHRAs to some of their employees, and group health benefits to others.
- Some accounts are restricted to reimbursing only for health insurance premiums, while others also reimburse for out-of-pocket medical expenses. Unspent funds can be saved over the course of the pay period for expenses in the calendar year.
- Every pay period, the employer will fund the account with a set amount over the course of the year. The employee will pay for their premiums and get reimbursed by showing proof of payment.
- Employees don’t pay taxes on health care spending reimbursed through the ICHRA.
- Accounts are not portable when employment ends.
- For applicable large employers subject to the ACA employer mandate, the ICHRA funding must meet the ACA’s coverage and affordability requirements and be enough to purchase the lowest-cost silver plan on the marketplace.
- There is no limit on how much an employer can fund the account with.
Not a good fit for all firms
There are many restrictions to ICHRAs as well as drawbacks which employers need to consider:
- The employee loses the employer-sponsored coverage they’re accustomed to and has to fend for themselves to find coverage that fits within the budget their employer provides. This could cause employee resentment.
- Offering group health plans to salaried employees and higher-wage staff and ICHRAs to lower-wage workers, who may view it as a two-tier system, could again cause resentment.
- Having an ICHRA could affect recruitment efforts and retention, as most workers have grown accustomed to their group health benefits.
- Employees may choose plans that leave them with either higher premiums than they’d pay for a group plan, or higher out-of-pocket expenses on the back end.
- Employees must use the funds to purchase health insurance and they may not be enrolled in their spouse’s health plan.
- If your ICHRA is considered affordable according to ACA rules, employees lose the premium tax credit if they opt out of the ICHRA. If your ICHRA is considered unaffordable under ACA rules, they can claim the premium tax credit and waive their right to the ICHRA.
Businesses most suited for ICHRAs
These plans often work best for operations that have:
- High staff turnover.
- A large number of lower-paid workers.
- A mix of salaried and hourly workers.
- A mix of employees at the company site and remote workers in other regions.
Sticking with a traditional group health plan can help you with recruitment and retention, but for some employers who look to attract workers who do not put a priority on employee benefits, these types of plans could be a good fit.
Making a move to one of these plans takes careful consideration and planning. We can help you sort through the facts and fiction about these accounts.