What Is an ICHRA and How Does It Work?

An individual coverage health reimbursement arrangement (ICHRA) is a flexible health benefits option, and it's growing in popularity in 2024. It allows employers to reimburse employees for a portion or all of their health insurance premiums.

Compared to traditional group plans, ICHRA health insurance suits employees who would prefer to choose their own health insurance based on their needs. As an insurance producer, you must understand the particulars of ICHRAs in 2024 to provide the best guidance to your clients.

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Understanding ICHRAs

The federal government issued new regulations in 2019 that aimed to provide more flexibility in employer-sponsored health coverage. The new ruling, sponsored by the Department of the Treasury, the Department of Justice and the Department of Health and Human Services, expanded health reimbursement arrangements (HRAs) to increase American employees' access to health insurance options. This program went into effect on January 1, 2020.

ICHRAs vs. HRAs

An HRA is a type of group health plan that is funded by employer contributions, and it reimburses employees' medical costs up to a predetermined dollar amount. An ICHRA is a type of HRA that specifically allows employees to choose their own health insurance provider from the marketplace, but it also applies to those on Medicare. Employers of any size are qualified to offer ICHRAs.

ICHRAs are funded entirely by the employer — no employee contributions are permitted.

How Do ICHRA Plans Operate?

Employers set specific caps for these plans based on various factors, and the affordability is determined by the monthly premium of the self-only lowest-cost silver plan (LCSP) compared to the monthly ICHRA employer contribution. There are no caps on annual allowances employers can offer in their ICHRAs.

It's important to highlight that employers cannot offer both an ICHRA and a group health plan to the same class of employees. While an employer may have both options, they can only offer one or the other. Full-time, part-time, temporary and seasonal workers are all eligible for ICHRAs based on the employer's policies.

Employers who offer ICHRAs are required to abide by certain specific notification guidelines. It must include key information about the ICHRA, including:

• The dollar amount of the ICHRA offer
• The date coverage begins
• Dependent eligibility
• The availability of a special enrollment period (SEP)
• Impact on premium tax credit (PTC) eligibility

Employees who choose an ICHRA should enroll during the annual individual market open enrollment period, usually between November and January.

The Advantages of Adopting ICHRA for Employers

The benefits of offering an ICHRA for employers include:

• Cost savings: ICHRAs can enhance employee benefits without increasing costs. They establish more predictable healthcare costs that include set allowances. Employees benefit by being able to choose more affordable options on the marketplace compared to what may be offered by a group health plan.
• Flexibility: Employees can choose their own insurance provider with ICHRAs, which means they can target a diverse range of health requirements. Employers also gain flexibility benefits. They can set different allowances based on employee categories — for example, a company might set higher allowances for full-time salaried employees and lower allowances for part-time or seasonal employees.
• Tax deductions: ICHRA reimbursements are tax-deductible for employers, and qualify as tax-free contributions for employees.

Challenges of Implementing ICHRAs

It's important to advise employers about some challenges they might face when adopting ICHRA for their employees:

• Complexity: If employers opt for an ICHRA, employees will have to put a bit more work into the decision-making process when choosing the right plan. Employees who aren't educated on choosing health insurance plans may make mistakes and get too little or too much coverage.
• Premium tax credit eligibility: Employees who are offered affordable ICHRAs cannot claim a PTC. To reclaim this eligibility, the employee would have to wave their right to participate in the ICHRA.
• Administrative challenges: ICHRAs come with administrative challenges, like more reporting and tracking expenses. Managing reimbursements and employee allowances is an administrative burden employers must consider before choosing this option.
• Compliance: There are a lot of regulations surrounding employer responsibilities when it comes to offering health insurance options to their employees.

HRA vs. MERP

A medical expense reimbursement plan (MERP) is an employer-sponsored health benefits option that reimburses medical expenses. Covered expenses can include prescription medications, hospital stays, doctor's office visits, urgent care, diagnostics and more. The Internal Revenue Code and Employee Retirement Income Security Act (ERISA) dictate the compliance and regulations for MERPs.

Like an HRA, a MERP is a type of Section 105 plan, meaning it provides tax-free medical reimbursements to employees. However, unlike a traditional HRA, employees can contribute to their MERP, meaning employers can share administrative expenses. A MERP expands on the advantages of an HRA to offer even more customization, security and flexibility and can even help keep renewal increases in check.

Benefits of MERPs

When exploring options for your employer group clients, consider these benefits of MERPs:

• Transparency: With a MERP, it's clear exactly what healthcare expenses are eligible for reimbursement. This means employees can manage their out-of-pocket healthcare costs more effectively.
• Flexibility: Employers can move to different health insurance carriers and alter plan designs with a MERP. An HRA is much more difficult to move or alter.
• Control: Employers have full control over what expenses qualify and can set the guidelines for reimbursement. Additionally, unspent funds from the MERP can carry over into the following year's program.
• Rate stability: One of the best perks for employers is stabilizing rates when it comes time for renewal. This is a point of concern for most companies, so it's something brokers can capitalize on to enhance client retention.

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