Individual Coverage HRA
The COVID-19 pandemic has shut down most employers’ efforts to experiment with ICHRAs as a new type of benefit plan.
What is an ICHRA?
Individual Coverage Health Reimbursement Arrangements (ICHRAs) are not a traditional group health insurance plan. Employee must purchase their own health insurance and their company provides some reimbursement.
ICHRAs can be tax-advantaged and flexible, but they can also lead to coverage loss and increased burden on the employee.
ICHRAs being promoted as alternatives to the Affordable Care Act, can negatively impact low-income people.
As of January 1, 2020, employers can offer employees ICHRAs instead of offering a traditional job-based health plan.
♦ The fear is that ICHRAs could draw healthier individuals away from the Affordable Care Act marketplace plans. Consequently, this may cause individual health insurance marketplace premiums to skyrocket.
There is the real potential that employers might try to shift sicker employees to ICHRAs and keep their healthier employees in their more expensive employer-sponsored health plan.
• ICHRAs may be one of the better health coverage initiatives to come out of the Trump administration.
They may be a good option for part-time and gig workers but most companies are likely to focus on their full-time employees.
ICHRAs first became available on January 1, 2020. Since that time, employers have offered an average of $5,971 ($743 per month) to single employees and $12,892 ($1,074 per month) to employees with a family.
Compared to annual premiums for employer sponsored family health coverage in 2019, which reached $20,576. This suggests ICHRAs could provide considerable savings for employers while shifting more healthcare expenses to the employee under the catch phrases ‘cost-sharing' and 'employee responsibility.'
To date, half of employers offering ICHRAs reimburse for premiums only while the other half also covers out-of-pocket expenses.
How do ICHRAs work?
The Individual Coverage HRA (ICHRA), can be setup to reimburse employees on a non-taxable basis for medical care and the purchase of individual insurance policies. Employers can offer funding to part-time or seasonal employees to help them pay for health care benefits on the open market.
♦ The ICHRA can only be offered if the employer does not offer a traditional group health plan. Employees may purchase insurance either on or off the Federal Exchange using their own money and then ask their employer to reimburse them up to a limit set by their employer.
Unlike other HRAs, the ICHRA is available to businesses of any size. ICHRAs have no allowance caps and permits businesses to vary eligibility and allowance amounts among different classes of employees.
♦ Employers of any size can offer their employees a monthly allowance of tax-free money. Employees then buy the healthcare services they want, including individual health insurance, and the business reimburses them up to their allowance amount.
Employers can also use these HRAs to pay employees’ Medicare premiums.
• Reimbursements don’t count as income for an employee.
To participate in an ICHRA, employees must have coverage through an individual health insurance policy, including on-exchange or off-exchange coverage, Medicare Parts A and B, or Medicare Part C.
The employee can be the primary policyholder or they can be covered under a family member’s individual policy.
• Employees’ family members are eligible to participate as well, provided they meet the same qualifications and the employer chooses to extend eligibility to spouses and dependents.
In theory, ICHRAs allow employees the freedom to choose a plan that best meets their families’ needs. Their company then reimburses them up to a certain monthly allowance for premiums and possibly other medical expenses. The reimbursements are tax free.
♦ In truth, the words “freedom of choice” hides the fact that a heavy burden is now placed on the employee.
Few employees understand what they should be shopping for. The insurance industry describes most consumers as having a “low health literacy.” A point that is readily exploited by many brokers.
To participate in an ICHRA, employees will have to purchase individual health insurance or be enrolled in Medicare Part A+B or Part C.
♦ ICHRAs do NOT provide benefits to uninsured employees.
Employees participating on a spouse's group plan (from another employer) cannot participate in an ICHRA.
If your ICHRA is considered 'affordable,' you will not be not be eligible to receive premium tax credits under the ACA. If your ICHRA is NOT considered 'affordable,' you have the option to opt out and take advantage of premium tax credits.
♦ Affordability is determined only by the amount you would pay for self-only coverage.
For plan years beginning in 2020, an ICHRA would not be ‘affordable’ if the monthly premium for the lowest-cost Silver plan (for self-only coverage) in the employee’s area minus the monthly amount made available to the employee under the ICHRA is more than 9.78% the employee’s HOUSEHOLD income.
• This percentage changes every year. For plans starting in 2021 it rises to 9.83%.
You may opt out of the ICHRA, but the amount available to you under the ICHRA will still count against any federal subsidies to which you may be entitled for a Marketplace plan. An ICHRA may actually be quite harmful to lower income employees.
♦ Individuals who receive coverage through an affordable ICHRA may see their dependents lose coverage or lose their advance premium tax credits.
It is estimated that as ICHRAs are adopted by more employers it will lead to a reduction in premium tax credits of $6.2 billion annually by 2029.
♦ The Trump administration made sure the reduction in tax credits was baked into the design of the minimum affordable ICHRA rule.
The Biden administration is likely to take a different approach.
ICHRAs can be useful for smaller businesses that cannot afford the rising healthcare costs associated with employer-sponsored health plans.
By setting up ICHRAs companies can better predict their healthcare expenses. They no longer have to haggle with insurance companies over plan benefits and annual premium increases. This burden can be shifted to the employee.
♦ Employers have a high degree of control over ICHRAs.
Employers are allowed to create different classes of employees and fund those classes differently. The employer than reimburses the employee up to their allowance amount.
It is assumed that the entire ICHRA balance is spent on healthcare premiums and cost-sharing each year. The employee covers expenses beyond their allowance.
♦ ICHRAs are NOT the property of the employee.
In the rare case that the employee does not use all their allotted funds, the employer has the option to keep the funds and reset the employee’s balance at the end of the year or carryover the unspent balance to the next year.
Employers can control if ICHRA funds are available to employees after separation.
Administration is complex
Administration is complex without an ICHRA administrator. There are numerous rules and notifications that must be followed if an employer wishes to offer an ICHRA.
Benefit management companies are eager to point out that there are significant penalties for violations if an employer gets things wrong.
• It should come as no surprise that these management companies along with insurance brokers are heavily promoting ICHRAs as the best thing to come along since Texas toast.
♦ Promoters of ICHRAs talk about the benefits for employers, such as: getting out of the business of managing your employees’ health risk and reducing costs by replacing a defined benefit plan (ESI) with a defined contribution plan.
Sound familiar? It is the same argument that led many employers to ditch pension plans for defined-contribution plans, such as a 401(k).
• ICHRAs can be offered to a variety of employee types including, part-time, seasonal and temporary employees of staffing firms. Employers to create different classes of employees for the purpose of offering ICHRAs, and the funding for these groups can vary.
Compared to the freedom of the old stand-alone HRA, the employee classes permitted with the ICHRA are narrow. It may be difficult for businesses to use these classes to help them compensate high-value employees differently. Hiring and keeping their most valuable workers may be more challenging.
♦ There is no minimum required funding amount and no upper limit either. However, employers subject to the ACA Employer Mandate must make sure their ICHRA are considered 'affordable.'
An employer can offer a group health insurance policy, but they cannot offer the same employee class both an ICHRA and a group health insurance policy.
A business could offer full-time employees group health and part-time employees an ICHRA, but they cannot offer full-time employees a choice between group health and the ICHRA.