ICHRA Update: Interest is Growing
The Individual Coverage Health Reimbursement Arrangement (ICHRA) has been an option for employers since the beginning of 2020. As the year draws to a close and a new one beckons, interest among employers appears to be growing.
When the regulations governing ICHRAs were finalized last year, federal regulators predicted that, after employers “fully adjusted to the rule,” approximately 800,000 of them would adopt this alternative approach. One administrative services vendor that jumped into the field believes the numbers “could be much higher.”
Only time will tell. ICHRA uptake from early adopters has been strongest among employers too small to be subject to the Affordable Care Act’s (ACA’s) employer mandate but still committed to helping employees obtain health care coverage. However, some applicable large employers (ALEs) under the ACA — those with at least 50 full-time employees, including full-time equivalents — have taken an interest, according to industry research.
Like most employers, you’ve probably already rolled out your 2021 health care plan (including any design changes). It’s not too early, however, to begin thinking about 2022 — particularly if you’re open to making some radical changes.
The ICHRA is an outgrowth not of federal legislation, but of an executive order issued by President Trump in 2017. In a nutshell, ICHRAs allow employers to make tax-deductible contributions to reimburse employees for part or all of the expenses those employees incur in securing individual health care coverage. Employer contributions are tax-free to employees, as is the value of traditional health care coverage.
Generally, employees submit receipts for qualified expenses to their employers, and the employers reimburse the employees up to whatever limits have been established. In other words, funds don’t accrue in an account per se; expenses are simply accounted for as they’re reimbursed.
Some vendors already engaged in traditional HRA administration have jumped into ICHRA administration. Thus, your own accounting department doesn’t need to be involved in the process if you choose to outsource.
For employees, ICHRAs provide the freedom to choose their own health care plans and to maintain them if they move on to other employers — without your financial support in that scenario, of course. (Note: Employees must maintain individual coverage to be eligible for ICHRA benefits.)
For employers, the primary benefits of switching from a traditional health care plan to an ICHRA are two-fold:
- You can precisely “define” (or limit) your health care benefit expenditures in a way that’s analogous to a defined contribution retirement plan, such as a 401(k).
- You’ll free yourself from the nuts and bolts of plan administration.
ICHRAs differ from traditional HRAs in that they aren’t integrated into existing health care plans (because ICHRAs effectively replace them), and ICHRAs can pay for health insurance premiums.
From a flexibility standpoint, ICHRAs represent an improvement over another variant on the basic HRA model: the Qualified Small Employer Health Reimbursement Arrangement. These plans have ceilings on annual employer contributions and must be offered broadly to most employees.
In contrast, ICHRAs allow you to set the amount of dollars you’re prepared to spend on employees’ health coverage. You can spend as little or as much as you want. The maximum would involve paying both the full amount of your employees’ individual health insurance premiums along with their deductibles and co-pays.
Matters only get somewhat complicated when you’re an ALE and the minimum amount you can contribute without penalty equals the minimum you must spend to avoid failing the ACA’s minimum essential benefits test. But that’s no more complexity than you’d face as an ALE offering a traditional health plan.
Flexibility is indeed the hallmark of the ICHRA. For example, in addition to setting the dollar limit per employee, you can adopt a “use it or lose it” policy. That is, you may keep dollars that aren’t used by an employee over the course of a plan year. Or you can allow unused dollars to accrue for employees to spend in subsequent plan years.
Also, along with being able to make the typical single vs. family coverage distinction, you can vary ICHRA benefits among different “classes” of employees. Permissible classes are:
- Those covered under a collective bargaining agreement,
- Those in a waiting period (eligibility for ICHRA benefits can be deferred for up to 90 days after hire),
- Foreign employees who work abroad,
- Those working in the same geographic location,
- Temporary employees of staffing firms, and
- A combination of two or more of the above.
However, ICHRA rules do require a minimum number of employees for 1) each group that’s singled out for coverage, or 2) coverage that varies from that offered to employees in other classes.
Those size requirements vary according to total employee head count. If you have fewer than 100 employees, the minimum class size is 10. The minimum class size if you have between 100 and 200 employees is 10% of your employee population. And if you have at least 200 employees, the minimum class size is 20.
Whether you opt to create different benefits for different employee classes is a strategic matter. If you choose not to make a wholesale switch to an ICHRA, you could “grandfather” current employees under your existing health plan and offer the ICHRA only to new employees.
Needless to say, moving to the ICHRA defined contribution model of health benefits calls for considerable forethought. As more early adopters gain experience with ICHRAs, additional insights should be available to help you assess the pros and cons. Your benefits advisors can also assist you in assessing whether one of these arrangements is right for your organization.