The ICHRA Rises: An Intriguing New Benefits Option
Three federal agencies are predicting that 800,000 employers will eventually seize the opportunity to help employees secure health coverage on their own by offering an intriguing new benefits option: the Individual Coverage Health Reimbursement Arrangement (ICHRA). Will your organization be one of them?
Final regulations for ICHRAs took effect on August 19, 2019, following an announcement in late June by the IRS, Department of Labor and Department of Health and Human Services. In theory, an employer could begin offering employees one as soon as January 1, 2020, but a requirement that employees be given 90 days’ notice makes it unlikely that an organization will move that quickly.
Nonetheless, as you strategize how your health benefits offerings might change for the better going forward, an ICHRA might be worth considering.
In a nutshell, the final ICHRA regs liberalize the original HRA regs to the point of allowing employers to offer health care benefits through a model that’s like a 401(k) plan for retirement savings — by shifting decision-making responsibilities to employees.
“Among other medical care expenses, [ICHRAs] can be used to reimburse premiums for individual health insurance chosen by the employee, promoting employee and employer flexibility, while also maintaining the same tax-favored status for employer contributions towards a traditional group health plan,” the regulatory triumvirate stated when announcing the new rules.
Flexibility is the hallmark of ICHRAs. There’s no minimum or any maximum amount you can reimburse employees for their health expenses. In contrast, the legal forebearer of the ICHRA, the “qualified small employer HRA,” limited reimbursement for individual health coverage to $5,150 and family coverage to $10,450.
Note: A related benefit entity, the “excepted benefit HRA,” was announced by federal agencies at the same time as ICHRAs. As defined under the new regulations, excepted benefit HRAs generally would be used to cover ancillary health services such as dental and vision. Alternatively, employees could use them to pay deductibles and co-pays for their regular health care plans if employer contributions to employees’ ICHRAs don’t cover these costs. (Employees could also use a cafeteria plan for the same purpose.) Annual contributions to excepted benefit HRAs are set at an inflation-adjusted amount of $1,800.
Smaller employers targeted
If your organization is large enough to be subject to the Affordable Care Act’s (ACA’s) employer mandate, shifting from a traditional health care plan to an ICHRA wouldn’t relieve you of the basic affordability and breadth of coverage standards of that law. The IRS is working on “safe harbor” rules that would simplify the process of determining whether an ICHRA is ACA-compliant for applicable large employers.
For smaller organizations not subject to the ACA’s employer mandate, the new regulations seek to either:
- Make it easier to continue to offer health care benefits
- Incentivize such employers to begin offering health care benefits
Offering an ICHRA isn’t an all-or-nothing proposition. For example, if you currently sponsor a traditional health care plan and worry that switching over to an ICHRA would create labor relations problems, you can instead offer an ICHRA prospectively — that is, only to new employees. In such cases, however, you cannot give your current employees the choice of staying on the current plan or opting for the ICHRA instead.
If you currently offer a standard HRA to help pick up some of employees’ costs associated with a conventional health plan, you can keep that old-school HRA — the final regs don’t force you to convert it to an ICHRA. If you do adopt an ICHRA and (as is likely) the maximum amount that you’ll fund employees’ ICHRAs is below what employees will need to pay to buy coverage on the open market, employees can use a flexible spending cafeteria plan (assuming you have one) to pay as much of the difference as their cafeteria funds allow. As noted above, they could also use an excepted benefit HRA.
If an employee buys coverage through a Health Insurance Marketplace using ICHRA dollars, he or she will become ineligible for premium tax credits. Warning employees about this is one of the disclosures that employers must provide when adopting an ICHRA.
Segmentation and verification
ICHRAs don’t have to be one-size-fits-all. You may divide your workforce into several different segments and vary their reimbursement amounts accordingly. For instance, you can offer one benefit formula to salaried employees, and another design to hourly workers. Other acceptable employee-segmentation categories include:
- Geography (work location),
- Temporary vs. full-time,
- Number of dependents,
- Full-time vs. part-time, and
Because older employees will face higher premiums when buying health coverage on the individual market, you can reimburse them at higher levels — but no more than three times as much as what you reimburse employees in the lowest age bracket.
However, your ability to create some of these benefit distinctions depends on the employee population within each segment. For example, if you have 100 employees, you’ll need at least ten employees per benefit-distinction segment.
One of the concerns expressed by people who commented on the original proposed version of these regulations was that ICHRAs would encourage employees of companies not subject to the ACA’s employer mandate to buy short-term limited-benefit health insurance instead of the more expensive, ACA-compliant policies. The final regulations forbid use of ICHRAs to buy those limited-benefit policies but do allow them to be purchased via an excepted benefit HRA.
Another important obligation in offering an ICHRA is to “have reasonable procedures in place to substantiate that participating employees and their families are enrolled in individual health insurance or Medicare while covered by an HRA,” according to a FAQ list issued by the federal agencies. The IRS doesn’t want employees to just pocket the cash tax-free without using it for its intended purpose.
Two roadblocks to adoption
What might keep the ICHRA from meeting the federal government’s expectations for widespread adoption? An analysis of the new rules by the Society for Human Resource Management highlighted a couple of potential factors.
First, “inflation in the individual health insurance markets tends to exceed inflation in the group market, eroding the purchasing power of employers’ health care dollars faster than group insurance.” This concern, of course, is only applicable to employers that already offer a group plan.
The other concern is that, by turning employees loose to buy their own coverage, employers would forfeit plan designs that steer employees toward more healthful lifestyles. Employers will also lose access to aggregate employee health data that they might use to shape their health promotion programs. But these concerns are more likely issues for larger organizations than smaller ones.
The next frontier
ICHRAs may represent the next frontier in health care benefits. But whether employers will flock to that open ground in great numbers remains to be seen. If this plan design seems to fit the size and objectives of your organization, discuss it further with your benefits and tax advisors.