Will ICHRAs Become the 401(k)s of Employee Health Benefits?

Thanks to regulations the IRS issued in June 2019, employers will have an option other than a group health plan when offering employees health insurance coverage, starting in 2020.

Individual coverage health reimbursement arrangements (ICHRAs), pronounced "ick-rahs" by benefits advisors and vendors, could become the core component of a defined-contribution approach to employee health benefits.

Here's how they work: An employer contributes a set dollar amount each year to each employee, tax-free, through the ICHRA. The employees use that money to buy their own individual or family health insurance coverage directly from insurers or brokers or on the public exchanges established under the Affordable Care Act (ACA).

The June regulations modified existing guidance dating from 2013 that forbade employees from using health reimbursement arrangements (HRAs) to buy coverage on the open market.

Smaller employers with fewer than 50 full-time or equivalent employees can provide similar subsidies through qualified small-employer HRAs (QSEHRAs), pronounced "q-sarahs." Those using a QSEHRA to buy an exchange policy may be eligible for a government tax credit or subsidy, which ICHRA participants are not eligible to receive if the ICHRA their employer offers would allow them to purchase on an available ACA marketplace exchange coverage that meets the ACA's affordability threshold. 

If enough employers embrace this new approach, ICHRAs (and QSEHRAs) could lead a seismic shift in health benefits in much the same way that employers replaced defined-benefit pension plans with 401(k)s and changed the retirement landscape in a single generation. While benefits experts see hurdles to a sweeping transformation of employee health benefits, a number of large employers are expected to shift their coverage from group plans to ICHRAs starting in 2020. If their experience is positive, many more may follow suit.

Rising Costs Lead to Growing Concerns

Before the ACA passed, some small and midsize employers, because they could not afford to offer group coverage, gave each employee a certain amount of money to buy individual health insurance. Those employers may once again take up this approach using ICHRAs.

However, this time "they may be joined by some larger employers who are saying that they don't know if they can continue economically to offer group health coverage," said Gary Kushner, president and CEO of benefits consultancy Kushner & Co. in Portage, Mich. With average 2019 premiums hitting $20,576 for family coverage and $7,188 for single coverage, according to new data from the Kaiser Family Foundation's 2019 Employer Health Benefits Survey, the economics of employer-sponsored health insurance do not promise to get any easier. Family coverage has increased 54 percent since 2009 and 22 percent since 2014.

"ICHRAs could be a way to move employers out of the group health insurance market," Kushner said.

[SHRM members-only toolkit: Managing Health Care Costs]

Not So Fast, Employers Say

Yet employers are in no rush to adopt ICHRAs, for several reasons that include the following:

• The requirement that employers give their employees 90 days' notice before implementing ICHRAs makes this approach, for most employers, unreasonable for the 2020 plan year that begins Jan. 1.
  

• The high cost of individual coverage purchased on the federal or a state health insurance exchange could make coverage prohibitively expensive, even with an employer's ICHRA contributions, because ICHRA participants are not eligible for premium tax credits when buying exchange-based coverage.

Affordability Threshold

Another consideration: When employers with 50 or more full-time or equivalent employees provide coverage through ICHRAs rather than a group health plan, the ICHRAs must meet the ACA's coverage and affordability requirements.

To be considered affordable under the ACA, the cost of health insurance for an employee in 2020 must not be more than 9.78 percent of the employee's household income.

Jordan Berkenpas, a member of the customer service team at PeopleKeep, a provider of health savings accounts and other consumer-directed accounts, explained in a blog post, "The lowest-cost silver plan on the local ACA exchange is the standard for the calculation, with an employer's ICHRA contributions being subtracted from the premium. That means the monthly premium for the lowest-cost silver plan, minus the ICHRA monthly allowance being offered, should not exceed 9.78 percent of the employee's household income for the month. If this requirement is met, the ICHRA is considered affordable."

Because employers don't know their employees' household incomes, there are three affordability safe harbors employers can use that are based on information the employer does have, the most popular being the employee's W-2 wages as of the first day of the plan year.

On Sept. 30, the IRS released a proposed rule that clarifies and expands on how to apply the ACA's affordability safe harbors to ICHRAs, and also how self-insured health plan nondiscrimination rules apply. Comments are due by Dec. 30.

"This guidance should simplify determining an ICHRA's affordability and help employers avoid the shared responsibility payment," according to an analysis by benefits services provider Ascensus.

Staying Competitive

There are also workforce management issues to consider when weighing a shift to ICHRAs. "The reality is that group health coverage is often superior to individual market coverage," said Julia Zuckerman, vice president and senior consultant for compliance at benefits consultants The Segal Group in New York. "It seems unlikely that an employer that wants to offer competitive benefit packages, including health coverage, as a tool to recruit and retain employees in a tight job market would offer an ICHRA."

A Willis Towers Watson survey of 535 employers with at least 100 employees, conducted in January 2019, found that just 2 percent to 4 percent of employers were considering using ICHRAs to provide health benefits to full-time, part-time, seasonal or collectively bargained employees, and only 5 percent were considering using them based on employees' geographic location.

Targeting Benefits

Despite these challenges, ICHRAs may have an important role to play for groups of employees not currently eligible for employer-sponsored health coverage. The final regulations allow employers to carve out certain classes of employees based on a specific characteristic, such as seasonal, full-time, part-time, salaried or hourly status, and provide some leeway to adjust reimbursement amounts based on factors like age and family size.

If a specific class of employees, such as seasonal workers, has not historically had access to group health coverage, an employer could offer ICHRA reimbursement for a portion of the health insurance these workers buy on their own.

"This can be a great option and a great tool for employers that want to provide a needed benefit to certain employees while also managing their budget," said Kristen Appleman, vice president of health and wealth at ADP TotalSource in Atlanta. However, she also noted that buying individual health insurance can be a daunting prospect for those who've never done so before. "These employees are likely to look to the employer to help them out through education that can help them make decisions," she said.

Employers would have to do so carefully. For ICHRAs to be exempt from the Employee Retirement Income Security Act (ERISA), among other requirements, employers must not select or endorse any insurance issuer or insurance coverage, leaving employees to choose individual coverage on their own.

ICHRA-adopting employers, however, can still provide crucial advice without running afoul of ERISA by addressing how ICHRAs work and how employees can evaluate plan options available on an ACA exchange or in the open market.

Joanne Sammer is a New Jersey-based business and financial writer. 

Related SHRM Articles:

New Final Rule Lets Employees Use HRAs to Buy Health Insurance, SHRM Online, June 2019

Will Allowing HRAs for Plan Premiums Be a Game-Changer?, SHRM Online, June 2019

QSEHRAs Help Small Employers Solve the Health Care Coverage Puzzle, SHRM Online, May 2019