Newer models of health reimbursement arrangements (HRAs), such as the qualified small employer HRA (QSEHRA), established in 2017, and the individual coverage HRA (ICHRA), established in 2020, continue to generate interest as alternatives to group health coverage, especially among small and midsize employers.
As with other HRAs, QSEHRAs and ICHRAs are funded solely by employers with no employee contributions permitted. But unlike traditional HRAs, employees can use QSEHRAs and ICHRAs to pay premiums for nongroup health coverage they purchase for themselves and their families on an Affordable Care Act (ACA) marketplace exchange.
There is growing interest in these accounts, sometimes referred to as "defined contribution health care," as a way for employers to keep their health care spending at a fixed dollar amount, new research shows.
While the percentage of employers that have adopted these approaches remains in low single digits, more employers say they're open to considering them, according to a report by the HRA Council, a trade organization for HRA administrators, carriers, enrollment firms and practitioners.
The HRA Council's report, Growth Trends for ICHRA and QSEHRA 2020 to 2022, based on aggregate client data from council members, shows that 92 percent of employers offering HRA-based individual coverage have 20 or fewer employees. Up to 85 percent of small and midsize clients served by council members did not offer health coverage to their employees until they were able to offer an ICHRA or QSEHRA.
QSEHRAs and ICHRAs are a popular solution "to cover more Americans with affordable, quality health insurance," said Robin Paoli, executive director of the HRA Council. "Employees are empowered to choose the coverage they want from respected regional and national insurers, and employers are empowered to offer predictable, cost-effective benefits with fewer administrative burdens."
The number of large employers switching to ICHRAs, in particular, has been "growing exponentially," albeit from a small base, said Jack Hooper, chairman of the board for the HRA Council and CEO and founder of Take Command, an HRA platform firm. "Small and medium-sized businesses are leading the charge to deliver much-needed innovation in the benefits space," as they look to provide choice for employees and cost control and flexibility for employers, he said.
ICHRAs and QSEHRAs
With ICHRAs—pronounced "IK'-rahs"—employers with 50 or more full-time or equivalent employees, and thus subject to Affordable Care Act (ACA) coverage requirements, can opt to pay for employees to purchase their own health insurance coverage on the ACA marketplace or through an insurance broker, rather than providing an employer-sponsored group health plan.
When these employers use ICHRAs rather than a traditional group health plan to fund employee health care, their funding must be sufficient for employees to purchase a plan that meets the ACA's coverage and affordability requirements.
QSEHRAs—pronounced "kyoo-SEHR'-ahs"—allow employers with fewer than 50 employees to use pretax dollars to reimburse employees who buy nongroup health coverage. The rules for ICHRAs and QSEHRAS differ. For instance, QSEHRAs have an annual cap on employer payments and reimbursements, while ICHRAs do not.
Another difference is that QSEHRAs allow employees to qualify for both their employer's subsidy and the difference between that amount and any ACA marketplace premium tax credit for which they're eligible. If an ICHRA is deemed affordable, however, employees must choose the ICHRA over a premium tax credit.
ICHRAs, in particular, are extending benefits to traditionally difficult-to-insure groups, like part-time and seasonal workers, the council reported.
The report also showed that:
- Average participation rate for employees offered an ICHRA or QSEHRA is 60 percent, comparable to industry standards for employer-sponsored group plans.
- Average age of employees covered by an HRA is younger than the typical Healthcare.gov enrollee, meaning HRAs are bringing younger and healthier lives to the ACA marketplace. Around 57 percent of employees accepting an HRA to fund their marketplace health insurance are between 18 and 44, with the largest age cohort being 26 through 34 for each year since 2020.
"Traditionally, employers have only offered one group plan that may not have worked well for employees in different geographic locations, demographics or family statuses," said Victoria Glickman Hodgkins, CEO of PeopleKeep, a benefits administration software company. "HRAs allow employers to offer a more personalized approach to health benefits."
ICHRA Compliance Considerations
Current rules do not let employers offer both ICHRAs and group health plan options to the same employees.
"Not being able to offer ICHRA plans next to traditional employer-sponsored insurance is certainly a limiting factor for many—especially for group plan brokers, who largely still see ICHRAs as a potential threat to their revenue and often can't reconcile giving up one for the other," said Shandon Fowler, vice president for product marketing at Alegeus, a maker of software for administering health care benefit accounts.
However, employers can offer certain classes of workers a group plan and offer others an HRA-based option instead, he noted. "Fast-food or retail chains, for example, can keep corporate employees on a group plan and move their hourly workers at other locations to an ICHRA, saving on cost and potentially administration," Fowler pointed out.
But overall, he said, companies most likely to shift to ICHRAs, "are on the small side, 100 to 200 employees, and have not offered health insurance before."
In some regions of the U.S., "like where I live in South Carolina, the public marketplace plans beat group health plans on cost and are comparable on coverage," he noted. "That kind of shift really gets businesses to open their eyes and take [coverage through HRA approaches] seriously."
Employers' ICHRA Contributions Are Rising
"Personalized health care benefits that allow employees to make their own choice of plan based on a set budget are a win-win for small to midsize organizations and their employees," said Victoria Glickman Hodgkins, CEO of PeopleKeep, a benefits administration software firm. "With an ICHRA, which has no allowance caps, employers are demonstrating their willingness to allocate funding sufficient for most employees to choose very high-quality coverage."
According to PeopleKeep's data, the average monthly employer contribution to employees' ICHRAs this year was $981, up 11 percent from 2021.
This year's average contribution was more than double the cost of the average lowest-cost self-only ACA marketplace gold plan premium of $462, as reported by the Kaiser Family Foundation, Hodgkins said.
Employees can use ICHRAs with funding that exceeds premium costs to pay for other out-of-pocket health care expenses they might owe, such as co-pays or pre-deductible costs.