Individual coverage health reimbursement arrangements (ICHRAs) became available as a new employee benefit in January 2020 under IRS regulations issued by the Trump administration in June 2019. As ICHRAs approach the end of their initial year, consultants and firms that administer the accounts weighed in on the benefit's future.
With ICHRAs, pronounced "IK'-rahs," employers subject to Affordable Care Act (ACA) coverage requirements could 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. Among a few ICHRA facts to keep in mind:
- As with other health reimbursement arrangements (HRAs), employees don't pay taxes on health care spending reimbursed through an employer-funded ICHRA.
- An ICHRA, like most other HRAs, is not portable when employment ends, although businesses subject to COBRA requirements must give eligible employees a chance to elect COBRA coverage.
- When employers with 50 or more full-time or equivalent employees provide coverage through an ICHRA rather than a traditional group health plan, employer funding must be sufficient for employees to purchase a plan that meets the ACA's coverage and affordability requirements. For instance, in 2021, an employer's ICHRA allowance must be high enough that employees can buy the lowest-cost silver plan on an ACA marketplace exchange by combining their ICHRA funds with no more than 9.83 percent of their adjusted gross income.
Employers Take Notice
There is a growing interest in ICHRAs as a way for employers to keep their health care spending at a fixed dollar amount. This is according to 397 large U.S. employers that participated in HR consultancy Willis Towers Watson's 2020 Health Care Delivery Survey, conducted in August and September. The survey revealed these statistics:
- About 15 percent of employers polled were planning to offer or were considering offering ICHRAs to at least some of their employees in 2022 or later.
- Almost a quarter (22 percent) of wholesale and retail employers were planning to offer or were considering offering ICHRAs in 2022 or later.
In a further sign of support for ICHRAs, one-third of chief financial officers (CFOs) are considering ICHRAs for some of their active employees, according to 54 CFOs who participated in the Willis Towers Watson 2020 Health Care CFO Survey, conducted in September and October.
"Not surprisingly, relatively few employers adopted ICHRAs this year, as the pandemic diverted much of their attention to other critical benefit matters," said John Barkett, senior director of policy affairs, benefits delivery and administration at Willis Towers Watson. "However, we expect to see interest grow as companies learn more about ICHRAs and the market for individual health plans continues to grow more robust each year."
As more employers adopt ICHRAs to fund health care, he added, "employees could find relief from the burden of having to change plans whenever they change jobs."
ICHRAs, QSEHRAs and Group Plans
Dallas-based HRA administrator Take Command Health recently posted its first ICHRA annual report. "Many business owners and brokers are evaluating their options for group benefits, searching for flexible and budget-friendly options," said Jack Hooper, the firm's CEO.
Among the firm's clients, ranging in size from one to 151 eligible employees, 46 existing clients that previously offered a qualified small-employer HRA (QSEHRA) switched to an ICHRA to offer more generous benefits to their employees.
QSEHRAs—pronounced "kyoo-SEHR'-ahs"—allow employers with fewer than 50 full-time employees to use pretax dollars to reimburse employees who buy nongroup health coverage. The rules for ICHRAs and QSEHRAS differ. For instance, QSEHRAs have a reimbursement cap while ICHRAs do not. QSEHRAs first became available in 2017.
Take Command Health's client data showed increasing interest in ICHRAs:
- California, Texas, Florida, Pennsylvania and New York lead the country in ICHRA sign-ups, thanks to their strong individual markets.
- Professional services, nonprofits, tech companies, and health care providers and services lead in sign-ups.
- The average reimbursement rates for 2020 ICHRAs were $749.93 for singles, $847.20 for couples and $931.95 for families.
- Survey respondents rated budget control and flexibility at the top of their list of ICHRA benefits.
"Despite the uncertainty that we've all faced these past few months, we've seen sign-ups for individual coverage HRAs climb steadily and double since January," Hooper said. "Carriers are returning to the individual market, and individual premium prices are stabilizing—critical factors in the success of this new HRA."
Differences by Industry
Marek Ciolko, CEO of Gravie, a Minneapolis-based health insurance brokerage, currently has 52 ICHRA clients, some of whom dropped group health coverage and adopted ICHRAs.
"With the unsustainable increases in many current group plans, an ICHRA is a good option," Ciolko said. "Many want to get out of the business of administering health benefits and also prefer the simplicity and predictability of defined contributions enabled by ICHRAs."
Specifically, he noted, the firm has seen an increase in interest from companies in the home health care, restaurant, and manufacturing and delivery sectors. "Another area where we have seen interest in ICHRAs is midsized companies that find it challenging to locate or maintain health coverage at reasonable rates due to employee health status," he said.
Salt Lake City-based PeopleKeep, which provides consumer-directed health accounts, recently posted its own "first nine months" report on ICHRAs.
"There is a vast difference in the allowance amounts offered by employers who allow reimbursement [through ICHRAs] of both insurance premiums and out-of-pocket expenses compared to those who only reimburse employees for premiums," wrote Nick Green, product marketing manager at PeopleKeep.
Among the ICHRAs PeopleKeep administers, 37 percent were limited by employers to reimbursing plan premiums, while 63 percent could be used to reimburse both premiums and out-of-pocket costs.
Employers' Average Monthly ICHRA Funding Amounts
|Reimburse Plan Premiums Only
|Reimburse Premiums and Out-of-Pocket Costs
|Employee plus spouse coverage
|Employee, spouse and dependents coverage
"It stands to reason that employers who are able and interested in broadening the type of expenses they reimburse would also want to make more money available to their employees for those expenses," Green wrote. "What was unexpected was the degree to which that is true."
A Bipartisan Solution?
ICHRAs have "proven to be a great fit for employers who want more control over their health benefits costs than a group health insurance plan can provide but want to offer more in allowances than the QSEHRA will allow," Green stated.
Ciolko noted, "Employers don't have to worry about selecting plan options that will work for all of their employees, but rather can empower their employees to choose a plan and carrier that meets their needs."
According to Hooper, "We think the ICHRA model could be the key to bipartisan success. It delivers more lives to the individual market, which is important to Democrats, while providing consumer choice and flexibility that Republicans insist on."
He added, "We believe it could be one of hopefully a few bridges that help to fix the health care system from both sides."
Federal Tax Credit/Subsidy: QSEHRAs vs. ICHRAs
Employees' eligibility for a premium tax credit or subsidy when buying an ACA exchange-based plan differs for QSEHRAs and ICHRAs.
- QSEHRA participants who obtain health insurance from an ACA exchange and who are eligible for a tax credit/subsidy must report to the exchange that they are participants in a QSEHRA. The amount of the tax credit/subsidy is reduced by the available QSEHRA benefit.
- ICHRA participants, however, will not be able to receive any premium tax credit/subsidy for exchange-based coverage 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. However, if the ICHRA won't cover the cost of an "affordable" plan, employees must opt out of the ICHRA to qualify for the premium tax credit if they are otherwise eligible.
"QSEHRAs have a special rule that allows employees to qualify for both their employer’s subsidy and the difference between that amount and any premium tax credit for which they're eligible," said John Barkett, director of policy affairs at consultancy Willis Towers Watson.
While the ability of employees to couple QSEHRAs with a premium tax credit is appealing, the downside is QSEHRA’s annual contribution limits, Barkett said. In 2021, small businesses may offer up to $5,300 per self-only employee and up to $10,700 per employee with a family.
"QSEHRA’s are limited in their ability to fully subsidize coverage for older employees and employees with families, because employers could run through those caps fairly quickly,” he noted.
Similarly, for employees with many dependents, premiums could easily exceed the QSEHRA's family coverage maximum, whereas “all those dollars could be contributed pretax through an ICHRA," Barkett said.