Is an ICHRA right for your client? 6 ways to find out

The pain of rising healthcare costs is real and far reaching. According to the Kaiser Family Foundation, employer premium contributions increased 20% last year, while WTW estimates that 54% of groups expect that they will be over budget on healthcare spending in 2023. In addition, family premiums have risen 43% more than earnings (38%) and more than inflation (25%) in the past 10 years. 

As employers work with their benefits adviser to identify options that will allow them to continue providing high-value coverage to employees without breaking the bank, individual coverage health reimbursement arrangements known as ICHRAs have emerged as a hot topic and potential solution. 

Described by some as the "401(k) plan of health coverage," an ICHRA is a defined contribution group health plan introduced in 2020. It allows employers to contribute pretax funds to a spending account for their employees to help them purchase individual health insurance. Employees choose their own coverage, and premiums (if necessary) can be paid for with payroll deductions. 

Read more: How to attack the root cause of a broken healthcare system

An ICHRA can deliver simple and flexible plan design options that allow organizations to provide attractive health coverage for their entire employee population. But the primary advantage is the budget control because it is based on defined contribution amounts made with pretax dollars. That translates into cost savings and control for HR and benefit teams. 

Another benefit of ICHRAs is that employers have flexibility in classifying their workforce based on whether employees work full time, part time, are salaried, hourly or seasonal, as well as their location. This ability to allocate contributions ensures that your client's health benefit plans cater to the unique needs of different employee groups, all while avoiding complex eligibility requirements. This customized approach can bolster employee satisfaction and promote a healthier, more engaged workforce, which can support long-term retention rates and loyalty.

On the flip side, ICHRAs come with an additional administrative expense. Due to the reimbursement of individual health insurance premiums, an employer will need to hire a third-party administrator (TPA) to administer the ICHRA. TPA fees will vary and may include set-up costs, monthly admin, banking and plan document expenses. In addition, these accounts can inadvertently generate more work for HR teams that will likely field more questions from employees as they attempt to navigate the individual health insurance marketplace and choose a plan that meets their needs. 

Read more: 3 legal and financial considerations to make before offering an ICHRA plan

If your client is considering an ICHRA, take the time to talk through these six questions:

1. How much support do you want to provide employees when they are shopping for individual health insurance coverage?

Selecting an individual health insurance plan can be daunting for them. Keep in mind that if you have employees in multiple states, each state has its own rules and regulations for individual health insurance. 

2. How much support do you want to provide employees throughout the plan year?

When onboarding new employees, it's important to educate them about what ICHRA coverage means, the employer contribution amount and the fact that ICHRA reimbursement only applies to coverage obtained via the individual health insurance marketplace.

3. Who will administer the ICHRA and what level of service do they offer?

ICHRA plan administration costs can vary along with the level of services provided. Be sure to ask if the administrator offers support like a summary plan description and plan document. And, do they use a standard claim submission reimbursement model or a fintech solution where the employer pays the premium at the carrier level?

Read more: What is the difference between an HRA, QSEHRA and ICHRA?

4. Which employees will be offered the ICHRA?

There are 11 different classifications of employees defined by ICHRA regulations. They include full time, part time, seasonal, salaried, non-salaried (hourly), employees covered by collective bargaining agreements, employees who have not satisfied a waiting period, temporary employees of staffing firms, non-resident aliens with no U.S.-based income, employees working in the same insurance rating area, or any combination of these categories.

5. How will you establish the ICHRA contribution allowance?

Several different strategies can be deployed here. For example, employers can provide all employees with the same amount. They can vary the contribution by employee classification, giving full-time and part-time employees different contribution amounts. In addition, the contribution amount can be varied by employee age, giving older employees a higher contribution allowance since health plan premiums increase with age. In this case, contribution allowances must be structured using a 1:3 ratio, from the youngest to the oldest employee.

6. Do you have more than 50 full-time equivalent employees?

The Affordable Care Act requires employers with more than 50 full-time equivalent employees to offer comprehensive health coverage to employees who work more than 30 hours per week. This is known as the "employer mandate." Employers may face steep penalties (i.e., shared responsibility payments) for failing to offer health coverage to substantially all their full-time employees or for not offering coverage that is affordable and that delivers a minimum level of coverage to full-time employees. 

Employee benefit options are constantly evolving, and it can be a heavy lift for already overworked HR teams to manage. Their best strategy for staying ahead of the healthcare cost curve and workforce dynamics, of course, is to partner with a qualified agent, broker or consultant who can offer the guidance they need and provide support for employees as they transition to this new coverage format.