Starting in 2020, employers have an attractive new alternative to traditional group health plans: The individual coverage health reimbursement arrangement (ICHRA). ICHRAs have several advantages over previously available health reimbursement arrangements (HRAs), including increased design flexibility, greater ability to control costs, and no contribution limits.
HRAs aren’t new. Before passage of the Affordable Care Act (ACA), many employers offered HRAs to help employees pay for medical expenses. These employer-funded plans use pre-tax dollars to reimburse employees for out-of-pocket medical expenses and individual health insurance premiums. Once the ACA became law, however, the IRS ruled that HRAs are group health plans that fail to comply with the ACA’s market reforms and, therefore, are subject to a penalty tax of $100 per day per affected participant.
In 2016, Congress passed the 21st Century Cures Act, which opened the door for a new type of HRA: The qualified small employer health reimbursement arrangement, or QSEHRA. By excluding these arrangements from the ACA’s definition of “group health plan,” the act made it possible for qualifying businesses to offer HRAs without triggering penalties. Small employers (those with fewer than 50 full-time or full-time-equivalent employees) may offer QSEHRAs to their employees penalty-free, provided the following requirements are met:
- The HRA must be funded solely by the employer, without any salary reduction contributions.
- The employer must not offer a group health plan to any of its employees.
- Benefits must be provided on the same terms to all eligible employees (although they may vary based on certain age and family-size variations in insurance prices).
- Benefits can only be used to pay medical care expenses (as defined by the ACA) incurred by eligible employees or their family members.
- Payments and reimbursements cannot exceed specified limits. (For 2020, the limits are $5,250 for individual coverage and $10,600 for family coverage.)
Employers that establish QSEHRAs must offer them to all full-time employees who are 25 or older and have completed 90 days of service. They may exclude part-time and seasonal workers. Several other requirements apply, including various reporting and employee notice provisions.
Under regulations issued in 2019, employers now have some new options that make HRAs more flexible and user friendly. One of these options is the ICHRA, which provides an attractive alternative to traditional group health plans. Employers of any size can use HRAs to reimburse employees on a tax-free basis for individual health insurance premiums (purchased directly or through the Exchange), Medicare premiums, and certain other medical expenses. Note that employees must have individual health insurance or Medicare to be eligible for reimbursements from an ICHRA.
One big advantage of ICHRAs over QSEHRAs is they’re available even to employers that offer traditional group coverage to some employees. Employers cannot give employees a choice between an ICHRA or a traditional group health plan, but they can offer different plans to different employee classes. For example, an employer could offer a traditional plan to full-time employees and an ICHRA to part-time employees, or it could offer a traditional plan to existing employees (as of a specified cutoff date) and offer an ICHRA to new employees. Employee classes may also be based on geographic location, satisfaction of a waiting period, salaried versus hourly, and certain other factors.
Another advantage of ICHRAs is that there are no contribution limits. Employers can set maximum contributions in their discretion, so long as ICHRAs are funded exclusively by employer contributions and their terms are the same for all employee within a class. Employers can, however, provide higher contribution limits for older employees or those with more dependents.
Is It Right for You?
Employers concerned about the cost of traditional group health coverage should consider an ICHRA, either by itself or in combination with a traditional plan. An ICHRA offers flexible plan design options, greater control over costs and other benefits. We can help you assess your health care needs, weigh the pros and cons of the various options available, and design a plan that’s right for your business and your employees.