What Is an ICHRA?
An Individual Coverage Health Reimbursement Arrangement (ICHRA) is an employer-sponsored health benefit that allows a business to reimburse eligible employees for qualifying individual health insurance premiums and, depending on how the arrangement is designed, certain other eligible medical expenses.
Instead of choosing one traditional group health insurance plan for everyone, the employer establishes a defined reimbursement allowance. Eligible employees then purchase their own individual health insurance coverage, and the employer reimburses qualifying expenses according to the terms of the ICHRA.
This approach can give employers greater control over their benefits budget while giving employees more choice in selecting health coverage that fits their individual needs.
How Does an ICHRA Work?
An employer first decides which eligible employees will be offered the ICHRA and establishes a reimbursement allowance according to the arrangement’s design. The employer does not simply give employees unrestricted cash; reimbursements are made for qualifying expenses after the required documentation and eligibility requirements are satisfied.
Employees who participate generally obtain qualifying individual health insurance coverage rather than enrolling in a traditional group health plan offered to the same employee class. Depending on the arrangement, eligible expenses may include individual health insurance premiums and certain other qualified medical expenses.
The employer determines the amount available for reimbursement, subject to applicable ICHRA rules, while employees have the ability to choose individual coverage that better fits their own healthcare needs and circumstances.
In simple terms: the employer provides the benefit dollars, while the employee chooses the individual health insurance coverage.
Why Are Employers Considering ICHRA?
Traditional group health insurance can work very well for many businesses, but it isn’t always the best fit for every workforce. Premium costs, employee locations, participation requirements, and the challenge of finding one plan that works well for everyone can make offering benefits more complicated.
An ICHRA gives employers another way to approach health benefits by establishing a defined reimbursement amount rather than selecting a single health insurance plan for all eligible employees.
This can be particularly useful for businesses with employees in different geographic areas, companies with a workforce whose healthcare needs vary, or employers looking for greater predictability in how much they contribute toward employee health benefits.
For the right business, an ICHRA can shift the question from “Which one health plan should we offer everyone?” to “How much will we contribute toward helping employees obtain coverage that works for them?”
Employee Classes and Workforce Flexibility
One of the features that makes this type of health benefit flexible is the ability for an employer to offer different arrangements to certain groups, or classes, of employees, as long as the plan follows applicable federal rules.
Employee classes can be based on permitted categories such as full-time versus part-time employees, salaried versus hourly employees, employees working in different geographic areas, or certain other classifications allowed under the regulations.
This can be especially valuable for businesses with different types of employees or workers located in multiple states. Instead of trying to make one traditional group health plan work equally well for everyone, an employer may be able to design a benefits strategy that better reflects the structure of its workforce.
There are important rules governing how employee classes are established, including minimum class-size requirements in certain situations.
Employee classes should therefore be designed carefully rather than simply dividing workers into arbitrary groups.
Giving Employees More Choice
With a traditional group health plan, employees generally choose from the coverage options selected by their employer. That can work well, but one plan or network may not meet the needs of every employee.
A reimbursement-based approach can give eligible employees greater flexibility to select individual health coverage available in their area. This can be especially helpful when employees live in different counties or states where carrier networks and plan availability may vary.
Employees may be able to consider factors that matter personally to them, such as premiums, deductibles, provider networks, prescription drug coverage, and other plan features.
For employers, this creates an opportunity to provide a meaningful health benefit without necessarily having to find a single insurance plan that works equally well for the entire workforce.
The employer establishes the benefit. The employee has greater choice in selecting the coverage.
More Predictable Benefit Costs for Employers
One challenge with traditional group health insurance is that renewal increases can make it difficult for a business to predict future benefit expenses.
With a defined reimbursement strategy, the employer determines how much it intends to make available to eligible employees. This can provide greater control over the company’s health-benefit budget while still allowing it to offer meaningful assistance toward employee coverage.
Employers can structure contribution amounts according to the rules governing the arrangement and their overall benefits strategy. This makes it possible to balance the desire to provide competitive benefits with the need to manage costs responsibly.
For growing businesses, this predictability can also make it easier to plan for the cost of adding employees or expanding into new geographic areas.
Instead of simply reacting to an insurance renewal each year, the employer can take a more deliberate approach to determining its contribution toward employee health coverage.
Supporting Employees in Multiple Locations
Providing health benefits can become more complicated when employees live or work in different states, counties, or insurance markets. A health plan with a strong provider network in one location may offer limited options somewhere else.
Allowing eligible employees to select individual coverage available where they live can help address this challenge. Each employee can evaluate the carriers, provider networks, premiums, and plan options available in their own area rather than relying on a single group plan to serve everyone.
This can make the approach particularly useful for businesses with remote employees, multiple locations, or a workforce that extends beyond the company’s home state.
There are still important eligibility, plan-design, and administrative requirements to consider, so a multi-state workforce should be evaluated carefully before deciding whether this approach is appropriate.
For some employers, greater geographic flexibility can make it easier to provide consistent financial support even when employees’ insurance options differ by location.
When This Approach May Not Be the Right Fit
A reimbursement-based health benefit can offer flexibility, but it isn’t automatically the best solution for every business.
Some employers may be better served by traditional group health insurance or a level-funded plan, particularly when they have a workforce concentrated in one area, strong participation, and access to competitive group coverage.
Employers also need to consider administration, employee communication, individual plan availability, provider networks, and how employees will navigate selecting their own coverage.
The goal shouldn’t be to choose a particular benefit strategy simply because it is different. It should be to compare the available options and determine which approach makes the most sense for the employer and its workforce.
Sometimes traditional group coverage is the better answer. Sometimes a reimbursement strategy provides advantages. The important part is understanding the differences before making that decision.
ICHRA and the ACA Marketplace
Employees participating in an employer reimbursement arrangement generally obtain their own qualifying individual health insurance coverage. Depending on where they live, coverage may be available through the ACA Marketplace or directly from an insurance carrier.
An important consideration is how the employer’s offer affects an employee’s eligibility for premium tax credits through the Marketplace. The affordability of the employer’s offer can affect whether an employee is eligible for those savings.
Because the calculation depends on federal rules and an employee’s individual circumstances, employers should communicate the benefit carefully, and employees should understand how accepting or declining the arrangement could affect their Marketplace eligibility.
The Marketplace helps determine eligibility for premium tax credits and other savings; the health insurance coverage itself is provided by an insurance carrier.
This is an area where understanding the rules before enrolling can make a significant difference.
Helping Employees Understand Their Options
Moving from a traditional group health plan to an individual coverage approach can be a significant change for employees. Instead of simply enrolling in a plan selected by their employer, employees may need to compare several coverage options and make decisions for themselves.
That means communication and education are an important part of the process. Employees should understand how the benefit works, how much their employer is making available, which expenses may qualify for reimbursement, and what they need to do to maintain eligible health coverage.
They may also need help understanding differences in premiums, deductibles, provider networks, prescription coverage, and other plan features before making a selection.
A successful benefits strategy isn’t simply about establishing the arrangement. Employees should also have the information and support they need to understand their choices and use the benefit effectively.
Is This Approach Right for Your Business?
There isn’t one health-benefit strategy that works for every employer. The right approach depends on the size and structure of the workforce, employee locations, available insurance options, budget, and the goals of the business.
When evaluating the options, we can look at questions such as:
- Where do your employees live and work?
- What are you currently spending on health benefits?
- How predictable do you want your employer contributions to be?
- Are employees satisfied with their current coverage and provider networks?
- Would greater individual plan choice benefit your workforce?
- How does this compare with traditional group health insurance or a level-funded plan?
Looking at these factors together can help determine whether a reimbursement arrangement deserves serious consideration or whether another group-benefit strategy may be a better fit.
The objective isn’t to fit every employer into the same solution. It’s to understand the options and build a benefits strategy around the needs of the business and its employees.
Frequently Asked Questions
ICHRA can give employers a different way to provide health benefits, but it also raises important questions about eligibility, employee choice, reimbursements, Marketplace coverage, and plan design. Here are answers to some of the most common questions employers and employees have when considering an ICHRA.
How does an ICHRA work?
The employer establishes a defined amount that eligible employees can use toward qualifying expenses. Employees obtain eligible individual health insurance coverage, submit the required documentation, and receive reimbursement according to the terms of the arrangement.
Can employees choose their own health insurance plan with an ICHRA?
Generally, yes. Eligible employees can select qualifying individual coverage available in their area, allowing them to consider premiums, deductibles, provider networks, prescription coverage, and other features that matter to them.
Can an employer offer different amounts to different employees?
Contribution amounts can vary in certain circumstances according to federal rules, including permitted employee classes and factors such as age and family size. The arrangement must be structured in accordance with applicable requirements.
Can this work for employees in different states?
It can be particularly useful for geographically dispersed workforces because employees can select eligible individual coverage available where they live. Plan availability, carrier networks, and premiums can vary considerably by location.
Can an employer offer traditional group insurance to some employees?
Employers may be able to offer a traditional group health plan to one permitted employee class while offering an individual coverage reimbursement arrangement to another. Federal rules govern how those classes can be established.
Are employer reimbursements taxable to employees?
When properly structured and administered according to applicable federal requirements, reimbursements for eligible expenses generally can be provided to employees on a tax-free basis. Employers should consult appropriate benefits, tax, or legal professionals regarding their particular arrangement.
Can employees still receive ACA premium tax credits?
Possibly. Eligibility can depend in part on whether the employer’s offer is considered affordable under federal rules. Employees should understand the effect of the employer’s offer on Marketplace financial assistance before making an enrollment decision.
Does the employer choose the employee’s insurance company?
Generally, no. One of the primary differences from traditional group coverage is that eligible employees select qualifying individual coverage available to them rather than everyone enrolling in a single employer-selected insurance plan.
Is this better than traditional group health insurance?
Not necessarily. Traditional group coverage, level-funded plans, and reimbursement arrangements each have potential advantages. The better choice depends on factors such as workforce size, employee locations, available plans, participation, budget, and the employer’s objectives.
Is ICHRA Right for Your Business?
Choosing between traditional group health insurance, level-funded coverage, and an ICHRA depends on your workforce, budget, employee locations, and benefits goals.
We can help you compare the options and understand how each approach may work for your business before you make a decision.
Resources
HealthCare.gov — ICHRA
Official information about Individual Coverage Health Reimbursement Arrangements, including how they work with individual health coverage and Marketplace savings.
Learn About ICHRA at HealthCare.gov
U.S. Department of Labor — Health Reimbursement Arrangements
Federal guidance and information concerning HRAs and employer-sponsored health benefits.
Visit the U.S. Department of Labor
IRS — Individual Coverage HRAs
Tax guidance covering Individual Coverage HRAs, eligibility and reimbursement rules.