ICHRAs Explained - 5 Pros & 5 Cons

The landscape of employer-sponsored healthcare is undergoing a transformative shift, driven by rising costs and the increasing need for flexibility. One innovative solution gaining traction is called the Individual Coverage Health Reimbursement Arrangement (ICHRA). An ICHRA is a healthcare benefit model that allows employers to reimburse employees for their individual health insurance premiums and other qualified medical expenses. Instead of offering a traditional group health insurance plan, employers allocate a specific amount of pre-tax dollars for each employee to spend on healthcare.

How ICHRA Works

At its core, the ICHRA model is simple. Employers allocate a specific pre-tax amount to reimburse employees for their medical expenses, including health insurance premiums. Unlike traditional group plans, where everyone is more or less "locked into" the same plan, ICHRAs offer greater latitude for employees to pick the insurance coverage that suits their individual or family needs best. Employers determine the reimbursement amount, which can be customized based on various classifications such as full-time or part-time employment, geographic location, or seniority.

PROS

1. Flexibility for Employers and Employees

   One of the key advantages of an ICHRA is the flexibility it offers. Employers can define the amount of money they wish to reimburse employees for their medical expenses. Employees, in turn, have the flexibility to choose a health insurance plan that best suits their needs rather than accepting a one-size-fits-all group plan.

2. Budget Control

   Employers can decide how much they want to contribute to employees' health care expenses, offering better control over costs.

3. Employee Autonomy

   ICHRA allows employees to make decisions about their own healthcare needs. They can choose the coverage that fits them best and even opt for plans that may cover their specific healthcare providers or any specialized treatments they may need. This can result in a better fit between the employee's needs and the insurance coverage, increasing overall satisfaction.

4. Portability of Coverage

   The health coverage in ICHRA is tied to the individual, not the job, making it portable. If an employee leaves their job, they can keep their health insurance plan and continue paying for it independently or transition it to a new employer's ICHRA. This can make job changes or life transitions smoother with regard to healthcare coverage.

5. Tax Benefits

   Both employers and employees can benefit from tax advantages when using an ICHRA. Employers' contributions are generally tax-deductible business expenses, reducing the overall tax liability for the company. Employees also receive tax benefits, as the reimbursement for health insurance premiums is generally tax-free.

CONS

1. Ineligibility for Tax Credits

   If an employer provides an ICHRA that is deemed "affordable" under ACA guidelines, employees are not eligible to receive premium tax credits for marketplace plans.

2. Complex Calculations

   The determination of whether an ICHRA is "affordable" can be complex and involves several factors like employee income and the cost of individual insurance plans in their area.

3. Limited Employer Oversight

   With ICHRAs, employers have less control over the quality and type of health plans that employees may select. If an employee chooses a subpar plan and receives inadequate healthcare coverage, the employer has little to no say in improving the quality of care.

4. Complexity of Choices for Employees

   While flexibility is often seen as a benefit, the wide array of insurance options can be overwhelming for some employees. Navigating the individual insurance market can be complicated, requiring a degree of healthcare literacy that not everyone possesses.

5. Administrative Challenges

   Despite potentially simpler administration compared to group plans, ICHRAs still require a level of oversight that can be challenging for smaller employers. Employers must validate expenses, manage reimbursement processes, and ensure compliance with healthcare laws, which can still be time-consuming.

If you’re wondering if an ICHRA is a good fit for your organization, feel free to contact Christian Mosier at Christian@benxconsulting.com