ICHRA pros and cons

Individual Coverage Health Reimbursement Arrangements (ICHRAs) offer employers a viable alternative to traditional group health coverage.

ICHRA offers an affordable and personalized health coverage for organizations (that do not subscribe to one-size-fits-all). All this is done while giving beneficiaries more customization and flexibility in their choice of health insurance.

Although ICHRA is suitable for most employers, it may involve administrative complexities and potential compliance nightmares.

Is ICHRA good for employees?

The transition from the traditional group healthcare plan to an ICHRA can have many advantages and disadvantages for both employers and employees. Below, please see a breakdown of these factors:

Pros of ICHRA to employees:

• Flexibility and Portability: ICHRAs cover belongs to the employee, hence not tied to a specific employer. Employees pick their health insurance coverage. An employee switching jobs will easily continue using their plan and reimbursement.
• Options and personalization: Employees have options to customize a cover that best fits the individual’s healthcare needs and circumstances; this is in total contrast to the traditional group plan of one-size-fits-all.
• Potential for Lower Premiums: Depending on the participant’s market and needs, it may be easy for employees to find plans that offer lower premiums compared to traditional group insurance.
• Higher Limits: ICHRA (compared to QSEHRA) has no annual reimbursement limit. Employer is allowed to offer as much of an allowance as they can to their employees.
• Tax benefits: ICHRA reimbursements are tax-free as long as the purchase individual health insurance plan that meets minimum essential coverage (MEC).
• Empowerment: Participants are given more total control, power, and choices over their overall healthcare decisions.

 Cons of ICHRA to employees:

• Health Responsibility: The burden of selecting health insurance plans is shifted to the employee. This may be overwhelming for new employees who may be unfamiliar with the process.
• Financial Risk: Employees may face the risk of incurring higher out-of-pocket expenses if the reimbursement amount set by the employer is not sufficient to cover the costs of their chosen plan.
• Plan exclusions: ICHRA accepts only qualified plans. Not all individual insurance qualifies for ICHRA Plan reimbursements, e.g., an employee on a spouse’s group plan may find themselves ineligible.
• Impact on premium tax credit: ICHRAs affect access to premium tax credits, which can assist in lowering health insurance premiums. Employees enrolled in ICHRA cannot receive premium tax credits.
• Limited Network Access: Access to health care providers is solely determined by the choice of an employee’s health insurance. Most individual plans do not offer access to preferred provider option (PPO) plans, which do offer out-of-network coverage.

Is ICHRA good for employers?

Pros of ICHRA to employers:

• Cost Control and Savings: Employers can comply with the Affordable Care Act (ACA) requirements while having total control over healthcare costs. The employer is allowed to set the reimbursement, hence suitable for budgeting and cost predictability.
• Flexibility: ICHRA allows for customization. Employers can offer tailored health benefits to different groups of employees, hence the ability to cater to specific needs.
• Tax Advantages: ICHRA offers tax-free reimbursements to employees while at the same time being a tax-deductible on the employer’s tax return, potentially lowering the overall tax liability.
• No Participation Requirement: Compared to the traditional group covers, ICHRA has no minimum participation requirements, hence giving employers more flexibility.
• Talent Retention: Most employers see health benefits through the lens of one-size-fits-all. But nowadays, Employees expect choice, customization, and flexibility in their choice of an insurance plan.
• ACA’s compliant –Applicable large employers (ALEs) are mandated to offer affordable health coverage to full-time employees under the ACA pay-or-play rules. ICHRAs can be used to provide coverage without penalty if deemed affordable.

 Cons of ICHRA to employers:

• Administrative/Compliance Nightmare: Setting up and managing an ICHRA can be more complex than traditional group health plans; it requires careful planning to comply with set regulations (ERISA compliance and COBRA).
• Potential for Confusion and Backlash: Traditional plans are always a top choice for their simplicity. On the other hand, ICHRA tends to be complex and can be confusing for both employers and employees. Also, there will always be a tendency for employees to question the adequacy of the reimbursement options.
• Market Dependency: The Success of ICHRA depends on an employee’s medical needs, his coverage preferences, medical plans available in the individual market, employee’s household income, and the size of the ICHRA allowance provided.

Bottom Line

• Employees opting out of an affordable ICHRA benefit cannot access the premium tax credit. However, if the plan is unaffordable, employees can waive the right to the ICHRA benefit and receive their premium tax credit.

• Employees must enroll in an individual health plan during their initial ICHRA offering. They can also qualify for a special enrollment period if they want to switch plans later. Missing these windows can result in loss of coverage, leading to stress and potential financial risk.