What HR Should Know About Individual Coverage Health Reimbursement Arrangements
Estimated reading time: 8 minutes
We’re all reading the same stories about how competitive the recruiting landscape is these days. And how organizations are having to increase employee pay to attract and retain the best talent. One aspect that I’m not sure we’re spending enough time talking about is benefits.
Benefits play a key role in employee compensation according to a study by Prudential. And 73% of employees say benefits are a big reason they would stay at a job. One benefit that often stands out is health insurance. Employees want to know that they have good health insurance for both preventative care as well as an emergency need.
If you’re not aware, there’s a new type of health reimbursement arrangement called the individual coverage health reimbursement arrangement or ICHRA. It’s not the same as a health savings account (HSA) or flexible spending account (FSA). An ICHRA allows employers to reimburse employees for some or all the health insurance premiums that they purchase on their own.
To learn more about ICHRAs, I asked Cory Jorbin from HUB International to join us. Cory is the chief compliance officer in HUB’s employee benefits west region. In his role, he provides day-to-day compliance support to account teams and clients of all sizes on employee benefits such as the Employee Retirement Income Security Act (ERISA), the Affordable Care Act (ACA), The Health Insurance Portability and Accountability Act (HIPAA), the Family and Medical Leave Act (FMLA), cafeteria plans, and other related matters. Cory is a licensed attorney in the State of Illinois and is admitted to practice before the U.S. Tax Court.
Please remember that Cory’s comments shouldn’t be construed as legal advice or as pertaining to any specific factual situations. If you have detailed employee benefit questions, they should be addressed directly with your benefits broker or friendly neighborhood labor and employment attorney.
Cory, thanks for being here. Tell us what an individual coverage health reimbursement arrangement (ICHRA) is and how it differs from a health reimbursement account (or HRA)?
[Jorbin] An Individual Coverage Health Reimbursement Arrangement (“ICHRA”) is an employer funded account which employees use to purchase individual health insurance coverage. It replaces a traditional group health plan. When employers offer a traditional group health plan, they select the network and plan design and contribute towards the cost of coverage. An ICHRA allows employers to contribute to the cost of coverage but allows employees to choose their own network and plan design.
Is there a typical organization that finds an ICHRA popular – i.e., organization size, industry, geographic region, etc.?
[Jorbin] ICHRAs can be a good fit for any organization, however certain organizations may find an ICHRA to be especially advantageous.
Employers with employees in multiple states, and employers with a significant population in a single state, plus employees in other states. In the group insurance market, the employer chooses the network, and this may not be the preferred network in all areas where the employer has employees. As network coverage and preference can vary by region, an ICHRA allows employers with employees in multiple states to allow their employees to purchase the coverage with the network access they want.
The ICHRA rules also allow employers to continue to offer a group plan in certain markets while offering an ICHRA in other markets. If an employer is based in a certain state, they may wish to keep their group plan for employees in that state. If they also have employees in other states (which has become more common since the pandemic began), offering an ICHRA to employees outside the employer’s home state allows those employees to purchase the coverage with the network access they want.
Employers with high turnover. With an ICHRA, the underlying health coverage belongs to the employee rather than the employer. Therefore, if the employee separates from the employer, they can keep their own individual coverage after separation. While many employers are subject to the Consolidated Omnibus Budget Reconciliation Act (COBRA) or state continuation provisions, these only allow former employees to continue their coverage for a limited amount of time following separation.
Employers who struggle with low plan participation. In the group market, insurance carriers require a certain level of minimum participation in the group health plan. If the plan is not able to meet the minimum participation requirement some carriers will decline to quote, while others may add additional charges to the rates. The ICHRA model allows employers to avoid minimum participation requirements.
Employers may have low participation but still meet the carrier’s participation requirements. These employers may also be good candidates to consider an ICHRA. Low participation may be driven by the plan having high rates. If this is the case, those who enroll in the plan may do so because they utilize the coverage and incur claims. The result is a cycle of adverse selection. Each year rate increases are driven by high utilization (and claims), which further limit participation. An ICHRA allows employers to break this cycle.
Employers who do not currently offer benefits. Many employers are struggling to attract and retain talent. An employer who does not offer benefits is at a competitive disadvantage for talent. At the same time, offering benefits can be costly. ICHRAs are a good way for employers who do not currently offer benefits to employees to at least offer something, while also managing their costs and not contending with carrier minimum contribution rules and participation requirements.
Let’s discuss the “why”. Name a couple of advantages for employers to offer an ICHRA. Are there any downsides to consider?
[Jorbin] There are several advantages for employers:
- An ICHRA allows employees to choose the coverage and network they want, thus increasing choice for employees
- If an employer expands employee population into new geographic areas an ICHRA allows them to do so without changing current group plan, which can be (particularly valuable for employers with current health maintenance organizations (HMOs) and regional carriers
- An ICHRA allows employers to more consistently manage costs without being at the mercy of medical claims
A few disadvantages for employers include:
- An ICHRA is a change from what employees have come to expect from employers, so educating employees is critical.
- The employer has no control over what plan options employees will choose. Buyer’s remorse can be real, which again highlights the importance of education.
- Employers also have no ability to correct mistakes made by employees, such as policy cancellation due to non-payment of premiums.
On the flip side, what are a couple of ICHRA advantages for employees? Any downsides employees need to think about?
[Jorbin] The advantages for employees include:
- Employees can choose the coverage level and network they want and aren’t limited to the plan and networks chosen by employers
- Employees and spouses/dependents can choose different networks or levels of coverage, which is not possible in the group market.
- Employees can directly impact their premium cost by choosing the plan that meets their medical and financial needs. For example, If the employer offers a group plan for $100 per month for employee only coverage, the employee is limited to this cost. With an ICHRA, an employee with minimal medical needs may be able to purchase a lower-level plan for only $50, while one with greater needs may be able to purchase a more comprehensive plan for $200 per month.
The disadvantages for employees:
- A paradox of choice where employees struggle to choose a plan given the number of options in certain areas. Note, even if employees don’t like the 2-3 group options offered by an employer, at least the employer has made the process of choosing a plan easier.
- Individual rates are driven by geographic rating areas and age. Therefore, rates can vary significantly by location, and older employees could likely pay more for coverage than under the current.
- Since the underlying coverage belongs to the individual rather than the employer, employees can’t rely on their employers to assist with claims or other coverage issues.
Last question. Many organizations use the fourth quarter as “open enrollment season”. Is an ICHRA easy to implement, meaning is this something organizations could act on this year or is it more of a next year project?
[Jorbin] January 1st is the best time to move to an ICHRA since all individual market plans renew on the calendar year. ICHRAs can be relatively easy to implement, however employers should act quickly if they are considering an ICHRA for January 1st.
Employers need to first determine whether the employer will administer the ICHRA themselves or utilize a third-party vendor. Next, they will need to establish ICHRA contributions and communicate this, along with the required notices to employees.
Finally, employees will need to enroll in individual coverage and work with the employer and/or vendor administering the ICHRA to understand payment processes. For coverage to be effective January 1st, employees must enroll by a certain date, which varies by state.
My thanks to Cory for sharing his knowledge with us. If you want to learn more about ICHRA plans, check out HUB’s “Straight Talk About ICHRAs” webinar recording.
Benefits are so important to organizations and individuals. But they can also be tricky to maneuver. It’s good to remember that we have options and to explore them. Because benefits are a great way for employers to stay competitive.
Image captured by Sharlyn Lauby while exploring the streets of Salt Lake City, UT
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