ICHRA vs a traditional group health plan

With an individual coverage HRA, or ICHRA, you set a monthly allowance and each employee buys their own individual health plan, which you reimburse up to that amount. With a traditional group plan, you buy one policy and your employees enroll in it.

Each fits a different kind of business. An ICHRA trades a shared plan for a fixed budget and more individual choice, while a group plan keeps everyone on one plan, with the carrier’s participation and contribution rules attached.

How does an ICHRA work?

You decide the allowance. Employees choose a plan in the individual market, on or off the Marketplace, and to be reimbursed, each one has to be enrolled in individual health insurance or Medicare. You need a reasonable way to confirm that, such as proof of coverage when they enroll. Reimbursements are generally tax-free to employees when the arrangement follows the rules, but confirm the tax treatment for your business with a tax professional.

Employees must be allowed to opt out and waive the ICHRA once a year. A new ICHRA also gives employees a special enrollment window in the individual market, so the plan year doesn’t have to start in January.

How do employee classes work?

You can offer different allowances to different classes of employees, but only classes the rules allow. The list includes full-time, part-time, salaried and hourly employees, seasonal workers, employees in a waiting period, employees covered by a collective bargaining agreement, and employees whose main worksite is in the same rating area, plus a few narrower groups and combinations of these. Within a class, terms must match. The allowance can rise with age, up to three times what the youngest employees get, and with the number of dependents.

Two limits trip people up. You can’t offer a group plan and an ICHRA to the same class, and if you split classes between the two, minimum class sizes can apply to some kinds of classes.

Say you have 12 full-time employees. Eight live near your office and four work remotely in other parts of the country. You could offer every full-time employee the same monthly allowance, with higher amounts for older employees, and each person picks a plan with a network that works where they live. A group plan, by contrast, would ask the four remote employees to use whatever network that one plan has in their area.

Can owners participate in an ICHRA?

It depends on how your business is taxed. In general, sole proprietors, partners and shareholders who own more than 2 percent of an S corporation aren’t treated as employees for HRA purposes, so they can’t take tax-free reimbursements from their own ICHRA. C corporation owner-employees generally can. Check your own situation with a tax professional before you design the plan around yourself.

When does the ICHRA notice go out?

Employees get a written notice at least 90 days before each plan year starts. A January 1 start means early October. Someone who becomes eligible later, such as a new hire, gets it no later than the date the ICHRA can first take effect for them, and a business founded less than 120 days before its first plan year gets that same later deadline for the first year only.

The Department of Labor publishes a model notice that covers what employees need to know, including how the allowance affects their eligibility for a premium tax credit.

How do you set up an ICHRA?

The setup usually runs in this order:

1. Decide which classes of employees get an ICHRA and what each class’s monthly allowance will be, including any age or family-size steps.
2. Check whether each allowance counts as affordable for the employees in that class, and what that does to their tax credits.
3. Put the arrangement in a written plan document and set up how you’ll confirm coverage and pay reimbursements. Many employers use an administrator for this part.
4. Send the notice at least 90 days before the plan year, or by the later deadlines for new hires and new businesses.
5. Help employees choose and enroll in individual plans during Open Enrollment or their special enrollment window.
6. Collect proof of coverage, then reimburse premiums each month up to the allowance.

When is an ICHRA affordable, and why does it matter?

For each employee, compare the monthly premium for the lowest-cost silver plan for self-only coverage where they live with your monthly allowance. If what’s left for the employee to pay is no more than a set percentage of their household income, the ICHRA counts as affordable. The IRS sets that percentage each year.

Affordability decides the tax credit. If the ICHRA is affordable for an employee, that employee can’t get a Marketplace premium tax credit, even if they opt out. If it isn’t affordable, they can opt out and use the credit if they otherwise qualify. Nobody gets both.

That rule has a catch for lower-income employees. An allowance that counts as affordable can take a tax credit off the table even when the credit would have been larger than your allowance. Check your lowest-paid people first.

Where does an ICHRA fit better than a group plan?

It tends to fit when:

• Your employees live in different areas, and no single network serves them all well
• You can’t meet a carrier’s participation minimum, because many employees have coverage elsewhere or don’t want a group plan
• You want a set budget per employee that doesn’t rise automatically when premiums do
• You want different allowances for part-time, seasonal or hourly staff

It also changes what your employees do. Each one shops, enrolls and submits proof of coverage on their own, usually during Open Enrollment or their special enrollment window, so they need somewhere to get help.

Where does a group plan fit better?

A traditional group plan usually fits better when:

• Your employees want broader networks or coverage that travels, and the individual plans in your area lean on HMO and EPO networks
• You want one plan, one enrollment and one set of ID cards, with no employee left to shop alone
• Most of your team lives near your business, inside one carrier’s network
• You want to cover yourself alongside your team, and your business is taxed in a way that keeps owners out of an ICHRA

If you want both options priced for your team, tell us about your group and ask for the ICHRA comparison too; ICHRA modeling is listed among our Concierge services as work we do on request. If you already have a group plan, you can make us your broker without changing the plan and look at an ICHRA before your next renewal.