ICHRA Plans: An Affordable Alternative for Small Businesses
Health benefits play a significant role in attracting and retaining employees, but for many small businesses, offering traditional group health insurance can be financially daunting. The Individual Coverage Health Reimbursement Arrangement (ICHRA) provides a more affordable alternative to group health plans, allowing small businesses to offer competitive health benefits without the high costs. Below, we'll explore what an ICHRA is, how it works, and why it may be a viable option for small business health plans.
What Is an ICHRA Plan?
An ICHRA, or Individual Coverage Health Reimbursement Arrangement, allows employers to reimburse employees for individual health insurance premiums and certain medical expenses. Instead of paying for a group health insurance plan, employers set a reimbursement limit, and employees purchase their own health insurance through the individual marketplace.
How ICHRA Plans Work
1. Employees Choose Their Plan
Employees select an individual health insurance plan from the marketplace or a private insurance provider that suits their needs.
2. Employer Reimbursement
Employers set a fixed monthly reimbursement limit, covering premiums and qualified medical expenses. There’s flexibility in how much employers can contribute, and there’s no cap on the reimbursement amounts.
3. Third-Party Administrators
Many businesses opt to work with companies that specialize in managing ICHRAs. These administrators handle the setup, employee education, and ongoing support, making it easier for employers to implement and maintain these plans.
By allowing employees to choose their own health plans, ICHRAs offer a personalized solution that fits their healthcare needs while giving employers a predictable way to manage health benefit costs.
What Does an ICHRA Plan Cover?
ICHRA plans can cover a range of healthcare expenses, including:
Individual Health Insurance Premiums
The primary benefit of ICHRAs is that they reimburse employees for their health insurance premiums. This means employees aren’t locked into a one-size-fits-all group plan; they can choose the best coverage for them.
Qualified Medical Expenses
Employers may also reimburse other out-of-pocket expenses such as doctor visits, prescriptions, and medical procedures. This flexibility allows businesses to tailor their ICHRA offerings to fit both budget constraints and employee needs. This customization makes ICHRAs a more flexible option for small companies than traditional group health plans.
A full definition of “qualified medical expenses” is available in IRS Publication 502.
Which Businesses Can Offer an ICHRA?
ICHRA plans are ideal for businesses of all sizes, but they are particularly attractive to small businesses that want to offer health benefits without committing to a group health plan. Whether you're a small start-up with a handful of employees or a more established company not yet ready to offer group health insurance, an ICHRA could be the solution.
Even Applicable Large Employers (ALEs)—those with 50 or more employees—can offer an ICHRA to satisfy the Affordable Care Act (ACA) employer mandate, as long as the reimbursement amounts meet ACA affordability requirements. However, for ALEs, the contribution levels must be carefully structured to avoid penalties.
A business can provide ICHRA as either a stand-alone benefit or in addition to a group health insurance plan. However, they cannot offer the same group of employees the option to choose between the two.
For instance, it’s acceptable to give full-time employees a group health plan and part-time employees an ICHRA, but full-time employees cannot be given the choice between the group plan and an ICHRA.
Employee Eligibility for ICHRA Plans
An ICHRA is a flexible option, but there are specific guidelines for employee eligibility:
Employees must have individual health insurance coverage to participate.
Employees cannot be simultaneously enrolled in both an ICHRA and a traditional group health plan.
Employers can structure ICHRAs to offer different reimbursement levels to different classes of employees, such as full-time versus part-time, salaried versus hourly, or geographic location. However, the rules must be applied consistently within each class to avoid discrimination.
Benefits of ICHRA Plans for Employers
Offering an ICHRA presents multiple advantages for small businesses:
Cost Savings & Control
The primary benefit of an ICHRA is budget control. Employers set a fixed reimbursement amount, which helps them avoid the fluctuating costs associated with group health plans. This can be particularly important for small businesses that need to manage their expenses tightly.
Customization & Flexibility
Employers can tailor the reimbursement amounts and covered expenses to suit their business needs. This flexibility allows them to offer competitive health benefits without overextending financially.
Tax Advantages
Employer reimbursements through an ICHRA are tax-deductible, and employees receive their reimbursements tax-free, increasing the benefit's overall value.
Ease of Administration
By partnering with third-party administrators, employers can streamline the implementation and management of ICHRA plans. This saves time and reduces the complexity of offering health benefits.
Benefits of ICHRA Plans for Employees
ICHRA plans also provide substantial benefits for employees, making them an attractive option:
Freedom of Choice
With an ICHRA, employees aren’t confined to a single group plan. They can choose the health insurance plan that best fits their individual or family needs.
Portability
Employees keep their health insurance plan even if they leave the company, offering greater continuity of care than traditional group plans.
Tax-Free Reimbursements
Employees receive tax-free reimbursements for eligible expenses, which can reduce their out-of-pocket healthcare costs.
Why Small Businesses Should Consider ICHRA Plans
For small businesses, offering health benefits can be challenging due to the high costs associated with group health plans. However, by adopting an ICHRA, small businesses can provide valuable health benefits without stretching their budget too thin.
The ability to set a fixed reimbursement amount gives employers control over their healthcare spending, while employees enjoy the flexibility to choose the best coverage for their needs. Plus, the tax advantages make it a win-win for employers and employees.
For businesses not yet ready to commit to group health insurance, an ICHRA plan offers an affordable, scalable, and flexible alternative that can help attract and retain top talent.
Third-party administrators can simplify tasks like processing claims, handling reimbursements, and ensuring compliance with IRS rules. They can help small businesses implement and manage ICHRAs without the administrative burden and provide tools to customize plans, communicate with employees, and ensure that businesses stay compliant with regulations.
Final Thoughts
As healthcare costs continue to rise, more small businesses are turning to Individual Coverage Health Reimbursement Arrangements (ICHRA) as an effective way to offer small business health benefits. With the flexibility to control costs and the ability to provide personalized coverage for employees, ICHRAs stand out as one of the leading small business health plans available today. If your business is exploring health insurance options, an ICHRA could be the affordable alternative that works for you.
By allowing small businesses to offer tailored health benefits while maintaining financial control, ICHRA plans represent a smart solution for providing competitive employee healthcare.
Still have questions about ICHRA plans? Schedule an introductory call with JLS Accounting today!