The Rise of ICHRAs as an Option for Employers

The cost of health care in the United States is getting more expensive than in previous years, and is expected to get more expensive. In a recent article, Kathryn Mayer from SHRM sites two studies from WTW and benefits consulting firm Buck that show the cost of Medical care benefits in the United States is projected to increase by an estimated 8.9 percent in 2024, compared to 2023 costs, which increased by 8.2 percent over 2022 costs⁴. The study from Buck also shows that Medical costs for employer-sponsored plans are rising between 6.8 percent and 7.3 percent, which is outpacing inflation⁴. Mayer sites multiple drivers of medical costs including new medical technologies, overuse of care due to medical professional recommendations, poor health habits, inflation, and underuse or lack of preventive services⁵.

With medical costs on the rise, many employers are evaluating their healthcare options to find cost-effective means to provide their employees with quality healthcare options. An option gaining traction with employers are Individual Coverage Health Reimbursement Arrangements or ICHRA, for short.

ICHRAs are employer-sponsored health reimbursement arrangements (HRA) that allow employees to purchase individual plans or Medicare plans with a stipend from the employer. The employee can purchase a low cost or high cost plan depending on their needs, paying the difference in what the employer funds through payroll deductions like they do with their group coverage. But some questions that employers may be asking is how an ICHRA compares to a more traditional group coverage and is it right for their business and employees?

Who Can Set Up an ICHRA and Who is Eligible?

Employers of any size are able to offer an ICHRA to their employees, so long as they have other employees working for them². ICHRA coverage can be offered to different classes of employees, including classes of employees who may not be eligible for coverage under a traditional employer-sponsored group health plan, like part-time and seasonal employees, employees who haven’t satisfied a waiting period, non-resident aliens, and other classes of employees who are otherwise ineligible for coverage under a typical employer-sponsored healthcare plan^1,2,3.

What Groups Are Good Candidates for ICHRA?

While ICHRAs are certainly getting a lot of attention, they aren’t a one-size-fits-all. Based on our experience, these are groups most likely to benefit from an ICHRA:

Groups with ACA plans (i.e., fully insured but not Grandmothered or Grandfathered, not medically underwritten)
Groups with bad risk going forward (i.e., high-cost claimants) where the guaranteed issue nature of individual coverage is beneficial and medical underwriting is not.
Groups with a large portion of Medicare-eligible employees. ICHRAs are the only method where employers can legally reimburse employees for the cost of Medicare, Medicare supplements, and Medicare Advantage plans.

Benefits and Limitations to Consider

Offering an ICHRA can offer some benefits for employers. Benefits include:

It can be offered alongside a traditional group health plan but only for employees not otherwise eligible for the group plan, such as part-time or seasonal workers.
Offering an ICHRA, employers can also control their costs for health care spending by offering a stipend towards the cost of coverage avoiding renewal rate increases. This is similar to employers using a flat rate towards the cost of coverage instead of a percentage.
The employer and employees can pay premiums on a pre-tax basis through a Section 125 cafeteria plan¹. This is the only legal way an employer can deduct an employee’s individual or Medicare premiums on a pre-tax basis.

While the ICHRA offers the above benefits and more, there are some limitations and considerations that need to be considered as well:

Many ICHRAs are administered through a third-party administrator, which can add additional employer administration costs and lead time for implementation. Lead time is generally 90-120 days from when you start to evaluate them as an option. Individual premiums are typically released in mid-to-late October for January 1.
Because employees can purchase any option available for coverage, the payment of these premiums and the management of eligibility becomes critically important.
Individual coverage typically varies by county and region where plan options available may not include all area hospitals (and perhaps only one covered hospital except for emergencies) or have restricted provider and/or pharmacy lists.

There are certainly other benefits and limitations to offering ICHRA coverage, so employers should consult with their ARC Benefit Solutions representative to fully discuss these considerations. We have a subject matter expert that we bring in who is experienced with Medicare, individual, and group benefits to assist with these programs.

In an environment where employees are becoming less satisfied with their healthcare coverage options and employers are struggling to keep up with rising costs, employers may be interested in looking into diversifying their sponsored employee benefits that offers employees more coverage options while keeping costs in check. ICHRAs have a lot of benefits that can accomplish this, but there are also more options and limitations for employers to consider when comparing an ICHRA to a traditional employer-sponsored healthcare plan. If you are interested in exploring ICHRA coverage for your business, please contact your ARC Benefit Solutions client advisor for more information.

Who Can Set Up an ICHRA and Who is Eligible?

What Groups Are Good Candidates for ICHRA?

Benefits and Limitations to Consider

Resources