ICHRA: The Basics

Super Simple ICHRA Explained

What does ICHRA stand for?

ICHRA stands for Individual Coverage Health Reimbursement Arrangement. It’s also commonly referred to as an ICHRA plan.

What is an ICHRA?

An ICHRA is a type of account-based healthcare plan that allows employers to reimburse employees for individual health insurance premiums and qualified medical expenses tax-free. 

How does an ICHRA work?

The way ICHRA works is super simple. An employer establishes a budget for benefits, employees choose a health plan, and the employer reimburses them on their paycheck. If medical expenses are incurred, they can simply upload a receipt and get reimbursed. 

Who is an ICHRA for?

While ICHRA is available to employees of any size, there are two types of employers that choose to offer an ICHRA. The first is companies that are net new to benefits or recently qualified as an ALE (Applicable Large Employer). The second is companies who are facing renewal hikes, participation concerns, or budget concerns and are looking for an alternative to their group plan.

And now, a little more context. 

ICHRA Plan Overview

An Individual Coverage Health Reimbursement Arrangement, or ICHRA, is a new type of HRA in which employers of all sizes can reimburse their employees for a designated amount of health insurance premiums. ICHRA’s simple and modern health insurance reimbursement model has been a game-changer for employers looking to provide health benefits to their staff.

Evolving from another type of HRA, the QSEHRA, ICHRA appeals to more employers by offering greater design flexibility and higher tax-free employee reimbursement limits.

ICHRA uses a reimbursement model that is much simpler than traditional group benefits.

How does ICHRA work?

As the name implies, ICHRA is based on reimbursing employees for insurance rather than buying it for them. At a high-level, the way ICHRA works is very simple:

1. Employers design their plan, including defining which employees are eligible and establishing reimbursement limits
2. Employees purchase the individual plans they want
3. Employees submit claims for reimbursement
4. Employers reimburse employees for valid claims

To stay compliant and keep employees and the IRS happy, there are some important rules and regulations we’ll get into later in this guide.

ICHRA reimbursement has several advantages over traditional group plans that may be appealing to some employers. For instance, HRA insurance (sometimes called a “defined contribution”) gives employers greater ability to control costs and provides employees with more options to choose from. This is very different from the current model of group insurance (sometimes called a “defined benefit”) where employers must choose a one-size-fits all plan for the group and employees are limited to options sponsored by the employer.

In addition, ICHRA takes the burden of managing a health plan and underlying health risks off of the employer. You or your clients won’t have to hassle with renewals, worry about participation rates, stress about what doctor networks your employees want, or be surprised by annual premium increases. Instead, with ICHRA employers can decide which employees qualify, set their monthly allowances, and get back to managing their business while employees get to choose the plans they want.

In this guide, we provide a summary overview of ICHRA’s benefits and basic ICHRA requirements. We’ll share practical tips for evaluating if the ICHRA health insurance model would be a good fit for you or your client, ideas on how to design and optimize an ICHRA solution, and important details on administration and compliance. 

Background: Where did the individual coverage HRA come from?

Although it’s still new, ICHRA feels like something that’s been a long time coming. We’ve watched the retirement industry move from defined benefit to defined contribution models (think pension plans to 401k), so it was only a matter of time before the health insurance industry followed suit. Today, we’ve seen the ICHRA market grow exponentially year over year and we expect that trend to continue to gain momentum. Let’s dig in a little deeper to the history behind employer-subsidized health insurance.

Traditionally, HRAs are commonly used with group health plans. Before the Affordable Care Act (a.k.a. “Obamacare”) passed in 2010, it was common for small employers to use HRAs to reimburse for individual health insurance. However, unintended regulations that spun out of the ACA put a halt to the practice of reimbursing (and even penalized employers who continued doing it).

Although it took a while, congress finally addressed the problem. In December 2016, a hodge-podge bill called the 21st Century Cures Act was passed by a Republican Congress and signed by President Obama. The bill created the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), which again makes it permissible for small employers to reimburse for individual insurance as long as the employers (and employees) met several strict guidelines.

With QSEHRA gaining traction, the Trump Administration issued additional guidance to expand the use of HRAs. In October 2018, the U.S. Departments of the Treasury, Health and Human Services (HHS), and Labor proposed new regulations to expand the usability of health reimbursement arrangements (HRAs). The rules were finalized in June 2019 and created two new types of HRAs: the Individual Coverage HRA and the Excepted Benefit HRA.

HHS projects that in the next 5-10 years, roughly 800,000 employers will offer Individual Coverage HRAs to pay for insurance for more than 11 million employees. We think if market conditions break the right way, it could be much, much higher.