What Is ICHRA and How Does It Work?

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TLDR

When it comes to offering health insurance to your employees, your options can often seem muddled. Here, we’ll compare a traditional health plan with a professional employer organization (PEO) and an individual coverage healthcare reimbursement arrangement (ICHRA).
A traditional group health plan can offer multiple health benefits, such as medical, dental, and vision, and is provided to eligible employees by the employer.
A professional employer organization, or PEO, is an outsourcing company providing comprehensive human resources solutions for small to mid-sized companies, including providing health benefits.
An individual coverage health reimbursement arrangement, or ICHRA, is a new option for employer-sponsored health benefits for companies of all sizes, including startups. Effective for use in January 2020, an ICHRA allows employers to reimburse employees for health care costs instead of purchasing insurance for them.
Costs are minimal when setting up an ICHRA.
Any size startup can use an ICHRA.
Health plan premiums and medical expenses can be reimbursed at the startup’s discretion.
The startup can set reimbursement caps on health benefits, giving the company complete control over its health insurance budget.
ICHRAs are scalable. Founders can scale benefit offerings across employee classes as well as scale reimbursement amounts.

When it comes to offering health insurance to your employees, your options can often seem muddled. And since you’re busy running and growing your startup, you don’t have a lot of time to research the different types of health benefit plans, comparing the benefit of each.

In this article, we’re going to shortcut that analysis for you. Here, we’ll compare a traditional health plan with a professional employer organization (PEO) and an individual coverage healthcare reimbursement arrangement (ICHRA).

What is ICHRA?

Before we define an ICHRA, let’s first define a traditional group health plan and a PEO.

Traditional Group Health Plan

A traditional group health plan can offer multiple health benefits, such as medical, dental, and vision, and is provided to eligible employees by the employer. To offer a traditional group health plan, the startup must have at least one qualified full-time employee (other than the founder). Participants can add spouses or dependents to the plan at an additional cost.

Plan participants can typically get reduced health care costs through these plans, as discounts on services are negotiated. Additionally, the cost is also reduced as the financial risk is spread out among numerous employees. Further, the employer contributes to the overall cost of the plan, reducing the cost of benefits.

PEO

A professional employer organization, or PEO, is an outsourcing company providing comprehensive human resources solutions for small to mid-sized companies, including providing health benefits.

If your startup hires a PEO, you enter into a joint-employment agreement with the PEO, meaning both your startup and the PEO share in employer responsibilities. For example, the PEO becomes the employer of record for your employees, as it handles human resources issues such as payroll and health benefits. The startup, on the other hand, retains all responsibility for running and growing the startup.

Many small or mid-sized businesses can’t afford to offer well-rounded health insurance benefits to their employees. PEOs solve this issue. By having access to more comprehensive benefits packages, smaller businesses offer their employees higher quality benefits, as larger companies do.

ICHRA

An individual coverage health reimbursement arrangement, or ICHRA, is a new option for employer-sponsored health benefits for companies of all sizes, including startups. Effective for use in January 2020, an ICHRA allows employers to reimburse employees for health care costs instead of purchasing insurance for them.

With an ICHRA, startup founders can design the health plan, decide on employee eligibility, and establish reimbursement levels for health care costs. Then, the employees can purchase the plan with preferred options. Once purchased, the employer reimburses the employee for the cost of the health plan premiums, tax-free. Additionally, when the employee incurs medical expenses, the employer will reimburse the employee—also tax-free.

Startup founders can offer both an ICHRA and a traditional group health plan. However, the ICHRA and the traditional plan must be provided to separate employee groups. An employee cannot be forced to choose between the ICHRA and the traditional health insurance plan.

What Are the Enrollment Requirements for ICHRAs?

The ICHRA regulations and the plan document establish the requirements for both employee eligibility and enrollment. First, to be eligible to participate in an ICHRA, the employee must be covered by an individual health insurance plan, such as health insurance purchased from a public marketplace or Medicare.

Additionally, startup founders can refine employee eligibility based on eleven different classes of employment. Those classes include:

Full-time
Part-time
Seasonal
Temporary employees (staffing firm)
Salaried
Hourly
Union (collective bargaining agreement)
Waiting period employees (employees who just joined the employer and are in their initial waiting period for eligibility)
Non-resident aliens
Employees in different geographic locations, based on rating areas.
A combination of two or more of the above.

Here’s something for founders to keep in mind—owners or part-owners are not eligible to participate in an ICHRA. Neither are employees that participate in their spouse’s group health insurance.

If startups choose to establish an ICHRA, it’s good news for employees as to enrollment. The establishment of an ICHRA creates a unique “special enrollment period.” This means that upon choosing to participate in the ICHRA, the employee has sixty (60) days before and after the ICHRA’s effective date to enroll in a qualified individual health plan. The employee does not have to wait until the annual open enrollment or special enrollment periods (e.g., enrollment permitted for specific changes such as marriage or divorce), common to most individual and group health plans, including those offered by PEOs.

What Are the Benefits of an ICHRA?

Here are some benefits of an ICHRA to consider for your startup:

Any size startup can use an ICHRA.
ICHRAs allow for more flexibility in the design of offered health benefits.
ICHRAs allow founders to tailor the plan’s eligibility to 11 employee classes.
No minimum or maximum contributions are required, as common with other benefit offerings, including traditional group health insurance plans.
Health plan premiums and medical expenses can be reimbursed, at the startup’s discretion.
The startup can set reimbursement caps on health benefits, giving the company complete control over its health insurance budget.
If the startup has more than 50 full-time employees, the ICHRA can satisfy the Affordable Care Act’s employer mandate.
ICHRAs are scalable. Founders can scale benefit offerings across employee classes as well as scale reimbursement amounts.

How to Set Up an ICHRA Easily

Setting up an ICHRA for your employees is an easy process. First, you’ll choose your plan design, including any options that best fit the needs of your employees—while staying within your startup’s budget. Next, you’ll decide to which employees you’ll offer the ICHRA. Although you can tailor this offer among the employee groups mentioned above, once you choose a group, the ICHRA must be provided at the same terms across those employees within that group.

Then, you’ll decide on the terms and reimbursement amounts. Additionally, you’ll decide on your plan’s start date. Last, you’ll finalize your plan documents, notify your employees, and begin managing the plan. However, be careful here. Your plan documents must comply with federal law, you must create a process to substantiate claims and reimbursements, and you must understand record-keeping and tax reporting.

Like any benefit plan, you’ll want to engage a knowledgeable attorney or health plan broker to ensure your plan documents and ICHRA processes are in order. Our suggestion for a professional ICHRA vendor is Savvy.

What Does It Cost to Setup an ICHRA?

Costs are minimal when setting up an ICHRA. By working with experienced vendors, like Savvy, you can choose from legally compliant plan documents, buying them individually or as a package (depending on the vendor). You may also have costs associated with any legal advice requested.

Unlike an ICHRA, setting up a traditional health plan through your own startup or through a PEO is more costly, as they both require more documentation and implementation.

Let’s Compare: ICHRA vs. Traditional Health Plan vs. PEO

Now that we’ve reviewed the basics of an ICHRA, let’s see how it compares with traditional health plans and PEOs.

First, let’s compare ICHRAs and traditional health plans.

RISK: Traditional health plans put health risk responsibility on the employer, where an ICHRA transfers this risk to the employee.
BUDGET: Traditional health plans focus more on the products offered, where an ICHRA is budget-forward. ICHRA reimbursement levels are based on the startup’s budget, giving the startup greater financial control.
FLEXIBLE: Traditional health plans are more of a one-size-fits-all product, where an ICHRA can be flexibly designed for employees’ needs.
PORTABILITY: Traditional health plans are generally not portable. When an employee terminates employment, the only way to continue with the traditional health plan is through COBRA, which typically limits you to eighteen (18) months of coverage. ICHRAs, on the other hand, are portable, meaning that if the employee terminates employment, he or she can take the ICHRA with them.
CHOICE: Traditional health plans may give employees one or two choices for medical coverage, where an ICHRA gives employees personalized options.

Next, we’ll compare ICHRAs and PEOs.

RISK: PEOs assume any risks associated with the health plan, significantly reducing risk for the startup, where an ICHRA transfers this risk to the employee.
BUDGET: Depending on the totality of services selected, PEOs typically cost 2%-12% of payroll, with additional flat rates per participant. An ICHRA, on the other hand, is budget-forward. ICHRA reimbursement levels are based on the startup’s budget, giving the startup greater financial control.
FLEXIBLE: PEOs are more flexible than traditional health plans but not as flexible as ICHRAs. For example, PEOs can offer health benefits to scale with your startup as you grow. However, ICHRAs can be flexibly designed for employees’ needs, allowing for different benefits and reimbursement amounts across employee classes.
PORTABILITY: Similar to traditional health plans, PEO plans are generally not portable. When an employee terminates employment, the only way to continue with the PEO health plan is through COBRA, which typically limits you to eighteen (18) months of coverage. ICHRAs, on the other hand, are portable, meaning that if the employee terminates employment, he or she can take the ICHRA with them.
CHOICE: PEOs can often offer more options for health plan participants in small to mid-sized businesses, meaning smaller companies can have access to big company benefits. However, the benefit offerings are still restricted by the traditional health plan sponsored by the PEO. ICHRAs, however, offer employees numerous personalized options that can be tailored across employee classes.

ICHRAs are still the new kids on the block but are already gaining a reputation. Referred to as the new 401ks of health benefits, ICHRAs are starting to make a splash with employers who want to control their health plan spend. According to the Willis Towers Watson 2020 Health Care Delivery Survey, about 15% of employers are planning on offering or considering offering ICHRAs to some employees in 2022 or later.

Choosing health insurance for your startup’s employees is a big step. Don’t go it alone. By pairing up with a health plan expert, you can feel confident that you’ve chosen the right benefits for your employees.

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