Giving employees money toward their healthcare is nothing new. 1974 was the first introduction to giving tax-free dollars with the Employee Retirement Income Security Act (ERISA). The dollars funneled through something called a Health Reimbursement Arrangement (HRA). However, it ultimately did not solve the high cost of healthcare and the unrelenting insurance increases in the U.S.
Here’s a quick history of the evolution of HRAs:
- The 1980s ushered in Health Reimbursement Arrangements
- 2010 the Affordable Care Act removed free-standing HRAs altogether
- 2017 the act allowed for QSEHRA (Qualified Small Employer HRAs). However, this was only allowed in very limited structures and plan designs
- January 2020 the ICHRA (Individual Coverage HRA) came on the market as a new option for small businesses
What is ICHRA?
Individual Coverage Health Reimbursement Arrangements (ICHRAs) were first available as an employee health benefit option starting in 2020. Quite simply, it allowed employers to offer tax-free dollars to their employees to spend on the Individual Marketplace, also called the “Exchange”. This allowed them to buy their own coverage as opposed to offering a traditional group plan.
ICHRA gained some immediate attention. This the first time that employers were hearing in the news that they could finally control their costs. After two decades of unsustainable increases, anything innovative was welcomed with open arms. We finally realized what we had been doing was not working anymore.
However, there were some significant problems with ICHRA. While it did let small businesses define their budget and have total control over what they were spending, it did not necessarily help employees very much. Employees were not very excited about a few parts of this new option—particularly that they were more expensive and they could only be used in one spot.
Let’s first take a look at the two greatest flaws of ICHRA (while not overlooking the great momentum it brought) and then look at a positive alternative.
The innovative approach to health benefits that ICHRA started is brought to fruition in a new, better alternative for small business health benefits!
1. ICHRA Loses Discounts
Would you ever pay full price for an item you could easily use a coupon for? Of course not! So why would you ever not use a tax credit that you were qualified for?
Imagine doing your taxes and your CPA tells you that you qualify for a huge tax credit, but you tell them you’d rather keep paying more taxes. It wouldn’t happen! Because not lowering your costs when you very easily could is just bad business—am I right?
To review, ICHRA lets an employer set their budget and give tax-free dollars to their team to buy Individual plans. What if I told you that certain post-tax incentives were more beneficial to both the employer and the employee than just writing something off in terms of taxes? It’s not just possible, it’s here.
Tax credits can discount the cost of Individual insurance plans. (It’s something called an Advanced Premium Tax Credit). This means that the IRS actually sends dollars to the insurance company and the individual simply pays a lower cost. Generally, these can save 50% or more on the cost of the plan itself, which is very helpful for both the employer and employee.
What is an Advanced Premium Tax Credit (APTC)?
APTCs are the mechanism used by the IRS to discount Individual insurance plans that are available on the Individual Marketplace, also called the “Exchange”. They are determined by the age, income, household size, and zip code of the individual applying to purchase the plan. Once the APTC is determined, that amount is then sent directly to the insurance company on behalf of the individual. Hence, their purpose of the Individual plan simply feels “discounted”.
This means that by going with an ICHRA, you lose out on that 50% discount. (Note that it’s not 50% every time. Sometimes it’s less, but sometimes it’s more). You get none of these tax credits if you use ICHRA to pay for those plans.
The reality is that when you look at the team as a whole, one way or another, the cost of ICHRA is more than what it should be. Let alone the fact that it can only be used on one thing…
2. ICHRA Loses Flexibility
Dollars offered through an ICHRA not only negate tax credit discounts but also can only be used in one spot—the Individual Marketplace (also called the “Exchange”).
While this is not all that terrible on the surface (after all, Individual plans are all guaranteed-issue and strong insurance plans), the fact is that Individual plans are not always the best choice for the employee. With ICHRA, employees can only purchase from the Exchange.
This reality poses a problem; especially when it comes to spousal carve-out. In this scenario, if your spouse has a plan available that you would like to join, but your employer offers you an ICHRA, you are now ineligible to join your spouse’s plan. You have to buy your own Individual plan—apart from your spouse.
That may not sound bad on the surface but did you that the #1 cause of bankruptcy in the U.S. is medical expenses? If there are two separate health insurance plans between two people in a family, there are now two separate out-of-pocket maximums?
This means that a family on two separate plans may double their risk simply because of ICHRA. This goes to show that ICHRA is not always a better benefit to the employee, no matter how much the employer has controlled their own cost.
ICHRA has zero flexibility in its usage. In many ways, it still repeats the same one-size-fits-all mantra that has been one of the root problems with the health insurance industry for over a decade, especially for small businesses. There needs to be a change. Thankfully, health benefits are finally starting to catch up.
3. 401(k) of Health Benefits
Harvard Business Review released their latest data that breaks down the economics of why traditional group health plans simply don’t make sense for small businesses anymore. Opting for traditional group insurance over a managed individual plan in this day and age would be as silly as offering a pension plan instead of a 401(k) to your employees. Giving a budget over to your employees to invest it however they see fit is just good business.
Many employers are starting to notice this trend and jump on board. The Department of Labor has suggested that up to 11 million employees and 800,000 employers will leave old group plans and move into managed individual plans.
- Pension plans went away and now we have 401(k) for retirement benefits.
- Group plans are going away and now we have managed individual health benefits.
Don’t get left behind in the wake of this change. Traditional group plans will only continue to rise in costs, while Individual plans will keep winning more and more.
WageUp® is better than ICHRA!
In 2015 the IRS made a provision that allows for small businesses to offer budgets to their employees that also unlock discounts and allows the money to be spent flexibly (both of which are not the case with ICHRA).
It did require two specific rules to accomplish this: 1) it must be taxable, and 2) it must be voluntary. If you keep those two primary contingencies, you could build out budgets for your team that make sense for them and the company.
There were a few things to keep in mind when offering this type of benefit.
- Keep all of the legal stuff organized.
- Knowing how much everyone needed.
- Make sure everyone has the help they need to find, buy, understand, and use their new style of health benefit.
Remodel Health’s proprietary managed individual model called WageUp® provides a taxable wage increase that unlocks discounts and allows total flexibility on how it’s spent by the employee. Not only that, Remodel Health has developed a total software and service solution that streamlines the process. This ensures that employees are both taken care of and that they have the best benefits experience.
Your small business deserves to save money.
Your employees deserve more options.
Both happen with WageUp® by Remodel Health®
Make your benefits better.
Schedule your free demo with one of our Benefits Consultants today! They can provide you with a risk-free analysis to discover all your options, serve employees better, and control costs and quality better than you ever have!
Important Notice: Remodel Health does not intend to provide specific insurance, legal, or tax advice. Remodel Health always recommends consulting with your professional representation to properly evaluate the information presented and its appropriate application to your particular situation.