Individual Coverage Health Reimbursement Arrangements (HRAs) for Small Businesses

Employers can support their employees in obtaining health insurance through Individual Coverage Health Reimbursement Arrangements (ICHRAs). This approach allows employees to choose a plan that best suits their personal and family needs, making it a customized and practical way to promote employee health. For small and mid-sized employers, ICHRA for small business also offers a way to provide health benefits with a predictable, employer-defined budget. Let's explore the details of this arrangement.

ICHRA vs. Traditional Group Health Insurance for Small Businesses

One key difference between ICHRAs and traditional health plans is that ICHRAs are not bundled plans selected by the employer. Traditional plans are typically chosen by employers and offered as a standardized package to all employees.

With an ICHRA, however, employees receive a set dollar amount to purchase their own health insurance, granting them more flexibility. This allows employees to select a plan that covers specific doctors, treatments, or medications that matter to them and their families.

Small businesses with fewer than 50 employees may also consider a QSEHRA, which has annual contribution caps. ICHRA has no federal cap, is available to employers of any size, and can be offered alongside a group plan to different employee classes.

Benefits of ICHRA for Small Businesses

One of the distinct advantages of ICHRAs for small businesses is that the employer sets a fixed contribution in advance, rather than absorbing renewal increases determined by a group carrier. This cost stability can be a crucial benefit for employers, particularly small businesses, seeking predictable budgeting for employee benefits.

Additionally, the individual market provides eligible employees with more healthcare choices compared to traditional group plans. Rather than being limited to a one-size-fits-all employer-selected plan, employees can choose health insurance that best suits their unique needs, allowing for customized coverage of preferred doctors, specific treatments, or medications. This increased autonomy not only enhances satisfaction but also ensures that employees are enrolled in plans that align more closely with their personal and family health priorities.

Tax Implications for Employees and Employers

ICHRAs offer tax benefits for businesses. Employers can deduct ICHRA contributions as a business expense, reducing their taxable income. For employees, these contributions are generally non-taxable, so they don't count as income or incur payroll taxes.

However, employees must be enrolled in qualifying individual health coverage to retain the tax-advantaged status. Employees can also pay any premium above their allowance pre-tax through a cafeteria plan, but only for coverage purchased off the exchange. This tax efficiency makes ICHRAs a cost-effective healthcare option for both employers and employees. 

Eligibility Criteria for ICHRAs

Eligibility for Individual Coverage HRAs depends on several factors. To qualify, employees must be enrolled in individual health insurance coverage or Medicare. Employers may set additional eligibility conditions, often based on employment type, such as full-time, part-time, or seasonal status. Employers can offer a group plan to some classes and an ICHRA to others, but not both to the same class.

Employers with 50 or more employees must also make the ICHRA affordable under ACA rules to satisfy the employer mandate, which is why allowances should be modeled by employee age and location.

Employers and employees can coordinate efforts to determine if employees meet specific eligibility requirements and to ensure they can participate in the ICHRA program.

Is ICHRA Right for Your Small Business?

This guide highlights the advantages of ICHRAs for small businesses and their employees and explains how the arrangement works. By offering a customized health coverage solution, ICHRAs provide employees with greater control over their healthcare choices, allowing for more tailored plans instead of a one-size-fits-all approach. Along with tax benefits, ICHRAs empower employees to address their unique medical needs. As the healthcare landscape evolves, understanding these options helps employers and employees make informed decisions.

California employers can also see how ICHRA works in California. To determine if an ICHRA would be beneficial for your small business, explore our ICHRA administration services or speak with a KBI Benefits agent today.