In this article
- What is an ICHRA?
- Two ICHRA pros for employees
- What are potential ICHRA cons for employees?
- The interaction of ICHRAs & affordable ACA health insurance: potentially a pro or con
- How much will I have to pay for my health insurance with an ICHRA?
- With an ICHRA, do I have to pay for my health insurance directly and get reimbursed?
- Who can help me choose a health plan to use with my ICHRA?
Since 2020, U.S. businesses of all sizes have been able to reimburse their employees tax free for individual health insurance premiums and medical expenses through Individual Coverage Health Reimbursement Arrangements (ICHRAs).1 As these plans are growing in popularity, more employees are wondering about ICHRA pros and cons, and how their employer’s ICHRA offer might affect their coverage costs.
Here’s what employees should know about ICHRAs:
What is an ICHRA?
An ICHRA is a type of employer-funded health benefit plan that allows an employer to reimburse employees for qualified medical expenses, including some or all of the premiums for individual-market health insurance coverage (or Medicare, if the person is Medicare-eligible),1 as well as the cost of out-of-pocket medical expenses.2
Since ICHRAs became available in 2020, this type of health reimbursement arrangement (HRA) has seen relatively rapid growth. According to the HRA Council, ICHRA adoption by employers increased by 29% from 2023 to 2024.3
Two ICHRA pros for employees
From an employee’s perspective, an ICHRA can be beneficial due to the wide range of plan options from which they can pick, as well as the portability of the coverage.
Employees can use their ICHRA benefits, which are not included in taxable wages,4 to help cover the cost of any individual-market coverage that’s available to them (Medicare premiums can also be reimbursed with an ICHRA allowance. But an ICHRA cannot be used to reimburse other types of coverage, such as group coverage offered by a spouse’s employer). Depending on where a person lives, this can mean that there are dozens of plan options, and well over a hundred in some areas.
That means each employee can pick any available individual-market health plan that best fits their needs, unlike traditional group coverage, in which the employer selects one or multiple plan options from which employees can choose.
Another benefit of an ICHRA is that the employee’s health plan is not tied to employment. An ICHRA contribution is made by the employer and would cease if the employee were to leave the job. But since the employee purchases their health coverage in the individual market, they can keep the health plan regardless of their future employment circumstances.
This is in contrast to COBRA, which allows some people to keep their group coverage for up to a maximum of 18, 29, or 36 months – depending on the circumstances – after leaving a job.5 In either a traditional employer group plan or ICHRA, employees would lose their employer’s contribution to the premiums when they leave the job. But if they bought their coverage in the individual market, there wouldn’t be a time limit on how long they can keep it, as long as they continue to pay the premiums and the insurer continues to offer the policy. (If the policy were to be discontinued, the person would have the option to pick a different individual market policy available in their area.)
What are potential ICHRA cons for employees?
The potential downsides to ICHRAs depend on an employee’s medical needs, coverage preferences, the plans that are available to them in the individual market, the employee’s household income, and the size of the ICHRA allowance their employer provides.
Access to networks. An ICHRA gives employees access to all individual-market plans available in their area. But those coverage options may or may not include any preferred provider option (PPO) plans, which offer out-of-network coverage. Nationwide, the large majority of plans available in the Marketplaces in 2022 were exclusive provider organization (EPO) plans or health maintenance organization (HMO) plans,6 which do not offer out-of-network coverage unless it’s an emergency.
Depending on where you live, HMOs or EPOs may be your only coverage option in the individual market. That might suit your needs perfectly well, but it’s quite different from the employer-sponsored group insurance market, where PPOs continue to be the most common type of plan.7
Access to Marketplace financial assistance. Another potential issue with ICHRAs involves how they affect access to premium tax credits (premium subsidies) in the Marketplace. Depending on the amount the employer reimburses and the employee’s household income, an ICHRA could potentially result in more affordable coverage or less affordable coverage than the employee would have had without an offer of coverage from the employer. Let’s take a look at some examples to illustrate this.
The interaction of ICHRAs and affordable ACA health insurance: potentially a pro or a con
First, keep in mind that if an employee is offered employer-sponsored coverage – including an ICHRA – that is considered affordable, they cannot reject the ICHRA and use Marketplace subsidies instead – even if the Marketplace subsidy would be larger than the ICHRA benefit.
Employer-sponsored health insurance is considered affordable in 2024 as long as the employee’s share of the premium is no more than 8.39% of their household income8 (this threshold will increase to 9.02% of household income in 2025).9
For an ICHRA, this determination is based on the after-ICHRA cost of the lowest-cost Silver plan available to the employee in the individual market.10
For our example, let’s consider Bob, who is 50 years old, single without children, lives in Charleston, West Virginia (25301 zip code), and offered an ICHRA plan by his employer. For this example, let’s assume that Bob earns $60,000 in 2024.
According to an IRS tool, the lowest-cost individual-market Silver plan available to Bob has a full-price premium of about $1,244/month in 2024.
So Bob’s ICHRA will be considered an offer of affordable coverage as long as his after-ICHRA premium cost for the lowest-cost Silver plan isn’t more than $5,034 for the year (about $420/month), which is 8.39% of his income. So if his employer offers an ICHRA benefit of at least $824/month, the ICHRA will count as an offer of affordable coverage, meaning Bob will be ineligible for subsidies in the Marketplace.
But what if Bob earns $30,000 per year? For an ICHRA to be considered an affordable offer of coverage, it would have to result in Bob’s after-ICHRA cost for the lowest-cost Silver plan being no more than $2,517 (8.39% of $30,000), or about $210/month. So his employer would have to offer an ICHRA benefit of at least $1,034/month for the offer to be considered affordable. If the ICHRA benefit was less than that, Bob would be able to decline the ICHRA and be eligible for a Marketplace plan with subsidies instead.
Using the HealthCare.gov plan comparison tool, let’s look at how much Bob would pay for the lowest-cost Silver plan in the Marketplace with each of those income levels in 2024 (assuming his employer did not offer any health insurance benefit that was considered an affordable, minimum value offer of coverage):
- $60,000 income: $404/month in after-subsidy premiums
- $30,000 income: $34/month in after-subsidy premiums
So in Bob’s case, an offer of affordable coverage utilizing an ICHRA would work out fairly close to what he would have paid for a Marketplace plan with premium subsidies if his income was $60,000. But with an income of $30,000, an ICHRA that meets the definition of affordable coverage could still result in him paying quite a bit more in monthly premiums than he would have paid with a subsidized Marketplace plan if his employer hadn’t offered any health coverage benefit.
But what if Bob earns $150,000 per year? If his employer doesn’t offer any health benefits, Bob would qualify for a Marketplace premium subsidy of $195/month in 2024. So as long as his employer offers an ICHRA allowance larger than $195, Bob will be better off with the ICHRA than he would have been if his employer offered nothing at all.
The point here is that the relative affordability of an ICHRA versus Marketplace subsidies will depend on the person’s circumstances, including their age, zip code, and household income. And it will also depend on how much the employer reimburses via the ICHRA.
There are a few important things to keep in mind about how all of this works:
Note 1: An employer that uses an ICHRA must offer it on the same terms to all employees in a given class with adjustments allowed (but not required) based on the age of the worker and the number of dependents the worker has. (Examples of employee classes are full-time workers, part-time workers, and salaried workers.)11 So an employer cannot tailor their ICHRA offers to specifically accommodate whether or not each employee would otherwise be eligible for Marketplace tax credits (and if so, how much those tax credits would be).
Note 2: Large employers (50 or more full-time equivalent employees) face a penalty if the coverage they offer to their full-time employees (via a group plan or an ICHRA) isn’t considered affordable. Small employers – meaning they have fewer than 50 full-time equivalent employees – do not face such a penalty.
But regardless of the size of the employer, if the ICHRA offer is considered affordable, the employee is not eligible for Marketplace subsidies – even if the Marketplace subsidy would be larger than the ICHRA benefit. And if an employee accepts an ICHRA benefit, they cannot be eligible for Marketplace subsidies, regardless of whether the ICHRA is considered affordable coverage.11
Note 3: The lowest-cost Silver plan tool looks at the entire individual market, including all plans available to a given employee of the same agent and in the same zip code, both in the Marketplace and outside the Marketplace. But in most states, Silver plans sold outside the Marketplace have lower premiums than the premiums for the same Silver plan sold in the Marketplace.
This is because of the way that most states and insurers handle the fact that the federal government no longer reimburses insurers for the cost of cost-sharing reductions (CSR). In most cases, this cost is added to the premiums of Silver plans sold in the Marketplace – but not to the premiums of plans at other metal levels or plans sold outside the Marketplace.12 (This is because CSR benefits are only available on Marketplace Silver plans, which is why insurers in most states add the cost of CSR benefits to Silver Marketplace plans.)
Note 4: To avoid potential penalties, large employers must ensure that the coverage they offer – either a group plan or an ICHRA – to full-time employees is considered affordable for employee-only coverage. They do not face any penalties if the offer of coverage to an employee’s family members is not considered affordable.
Family members whose offer of employer-sponsored traditional group health coverage is not considered affordable may find that they’re eligible for premium subsidies in the Marketplace as a result of the “family glitch” fix, as long as they decline the employer’s coverage offer.
However, the family glitch fix does not apply to ICHRAs.13 So if the ICHRA allowance can be used to help pay for family coverage and the ICHRA offer is considered affordable for the employee alone, the employee’s whole family is ineligible for Marketplace subsidies, even if they decline the ICHRA.
How much will I have to pay for my health insurance with an ICHRA?
The answer depends on how much your employer contributes to an ICHRA, as well as the cost of the individual-market plan you select.
There are no limits on the amount an employer can contribute to an employee’s ICHRA.11 As noted above, employers that offer an ICHRA benefit must offer it on the same terms to all employees in a given class. They are allowed to make adjustments to the reimbursement amount based on the age of the worker and the number of dependents the worker has,11 since both of those factors will affect the premium of an individual-market plan.
However, employers are not required to make adjustments like that. An employer can choose to reimburse the same amount to every employee, regardless of age or dependents. A large employer does need to ensure that the coverage offer is considered affordable for each full-time employee, but a small employer – one with under 50 full-time equivalent employees – does not need to worry about this.
According to one analysis of PeopleKeep’s ICHRA customers, the average ICHRA allowance between mid-2022 and mid-2023 was about $909/month. But there was significant variation in allowances depending on several factors, including the size of the employer, whether employees were single or had families, and whether the ICHRA could be used to reimburse only premiums or premiums plus out-of-pocket medical expenses.14
With an ICHRA, do I have to pay for my health insurance directly and get reimbursed?
The answer depends on how your employer sets up the ICHRA. The employer might choose to have employees pay for their own coverage, submit proof of the payment, and then receive their ICHRA reimbursement via the payroll system.
But employers can also choose to provide a mechanism – such as a pre-funded debit card – that employees can use to access their ICHRA allowance directly. With this approach, employees don’t have to pay the cost upfront and then wait to be reimbursed.15
If the ICHRA allowance will cover only part of the cost of the employee’s individual-market health plan, the employee will be responsible for paying the remainder of the premium themselves. Employers can choose to offer a pre-tax payroll deduction option for this, but only if the employee buys coverage outside the Marketplace (off-exchange).11
To be clear, employees who are offered an ICHRA can use their ICHRA allowance to purchase any individual-market plan available to them, on-exchange or off-exchange. But if the employer chooses to allow employees to pay their own share of the premiums (the part that isn’t covered by the ICHRA) via pre-tax payroll deduction, that can only be done if the employee purchases their coverage outside the Marketplace.
All individual-market health plans with effective dates of January 2014 or later are compliant with the ACA, which means they all cover pre-existing conditions and the ACA’s essential health benefits without lifetime or annual benefit caps.16 Shopping in the Marketplace is the only way to obtain premium tax credits (subsidies), but premium tax credits aren’t available if you’re receiving an ICHRA benefit.17 So if your employer says they will allow a payroll deduction of your share of the premium, selecting your plan outside the Marketplace will allow you to pay your share of the premiums pre-tax. And you’ll still be getting a health plan that’s fully compliant with the ACA.
Who can help me choose a health plan to use with my ICHRA?
If your employer is offering an ICHRA, you can use it with any individual-market plan that’s available to you. Your employer cannot require you to select a specific plan, nor can they endorse a particular individual-market insurer.11
If your employer has a relationship with an insurance broker, your employer may provide that person’s contact information so that you can reach out to them for assistance with plan selection. But you can choose to use any broker you want, or do the whole process yourself. There is no cost for using a broker, and your premiums will be the same whether you have assistance or not.
As is always the case for anyone shopping for individual-market coverage, your opportunity to enroll in a plan is limited to the annual open enrollment period (Nov. 1 to Jan. 15 in most states) or a special enrollment period. If your employer starts offering an ICHRA, that will trigger a special enrollment period that will allow you to enroll in an individual-market plan without having to wait for the next open enrollment period.
Note that you cannot use an ICHRA allowance to purchase short-term health insurance (which is specifically excluded from the definition of individual-market coverage)18 or any plan that’s considered an excepted benefit and thus not regulated by the ACA. However, employers can choose to offer another type of HRA, called an Excepted Benefit HRA, which can provide some reimbursement for those types of coverage.11
Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org.
Footnotes
- “Health Reimbursement Arrangements (HRAs)” and “FAQs on New Health Coverage Options for Employers and Employees” Internal Revenue Service. June 13, 2019. Accessed Nov. 6, 2024 ⤶ ⤶
- “Individual Coverage HRAs” HealthCare.gov. Accessed Oct. 29, 2024 ⤶
- “Growth Trends, ICHRA & QSEHRA” HRA Council. Volume 3, 2023-2024 ⤶
- “Health Reimbursement Arrangements (HRAs)” and “FAQs on New Health Coverage Options for Employers and Employees” (Question 1) Internal Revenue Service. June 13, 2019. Accessed Nov. 6, 2024 ⤶
- “FAQs on COBRA Continuation Health Coverage for Workers” U.S. Department of Labor. Accessed Oct. 30, 2024 ⤶
- “Insights into the 2022 individual health insurance market” McKinsey.com, Aug. 23, 2022 ⤶
- “2024 Employer Health Benefits Survey” KFF.org. Oct. 9, 2024 ⤶
- “Revenue Procedure 2023-29” Internal Revenue Service. Accessed Oct. 30, 2024. ⤶
- “Revenue Procedure 2024-35” Internal Revenue Service. Accessed Oct. 28, 2024. ⤶
- “Health Reimbursement Arrangements (HRAs)” Internal Revenue Service. Accessed Oct. 30, 2024 ⤶
- “FAQs on New Health Coverage Options for Employers and Employees” Internal Revenue Service. June 13, 2019 ⤶ ⤶ ⤶ ⤶ ⤶ ⤶ ⤶
- “Silver Loading (§ 156.80)” – Part of the HHS Proposed Notice of Benefit and Payment Parameters for 2026. U.S. Department of Health & Human Services. Oct. 10, 2024 ⤶
- “Affordability of Employer Coverage for Family Members of Employees” Internal Revenue Service. Oct. 13, 2022 ⤶
- “2023 ICHRA Annual Report” PeopleKeep. Accessed Oct. 31, 2024 ⤶
- “What employers need to know about HRA debit cards” PeopleKeep. June 3, 2024 ⤶
- “Health Insurance Rights and Protections” HealthCare.gov. Accessed Nov. 6, 2024 ⤶
- “Individual Coverage HRA Model Notice” (page 6) U.S. Department of Labor. Accessed Nov. 6, 2024 ⤶
- “Short-Term, Limited-Duration Insurance and Independent, Noncoordinated Excepted Benefits Coverage” (page 1). U.S. Departments of the Treasury, Labor, and Health & Human Services. April 3, 2024 ⤶
