ICHRAs offer a new approach to health benefits for employers

Most Americans get their health insurance through an employer, but that system is becoming increasingly costly, with premiums up 25% in the last five years. In fact, a recent survey of small to mid-sized business owners and managers found 75% are worried that within three years their group health plan will be too expensive to offer.

In the same way that employer-managed pensions gave way to employee-directed 401(k)s, a similar transition is underway for health benefits. This new model enables employees to take greater control of their health benefit decisions, while allowing employers of any size to contribute financially without actually having to administer health plans.

Introduced during the first Trump administration, Individual Coverage Health Reimbursement Arrangements (ICHRAs) continued to receive federal support through the Biden years. And their popularity is growing: ICHRA adoption is up 52% this year. 

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An evolution in employer health benefits

As an alternative to the costly group health insurance model, ICHRA allows companies to make tax-advantaged contributions toward the premiums of health plans employees select for themselves and their families in the individual market. Plans must meet federal minimum coverage standards to be qualified. 

Like the change from pensions to 401(k)s, ICHRA moves employers from providing "defined benefits" to "defined contributions." Rather than sponsoring a health plan for everyone as a defined benefit, this approach allows employers to provide a defined financial contribution toward the cost of employee-purchased health coverage. ICHRA puts a cap on employer costs and enables employees to select from a broader range of plans, rather than the one to three options usually offered by most companies. 

In some states, premiums for self-purchased individual coverage can run 30% to 50% less than group coverage on a per-person basis, making ICHRA especially compelling in those locations. 

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Businesses in need of a new solution

A recent survey of owners and managers of businesses with 500 or fewer workers uncovered frustrations with the current model used by most companies. The survey found that 93% of respondents said they need a new health benefit solution. A similar number (92%) agree this issue is being ignored by policymakers. Conversely, a majority (75%) describe an ICHRA-style model as a desirable alternative.

ICHRA tax incentives were considered (but not adopted) as part of last summer's tax and budget legislation. Congressional leaders continue to discuss potential policy changes designed to spur adoption of ICHRA, including renaming them CHOICE arrangements, providing two-year tax incentives for some small employers and providing funds to create awareness.   

As those discussions continue, an increasing number of businesses aren't waiting for Congress. For employers facing insurance premium hikes, ICHRA can serve as a temporary or long-term solution to stabilize healthcare expenses. 

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Steps to smooth the transition

Owners and executives of employers of all sizes should work with an insurance broker or ICHRA provider to review their local insurance market before making the leap to ICHRA, as insurance costs can vary by state and county. Individual market premiums can be significantly more affordable than group rates, but that's not true everywhere. Employers should evaluate their local market conditions to understand whether ICHRA is a good option for them. 

It's also important to choose the right administrator, given that managing ICHRA benefits can be a hurdle. Some third-party administrators offer end-to-end solutions, handling everything from premium contributions to plan shopping and enrollment, with ongoing employee support. 

After making the move to ICHRA, it is important for employers to work with an ICHRA administrator to notify their employees about the change and help with the transition, as doing so can help ensure adoption and promote satisfaction. Some employees may not be familiar with ICHRA, so it is important to highlight for them both the pros and cons. 

Some of the positives include the ability to pick from an assortment of plans and the option to evaluate plans based on favored doctors and prescription coverage. It is also important to recognize the differences employees may experience, such as changes to out-of-pocket costs and care provider networks.     

The new energy behind ICHRA is encouraging development for many small and mid-sized employers, while some large companies are also making the switch. For businesses seeking cost control, flexibility, and employee satisfaction, ICHRA could be the future — a future that may arrive soon.