The Basics: ICHRA vs. HRA — what’s the difference?

What is an HRA?

A Health Reimbursement Account (HRA) is a tax-advantaged benefit offering set up by an employer to help employees cover qualifying health expenses. HRAs offer tax advantages to both the employer and the employee.

HRAs are sometimes confused with HSAs (Health Savings Accounts) or FSAs (Flexible Savings Accounts). Unlike FSAs or HSAs, HRAs are only funded by the employer. In the case of HSAs and FSAs, employees can contribute to them directly to help cover eligible medical expenses.

For example, let’s say a startup creates an HRA and allocates $1,000 annually to each employee's HRA. Employees use this HRA to cover out-of-pocket expenses. So, if an employee pays for a $200 prescription, they can submit the receipt to the employer for reimbursement.

From there, the employer reviews the claim and reimburses the employee $200 from their HRA balance. The reimbursement is tax-free, and the company’s contributions to the HRA are tax-deductible for the employer.

How HRAs work

Employers set aside a certain amount of money for employee HRAs. All employees of the same class will have the same allowance. However, employers can make an exception based on employee age or number of dependents.

The funds in the HRAs can be used to cover medical costs like co-pays, deductibles, prescriptions, and even over-the-counter medical supplies. What is covered by the HRA will vary based on the plan’s design. When an employer sets up an HRA, the plan’s coverage can be tailored to meet the needs of their employees.

An HRA isn’t technically an account like an HSA. In some instances, an employee might have an employer-provided HRA debit card.

Depending on the HRA, there may be certain reimbursement limits.

Is an HRA portable?

Unlike an HSA, HRAs are not portable. If an employee leaves a company with money remaining in the HRA, they can’t take it.

However, unlike an FSA, if money remains in an HRA at the end of the year, it can be rolled over to the next year. Employers have the option to set a maximum rollover amount each year.

Tax advantages of an HRA

HRAs are tax-advantaged, with the benefit of potential savings for employers and employees.

The employer's contributions to employee HRAs are tax-deductible, reducing the company’s taxable income.

Conversely, employees' reimbursements for qualified healthcare expenses are tax-free. They don’t have to pay income tax on reimbursed HRA funds.

Key benefits of an HRA

An HRA offers some key benefits when compared to other tax-advantaged healthcare accounts

HRAs can:

• Help cover the cost of medical expenses, including copays, medications, and premiums

• Save employees and employers money through tax advantages

• Offer flexible plans set by the employer

What is an ICHRA?

An Individual Coverage Health Reimbursement Account (ICHRA) is a type of HRA. With ICHRAs, employees purchase their health insurance coverage and are reimbursed for their premiums and, in some cases, other qualifying medical expenses.

ICHRAs can offer more flexibility than traditional group health insurance plans. In traditional group health insurance plans, an employer selects a group plan, and all employees are covered under the same policy. In the case of ICHRAs, employees shop the marketplace with an employer allowance and select a plan that best fits their needs.

Let’s say a mid-size employer sets up an ICHRA, which costs $500 monthly for all full-time employees. The ICHRA funds can be used to reimburse employees for premiums on individual health insurance plans purchased through the Health Insurance Marketplace or directly from insurers, as well as for qualifying out-of-pocket medical expenses.

So if an employee decides to enroll in coverage through the marketplace, that’s $400 a month, they can pay out of pocket and apply for reimbursement through their employer. If approved, they’ll have $100 remaining in their monthly ICHRA allowance for other qualifying expenses, including co-pays and prescriptions.

How ICHRAs work

Like any HRA, employers decide how much money they want to contribute to employee ICHRAs. Allowances can vary based on employee class.

Employees use this allowance to pick an individual health insurance plan. They can make the selection from the marketplace or other sources. Once they have a plan in place, employees can submit their medical expenses via claims for reimbursement. An ICHRA can reimburse medical expenses, including premiums, copays, deductibles, and more.

Is an ICHRA portable?

Because employees purchase individual coverage on the marketplace, their policy is portable. Employees can take their coverage with them if they leave the company, opting to pay the premiums out of pocket without employer reimbursement.

If their new employer also has an ICHRA, they could be reimbursed for coverage in the new role as long as it's a qualifying expense.

Tax advantages of an ICHRA

Like other HRAs, employer contributions to an ICHRA are tax-deductible. Employee reimbursements are tax-free.

What employers qualify for an ICHRA?

Unlike other HRAs, employers of any size or industry can offer their employees an ICHRA. This includes small businesses, non-profits, and even large corporations.

The only requirement is that the employer must adhere to administrative and compliance guidelines when offering the ICHRA. That can include additional reporting on the part of an employer.

Benefits of an ICHRA

While ICHRAs are similar to other types of HRAs, they have their own pros and cons for employers and employees.

• Flexibility: Employees have the opportunity to pick the plans that fit them best.

• Managing costs: For employers, ICHRAs create the opportunity to budget and better manage the cost of care than traditional healthcare coverage.

• Tax-advantages: Employer contributions to an ICHRA are not subject to payroll taxes. When the employee is reimbursed through an ICHRA, reimbursement is not taxed.

• Personalization: Employees have a chance to feel seen in selecting a plan that fits them and their budget best.

How to choose between ICHRA and HRA?

Understanding the nuances between Individual Coverage Health Reimbursement Arrangements (ICHRA) and standard Health Reimbursement Arrangements (HRA) can be a game-changer for both employers and employees. Though they sound similar, their core functionalities significantly differ.

"Choosing the right health reimbursement model isn't just about the tax benefits; it's about meeting the unique needs of your workforce and aligning with your company's overall strategy."

Both arrangements are designed to reimburse employees for healthcare expenses, but the way they are structured and operate differs. An HRA is generally paired to employer-provided group health plans, whereas an ICHRA offers a more flexible approach, allowing employees to select individual health plans. This flexibility can make ICHRAs particularly attractive in today's diverse employment landscape.

In summary, what are the key things to keep in mind?

• Flexibility: ICHRAs allow employees to choose individual health insurance plans suited to their specific needs.

• Portability: Traditional HRAs are often linked to employment, while ICHRAs offer a portable solution.

• Customization: ICHRA removes the burden from businesses of selecting a one-size-fits-all group plan and enables you to adjust allowances based on factors such as employment classification, zip code, and age.

Ready to explore ICHRA? Let Thatch be your guide. Thatch can help you set a budget and enable your team to choose the coverage that best suits them.