Legislative Update: New Opportunities for Small Businesses with ICHRA 2.0

On May 22, the U.S. House of Representatives passed major upgrades to Individual Coverage Health Reimbursement Arrangements (ICHRAs), with new and improved tax advantages and greater flexibility. The proposal could significantly enhance the ability of small businesses to offer competitive, cost-effective healthcare benefits to their employees. The ICHRA upgrades are part of a broader budget and tax package currently moving through Congress. Here’s what you need to know:

What is an Individual Coverage Health Reimbursement Arrangement (ICHRA)?

In 2019, the federal Departments of Treasury, Labor, and Health and Human Services published rules creating ICHRAs with the goal of expanding access to affordable, quality healthcare coverage. ICHRAs enable businesses to provide employees tax-free reimbursements for the costs of individual health insurance premiums and certain medical expenses. ICHRAs are an attractive alternative to traditional group plans because they maximize employee choice while reducing costs and administrative burdens for employers. Moreover, they allow small businesses to compete for talent by offering competitive, personalized health care benefits.

How does the proposal enhance ICHRAs?

The proposal reflects a legislative evolution of ICHRAs in three ways: 

1. Employer tax credits:

Small business (those with fewer than 50 full-time employees) offering ICHRAs (which the bill renames “CHOICE Arrangements”) would gain access to new federal tax credits—up to $1,200 per enrolled employee in the first year an ICHRA/CHOICE Arrangement is offered and $600 per enrolled employee in the second year.

2. Greater flexibility

The bill would generally codify the 2019 rules and rename ICHRAs as “Custom Health Option and Individual Care Expense (CHOICE) Arrangements.” While mostly similar to ICHRAs, the CHOICE Arrangement proposals introduce specific enhancements:

• Relaxed notification requirements:  The proposal would afford businesses more time to plan their benefits strategy by requiring employers to give employees written notice of terms 60 days before the plan year begins. Current ICHRA rules require such notices 90 days prior to the start of the plan year, which may be challenging for employers who are unprepared to make benefits decisions that far in advance.

• Optionality for employees: Under the proposal, businesses offering fully-insured small group health plans would be permitted to give employees the option to choose between traditional plans and CHOICE Arrangements. Under current rules, employers may not offer any employee a choice between an ICHRA and a traditional group plan. 

3. Tax advantages for Exchange coverage

The proposal would allow employees using CHOICE Arrangements under a cafeteria plan to pay the balance of their premium on a pre-tax basis, regardless of whether the plan was purchased on or off a health insurance Exchange. For ICHRAs, current law limits this favorable tax treatment to plans purchased off-Exchange. If passed into law, these provisions will take effect by the end of the year, meaning business could take advantage of these enhancements beginning in plan year 2026.

Next Steps:

With the CHOICE Arrangement provisions passing the House, the focus now shifts to the Senate, who will work toward sending a bill to the President’s desk before the end of July.

Thatch is monitoring these developments closely and directly advocating for the CHOICE Arrangement provisions and other healthcare policy improvements that support businesses and their employees. We are committed to guiding your business through these opportunities. Contact our experts today to understand how Thatch can help you maximize your benefits offerings.