William Freedman |
Health care is considered a human right in a lot of countries. But America is not a lot of countries. Here, health care is a suite of products and services for sale. We can bemoan that fact or even cheer it, but we can’t deny it. The helpful thing to do is to work with it.
For reasons we’ve covered previously in this space, employer-funded health insurance has become our principal way of paying for these products and services. Most managers probably don’t like the fact that they’ve been pressed into the insurance business because their day job – getting the most productive work out of their employees – is enough of a challenge.
For years, companies have had ways of providing different kinds of healthcare coverage to different kinds of employees. This blog focuses on Individual Coverage Health Reimbursement Arrangements, or ICHRAs, which have only been a thing for a few years. They’re not to be confused with legacy Health Reimbursement Arrangements, or just plain HRAs, which amount to a license for big companies to give their top executives a tax-advantaged blank check to cover all their healthcare-adjacent costs.
But now it’s Joe and Jane Lunchbuckets’ turn. There are 11 ways of divvying employees up into classes for ICHRA purposes.
Here’s the Internal Revenue Service’s list of the 11 ICHRA classes:
|11 types of ICHRA classes for 2023|
|Remote or satellite office employees|
|Employees in a waiting period pending coverage|
|Non-U.S. nationals working for an American company outside the U.S.|
|Temps who technically work for a third-party agency|
|A combination of any two or more of the above|
Which seems to include... everybody? So the real question is: Who is excluded?
“Contractors!” is the most intuitive response, but that turns out to be the wrong answer. While your business needs to issue at least one W2 to be eligible to offer ICHRAs, everybody else who participates can be a 1099er. Another wrong guess: Medicare recipients. Those employees who qualify for that program are well within the law if they choose to use ICHRA funds to pay their deductibles, copays and Part B premiums.
Rather, the only exceptions the IRS calls out are those covered by their spouse’s health plan – which just makes sense – and employees who are part owners of the company. In the startup world, of course, there’s a lot of that. So you might want to check with lawyers about how to structure employee equity plans so that your early-stage work force can benefit from both those incentives and their ICHRAs.
Before we move on, let’s spend a moment on the distinction between full- and part-time staff. It’s up to you as the startup’s founder to define the boundary as above or below 40 hours per week, or 30 hours or anywhere in between. But you need to be consistent. But if you’re using ICHRAs to comply with the Affordable Care Act’s employer mandate, you should set that bar at 30 hours.
Now that we have a rubric for how to classify employees, let’s look at why it’s important for you as an ICHRA funder.
These employee classes provide the definitions you need to classify your employees into pools. This gives you flexibility into how you marshal your resources so you provide the most generous benefits to the kinds of employees you most want to attract and retain. If that’s remote employees exclusively, you can offer ICHRAs only to remote employees. If you’re looking for mainly full-timers but also need some seasonal staff, you can proportionally fund pools for those two classes. And it’s OK to give one class more funding per person than another. If you have salaried engineers who spend an hour per day on LinkedIn looking to see what jobs are out there, you can hand them $800 every month while giving your hourly work force $500.
Classes are also important to determine which employees get ICHRAs and which get employer-sponsored health insurance. While ICHRAs may be the future of American health coverage, even those of us in the ICHRA business are aware that the rollout must be incremental. In the short run, people might be suspicious that “the boss is trying to take away my health care!”
So it might be a good idea to continue offering legacy plans to salaried employees and perhaps to the full-time hourly workers. But now you’ll have an affordable way of extending an analogous benefit to the part-timers, temps and seasonal workers who deserve it, but who you couldn’t otherwise afford to cover.
Remember, you can’t offer legacy health insurance and ICHRAs to the same class of employee. And, if you do offer legacy health insurance and ICHRAs to separate classes, you face the added stricture of minimum class sizes.
These apply only to the first five classes listed above: full-timers, part-timers, salaried workers, hourly workers and remote or satellite office employees. If you have 100 or fewer eligible employees, each class must comprise at least 10 of them. If you have 200 or more, that minimum number becomes 20. If you’re in the 101-199 range, at least 10% of eligible employees must be within that class.
There are lots of exceptions, though. In many cases, minimum class size doesn’t apply. It’s too messy a topic to break out here. No doubt, we’ll cover this in a later post.
ICHRAs allow firms of any size to offer employees tax-free contributions to cover up to 100% of their individual health insurance premiums as well as other eligible medical expenses.
Instead of offering insurance policies directly, companies advise their employees to shop on a government-sponsored exchange and select the plan which best suits their needs. Premiums are then reduced by employer reimbursement rather than an advance premium tax credit.
ICHRAs also provide further reimbursement for such out-of-pocket expenses as online health products and services.
And, while participating in an ICHRA might add a layer of complexity for individuals shopping for health insurance on an exchange, it takes a huge financial and administrative burden off the companies that hire them. By sponsoring ICHRAs, companies – especially small businesses and startups – can focus less on curating and administering health plans and redirect that attention to operations.
Thatch makes ICHRAs easy for businesses, and delightful for employees. Schedule a demo to see how Thatch helps startups provide better healthcare for their teams.Schedule demo