ICHRA vs. Group Plans: What’s best for your business?

Choosing the right health insurance plan for your employees can be daunting, especially when weighing the benefits of Individual Coverage Health Reimbursement Arrangements (ICHRA) against traditional group health insurance plans. Both options offer unique advantages and can significantly impact your organization’s budget and employee satisfaction. 

While they’re a relatively new offering, ICHRAs have experienced major growth. Since their inception in 2021, there’s been an estimated 350% uptick in adoption rates. Perhaps this is because it’s a flexible option where employers give employees a set amount of money to buy their health insurance plans, allowing employees to choose coverage that fits their needs. In contrast, group health insurance involves the company purchasing a few insurance plans on behalf of employees that cover all employees. 

With group plans, the coverage is uniform for everyone, while ICHRA provides more customization but requires employees to handle their own plan selection. Both options have their own benefits and trade-offs, so choosing the right one depends on the company’s goals and the employees’ preferences.

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

An ICHRA is a way for your business to offer healthcare benefits to your team. HRAs are a new way to provide employer-sponsored healthcare that allows you to use pre-tax money from your business to reimburse your team for any of their healthcare expenses. This includes health insurance, dental insurance, vision insurance, and even out-of-pocket costs.

ICHRAs are particularly attractive to small and medium-sized businesses because they provide your team with more flexible and cost-effective healthcare benefits. Thatch helps administer and manage ICHRAs for your team.

Flexibility and personal choice

ICHRAs are known for their flexibility, allowing employees to choose their own insurance plans to fit their healthcare needs. Beyond insurance, employers also have the option to use their healthcare budget for any qualified medical expense, including out-of-pocket costs for items like: 

• Prescriptions

• OTC medications 

• Healthcare bills

Cost control for employers

ICHRAs can be more cost-effective for businesses, especially smaller organizations, as they allow employers to set a specific budget for healthcare through a defined contribution. Employers can decide how much to contribute, offering some control over healthcare costs.

The defined contribution model of ICHRAs also provides an element of cost predictability that is often lacking in group health plans. Traditional plans come with the unpredictability of rate hikes, new fees, or cost-sharing changes, making it challenging for businesses to budget accurately. The ICHRA’s fixed contribution system avoids these pitfalls by putting the control back in the employer’s hands.

However, it’s worth noting that the cost stability for employers could translate into more financial variability for employees. Under an ICHRA, employees will have to shoulder the difference if healthcare costs rise and the employer doesn’t increase contributions accordingly. Employers use an ICHRA administrator or external service to help them understand and budget accordingly.

Tax advantages

Employers can benefit from several tax advantages through ICHRA coverage: 

• Tax-free contributions. Contributions made to an ICHRA are tax-deductible as a business expense, just like other health benefits. This can reduce the company's taxable income, lowering its overall tax liability.

• Payroll taxes.  ICHRA contributions are not subject to payroll taxes. 

• Tax-free spending for employees. Employees receive the reimbursement funds from an ICHRA tax-free, as long as they use the money for health insurance premiums and in some cases, other qualified medical expenses. 

What is a group plan?

A group health plan is a traditional form of employer-sponsored healthcare coverage. Under a group health plan, an organization purchases its employees' standard health insurance policy. This type of plan often covers employees and sometimes their dependents under a single policy. Under a group health plan, both the employer and employees typically share the cost of premiums. The cost of premiums and out-of-pocket expenses can vary based on HMOs, PPOs, or EPOs.

Group health plans are often more attractive for larger employers, particularly those that self-insure. Because the employer selects the plan, it limits employees to the health services, facilities, and doctors stipulated within that plan.

Comprehensive coverage

Coverage through a traditional plan can be a double-edged sword. Employers, trying to find the best fit for the most people across an organization, don’t tailor coverage to each individual employee. 

This one-size-fits-all approach could mean overpaying for employees who take little advantage of the coverage or alienating employees who need additional coverage that’s not available through employer-sponsored plans.

Participation rate

In the case of employer-sponsored health plans, the percentage of employees who want to enroll will influence whether or not a company can offer coverage. Group health insurance can typically only be offered if 70% or more of the employees enroll in the program.

How does ICHRA compare to group health plans?

ICHRA: Benefits vs. drawbacks

Group plans: Benefits vs. drawbacks

ICHRA vs. Group Plans: How to decide

Many factors will influence the decision-making process regarding group plans and ICHRA coverage for employees. Consider the following guiding questions when kicking off the process. 

How do ICHRA and group health plans impact a business's budget?

ICHRAs offer flexible, predictable costs, while budgeting for group health plans can be more variable. With ICHRA, employers contribute a fixed amount per employee, providing more predictable and controlled costs. This predictable contribution helps in budgeting, as expenses are capped and known in advance.

Costs can be less predictable with group health plans. Premiums may fluctuate based on claims experience, renewal rates, and changes in coverage. Unexpected increases in premiums can affect budgeting.

How do employee preferences vary between ICHRA and group health plans?

Preferences will vary based on the employee, but ICHRAs offer more individualized flexibility for employees. They can pick the type and amount of coverage they want. While it might initially feel daunting, the process leaves them with more control at the end of the process.

Group health plans can only offer a few options for employees, meaning they’ll select from a more limited menu. While the plans likely offer them coverage, it won’t be as personally tailored to their needs, which can be frustrating for some. 

What are the regulatory requirements for implementing ICHRA and group health plans?

ICHRA and group health plans each have specific regulatory requirements. ICHRA involves adherence to ACA rules regarding individual coverage and tax compliance, while group health plans must comply with broader ACA mandates, non-discrimination laws, and detailed reporting and disclosure obligations. Employers should carefully navigate these regulations to ensure compliance and avoid penalties.