Small Employers Take Advantage of ICHRAs to Lower Their Employees’ Health Care Costs

Since first launching in 2020, individual coverage health reimbursement arrangements have grown rapidly in popularity among employers seeking to make health benefits more affordable and personalized for their employees, according to PeopleKeep—a provider of personalized benefits to small and midsize organizations.

ICHRAs allow employers to provide workers with tax-preferred funds to pay for health insurance coverage that workers purchase in the individual market, subject to certain conditions. The defined monthly allowance can also help employees pay for out-of-pocket medical expenses of their choosing, including prescription drugs, doctors’ visits and glasses.

While money from an HRA is not taxable to the employee, the arrangements differ from health savings accounts (also tax-free to employees) in that HSAs, which have to be paired with a high-deductible health plan, can be funded by both the employee and employer and consists of an account, while only the employer funds an HRA, which typically sees employees reimbursed for their expenses.

According to PeopleKeep’s 2023 ICHRA report, many employers have found that ICHRAs offer more autonomy for employees and budget control for employers than traditional group plans. PeopleKeep was also the first company to deliver an ICHRA administration product to market.

The HRA Council, of which PeopleKeep is a member organization, reported that ICHRA adoption among U.S. employers grew by 64% between 2022 and 2023.

The average monthly allowance employers offered their employees between July 1, 2022, and June 30, 2023, was $908.80, and the median monthly allowance employers offered was $550, according to PeopleKeep. These amounts exceeded the cost of the average lowest-cost self-only gold plan premium on the federal Health Insurance Marketplace for a 40-year-old, which comes in at $472.

“With this comparison, we can see that, on average, employees looking to purchase self-only health insurance coverage likely had more than enough to pay for a gold-level health plan,” the report stated. “Employees could use any additional funds to cover qualifying out-of-pocket medical expenses.”

Jamie Greenleaf, senior vice president of retirement and wealth at OneDigital, said there is likely an increase HRA usage because plan sponsors are looking for ways to control costs around health benefits.

“[Plan sponsors] are changing their plan design[by] adding more HDHPs to reduce premiums for employees, along with reducing the employer’s cost as well,” Greenleaf said via email. “HRAs are employer-owned, and if an employee doesn’t use the dollars, the company doesn’t spend it. The HRAs can be used as a way to protect employees who end up needing health care without a negative impact to the employee’s pocket, because they can use the HRA dollars.”

Greenleaf added that 80% of employees over-insure themselves, and by setting up proper plan design and adding HRAs, it can be a “win-win” for both the employer and employee without giving up care.

Small Plans Favor HRAs

Another popular type of HRA is the qualified small employer HRA, which has been available to employers with fewer than 50 full-time-equivalent employees since 2016. With this type of HRA, the IRS maintains a maximum allowance cap, whereas with an ICHRA, employers can offer as much of an allowance as they want.

The monthly cap in 2023 for a QSEHRA is $487.50 for single employees without dependents. In contrast, ICHRA customers gave their single employees on average this year.

PeopleKeep argued that the benefit of offering an HRA is the ability to offer an allowance that fits into the employer’s budget, as there are no minimum allowance requirements.

On average, PeopleKeep found that the smallest organizations tended to offer the highest ICHRA allowances compared to larger companies. In 2023, organizations employing between one and four employees offered roughly 163% more than the largest organizations, with 50 or more employees. For instance, organizations with one to four employees offered an average monthly allowance of $1,144, whereas those with more than 50 employees offered an average allowance of $434.

Smaller organizations may have a better idea of what individual employees’ needs are when setting up their benefits, and they also may want to take care of their employees as much as possible to reduce turnover and avoid competition from larger organizations, the PeopleKeep report explained.

HRA Plan Design

PeopleKeep also analyzed how its ICHRA customers designed their health benefits.

When setting up an ICHRA with PeopleKeep, employers can choose whether to offer a premium-only or premium-plus plan. With a premium-only plan, employers limit reimbursements to only cover the cost of their employees’ individual health insurance premiums, but with a premium-plus plan, employers reimburse their employees’ premiums and qualifying out-of-pocket medical expenses.

Over the past year, 56% of PeopleKeep’s customers offered a premium-plus ICHRA, allowing their employees to use the funds to buy any eligible item under IRS Publication 502. The average monthly allowance for a premium-plus plan was $1,050.

PeopleKeep argued that organizations of all sizes can leverage an ICHRA to provide their employees with an individualized health benefit to attract and retain top talent.