Health Reimbursement Arrangements (HRAs) can be a valuable solution for businesses, but their suitability varies depending on each organization's unique needs and circumstances. In this article, we delve into the challenges associated with implementing HRAs that brokers should consider before recommending them to clients.

HRAs offer a flexible alternative for healthcare coverage, but their successful adoption hinges on overcoming various regulatory, technological, and informational hurdles. By exploring these challenges, brokers can better understand the complexities involved and provide informed guidance to clients considering the integration of HRAs into their benefits offerings.

One significant regulatory challenge impacting the adoption of Individual Coverage Health Reimbursement Arrangements (ICHRAs) is the restriction against offering both ICHRA and group health plans to the same class of employees. You can’t give employees in the same class a choice between participating in your traditional group health plan or your ICHRA benefit.

For example, you could offer all your full-time employees group health insurance and provide an ICHRA for your part-time employees. But you can’t offer your full-time or part-time employees a choice between which benefit they would instead participate in. This rule is designed to prevent adverse selection in the individual market but can be quite limiting for companies seeking compliant solutions.

Consequently, in order to afford healthcare coverage, many companies opt for a lower-tiered plan for all their employees instead of classifying their workforce. The administrative burden and paperwork required to segment employees by class appropriately discourage employers from fully leveraging ICHRAs. This results in companies providing a one-size-fits-all, potentially subpar coverage rather than tailoring benefits to meet the diverse needs of their employees.

ICHRA employee classes serve as customizable categories that employers can establish based on various job-related criteria. These classes enable employers to differentiate contribution amounts based on factors such as full-time versus part-time status, geographic location, job position, and tenure.

Common Types of Employee Classes:

• Full-Time Employees: These typically work a standard number of hours per week, often with a fixed schedule, and are eligible for various employment benefits.
• Part-Time Employees: Part-time employees work fewer hours than full-time employees and may have different benefit eligibility criteria.
• Seasonal Employees: These employees are hired to work during specific seasons or periods of increased demand, such as holidays or summer months. Their employment duration is limited.
• Temporary Employees: Temporary employees are engaged for a specific project or a predetermined period, and their employment is not intended to be permanent.‍
• Contractors/Freelancers: Contractors and freelancers are not considered regular employees but may be engaged on a contractual basis to provide specialized services.
• Union Employees: Union employees are part of a labor union and often have negotiated benefits and coverage under collective bargaining agreements.
• Salaried Employees: Salaried employees receive a fixed salary regardless of the hours worked. They may have different benefit structures compared to hourly employees.
• Hourly Employees: Hourly employees are paid based on the number of hours worked and may have different benefit eligibility criteria.

A general lack of information about ICHRAs can also be a significant barrier to their adoption. Many employers and brokers are unfamiliar with how ICHRAs work and the benefits they can offer, which creates a perception that implementing them is overly complex and difficult.

Without clear, accessible information and guidance, the process of setting up and managing ICHRAs seems daunting, discouraging companies from considering this option. Improved education and resources are essential to demystify ICHRAs and highlight their potential advantages, making it easier for employers to navigate the transition and realize the benefits of these arrangements.

The transition to HRAs can be hindered by the seemingly overwhelming number of health insurance options available on the individual market. This abundance can present a significant challenge for employees, employers, and brokers. While the variety of plans offers the flexibility to meet diverse employee needs, it can complicate the decision-making process.

Employers must carefully evaluate factors such as cost, coverage, and individual preferences, making it challenging to strike the right balance. The complexity of navigating these options can deter companies from adopting HRAs, as they strive to optimize benefits without overwhelming their employees.

Changes in the individual health market and rising costs could significantly impact the penetration of the HRA in the insurance market. States where the cost disparities between small group and individual plans are most pronounced are particularly compelling for ICHRA implementation, as they offer the potential for substantial cost savings and increased access to affordable healthcare coverage.

Right now, there are several states where employers can find significant cost savings on the individual market compared to group health plans, including Georgia, Ohio, Indiana, South Carolina, Colorado, Washington, New York, New Hampshire, Florida, Virginia, New Jersey, Missouri, and Iowa. See our full report, “Small Group vs. Individual ACA Health Insurance Premium Dynamics.”

However, these dynamics can shift; if rate increases in the individual market start to mirror those in the group market, the potential cost savings of switching to an HRA for both small and large employers would be negated.  Employers should carefully assess market trends and rate changes to ensure that adopting HRAs remains a financially beneficial choice.

Coordinating premium tax credits with HRAs can pose significant challenges for employers and employees. While premium tax credits offer eligible employees affordable health insurance options through the federal Marketplace, understanding how to align these with QSEHRAs and ICHRAs can be confusing.

To calculate if the ICHRA is affordable, you take the employee’s out-of-pocket cost for the lowest-cost silver plan premium on the Marketplace, minus their ICHRA monthly allowance. For 2024, if that cost does not exceed 8.39% of their household income, the ICHRA is deemed affordable.

If the ICHRA is affordable, employees cannot claim premium tax credits if they opt out of the ICHRA benefit, making it more advantageous for them to opt in. Conversely, if the ICHRA is unaffordable, employees can opt-out and receive premium tax credits instead.

Similarly, for a QSEHRA, affordability is based on whether the employee’s cost for the second-lowest-cost silver plan premium minus their QSEHRA allowance does not surpass 8.39% of their income. Employees cannot claim tax credits for months when the QSEHRA is affordable but can do so for months when it is not, reducing their credits by the QSEHRA allowance amount. Unlike the ICHRA, employees cannot opt out of a QSEHRA, further complicating the coordination of these benefits.

Specialty HRAs can be compelling tools designed to address specific and unique needs within a workforce. However, unleashing the full potential of Specialty HRAs requires a thorough understanding of the intricacies involved. These HRAs demand a high level of customization and expertise from providers, going beyond the standard offerings. Customizations must account for local conditions and the varying care costs in employee regions. Additionally, comprehensive plan documents are vital, ensuring both regulatory compliance and the plan's cost-effectiveness.

Coupling Specialty HRAs with stop-gap coverage and other insurance options can be an affordable and novel way to provide comprehensive benefits. Employers should carefully evaluate their HRA providers to ensure they possess the expertise and capabilities to navigate these complexities seamlessly.

What are the main regulatory challenges associated with ICHRAs? 

A significant challenge is the restriction against offering ICHRA and group health plans to the same class of employees, which limits employers' ability to provide varied benefits to different employee groups. This regulation aims to prevent adverse selection in the individual market but can be restrictive for companies seeking flexible benefit solutions.

‍How do HRAs benefit small businesses compared to traditional group health plans?

HRAs can offer small businesses more flexibility and potential cost savings by allowing them to reimburse employees for individual health insurance premiums and medical expenses rather than providing a one-size-fits-all group health plan.

‍How do premium tax credits interact with HRAs? 

Coordinating premium tax credits with HRAs can be complex. For ICHRAs, if the employee’s cost for the lowest-cost silver plan on the Marketplace, after the ICHRA allowance, does not exceed 8.39% of their household income, the ICHRA is deemed affordable, and employees cannot claim premium tax credits. If unaffordable, employees can opt-out and receive tax credits. For QSEHRAs, if the employee’s cost for the second-lowest-cost silver plan minus the QSEHRA allowance exceeds 8.39% of their income, the QSEHRA is unaffordable, allowing employees to claim tax credits; otherwise, they cannot. Unlike ICHRAs, employees cannot opt out of a QSEHRA, complicating the coordination of these benefits.

‍How do ICHRA employee classes work? 

ICHRA employee classes allow employers to categorize employees based on criteria such as job status (full-time vs. part-time), geographic location, or tenure, enabling differentiated contributions.

‍How can employers ensure that adopting HRAs remains financially beneficial? 

Employers should regularly assess market trends and rate changes in individual and group health insurance markets. Staying informed about cost disparities and potential savings can help ensure that HRAs remain financially viable.

Our team knows the ins and outs of the health insurance marketplace and will guide you towards the solution that make the most sense for your business and your team. Come with questions! Our experts are happy to dig into the details to get you the clarity you need.

During the call, Liferaft will run a cost-benefit analysis on your company's current healthcare spending and show you different ways you can save—without sacrificing plan quality. After your consult, Liferaft will design a unique plan for your employee's health insurance, including suggested plans and accounts, plan policy documents, and the annual budget.