Comparing Individual Coverage HRA (ICHRA) vs. Level-Funded Health Plans

As an employer, offering comprehensive and affordable health benefits is essential for attracting and retaining top talent. In 2022 alone, 43% of individuals who left their jobs cited poor benefits as their reason for doing so. However, finding the right solution that meets the diverse needs of your employees while staying within your budget can be challenging.

With more small to mid-sized businesses moving away from traditional health plans, companies are increasingly turning to alternative funding solutions to provide comprehensive benefits packages for their employees without breaking the bank. Navigating these options can seem complex and overwhelming, which is why Vitable Health has developed this employer guide to help you decide whether an individual coverage HRA (ICHRA plan) or a level-funded plan is right for your business. Read on to learn how these two types of plans compare, the benefits they provide, and which can help you deliver better healthcare benefits for your workers.

What is an Individual Coverage HRA (ICHRA)?

First introduced in 2020, an ICHRA is a structured health plan that can act as an alternative to a traditional group health insurance plan. An ICHRA plan enables companies of all sizes to utilize pre-tax dollars to reimburse employees for the cost of their individual health insurance premiums and potentially other eligible medical expenses. Individual coverage HRA plans are a type of HRA, which is an employer-funded plan that covers medical expenses for its employees. To learn about HRAs, including individual coverage HRAs, read our article here.

How does ICHRA health insurance work?

Employers that implement an ICHRA plan can choose how much they will contribute to the ICHRA for employee reimbursement. All workers within the same class (e.g., full-time vs. part-time) must receive the same contribution amount, although it may be increased by age or to accommodate those with more dependents.

Employees then purchase individual health insurance directly from a provider or through the Affordable Care Act (ACA) marketplace. Once an eligible medical expense or a health insurance premium (e.g., deductible or copayment) is incurred, the employee can request reimbursement with tax-free contributions from their employer through the ICHRA plan up to the amount spent.

Unlike employee-funded health savings accounts (HSAs) or Flexible Spending Accounts (FSAs), ICHRA funds cannot be withdrawn in advance to pay for medical expenses. An ICHRA also does not have a yearly reimbursement limit. It is important to note that only employees not currently enrolled in a traditional group health plan may be eligible for ICHRA health insurance. Read more here to learn about ICHRA plans.

Key features and benefits

The standout advantage of ICHRA is its flexibility. Employers control costs by setting a fixed reimbursement amount, which can be adjusted annually. This structure reduces administrative burdens by eliminating the need for claim management or provider negotiations. Employees benefit from the ability to choose health plans based on personal preferences, geographic location, and healthcare needs. This is particularly advantageous for distributed teams, where employees in different regions can select plans that best suit their local healthcare providers and needs.

Additionally, ICHRA is an appealing option for businesses new to offering health benefits, as it eliminates participation requirements and provides full control over reimbursement limits and eligible expenses.

Eligibility and enrollment

To participate, employees must have individual health insurance or Medicare. Employers can determine eligibility based on employee classes such as full-time, part-time, or regional workers. The ability to create tailored reimbursement plans for different employee categories ensures that all workforce segments are covered appropriately. Enrollment is simple, requiring employees to submit proof of coverage and qualifying expenses for reimbursement. Employees may also remain eligible for premium tax credits, though these are reduced by the ICHRA contribution.

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