Transitioning from traditional group health insurance to a Health Reimbursement Arrangement (HRA) such as an Individual Coverage Health Reimbursement Arrangement (ICHRA), or a Qualified Small Employer HRA (QSEHRA) can be challenging, especially during the first year.
Whether you’re working with small or large employers, understanding the complexities of COBRA, ACA reporting, and ERISA compliance is essential to creating a smooth transition. This guide will walk you through these complexities and also help to guide your clients toward the best-fit solutions.
Full Benefits Analysis
To begin, conduct a complete benefits analysis. This step will evaluate an employer’s current employee benefits package and involves:
- Assessing current benefits by reviewing the benefits offered, cost, and employee utilization.
- Understanding employees’ specific needs and preferences and considering factors like age, family composition, and health conditions.
- Comparing the cost of current benefits to potential alternatives, considering both direct costs (premiums, contributions) and indirect costs (administration, claims).
- Evaluating ownership since HRAs follow Section 105 rules with restrictions for owners, and most owners and owners’ families are unable to participate in HRAs.
- Assessing compliance by ensuring the benefits package complies with all applicable laws and regulations, including ACA, COBRA, HIPAA, and ERISA.
Evaluate Alternatives & Add-Ons
Next, explore all the HRA options. Your client might choose a traditional group health plan or consider an alternative or “add-on” plan such as one of these:
- Higher Deductible Health Plan (HDHP) with a Health Reimbursement Arrangement
- Individual Coverage Health Reimbursement Arrangements
- Qualified Small Employer Health Reimbursement Arrangements.
We’ll look deeper at each one of these in a moment, but first it’s important to realize there are numerous advantages to utilizing the above Health Reimbursement Arrangements including:
- Cost savings: HDHPs typically have lower premiums than traditional health plans. Employer contributions can be budgeted annually for ICHRA premiums and out-of-pocket expenses.
- Tax benefits: Contributions to an HRA are tax-deductible for the employer, and reimbursements are tax-free for employees.
- Flexibility: Employees can use the HRA funds to pay for medical expenses not covered by the HDHP, giving them more control over their healthcare costs.
- Additional Tax Savings: HRAs can be structured so the plan is still eligible for HSA (Health Savings Account), adding even more tax-saving power.
Including these add-ons in an employee’s benefits package can result in increased work-life satisfaction and peace of mind knowing their employer is contributing funds to offset higher deductibles.
Healthcare Option #1: High Deductible Health Plan with a Health Reimbursement Arrangement
A stacked HRA HDHP is a benefits arrangement that combines a High Deductible Health Plan with an HRA. Leveraging this type of arrangement can be the answer to lowering rising premiums. Here’s how it works:
- HDHP: The HDHP has a high deductible, requiring the employee to pay a significant amount out-of-pocket before insurance coverage kicks in.
- HRA: HRAs are a tax-advantaged arrangement funded by the employer. The employer contributes funds to the HRA, which allows the employee to be reimbursed for eligible medical expenses, including the deductible and out-of-pocket costs associated with the HDHP. Employers can customize the HRA based on their goals and budget.
Group health plans with high deductibles and an HRA layer can still be expensive, especially with high utilization. If this is a concern, it might be best to explore other options. Two modern approaches to healthcare, QSEHRA, and ICHRA, are often more affordable alternatives to traditional healthcare, and they can also help attract and retain workers.
Healthcare Option #2: Individual Coverage Health Reimbursement Arrangement
Switching from a group health plan to an ICHRA can also be challenging. While traditional group health plans are decided upon and paid for in part by employers, an ICHRA puts the insurance choice, and often the payment, in the hands of the employee.
Topics such as ICHRA plan design, classes of employees, mechanics of the plan, insurance shopping, who makes the payment, and the regulations and compliance surrounding each plan can get cumbersome, not to mention overwhelming. However, the benefits may outweigh any drawbacks.
ICHRAs offer incredible flexibility for employees, but it’s essential to carefully design the plan to meet both employer goals and employee needs. The first step to doing this is defining Employee Classes.
In contrast to traditional group health plans, where employee classes could be based on age, executive status, management, family status, and internal job titles or departments, ICHRA closely follows the Department of Labor classes. The four most-used classes for ICHRAs are salaried, full-time, part-time, regional, or a combination of these classes. Each class may have different eligibility and contribution amounts.
ICHRA Contribution Guidelines
- Contribution amounts can be a flat dollar amount for a whole class or a range based on the age of employees using the ICHRA 3:1 ratio.
- Employers can elect to contribute additional funds for dependents to ensure fairness and competitiveness while managing costs.
- ICHRA also allows the employer to add additional funds that could be allocated toward eligible medical expenses such as co-pays, deductibles, and prescriptions.
- ICHRA has no minimum or maximum dollar amount or participation requirement, making it a very versatile benefit.
Integration with Individual Coverage
It’s crucial to educate employees on choosing individual health plans to maximize the value of ICHRA. For example, suppose an employer is considering adding a pre-tax option alongside their ICHRA. In this case, policies cannot be purchased from state or federal exchanges – employees must go straight to a carrier.
Individual Health Plans are limited to:
- ACA Metal Plans – Individual or Family
- Medicare, Medicare supplements, and Medigap
- Student Health Care Plans
- Catastrophic Plans
ICHRA Compliance and Regulations
ICHRA is a self-funded Group Health Plan with ERISA, PHI, HIPPA, COBRA, ACA Reporting, and PCORI fees that need consideration and filing. Following these regulations is critical to avoiding penalties, and this is where a benefits administrator, such as Flyte HCM, can be invaluable.
Healthcare Option #3: Qualified Small Employer HRA
QSEHRAs have separate rules and regulations than an ICHRA and work well for employers with less than 50 employees. QSEHRAs are also ideal for small employers that may have employees taking advantage of the advanced premium tax credits that are available on the marketplace or exchanges.
To determine if a QSEHRA is the right fit for an employer, poll them and their employees using the following questions:
- Do employees or their families already have premium tax credits?
- Are employees on Tricare, Medicaid, Medicare, or ACA Metal Plans, or do they have an individual MEC policy?
- Are employers budgeting a contribution of less than $512 a month for all eligible full-time team members?
If the answer is “yes” to any of the above three questions, then QSEHRA might be a good fit.
QSEHRA Contribution Guidelines
- Contribution amounts can be a flat dollar amount for all full-time employees or vary by age.
- Employers also have the option of adding additional funds for family coverage to ensure fairness and competitiveness while managing costs.
- Contributions are limited and indexed annually for QSEHRAs. In 2024, the most employers can contribute to employees is $6,150 individually or $12,300 per family. Employers can lower the contribution amount in QSEHRA but can never exceed the allocated annual amount.
Which health plans are QSEHRA eligible?
- ACA Metal Plans – Individual or Family
- Medicare, Medicare supplements, and Medigap
- Medicaid
- Tricare
- Individual Plans that meet Minimum Essential Coverage (MEC)
QSEHRA Compliance
When employers offer a QSEHRA plan, all full-time employees are automatically enrolled. QSEHRAs are considered ERISA plans but not group health plans so COBRA and ACA Reporting do not apply. Employers must add annual contributions to their employees’ W2 in box 12, reporting the employer’s tax-free QSEHRA reimbursement.
Creating a Successful Open Enrollment Campaign
Once an employer’s HRA Plan is adopted, it’s time to conduct open enrollment. A well-planned open enrollment campaign ensures a smooth transition, whether transitioning to ICHRA, QSEHRA or staying with a traditional group plan.
Provide employees with easy-to-understand information about the available benefits options, required notices, enrollment information, and eligibility requirements. Offer educational resources, such as webinars, workshops, or one-on-one counseling, to help employees make informed decisions.
By guiding employers through a thoughtful benefits analysis, effective plan design, compliance regulations, and building an effective open enrollment campaign, you can help them transition smoothly to the best fitting plan. With the right approach, employers can balance cost control, employee satisfaction, and legal obligations to create a successful benefits strategy.
To learn more about the above plans and which might be the right fit for employers, contact Flyte for an introductory call.