One of the advantages of adopting an ICHRA (Individual Coverage Health Reimbursement Arrangement) group health plan is that employers are able to set their own contribution allowance. Obviously, this autonomy is a departure from the traditional small group plans that have very limited premium contributions already in place. If you’re navigating ICHRAs for the first time, it’s important to note different contribution strategies and which may work best for you.
How employer contributions work
Employers define the fixed dollar amount they want to contribute monthly, tax-free to the ICHRA. This represents the maximum amount for which the employee can be reimbursed through this benefit. With ICHRAs, no maximum or minimum contribution is required, so employers are able to be flexible within their budget.
Contributions and employee classes
Though employers can offer varying contributions to varying employee classes, it’s important to note that they must offer the same contribution to everyone in the same class, with two exceptions: age and the size of an employee’s family. There are eleven class descriptions, and they include:
- Employees covered by particular collective bargaining arrangements
- Non-resident aliens with no U.S.-based income
- Employees who have not satisfied waiting periods
- Temporary employees of staffing firms
- Employees working in the same insurance rating area (i.e. same geographic location such as state or multi-state region)
- Any combination of two or more of the above
Common contribution strategies
After evaluating what contributions to make per employee class, employers use a few common determinants to then set their contribution rates. Popular strategies include tier, relationship, and relationship and age. The contribution allowance will never be based upon the coverage that is purchased by each employee.
1. Contribution amount by tier
Tiers include the amount of people covered by the ICHRA benefit on a single plan. Tiers can include a single employee, employee and spouse, employee and child, employee and children, or an entire family. Employers can choose to fix their contributions based on the tier. For example: employers may offer $200 as a set contribution to an employee, but a $400 contribution to a family tier.
This strategy can benefit employers who may have a limited budget or limited HR administration departments, as it’s straightforward and simple to track. Employees are also probably well-versed in this tiered approach with health benefits. There’s also both a benefit and a drawback to not using a strategy that contributes by age: while it’s a positive that all employees receive equal amounts despite their age, some older employees may not receive enough to cover their higher premium cost.
2. Contribution amount by relationship
Another way that ICHRA contributions can be set is by the relationship to the employee. For example, employers can choose to contribute different amounts to the employee than they would their spouse or child. In a case where the employer contributes $200 to the employee, they could contribute $100 to the spouse and $50 to the child (per child up to 3 children).
Just like the tier contributions, these are easy for HR administrators to track and manage. It also allows for a potential cost-savings for an employer as their costs shift depending on how many children the employee has. Similar to the tier contributions, since these are not based on age, older employees may not receive enough to cover their higher premium cost.
3. Contribution amount by age and relationship
Employers can use a combination of age bands and relationship to determine their contributions. For example, if an employee is 50, has a spouse that’s 48 and a child who’s 16, their contributions can vary in amount. The employee who’s older may receive a higher contribution amount than a younger employee within the company. The individual plan premiums are based on age, so this allows for a more “fair” strategy by keeping the out-of-pocket expenses similar across the company.
Employers who want a more tailored approach to a contribution strategy may prefer this one. Additionally, it may be more beneficial for an employer with an older workforce, as they may offer a higher contribution that can help offset rising premium costs. This may increase participation rates of older workers. It should be noted that because it’s a bit more complex, this strategy can be more time consuming for HR administrators to define and then communicate the nuances to employees.
These are three popular contributions strategies for ICHRAs. If these do not fit your needs, there are other strategies we can walk you through. Just drop us a line at firstname.lastname@example.org.
Find out more about ICHRA group health plans
For more information about Nexben’s ICHRA-solution, and how it might benefit your business with cost-savings for both the employer and employees, read more here.