How does ICHRA affect health insurance subsidies?

Health insurance subsidies make coverage more affordable for Americans who don’t have access to employer-sponsored coverage. In 2023, 21.4 million people¹ enrolled in Health Insurance Marketplace plans during Open Enrollment. More than 19.7 million of them received health insurance subsidies, also known as premium tax credits. That's about 92% of Marketplace consumers.

Many employers who offer health coverage typically do so through a group plan, which often makes employees ineligible for health insurance subsidies. However, an increasing number of employers are turning to individual coverage health reimbursement arrangements (ICHRAs) to provide affordable and flexible benefits. This shift raises an important question: how does an ICHRA impact employees’ eligibility for subsidies?

In this article, we'll explain how the ICHRA interacts with health insurance subsidies. We’ll also explore the potential advantages it offers and the pitfalls you need to be aware of.

In this blog post, you'll learn the following:

• Why employers choose to offer an ICHRA instead of a traditional group plan.
• How the ICHRA reimburses employees for medical expenses and individual health insurance premiums.
• How the ICHRA impacts employees who receive health insurance subsidies.

What is the ICHRA?

Traditional group health plans often don’t benefit small organizations. They come with steep participation rates that many employers can't meet and annual price hikes that they can't afford. Not to mention, they're one-size-fits-all. They don't consider the unique needs of individual employees.

According to our 2024 Employee Benefits Survey, 92% of employees said health benefits are important. The ICHRA makes it possible for business owners to offer employees personalized health benefits on a budget.

With the ICHRA, employers can provide tax-free reimbursements to employees for their individual health insurance coverage instead of buying a traditional group health insurance plan for them. Keep in mind that eligible employees need qualified individual health plans (QHPs) that provide minimum essential coverage (MEC) to participate in the ICHRA.

The ICHRA allows employers to reimburse employees for more than 200 types of eligible medical expenses, including:

• Individual monthly premiums for health, vision, and dental coverage
• Doctor's visits
• Prescription drugs
• Over-the-counter medication

Unlike traditional group health plans, ICHRAs offer companies more flexibility in healthcare spending. Employers can set budgets and determine employee eligibility using 11 classes of employees, such as full-time employees or part-time employees.

Here's how it works:

• Employers set a monthly allowance for their employees to use on medical care expenses.
• Employees purchase qualifying individual health insurance coverage. They also buy other medical services or items with their own money.
• They submit proof of their eligible expenses to their employer or HRA administrator for reimbursement.
• Once the employer approves the eligible expense, they reimburse employees up to their allowance amount.
• Any unused HRA funds stay with the employer.

The ICRHA offers a modern approach to health benefits. It empowers employees to choose the individual health insurance plans that best meet their needs while enabling employers to control their healthcare spending.

What are health insurance subsidies?

The Affordable Care Act (ACA) created health insurance subsidies to lower the cost of individual health plans bought on public health exchanges. They aim to enhance the accessibility of healthcare coverage, particularly for those with limited household incomes.

These federal subsidies ease the burden of buying individual health insurance. They allow consumers to apply them to monthly premiums in advance. Individuals can also receive their premium tax credits with their income tax refund. Either way, it helps lower the total cost of their health insurance coverage.

The goal of these health insurance subsidies is to help more people get and maintain sufficient health coverage. This fosters improved health outcomes and financial security.

Individuals are eligible for PTC if they pay more than 8.5% of their household income for the silver-level benchmark plan in their area. If the Inflation Reduct Act’s enhanced tax credits expire at the end of 2025, eligibility will revert back to the ACA rules. Under the ACA, people with incomes between 100% and 400% of the federal poverty level qualify for PTC. In either case, you’re only eligible if your employer didn’t offer you affordable coverage or if you aren’t eligible for Medicare or Medicaid.

How does the ICHRA impact health insurance subsidies?

With the ICHRA, employers offer employees a monthly allowance that helps reduce or fully pay for out-of-pocket costs for individual health plans and other medical expenses. It offers them tax-free financial assistance, much like health insurance subsidies do. But employees can't reap the benefits of both.

Employees participating in an ICHRA can no longer receive their premium subsidies. However, the federal government has special rules for the ICHRA to ensure employees can afford their coverage.

Employees have two choices:

• They can participate in the ICHRA and waive their premium tax credits.
• They can opt out of their ICHRA. However, they can only collect premium tax credits if the ICHRA is considered unaffordable.

The federal government finds an ICHRA affordable if an employee pays no more than 9.02% of their household income for health coverage in 2025 after factoring in their ICHRA allowance. It uses the lowest-cost silver plan as the benchmark.

While affordability impacts whether employees can opt in or out of an ICHRA, there’s another reason to understand ICHRA affordability. If you have 50 or more full-time equivalent employees (FTEs), the ACA requires you to offer affordable health coverage to at least 95% of full-time employees. Offering an affordable ICHRA allowance can help you satisfy this employer mandate. Since you may not know your employees’ incomes, you can use safe harbors, such as the federal poverty level, to assess ICHRA affordability.

How do health insurance subsidies work with other types of HRAs?

There are different federal rules for other types of HRAs. If you offer a qualified small employer HRA (QSEHRA) to your employees, they can coordinate their health benefits with their premium tax credits.

However, premium credit eligibility hinges on whether their QSEHRA is affordable. Like the ICHRA, a QSEHRA is affordable in 2025 if an employee pays no more than 9.02% of their income for coverage after factoring in their QSEHRA allowance. However, QSEHRA uses the second-lowest-cost silver plan premium as a benchmark.

If a QSEHRA benefit is affordable, an employee can't claim subsidies for that month. If it's not affordable for one or more months, they can still collect their credits for those months if they qualify. But they have to reduce them by their QSEHRA allowance. Unlike with the ICHRA, employees can’t opt out of the QSEHRA to collect their full premium tax credits.

The QSEHRA is also slightly different than the ICHRA. Here's how it compares:

• The QSEHRA is only for organizations with fewer than 50 FTEs.
• Eligible employees only need health insurance policies that meet MEC to participate in the QSEHRA. They don't need to be individual plans like with the ICHRA. This means employees can have coverage through a spouse or parent's plan.
• QSEHRAs come with annual contribution limits. While an employer can offer as much as they would like with an ICHRA, they can't exceed the maximum contribution limit set by the IRS for the QSEHRA.
• The QSEHRA doesn't offer employee classes. However, employers can still customize monthly allowances based on employee age and family status. So, while you can't give hourly and salaried workers different allowances under a QSEHRA, you can provide varied allowances for your employees with families versus those who are single.

Conclusion

The individual coverage HRA (ICHRA) is an innovative health benefits solution for business owners. While this budget-friendly approach aims to enhance employee choice regarding health coverage, it also requires employees to make decisions about their health insurance subsidies.

With PeopleKeep’s ICHRA administration software, you can easily regain control over your healthcare budget while providing your employees with the tailored coverage they truly deserve.

1. CMS - 2024 Open Enrollment