How to Combine ICHRA with Other Insurance Products

23/10/2024

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Combining ICHRA with other insurance products offers employers flexibility and cost savings, but specific rules must be followed for compliance and maximum benefits. This guide explains how to combine ICHRA with group insurance and pre-tax options like cafeteria plans.

Table of Contents

8 Minute Read

Estimated Reading Time: 8 minutes

Table of Contents

Introduction: What Is ICHRA?
Can You Combine ICHRA with Group Insurance?
ICHRA vs QSEHRA: Key Differences
Conditions for Combining ICHRA with Group Plans
Examples of Combining ICHRA with Group Insurance
Combining Excepted Benefit HRAs (EBHRA) and Group Plans
Combining HRAs with Cafeteria Plans
Conclusion & Next Steps

Intro: What Is ICHRA?

ICHRA allows employers to reimburse employees for individual health insurance and medical expenses, offering a flexible alternative to traditional group insurance. It can be customized for different employee groups, providing tailored coverage. This post explores how combining ICHRA with group insurance delivers flexibility and cost savings.

Key Takeaways:

ICHRA can be combined with group insurance, offering flexibility and cost savings.
Key regulations govern how ICHRA works with group plans to ensure compliance.
Examples of real-world combinations, such as group plans for full-time staff and ICHRA for part-timers.

Can You Combine ICHRA with Group Insurance?

Yes, ICHRA can be combined with group insurance under specific conditions. You can offer one group of employees an ICHRA and offer a group plan to another group, based on predetermined ICHRA classes, but keep in mind you can’t offer a group plan and an ICHRA to the same employees.

How Does ICHRA Differ from Group Insurance?
Unlike group insurance, which provides the same plan for all employees, ICHRA allows employees to choose their health plan, tailoring coverage to individual needs.

This flexibility makes ICHRA ideal for combining with group insurance in diverse workforces.

Check out our post on ICHRA vs group health insurance for more info.

Why Combine ICHRA with Group Insurance?

Combining ICHRA with group insurance allows employers to tailor benefits to different employee groups.

Key reasons to combine the two include:

Flexibility: To meet diverse needs, offer group insurance to full-time employees and ICHRA to part-time or remote workers (as an example). You can also carve out remote workers or out of state workers that can’t access coverage through the group health plan. In California, this is a common situation since many employers offer Kaiser Permanente and out of state employees cannot access it.
Cost Control: Reduce costs by keeping group insurance for high-value employees and using ICHRA for others.
Employee Satisfaction: Employees can choose personalized plans that fit their needs, improving satisfaction.

This approach maintains group plans for key employees while offering cost-effective, flexible options for others.

ICHRA vs QSEHRA

While both ICHRA (Individual Coverage Health Reimbursement Arrangement) and QSEHRA (Qualified Small Employer Health Reimbursement Arrangement) are types of HRAs designed to reimburse employees for health expenses, they have significant differences, particularly when combined with group insurance plans.

What Is QSEHRA?
QSEHRA is a type of HRA designed specifically for small employers with fewer than 50 full-time employees. It allows these employers to reimburse employees for individual health insurance premiums and other qualifying medical expenses. Like ICHRA, QSEHRA offers a flexible alternative to traditional group health insurance but has more restrictions.

Why Can’t QSEHRA Be Combined With Group Insurance?

QSEHRA cannot be combined with group health insurance, while ICHRA can. QSEHRA was designed for small employers without group insurance, allowing them to provide healthcare benefits. If a group plan is already in place, QSEHRA cannot be added. In contrast, ICHRA offers more flexibility for larger employers, allowing them to combine group plans with ICHRA for different employee classes, such as offering group coverage to full-time employees and ICHRA to part-time or remote workers.

Key Differences Between ICHRA and QSEHRA in the Context of Group Insurance:

ICHRA can be combined with group insurance, giving employers flexibility to tailor benefits across employee classes.
QSEHRA cannot be offered alongside group insurance; it’s meant for small employers who do not offer a group health plan.
Class-based benefits: ICHRA allows you to segment employees (e.g., by full-time, part-time, or remote), offering group insurance to one class and ICHRA to another. QSEHRA does not offer this flexibility.

When Should You Choose ICHRA Over QSEHRA?

If your business already offers a group health plan or you plan to, ICHRA is a clear choice, as it allows you to offer different health benefits depending on employee classification. On the other hand, QSEHRA is best suited for small employers who want to offer a health reimbursement benefit without a group plan.

Conditions That Must Be Met to Combine ICHRA With Group Plans

To combine ICHRA with group health plans, specific conditions must be met for compliance:

Employees in Each Group Are Only Offered One Solution
Employees can only be offered ICHRA or group insurance, not both. This prevents adverse selection, where healthier employees choose ICHRA and less healthy employees remain on the group plan, driving up costs.
Must Meet the Minimum Number of Employees
Each employee class must meet minimum size requirements to prevent misuse and ensure compliance with the Affordable Care Act (ACA), ensuring fair health benefits for all.

In summary, employers must offer only one health benefit per employee group and meet minimum size criteria to combine ICHRA with group insurance.

Examples of Combining ICHRA with Group Insurance

Combining ICHRA with group insurance allows employers to tailor benefits for different employee classes while managing costs. Here are some common strategies:

Offer Full-Time Employees a Group Plan, ICHRA for Hourly Employees

Full-time employees typically benefit from group plans due to stable hours, while hourly workers can use ICHRA for individualized coverage. This strategy controls costs by limiting group plan expenses for part-time employees.

Keep Group Plan for Existing Employees, ICHRA for New Hires

Maintain the group plan for current staff and offer ICHRA to new hires. This allows a gradual transition to an ICHRA-based model, reducing group plan obligations over time while offering comprehensive coverage.

Offer Group Plan for Local Employees, ICHRA for Remote Employees

Local employees can take advantage of regional network benefits through a group plan, while remote workers use ICHRA to select individual coverage suited to their location. This approach offers flexibility without geographic limitations.

Offer Group Plan for Salaried Workers, ICHRA for Hourly Workers

Salaried employees receive comprehensive group coverage, while hourly workers use ICHRA to tailor coverage to their needs. This helps employers manage costs and provide personalized benefits for each class.

Combining Excepted Benefit HRAs (EBHRA) and Group Plans

Employers can offer Excepted Benefit HRAs (EBHRA) alongside group health plans. EBHRAs cover limited benefits like dental, vision, and preventive care, providing flexibility even for employees not enrolled in the group plan.

EBHRA vs FSA

EBHRA: Employer-funded and can be used for excepted benefits even if employees opt out of the group plan.
FSA: Employee-funded through pre-tax contributions, but only available to those enrolled in the group health plan.

EBHRA offers more flexibility since it doesn’t require group plan participation.

Employees Don’t Have to Accept Group Plan to Use EBHRA

Employees can use EBHRA funds without enrolling in the group plan. For example, employees with coverage through a spouse can still access EBHRA for eligible expenses, providing flexibility for those with outside insurance.

Qualifying Expenses and Limitations of EBHRA

Eligible expenses: Dental, vision, preventive services, and limited-scope benefits (e.g., chiropractic care).
Limitations: Subject to annual contribution caps and cannot be used for major medical expenses like surgery or prescriptions.

EBHRAs offer supplementary benefits, making them a great option for employees with existing coverage.

Combining HRAs With Cafeteria Plans

Combining Health Reimbursement Arrangements (HRAs) with cafeteria plans allows employers to offer flexible, cost-effective health benefits while maximizing tax savings for both the business and employees.

Why Combine HRAs With a Cafeteria Plan?

Combining an HRA with a cafeteria plan provides flexibility for employees and cost savings for employers. Employees can use their HRA for medical reimbursements while using pre-tax cafeteria plan contributions for premiums and other expenses, reducing their taxable income.

Key benefits include:

Employee Flexibility: Employees can manage healthcare expenses with employer-provided funds and pre-tax contributions.
Cost Savings: Employers offer comprehensive benefits without significantly increasing expenses by shifting some costs to employees.

Tax Advantages of Combining HRAs With Cafeteria Plans

The main reason for combining HRAs with cafeteria plans is tax savings.

For Employees: Contributions to a cafeteria plan are made pre-tax, lowering taxable income and reducing overall tax liability.
For Employers: Employer contributions to HRAs are tax-deductible, and pre-tax employee contributions to cafeteria plans reduce payroll taxes (Social Security and Medicare).

Reduced tax obligations benefit both employers and employees, making this combination highly appealing for small—to mid-sized businesses looking to offer competitive benefits.

Examples of Combining the Two

To illustrate the benefits of combining HRAs with cafeteria plans, let’s explore two examples demonstrating savings for employees and employers.

Example 1: HRA vs. HRA Combined with a Cafeteria Plan for an Employee

Sarah earns $50,000 annually and receives a $2,000 HRA contribution from her employer. Without a cafeteria plan, her entire $50,000 salary is taxed. If Sarah contributes $2,000 pre-tax to a cafeteria plan, here’s the comparison:

Without a cafeteria plan:
- Salary: $50,000
- Taxable salary: $50,000
- Taxes (15% rate): $7,500
- Net salary: $42,500
With a cafeteria plan:
- Salary: $50,000
- Pre-tax cafeteria contribution: $2,000
- Taxable salary: $48,000
- Taxes (15% rate): $7,200
- Net salary: $40,800

Sarah reduces her taxable income, saves on taxes, and covers medical expenses more efficiently.

Example 2: Savings/Tax Differences for the Employer

Sarah’s employer also benefits by reducing payroll taxes. Here’s the comparison:

Without a cafeteria plan:
- Payroll tax (7.65% on $50,000): $3,825
- HRA contribution: $2,000
With a cafeteria plan:
- Payroll tax (7.65% on $48,000): $3,672
- HRA contribution: $2,000

The employer saves $153 per employee annually. For 100 employees, the savings would be $15,300.

Summary of Savings:

Employee: Reduced taxable income and more efficient healthcare cost coverage.
Employer: Lower payroll taxes via pre-tax contributions.

These examples demonstrate how combining HRAs with cafeteria plans benefits both parties, making it an attractive option for cost-effective healthcare.