ICHRA vs Traditional Employer-Funded Insurance: What's Best For You?

Choosing the right insurance plan for your employees can be tough. 

The key is to strike the perfect balance between control, flexibility, quality, and costs. 

This brings us to two employee healthcare structures that can fit the bill: traditional employer-funded insurance and Individual Coverage Health Reimbursement Arrangement (ICHRA). 

Broadly speaking, both traditional employer-funded insurance and ICHRA provide companies with more control of their employees’ health plans. However, there are a handful of differences that give ICHRA an advantage in terms of flexibility, coverage quality, and administrative challenges.

In this article, we’ll take a finer look at the differences between the two plans to help you choose what’s best for your employees.

First, a quick introduction. 

What is ICHRA?

ICHRA — short for Individual Coverage Health Reimbursement Arrangement — is a relatively new health reimbursement arrangement where employers set a maximum reimbursement allowance for each employee. This can be used for their health insurance premiums as well as a list of eligible medical expenses. 

Implementing ICHRA can be simplified with the help of a third-party insurer or a visual management platform like SimplyHRA. 

Pros and Cons of ICHRA

Knowing the advantages and disadvantages of ICHRA is the first step towards sharp and effective decision-making when it comes to your employee healthcare plan.

Advantages of ICHRA

• Plan flexibility — Unlike traditional employer-funded or group healthcare plans, employees can customize their coverage to fit their specific needs. 
• Cost control — Employers set a hard cap on reimbursement allowances per employee, ensuring they never go overboard in terms of employee healthcare expenses. 
• No size constraints — In contrast to traditional group insurance plans, any business can adopt and implement ICHRA (regardless of the number of employees).
• Portability — Employees can keep their health benefits even after leaving the company.
• Tax benefits — ICHRA payouts are tax-free while employer contributions can be deducted as business expenses.
• Easier management — With platforms like SimplyHRA, ICHRA management is easier than ever — simplifying tasks like budget allocation, fund tracking, and compliance.

Possible disadvantages of ICHRA 

• Learning curve — Bothemployersr and employees must undergo intensive planning and training to understand how ICHRA works.
• Requires employee research — Employees must conduct their own research in terms of choosing between health insurance products and understanding their unique medical needs. 
• Dependency on individual markets — Everything in ICHRA — be it the costs, coverage, and plan availability relies on the individual health insurance market, leading to inconsistent benefits between employees and potential uncertainty in the future.

What is Traditional Employer-Funded Insurance?

With traditional employer-funded insurance, the company either purchases a health insurance plan on behalf of employees OR provides them with a monthly allowance for their healthcare needs. The cost of the plan varies depending on the type of insurance and benefits the employers choose.

The traditional employer-funded insurance plans can either be of the following:

• Fully-insured health plans — Employers pay fixed premiums to an insurance carrier to provide coverage for employees. Most companies choose this plan since the insurer assumes the financial risks and responsibilities of providing health benefits. 

• Self-funded health plan —  In a self-funded plan, the employer is directly responsible for providing healthcare benefits to their employees. Monthly contributions may change from month to month depending on the actual healthcare usage. 
• Group health insurance — This plan allows the company to select a health insurance plan (or plans) for a group of eligible employees. It is a popular choice for employers due to better affordability, predictability, and risk since healthcare costs are shared with employees. 

Pros and Cons of Traditional Employer-Funded Insurance

Here's a quick look at the benefits and downsides of traditional employer-funded insurance:

Advantages of employer-funded insurance

• Better coverage and benefits — Employer-funded insurance plans, in general, offer more benefits compared to individual health insurance plans. This is attainable since companies can negotiate rates and coverage with insurance providers for high-quality coverage.
• Tax credits — Employer contributions to health insurance premiums are tax-deductible, reducing the company’s taxable income. At the same time, employee payments can also be made through pre-tax, payroll deductions.
• Minimizes admin tasks for employees — Employers and third-party insurance carriers handle almost all of the necessary processes including claims processing, enrollment, and customer support. This has a significant positive impact on employee satisfaction and retention. 
• Secure coverage — Under the Affordable Care Act (ACA), applicable large employers (ALEs) or companies with 50 full-time employees are required to provide at least a minimum level of coverage to employees. This should be available to all qualified employees and their dependents regardless of their current health status. 

Possible disadvantages of employer-funded insurance 

• Tied to employment — Since the plan is funded by the employer, employees' health benefits and coverage can't be ported over once they leave the company. 
• Limited flexibility — Employers assume full control over the plan (or set of plans) their employees will get. 
• Higher costs — Certain types of employer-funded health insurance, including fully-insured plans, can be too costly for small-medium businesses.

ICHRA vs Traditional Employer-Funded Insurance: Side-By-Side Comparison

Still not sure which health insurance plan to choose? 

Here’s a side-by-side comparison of ICHRA and the traditional employer-funded insurance plans:

1. Cost

Cost is one of the biggest factors to consider when choosing an insurance plan for your business.

Traditional employer-funded insurance can be more expensive than ICHRA depending on the chosen plan and coverage. It costs roughly $703 per month (more for families) where employees cover 17% of the cost — often rising on a yearly basis as markets change.

On the other hand, ICHRA offers more control and predictability for employers in terms of costs. They reimburse employees for healthcare instead of buying it for them, avoiding unexpected rate hikes. 

2. Tax Implications

Both ICHRA and employer-funded insurance come with tax benefits for businesses. 

Remember, ICHRA is technically a type of employer-funded plan — explaining their similarities in terms of tax implications. Just remember that, with ICHRA, employees must have an individual insurance policy that meets the minimum essential coverage (MEC) to participate in ICHRA.

3. Flexibility

Flexibility is what really sets these two health insurance plans apart. 

Most of the time, employer-funded insurance plans are one-size-fits-all. That means employees have little to no choice when it comes to the specific benefits and insurance products they want for themselves. 

In contrast, ICHRA allows employees to choose individual insurance plans that will cater to their specific health needs. Not to mention that ICHRA also empowers employees to choose the medical services to be reimbursed (as long as they're included in the list of eligible medical expenses).

4. Employee Eligibility

Whether it's for ICHRA or any other traditional healthcare plan, employers often determine who is eligible for employment-linked healthcare benefits. 

In traditional employer-funded plans, coverage is generally offered to full-time workers. Their policies may also extend coverage to family members depending on the policy terms.

To be eligible for an ICHRA plan, the only requirement is that employees must have an individual health plan. Employers can use ICHRA to cover freelancers and part-time employees.

5. Administrative Overhead

With traditional employer-funded insurance, employers or third-party insurers handle the administrative burden such as enrollment, claims processing, and compliance.

This is the same for ICHRA plans. However, modern benefits management platforms like SimplyHRA can streamline administrative tasks through a drag-and-drop interface. These platforms also handle time-consuming paperwork and compliance-related tasks. 

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Key Considerations to Remember

Before you finalize your decision between ICHRA and traditional employer-funded insurance, here are five key considerations to ponder:

• Business size — Consider the size of your business when choosing health insurance for your employees. ICHRA doesn’t have size restrictions, making it ideal for small businesses.
• Budget considerations — Budget is one of the major concerns in choosing the right health plan for your employees. ICHRA is generally more cost-effective, but traditional employer-funded insurance can provide better coverage. 
• Employee needs — Take a good, hard look at your workforce's specific health needs. If you're going with ICHRA, make sure they have access to individual plans that can cover the health and safety issues in their line of work.
• Future outlook — With the annual increase in insurance prices, going for an ICHRA plan may be a better choice for employers. This is especially true if you're looking at the long-term financial impact of employer-funded healthcare. 

Conclusion

Healthcare is one of the most important employment benefits that every employer should provide. 

While most businesses and employees are familiar with the traditional employer-funded insurance plans, ICHRA definitely has the capacity to do more — as long as you play your cards right. 

If you’re a business owner who wants to know more about ICHRA plans, SimplyHRA is here for you. 

Book a demo now to learn more.