Advantages, Rules, and Limitations of ICHRA in Texas
Part Two: Is ICHRA the Right Choice for Your Business?
Shanti
8/3/20263 min read
Advantages, Rules, and Limitations of ICHRA in Texas
Part Two: Is ICHRA the Right Choice for Your Business?
In Part One of this series, we explained what an Individual Coverage Health Reimbursement Arrangement (ICHRA) is, how it works, and how it differs from traditional group health insurance.
With an ICHRA, the employer sets a defined amount of money to help cover employees’ health insurance costs, while employees are free to choose the individual health insurance plan that best fits their needs.
Before implementing an ICHRA, however, both employers and employees should understand several important rules. Marketplace premium tax credits, employee classifications, affordability requirements, and proper plan administration can all have a significant impact on the outcome.
Can an Employee Receive Both ICHRA and Marketplace Premium Tax Credits? This is one of the most important ICHRA rules.
An employee cannot receive ICHRA reimbursements and a Marketplace Premium Tax Credit for the same month.
Whether an employee may decline an ICHRA and instead receive Marketplace financial assistance depends on whether the employer’s ICHRA offer is considered affordable under federal regulations.
If the ICHRA is considered affordable, the employee generally is not eligible for Marketplace premium tax credits, even if they decline the ICHRA.
If the ICHRA is considered unaffordable, the employee may be able to opt out of the ICHRA and, if all other eligibility requirements are met, qualify for Marketplace premium tax credits.
For this reason, performing an affordability analysis before enrollment is extremely important. A mistake could cause an employee to lose valuable financial assistance or require repayment of excess premium tax credits when filing a federal tax return.
What Does Affordability Mean Under ICHRA?
ICHRA affordability is determined by comparing the employee’s required contribution toward a benchmark health plan with a federally established percentage of the employee’s household income.
Large employers subject to the Affordable Care Act’s Employer Mandate are generally required to ensure that their ICHRA offer is affordable for full time employees. Failure to do so could expose the employer to Employer Shared Responsibility penalties.
Because health insurance premiums vary based on factors such as an employee’s age and location, the same employer contribution may be affordable for one employee but not for another.
Many employers rely on one of the IRS safe harbor methods when performing these calculations. As a result, affordability should generally be evaluated with the assistance of an experienced ICHRA administrator or benefits professional.
How Do Employee Classes Work Under ICHRA?
Employers may provide different benefit amounts to different legally recognized employee classes.
These classes may include:
* Full time employees
* Part time employees
* Seasonal employees
* Salaried employees
* Hourly employees
* Employees working in a specific geographic location
* Employees covered by a collective bargaining agreement
* Employees who have not yet satisfied the waiting period
* Temporary employees hired through a staffing agency
For example, an employer may continue offering traditional group health insurance to full time employees while providing an ICHRA to another eligible employee class. However, employers may not classify employees based on their health status, medical conditions, claims history, or expected healthcare costs.
For example, an employer cannot separate employees with expensive medical conditions from the group health plan and move them into an ICHRA solely because of their health status.
Key Advantages of ICHRA for Employers
Better Cost Control
With traditional group health insurance, annual premium increases can be significant and often difficult to predict.
An ICHRA allows the employer to establish a fixed reimbursement budget, making healthcare benefit costs more predictable from year to year.
No Minimum Participation Requirement Like Many Group Health Plans
Many traditional group health insurance plans require a minimum percentage of eligible employees to enroll before coverage can be issued.
ICHRAs generally do not have the same participation requirements. This can be especially beneficial for employers whose employees already have health coverage through a spouse, Medicare, or another source.
Greater Flexibility in Plan Design
Employers may vary reimbursement amounts based on eligible employee classes, age, or family size, provided the plan complies with applicable federal regulations.
Employers may also choose whether the ICHRA reimburses only health insurance premiums or also includes certain qualified medical expenses.
More Choice for Employees
Employees are free to select an individual health insurance plan that better matches their preferred physicians, prescription medications, hospitals, and family circumstances.
This flexibility can improve employee satisfaction, particularly for companies with employees living in multiple cities or states.
Tax Advantages
When properly designed and administered, qualified ICHRA reimbursements are generally excluded from an employee’s taxable income.
Employer reimbursements are also generally deductible as ordinary business expenses for federal tax purposes.
Contact Us
Reach out anytime for personalized support
Phone
© 2025. All rights reserved.