One of the biggest questions to tackle when starting an ICHRA is “How much can I contribute?” The answer will depend a lot on the size of your company and your budget. But how much you can contribute and how much you should contribute are two different questions. That’s why Benafica helps you model several different financial strategies so you can customize a plan that works for your business.
When creating your ICHRA plan design, you can choose between two primary contribution strategies: Flat-dollar and Age-based. Along with that, you’ll decide whether or not to reimburse out-of-pocket healthcare expenses. Contribution strategies are set for the plan year, so you’ll want to make sure that whatever you choose is sustainable for at least 12 months.
Flat-Rate Contribution Strategy
The flat-rate contribution strategy for ICHRA is pretty straightforward: The employer provides the same dollar amount to every eligible employee (e.g. $500). This is a simple strategy that can be deployed quickly and easily.
It can be ideal for a small company offering benefits for the first time, or for businesses that have a more homogenous workforce where employees have similar healthcare needs. While you may never be able to tell exactly how much healthcare your individual employees will need, a flat-rate strategy can be a good jumping-off point for employers who want to contribute something to their employees’ healthcare costs, or if budgeting is your primary concern.
The flat-rate contribution strategy is quick and easy to set up, and easy to communicate with employees. It’s predictable for your budget, as you will know the maximum amount you will possibly spend. But while employees may perceive the flat-rate contribution as equitable, it can come with some drawbacks. Insurance premiums vary by age and location, so this strategy may underfund older employees or employees in areas with higher insurance premiums. And, if you’re an ALE, you might get stuck offering a high minimum contribution amount, as you’ll have to offer the highest minimum contribution amount to everyone.
In that case, you’ll want to look at a more flexible age-based contribution strategy.
Age-Based Contribution Strategy
The age-based contribution strategy is a little different from flat-rate, in that the amount per employee will differ based on their age and geographic location. This strategy is more equitable across your entire workforce, especially if you have a lot of age variation amongst your employees or multi-state operations.
Age-based contribution strategies require a bit more analysis up front, but they offer more flexibility for employers looking to tailor benefits to their workforce — especially when paired with employee classes. The beauty of an age-based contribution strategy is that you can scale it up or down to meet budget restraints or the needs of your workforce.
Here’s how it works in practice: Start with a “benchmark plan” — the lowest-cost silver plan available in your employee’s local market. The benchmark gives you a base amount for each employee and sets a minimum contribution level to meet IRS affordability rules. If you’re a large employer (ALE), this would be the least amount you can contribute.
Then, you can either offer that amount or customize contributions beyond the benchmark. For example:
- 100% of a mid-tier silver plan – Employees will get the dollar amount of a mid-tier silver plan premium.
- 75% of a mid-tier gold plan – Employees will get the dollar amount of 75% of a mid-tier gold plan premium.
- Hybrid strategies – Mix and match by employee class or geography, providing targeted flexibility for groups with unique needs.
With an age-based strategy, you can model the maximum amount you would possibly spend at a certain percentage of any given plan tier, knowing that you might come in a little bit lower depending on how many employees enroll, what plans they choose, and whether they use all their allowance.
Whether to Include Employee Health Expense Reimbursements
Another important decision you’ll make when designing your ICHRA is whether you want to reimburse premiums only or premiums plus qualified health expenses. If you cover only premiums, and your employee chooses a healthcare plan that is less than your monthly contribution amount, the employer retains the extra. However, you can choose to offer the extra (up to the full contribution amount) for out-of-pocket healthcare expenses.
For example, let’s say you decide to contribute up to 75% of a gold plan. If an employee chooses a lower-cost bronze plan instead, the leftover allowance can be used for things like:
- Copays when visiting the doctor
- Prescription drug costs
- Other IRS-approved medical expenses
It’s a little bit like an HSA, minus the bank account. An HSA gives employees tax-free dollars for healthcare expenses; an ICHRA does something comparable by allowing employees to submit eligible medical costs for reimbursement. This is a great option as an additional employee perk, as it allows employees to stretch their health dollars further and use that money in a way that fits their needs.
Find the Strategy That Works for You
ICHRA is a popular alternative to group health plans due to its flexibility. With no minimum participation requirements, and the ability to define your contribution style and employee classes, you can offer different amounts for different groups (e.g. full-time vs part-time, seasonal, temporary, or unionized). If you’re ready to explore ICHRA modeling for your company, contact us below.
- Visit Benafica’s ICHRA page and fill out the form at the bottom
- Call 651-287-3253
- Email hra@benafica.com