Employee health benefits are complicated and expensive, and also necessary and valued. If you’re a small business with under 10 employees, you’re generally left with two options — providing a group health plan or offering nothing at all. The former option is costly, while the latter makes it nearly impossible to attract and recruit talent.
Federal legislation passed in 2020 offers a new way. It’s called ICHRA, a weird acronym that’s even stranger to pronounce.
This guide will walk you through why ICHRA is the simplest, most affordable option for small businesses to offer health benefits, and we’ll do so in a way that won’t put you to sleep. Let’s dive in.
What is ICHRA?
ICHRA stands for Individual Coverage Health Reimbursement Arrangement—try saying that five times fast. It's such a tongue-twister that no one actually uses the full name. Instead, you'll commonly hear it referred to as ICHRA, pronounced as ICK-Ruh.
Now that you know the acronym (and how to say it), it's crystal clear what ICHRA means, right? Well, not exactly. So, let's simplify it further.
IRS definition: a specific account-based health plan that allows employers to provide defined non-taxed reimbursements to employees for qualified medical expenses.
Normal language definition: A way to give your employees pre-tax money to purchase their own health insurance.
To understand ICHRA, it’s best to start with how it compares to traditional options.
Hard & expensive: Group health insurance & SMBs
Small business owners typically access group health insurance by working with a broker who presents fully insured health plans, the most common type of health plan for companies with fewer than 100 employees. These plans are inflexible and exceedingly expensive.
Level funded plans are a new option, gaining traction because they are typically less expensive than fully insured plans. The reduced cost is possible due to underwriting which allows them to choose companies whose employees and dependents are younger and healthier.
Both types of health plans require a participation rate of at least 60% meaning the majority of employees must sign up for the business to even have access to the plan. This requirement is a high bar and tends to “kill the deal” leaving small business owners stuck.
Very small employers have to choose one health plan for their entire team. Since healthcare is personal and localized, the chances of finding a health plan that suits everyone's needs are about as likely as winning the lottery.
By now you might be thinking health insurance feels rigged against small businesses, especially smaller-sized ones. And, well, you're kind of right. There is another way.
Simple & budget-friendly: Fixed, pre-tax benefit (ICHRA)
Now imagine you were able to give your employees pre-tax money to choose a health plan that fits their needs.
Instead of spending 8 hrs a month to find and manage a health plan …. You can focus on your business.
Instead of exceeding your budget…You can set a fixed monthly amount.
Instead of forcing your employees into a one-size-fits-all health plan…They can select a health plan that aligns with their specific wants.
Here's a bonus: in 20 major metro cities across the U.S., health plans purchased on the marketplace cost 20% less than comparable group health plans. Surprising, right? It's yet another reason why ICHRAs are gaining popularity.
How do ICHRAs work?
With StretchDollar, there are just two main steps.
1. Choose a set pre-tax health benefit to give to employees each month. The amount can vary based on certain categories such as Full-Time vs Part-Time, Salary vs Hourly and Dependents.
2. Invite your employees to access the benefit and then choose a health plan, whatever plan fits their needs.
All of this can be done online through StretchDollar’s platform. Enrollment takes minutes. Accessing the benefit takes seconds. And shopping for a health plan, well, this part is all up to the employees but on average it’s about 30 minutes.
Where did ICHRAs come from?
By now, you might be nodding your head thinking — this makes so much sense. Why haven’t I heard of ICHRAs before? The short answer is that it’s relatively new. In 2020 (yup, right before the pandemic), federal legislation created ICHRAs to broaden the appeal for HRAs (health reimbursement arrangements) which didn’t catch on much because they were limited by the types of businesses that could offer HRAs and amount an employer could give to their team. This is supposed to be a not-so-boring guide so we’ve reserved the thrilling details of ICHRAs origins for this article. Or, go pour a second cup of coffee and dig into the IRS announcement.
Setting up an ICHRA with StretchDollar is the simplest way for small businesses to offer health benefits. And because it uses pre-tax dollars, you’re also able to stretch your benefits budget even further. What’s not to like?