HRAs and more
August 20, 2023

ICHRA History Lesson: How the Pre-Tax Health Benefit Came to Be

Let's go back in time and find out how and why ICHRAs were formed.
Ellen Decareau
A stack of antique looking books with the title: How ICHRA came to be

Key takeaways

With healthcare costs skyrocketing, businesses – especially small ones – are struggling to find ways to provide affordable coverage for their employees. Thankfully, a new option has emerged in recent years: ICHRA pronounced as ICK-Ruh. While this may be a new term for many, ICHRA has actually been around for a few years now, quietly making an impact in the health benefits world by making it possible for employers to give pre-tax money to employees for health insurance that they buy and own.

Let's dive into a little history lesson to find out how this lesser-known health benefit option came to be.

A little history on ICHRA

Warning, we're about to throw around a lot of acronyms.

Let's set the scene: In December 2016, the Obama administration signed into law the 21st Century Cures Act, setting the stage for the implementation of QSEHRA (pronounced CUE-Sarah), the predecessor for ICHRA.

QSEHRA stood for "Qualified Small Employer Health Reimbursement Arrangement," and it enabled small businesses with fewer than 50 full-time equivalent employees to provide up to $4,950 (as of 2019) in pre-tax funds to their employees each year to use towards the purchase of health insurance plans. Unfortunately, it wasn't that popular largely because of its limitations.

So, in June 2019, the Trump administration followed up with new regulations, allowing employers of all sizes to offer employees a pre-tax fixed benefit with no limit on the distribution. The new IRS program was called ICHRA, or Individual Coverage Health Reimbursement Arrangement, thus expanding the reach of this new health benefit option.

Why do we mention the involvement of two presidential administrations? Merely to point out that the expansion of HRAs have been a product of both sides of the political sphere. ICHRA was bi-partisan legislation meant to improve access to health benefits for U.S. businesses and their employees.

Why did 'access to health insurance' need to be fixed for small businesses

These days finding affrodable employee health insurance for small businesses is like navigating a messy maze. Premium costs have soared, and that's making it seriously tough for small businesses to offer health benefits. On top of the high expenses, small businesses have to deal with challenges like minimum participation rates (meaning, a certain number of employees, usually more than half, must be enrolled to make it an option) and complicated sales process that take 30+ hours over many weeks.

Corporations and large employers have more levers to pull for cost management available because they are able to self-fund their employee health insurance coverage. Small businesses lack the size to make a self-funded structure viable and so there options tend to be expensive fully-insured health plan or nothing at all. It’s why more small businesses are thinking outside the box – trying out new options like a fixed, pre-tax health benefit (also known as ICHRA) to solve the whole health insurance puzzle while give their team health benefits.

In 1999, a family health plan cost less than $6000. Today, it's close to $23,000. That's nearly a 400% increase. (Source)

What exactly is ICHRA, and how does it differ from other healthcare options?

ICHRA allows employers to give their employees "allowances" — pre-tax dollars — to purchase individual health insurance coverage of their choice. Meaning, employers can offer healthcare coverage without having to deal with traditional group plans (the paperwork and complicated process) or costly premiums. Instead, they can choose and control their own budget.

Employees benefit from the flexibility of choosing their own plan and have the benefit of employer contributions to cover the plan’s cost.

Before this pre-tax, fixed health benefit option (ICHRA), small businesses had only two main options when it came to employee healthcare coverage: buy a complicated and expensive small group health insurance plan or do nothing at all. Over recent years, the group market has only become more unaffordable and more complicated. (Check out our blog The Death Spiral of Group Health Insurance, for more details.)

Conclusion: Small businesses deserve better ICHRA

ICHRA may not be as well-known as other employee healthcare coverage options yet, but it’s getting the attention of more and more small businesses, hoping to take care of their people and also have more control of their benefits budget. ICHRAs offer a more flexible and affordable way to address employees' healthcare needs. It's better for the bottom line, better for recruitment, better for retaining employees...and, well, just better.

Interested in StretchDollar's ICHRA? Get started here.

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