Glossary Term

ICHRA

An individual coverage health reimbursement arrangement, or ICHRA, is a type of health benefit that can be used for health insurance premiums as well as qualified out-of-pocket costs. During the Trump administration, several government agencies collaborated to reverse Obama-era restrictions prohibiting employers from reimbursing insurance premiums for individual market health plans, thus creating ICHRAs. Under the final rule, employers were permitted to reimburse premiums for ACA-compliant individual market coverage under certain conditions.

The employee premium contribution is pre-tax with the use of a cafeteria plan so long as the employee selects an off-exchange individual market plan. Unlike QSEHRAs, ICHRAS are not limited to small businesses, contribution amounts are unlimited, and employers can offer different arrangements to different groups of employees.

ICHRAs have two primary tax consequences for employers: 1) they expand the ESI tax exclusion for all intents and purposes (as some employers that would not have offered group plans offer ICHRAs), and 2) they reduce one tax distortion by equalizing the tax treatment between employer-selected coverage and employer contributions that employees use to purchase individual market coverage that they prefer. This reduces tax revenue, expands coverage, and increases health care spending.

ICHRAs improve employer control over how they spend their compensation on health care. The ICHRA can also promote more cost-conscious behavior as an employee has an incentive to select a plan that costs less than his or her share of the premium.


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