Source: Ernie Clevenger, MyHealthGuide, with initial inquiry from ChatGPT
Legally, yes, Individual Coverage Health Reimbursement Arrangements (ICHRAs) are classified as self-insured (or self-funded) group health plans because………….
- IRS views ICHRAs as “self-funded”, and
- The employer is reimbursing medical expenses without transferring risk to a group insurance policy.
Nevertheless, functionally, ICHRAs operate differently from traditional self-funded plans, which involve claims processing and medical stop-loss. ICHRAs are defined-contribution models with capped employer costs.
Initially, I reasoned (incorrectly) that ICHRAs were not self-funded health plans because the employer is effectively transferring the claim risk to an insurance entity, just like fully-insured arrangements. On the surface, the employer uses an ICHRA to transfer claims risk to an insurance company. But technically, this transfer does not occur. The employer does not transfer risk through the ICHRA itself. Instead, employees purchase individual insurance policies, and the insurance company assumes the claims risk for that policy. The employer’s only obligation is to reimburse premiums or eligible expenses up to the fixed allowance.
ICHRAs are self-funded health plans
The ICHRA is deemed “self-funding” by inheriting its predecessor’s status, the HRA (Health Reimbursement Account).
The Affordable Care Act (ACA) itself does not explicitly define an ICHRA as a “self-funded” or “self-insured” plan. However, under long-standing ERISA and Internal Revenue Code (IRC) interpretations, HRAs—including ICHRAs—are considered self-funded group health plans, because:
- They are funded solely by the employer (not an insurance company),
- The employer bears the claims risk (i.e., reimburses claims), and
- They are not issued through a health insurance policy.
An ICHRA is legally considered an employer-sponsored group health plan under both ERISA and IRS definitions. The employer establishes and funds the arrangement, and it is subject to compliance regulations like traditional group plans. See Enabling Legislation and IRS Administration below.
A fully insured health plan is not a reimbursement-based, defined-contribution plan. A fully insured plan is a defined-benefit model where the employer pays a fixed premium to an insurer, and the insurer provides group coverage to employees. It is not a reimbursement plan. In contrast, an ICHRA is a defined-contribution plan where the employer reimburses employees for individual premiums or medical costs.
ICHRA Values to Employers
Employers are considering ICHRAs to offer flexible and cost-controlled health benefits to employees. The cost-controlled aspect is that employers pay a fixed contribution amount, no matter what their participants’ claims net out to that year.
An ICHRA is an employer-sponsored health benefit where the employer provides a fixed, tax-free allowance for employees to purchase individual health insurance—typically through the ACA exchange—or get reimbursed for eligible medical expenses. The employer does not offer a group health plan but instead empowers employees to choose their own coverage.
There are 11 different classes that employers can use to organize employees. The most often classes applied are part-time and seasonal employees. Many of these employers have a level-funded plan for full-time employees.
TPA Administration
A TPA often administers part of an ICHRA plan. Employers frequently work with a TPA to manage ICHRA compliance, documentation, employee enrollment, claims substantiation, and IRS reporting.
TPA Services:
- Educating employees about ICHRA
- Ensure regulatory compliance
- Helping employees make informed choices on plans available in the individual marketplace
- Understanding and improving their member experience
- Tracking participation rates
- Managing financial flows through ensuring seamless payments and synchronizing with carriers
Other benefits an employer provide in addition to the ICHRA include:
- Dental and vision insurance
- Telehealth services
- Employee Assistance Programs (EAPs)
- Health & wellness programs
- Dependent Care FSAs
- Limited-purpose FSAs (for dental/vision with an HSA)
- HSAs (if the ICHRA is HSA-compatible)
- Voluntary benefits like life, disability, and critical illness insurance
- Lifestyle perks (e.g., gym stipends, tuition assistance)
Employees can choose a plan through their state’s marketplace, allowing them to select coverage that best fits their needs and those of their families. These additions can supplement an employer’s benefit offering.
ICHRA Growth is Coming from Employers Offering Benefits for the First Time
ICHRA adoption is up 29% from 2023 to 2024, with ALEs growing by 84%. Entering their fifth year as a tax-advantaged solution for employer-sponsored insurance, ICHRAs had nearly 30% year over-year growth from 2023 to 2024, with Applicable Large Employers (ALEs) as the fastest growing cohort according to HRA Council Growth Trends ICHRA & QSEHRA, https://www.hracouncil.org/report
- Most employers adopting ICHRA or, its predecessor, QSEHRA (Qualified Small Employer Health Reimbursement Arrangement) are offering benefits for the first time.
ICHRA/QSEHRA have been a net gain for health insurance coverage by adding employers previously shut out of traditional group markets. Meanwhile, employers who did have a group plan are making the switch. Among employers who shared this data, 83% were not able to offer health insurance until they adopted an ICHRA or QSEHRA. With adoption still heaviest among smaller employers, this tracks with known challenges in the small group market. 17% of new adopters moved from traditional group coverage
Investor Interest
The rapid emergence of ICHRA has caught the attention of major investors, who view it as a potential successor to the 401k or even something greater due to its larger margins. Notable firms such as a16z, Index, General Catalyst, Google Ventures, Lux Capital, Oak HC/FT, and Hercules Capital, Inc. have significantly boosted investment in ICHRA services, contributing over $138 million through their backing of Thatch and Remodel Health. Venteur closed a $20 million funding round from JPMorgan’s MorganHealth arm making them leaders in the ICHRA space.
“If ICHRAs become widely adopted, it could very well be an extinction-level event for traditional group benefits—and by extension, the self-funding community, says Gerardo Zampaglione, Founder, Aegle Capital “It’s just like how very few private sector employers offer pensions today (vs. 401k). I don’t think the ecosystem fully understands the impact from ICHRAs, but they are very important to the investment community.”
Enabling Legislation and IRS Administration
The ICHRA was authorized under federal regulations issued by the U.S. Departments of the Treasury, Labor, and Health and Human Services pursuant to the Affordable Care Act (ACA) and Section 9831(d) of the Internal Revenue Code, created by regulations finalized in June 2019 (effective January 1, 2020).
Based on the final rule published in the Federal Register on June 20, 2019 (https://www.govinfo.gov/content/pkg/FR-2019-06-20/pdf/2019-12571.pdf), Individual Coverage Health Reimbursement Arrangements (ICHRAs) are classified as “account-based group health plans.”
An account-based group health plan is an employer-provided group health plan that provides for reimbursement of expenses for medical care. An HRA is a type of account-based group health plan funded solely by employer contributions. (p 28888)
An HRA is a self-insured group health plan and, therefore, is an eligible employer-sponsored plan. (p 28893) This classification applies to all HRAs, including ICHRAs, and subjects them to various federal requirements such as ERISA, COBRA, and ACA mandates.
The ‘Big, Beautiful Bill’ Promotes ICHRAs as CHOICE
The One, Big, Beautiful Bill,” which has passed the House and is now in the Senate, would codify ICHRA into the tax code, according to Stacy Edgar, CEO, Venteur Inc. “The bill renames ICHRA as the Choosing Health Options In Coverage for Employees (CHOICE) Arrangement, and provides a $1,200 per-employee tax credit to small businesses with 50 or fewer full-time equivalents (FTEs) that adopt it. Seen by many as a pivotal moment, this bill will have an immediate impact on small businesses while also providing the market validation needed to encourage larger employers to adopt flexible health coverage solutions.”
“The bill also changes an important rule: currently, employers can offer either ICHRA or a group plan to the same population, but not both. Under the revised law, both can be offered to the same group. This change will have underwriting implications for self-funded employers. It could go in either direction: employers might use ICHRA to transfer risk from their stop-loss coverage, or risk could shift in a way that drives self-funded employers into a “death spiral” due to unfavorable risk pools, ” Edgar added.
IRS Administration
The IRS concurs: An HRA is a self-insured group health plan and, therefore, is an eligible employer-sponsored plan. (https://www.federalregister.gov/documents/2019/06/20/2019-12571/health-reimbursement-arrangements-and-other-account-based-group-health-plans)
This means that HRAs, including ICHRAs, are considered self-insured plans for tax and regulatory purposes.
The IRS is consistent, indirectly, in IRS Notice 2002-45: IRS Publication (https://www.irs.gov/pub/irs-drop/n-02-45.pdf, p. 11), “An HRA is a self-insured group health plan and, therefore, is an eligible employer-sponsored plan.”
