to their employees while reducing costs. One way to do so is by transitioning from generic group health plans to an Individual Coverage Health Reimbursement Arrangement (ICHRA). ICHRA allows employers to offer employees a ‘healthcare allowance’ that can go toward health insurance premiums and other medical expenses on a tax-free basis. With cutting costs and budget constraints sitting top of mind in this inflation-driven economy, in this blog post, we'll outline the three most important financial benefits to employers when offering health care through ICHRA instead of traditional group plans: cost-cutting, budget predictability, and tax advantages.
According to a study published in Health Affairs, ICHRA has the potential to reduce costs for both employers and employees. One of the main benefits of transitioning to an ICHRA model of health benefits is that employees can get the same level of care they were getting through a group plan at a lower cost to the employer. Data from across the US shows that in certain regions, ICHRA plans can be as much as 15-30% cheaper than group plans.
One of the most clear and consistent advantages for employers transitioning to an ICHRA model is budget predictability. As we mentioned in our post on Why Group Health Plans Don't Work, price increases of employee-sponsored group health benefits are notoriously unpredictable. On average, group plans prices can increase by 7-20% YoY. Even if only a single employee covered by the group plan experiences a significant medical event, the premiums for the entire company go up the following year in order for the risk to be averaged out across all insured individuals. With ICHRA, employers shift from offering defined benefits to offering a defined contribution. ICHRA enables employers to set a clear, predictable benefits allowance for employees to put towards their healthcare.
The best part? ICHRA plans aren’t affected by previous year claims or other issues so the rates stay relatively similar each year. All this translates to cost stability for employers, enabling them to budget more effectively for the long term.
Employers can also enjoy significant tax advantages with ICHRA. Contributions from employers and employees to cover ICHRA plans are tax free for qualifying expenses, such as monthly insurance premiums and copayments. Employers can deduct the reimbursements they make to employees for health insurance premiums and qualified medical expenses as a business expense - resulting in significant tax savings.
While there are a wide variety of reasons to consider leveraging ICHRA, these three significant financial benefits are often enough to get Financial and Human Resource executives ready to make the change. Employers can save money, plan their budgets more effectively, and enjoy tax advantages with ICHRA. If you're an employer looking to offer better healthcare benefits while keeping costs down and improving budget predictability, ICHRA may be the perfect solution for your organization.
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