What is “401(k)-izing” Health Benefits?

Any employee can get stumped by the complexities of their benefits, and no offerings cause more confusion than health benefits and 401(k). What do you get when you combine the two? Due to a new federal regulation, you may find out.

Here’s how you can stay ahead of the change and help your employees understand how it affects them.

What Has Changed for Employers

A recent Internal Revenue Service code change allows employers to take funds that would normally go toward a traditional employer health care benefit plan and instead offer it to employees to pay for individual health benefits. These payments take the place of normal health benefit offerings. This move is reminiscent of when the 401(k) retirement plan became available as an alternative to pensions — thus resulting in the phrase “401(k)-izing” health benefits.

This new healthcare reimbursement account (HRA) option is referred to as an individual coverage HRA (ICHRA). It’s an expansion of the qualified small employer HRA (QSEHRA). The QSERHA allows employers with 50 or fewer employees to reimburse employees for a medical expense without providing group health insurance. ICHRAs will enable an employer of any size to reimburse employees for their health care expenses.

What the ICHRA Means for Employers

There are hurdles to this type of change. Some large employers are expected to shift their coverage from group plans to ICHRAs, according to the Society of Human Resource Management (SHRM). However, last year only up to 4% of employers with 100 or more employees said they’re considering using ICHRAs to provide health benefits.

“The high cost of individual coverage purchased on the federal or a state health insurance exchange could make coverage prohibitively expensive, even with an employer’s ICHRA contributions, because ICHRA participants are not eligible for premium tax credits when buying exchange-based coverage,” reports SHRM.

Knowing that there are a variety of responses to this new approach, small businesses should carefully consider the pros and cons of this “401(k) health benefits” option.

Weighing the Pros and Cons of ICHRA

This new health care benefit option presents some real opportunities for small businesses:

  • ICHRA is available to all businesses. Some small employers may have found it challenging to offer health care benefits in the past. The flexibility of the ICHRA offers an alternative to group coverage, especially because the employer can determine the reimbursement amount. This short-term solution may be enticing for employers.
  • There aren’t any minimum participation requirements. Employees get to choose a plan that meets their needs, and employers can reimburse qualifying expenses through a dedicated monthly amount for premiums and medical expenses.
  • Businesses can offer reimbursement based on employee class. Rather than providing a traditional employee health care plan, which lets workers choose an option from among a set range of plans, employers who use an ICHRA may offer reimbursement based on 11 designated “classes” of employees. However, whatever terms you offer to someone in one class of employees has to apply equally to everyone else in that same class.

However, jumping on this new option comes with downsides. Small businesses should consider potential cons of ICHRAs:

  • Administration is complex. Rather than working with an insurance provider to help administer benefits plans, if employers use an ICHRA, they’ll need to review and reimburse employees for qualifying expenses every month. To meet regulations, the administrative ramp-up and ongoing time commitment from employers will be significant.
  • It’s unfamiliar to employees. Understanding care options is often tough for employees, who aren’t experts and may not feel confident choosing the best plan for them. With the ICHRA, the burden of finding a plan is entirely on employees’ shoulders. The employer is removed from the process and can’t make recommendations or suggestions about providers. This puts employees, who aren’t experts at navigating their benefits, at a significant disadvantage.
  • Coverage may not comply with the Affordable Care Act. Satisfying affordable minimum coverage will depend on how the ICHRA benefit amount compares to insurance premium costs. A traditional health care plan offering can leverage group rates and contracts that make care more affordable for employees under normal circumstances.

These are just a few of the pros and cons related to offering employees an ICHRA benefit. At this point, it’s too early to tell what impact this type of offering will have. At a minimum, though, it will require a considerable shift for employers and employees alike. With that in mind, it’s essential that small businesses weigh all the options.

As with any decision of this magnitude, connect with your legal advisors, HR experts, fellow small-business owners and benefits consultants to get their insights about using ICHRA for health benefits. Learn from their experience. And, most importantly, if you do choose the ICHRA option, keep in mind that your employees will be looking to you for advice, just as you’re looking to your network for information now.

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This content is provided solely for informational purposes. It is not intended as and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal, accounting, tax and/or other professional advisers.

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