ICHRAs, Part 4: Employer Opportunities

This is the fourth part of a five-installment series on Individual-Coverage HSAs (ICHRAs). In previous installments, we reviewed the rules (Monday) and benefits (Tuesday), and examined whether employers could dump bad risk (Wednesday). The final installment (Friday) covers benefits advisors' and insurers' opportunities.

The Trump Administration’s new regulations on Individual-Coverage HRAs give employers a new (or, more properly, renewed) option when it comes to subsidizing the cost of employees’ premiums for medical coverage. Traditionally, the only options have been to subsidize premiums for employer-sponsored (group) coverage with pre-tax dollars through a Cafeteria Plan or not offer coverage.

There was one additional option, but the Obama Administration squashed it when writing regulations to support the Affordable Care Act (ACA). That option allowed employers to fund and HRA and allow employees to use the funds to pay for coverage in the nongroup market. But the Obama Administration determined that HRAs that weren’t integrated with a medical plan (for example, reimbursing a portion of the plan’s out-of-pocket costs that were the patient’s responsibility) had to follow ACA guidelines for a medical plan. Those guidelines stipulated that all plans could have no annual or lifetime benefit limits and had to cover a set of 10 Essential Health Benefits. Stand-alone HRAs for premiums were thus regulated out of existence.

In 2016, Congress introduced Qualified Small Employer HRAs (QSEHRAs), which allowed small businesses to use stand-alone (not integrated with a medical plan) to funnel tax-free funds to employees to pay for coverage. That plan is restrictive, however, so few employers have implemented this benefit.

The Employer Dilemma

Many employers who operate on low margins or employ low-skill works look carefully at their financial performance each year to determine whether or on what terms they can continue to absorb both the financial and administrative burden of group benefits. The percentage of employees enrolled in coverage declined during much of this decade, only to rebound last year. The likely explanation for this uptick is a particularly tight labor market, which forces employers to outbid competitors to attract and retain talent. Employee benefits are a particularly attractive form of compensation because, unlike regular pay, an employer contribution to medical premiums is tax-free to employees.

Even with this recent uptick, the long-term trend on group coverage is declining slightly. The next economic downturn, with accompanying higher unemployment rates, will provide employers with another focal opportunity to review their commitment to group benefits.

In this environment, ICHRAs give employers a tool to help employees pay for coverage without the employers’ sponsoring the coverage. But this option isn’t without risk. Employees still value tax-free benefits like medical, dental, and disability coverage; 401(k) contributions; and tuition reimbursement and repayment programs.

Employers are likely to adopt one of three strategies now that ICHRAs are an option:

Option 1: Cancel Group Coverage and Embrace ICHRAs

This approach allows employers to reduce – but hardly eliminate, as we learned in Installment 2 – the administrative burden of offering coverage, since ICHRAs constitute coverage. They can set the dollar amount that they give to each employee and increase that amount annually irrespective of premium increases.

Employers need to be wary of the potential negative consequences of this shift, though. If employer contributions through an HRA don’t keep up with premium inflation, or if the cost of nongroup coverage is high enough that the employee pays more for coverage (and thus experiences a drop in workers’ standard of living), the employer’s ability to attract and retain talent is compromised. Employers in certain industries may consider lower skill employees interchangeable, but many businesses rely on employees who can sell their scarce talent to other employers. This strategy may affect recruitment and retention.

This strategy works best when:

• the combination of the nongroup market and the employer’s contribution make and keep employees whole versus the former plan (although, if this were the case, the employer’s reasons for switching to an ICHRA program are less compelling), OR
• the company employs mostly low-skill, low-income employees who can be replaced easily until the work force is indifferent to a less attractive benefits offering (for example, most employees enroll in spousal coverage).
• premiums and products offered in the nongroup market are in line with what insurers offer in the group market. This situation often isn't present, as many states' nongroup markets include a small menu of products with high out-of-pocket costs and limited networks at premiums much higher than comparable small-group plans.
• the group has 51 or more employees eligible for benefits (and thus insurers use some degree of the group's experience to set premiums) and its claims costs are much higher than average. In this case, the employer may be able to reduce its total medical spend (shifting from paying group premiums to giving a tax-free stipend through the ICHRA) and provide employees with more affordable coverage.

Option 2: Retain Group Coverage

Employers can retain group coverage and adopt some of the benefits of ICHRAs. They can, for example, shift to a defined-contribution policy to fund their portion of employees’ premiums. A small but growing number of employers already do so. The concept is simple: Rather than pay, say, 75% of the cost of each plan, instead give employees a contribution equal to 75% of the premium of the lower or lowest premium. Then allow employees to buy up if they want richer coverage by absorbing the entire premium cost difference. Employers can adjust the value of the contribution in the future to reflect premium increases or increases in the compensation budget.

To reduce administrative costs, employers might explore offering a private marketplace. These programs were projected to cover 40 million Americans by 2018 when forecasts were made eight years ago, but they’ve fallen woefully short. They're a great distribution tool for employees with defined contributions, since shoppers typically can choose from between six and 10 medical plans, plus lots of traditional and nontraditional ancillary lines. The marketplace bears much of the administrative burden of educating employees, sending eligibility files to vendors, and generating reports to help employers with compliance.

Option 3: Offer a Mix of Group Coverage and ICHRA

This is an intriguing option for an employer with a work force that includes some high-skill employees and others whose jobs require lower skills. Think about a landscaping company with a professional staff to manage finances, acquire customers, service accounts, oversee crews, and purchase and maintain equipment, plus many low-skill workers to mow lawns, trim bushes, fertilize, remove weeds, and spread mulch.

Today, these companies must adopt a single program that gives all employees the same benefits. ICHRAs allow that company to create classes of employees so that the key staff people are placed in a "salary compensation" class and are offered group benefits. Others are placed in an "hourly compensation" class and receive ICHRAs that may or may not retain their value over time. This classing may sound cruel, but it allows employers to balance the breakdown of cash wages and benefits (remember, total compensation includes both cash and benefits, and a disproportionate increase in one leads to rebalancing that affects the other). ICRHAs may allow employers to continue to offer coverage and meet low-skill employees’ cash needs. Employers (adjusting the ICHRA value) and employees (staying or quitting) create equilibrium.

Bottom Line

Employers now have another tool to help them manage overall employee compensation and satisfaction. They need to be mindful of the effect that their decisions have on their work force because their employees will be providing the bluntest feedback possible – staying or leaving employment.

I’m director of strategy and compliance at Benefit Strategies, LLC. I’ve also created HSAunited, LLC which educates financial and retirement advisors, benefits, advisors, employers, and current and prospective HSA owners about these powerful financial accounts. You can follow HSAunited on LinkedIn. You can also subscribe to my biweekly blog or biweekly newsletter (commencing August 2019) and red my weekly HSA Wednesday Wisdom column in LinkedIn. My most recent book, HSAs: The Tax-Perfect Retirement Account, is sold on Amazon. I’m available as a continuing-education instructor or speaker.