The recent U.S. Senate passage of the Inflation Reduction Act extended subsidies for insurance coverage under the Affordable Care Act (ACA) by another three years. In other words, the ACA is here to stay.
How the ACA affects small businesses
The ACA established the Small Business Health Options Program (SHOP) for small employers (generally those with 1–50 employees) who want to provide health and dental coverage to their employees. Under SHOP, employers can decide between several options for offering employees health coverage.
Health reimbursement arrangements (HRAs) or Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) are one alternative to traditional group insurance; they are a type of group health plan allowing small employers to help their employees pay for medical expenses, including premiums in some cases. The IRS explains in greater detail the tax implications and benefits of offering these plans.
The rise of the ICHRA
The Individual Coverage HRA (ICHRA) is a relatively new coverage option established through a rule issued by the Trump administration in 2019. It went into effect in 2020.
ICHRAs allow employers of any size, not just small employers, to provide a tax-free reimbursement to employees for eligible health expenses. With an ICHRA, business owners determine a set budget to reimburse their employees for health insurance costs, which may include premiums and qualified medical expenses. Employees then buy their individual health insurance plans through the marketplace and are reimbursed for their health expenditures up to the amount predetermined by their employer.
ICHRAs may be more cost-effective and flexible than traditional group coverage for some employers and simpler from an administrative standpoint.