An ICHRA benchmark may help determine how much an employer contributes. It does not necessarily determine which health plan an employee buys.

I was recently comparing two ICHRA proposals for the same employer.

One proposal used a Bronze health plan as its ICHRA benchmark. The other used a Silver plan. One proposed paying a percentage of that benchmark. The contribution amounts varied by employee age.

At first glance, it looked like we were comparing different health plans.

We really weren’t.

We were comparing different methods for answering a much more basic question:

How much money should the employer make available to each employee?

Understanding that distinction makes ICHRA proposals much easier to evaluate.

An ICHRA benchmark is a measuring Stick

Suppose an employer wants to contribute toward employees’ individual health insurance premiums.

The employer could simply establish a flat allowance, such as $400 per month for every eligible employee.

But that creates an obvious issue.

Individual health insurance premiums vary substantially by age. A $400 contribution might cover most of the premium for a 25-year-old employee while covering much less for a 58-year-old employee.

Another approach is to choose a health plan as a benchmark and use its premium to establish the employer contribution.

For example, suppose the employer decides:

We will make available 75% of the premium for a particular benchmark plan.

Now assume that benchmark costs:

$300 per month for a 25-year-old employee
$700 per month for a 58-year-old employee

Using the same 75% formula, the employer would make $225 per month available to the 25-year-old and $525 per month available to the 58-year-old.

The employees receive different dollar amounts, but the employer is applying the same contribution philosophy to both.*

*Federal ICHRA rules generally require employees within the same class to be offered the arrangement on the same terms, but employers may vary the maximum allowance based on age and the number of covered dependents. Age-based variation is subject to a 3:1 limit between the oldest and youngest participants. U.S. Department of Labor / IRS

But the employee doesn’t necessarily buy the benchmark plan

This is where the terminology can become confusing.

Suppose our 58-year-old employee has a $700 benchmark premium and the employer establishes the ICHRA allowance at 75% of that amount.

The employee now has a maximum monthly ICHRA allowance of:

$525

That does not necessarily mean the employee has to purchase the $700 benchmark plan.

Perhaps the employee finds a Bronze plan for $600.

The $525 allowance can be applied toward that coverage, leaving the employee with $75 of the premium.

Perhaps the employee prefers a richer plan costing $850.

The employer’s allowance does not suddenly become 75% of $850. The employer has already established the allowance at $525. The employee can choose the more expensive plan and pay the additional cost.

That is the distinction I find most useful:

The employer first determines how the contribution will be calculated. The employee then makes an individual purchasing decision using the allowance that calculation produced.

Those are two separate decisions.

Bronze versus Silver may not mean what you think

This also explains why two ICHRA proposals can look so different.

One proposal might use a Bronze plan as the benchmark. Another might use Silver. A third might simply begin with an employer budget and establish dollar allowances from there.

That does not necessarily mean one employer is offering Bronze coverage while another is offering Silver coverage.

The plan may simply be the reference point used to establish the employer’s contribution.

Once the allowance is established, employees generally have the ability to purchase qualifying individual coverage available to them rather than being restricted to the particular plan used to calculate the allowance.

There is an important distinction for larger employers subject to the ACA employer shared responsibility rules. The lowest-cost Silver plan has a specific role in determining whether an ICHRA offer is considered affordable. The IRS generally measures the employee’s required contribution using the applicable lowest-cost self-only Silver plan for the employee’s location and age, reduced by the ICHRA amount.

That affordability benchmark should not be confused with whatever benchmark an employer or ICHRA provider may use when designing the employer’s contribution strategy.

The allowance is not simply cash

There is another point worth keeping straight.

An ICHRA allowance establishes how much the employer will reimburse under the arrangement. It is not simply additional compensation handed to the employee.

The employee must have qualifying individual health coverage, and the ICHRA reimburses eligible expenses according to the terms established by the employer. ICHRAs are employer-funded arrangements integrated with individual health insurance coverage or Medicare.

So when comparing ICHRA proposals, I would be careful with statements such as:

“The employer is paying 75% of the employee’s insurance.”

Maybe.

A more accurate description could be:

“The employer is using 75% of a particular benchmark premium to establish the employee’s ICHRA allowance.”

Those can produce very different results depending on the employee’s age, location and ultimate plan selection.

And then comes renewal

There is one more question I think employers should ask before adopting a benchmark approach:

What happens next year?

Suppose an employer establishes its contribution at 75% of a benchmark premium.

If that benchmark rises 12% at renewal, does the employer automatically continue paying 75% of the new amount?

Maybe that is exactly what the employer wants. It creates a consistent contribution formula and allows the employer contribution to adjust as individual-market premiums change.

But perhaps the employer has a specific benefits budget. In that case, automatically maintaining the same percentage could produce a larger increase than expected.

That is why the benchmark should not simply be something buried inside an ICHRA proposal.

It is part of the employer’s funding strategy.

The employer should understand what is being benchmarked, why that particular benchmark was selected, how the resulting allowances vary among employees and how the methodology will be handled at renewal.

The simple way to think about it

When an employer is presented with an ICHRA proposal based on a benchmark plan, I think there are really three questions to ask:

What plan or premium are we using as the benchmark?
What portion of that benchmark are we making available to employees?
What dollar allowance does that produce for each employee?

Only after answering those questions do we get to the employee’s decision:

What health plan does this employee actually want to buy?

That separation between the employer’s funding decision and the employee’s purchasing decision is one of the most important concepts to understand about ICHRA.

And once you see it that way, a proposal based on Bronze and a proposal based on Silver become considerably easier to compare.

About the Author

For more than three decades, Ted Stevenot has helped Ohio small businesses and their owners evaluate health insurance and employee benefits as a partner at McCarthy Stevenot Agency, Inc.

He writes the Broker’s Desk series to document the real-world decisions, conversations and observations that come from helping small businesses navigate health insurance.

Talk With McCarthy Stevenot Agency

If your Ohio business is considering a CHOICE Arrangement, formerly known as an ICHRA, the employer contribution is only part of the decision.

Employers also need to consider the individual plans available to employees, provider networks, affordability rules, administration and how the arrangement compares with available group options.

Contact McCarthy Stevenot Agency

to discuss whether a CHOICE Arrangement or traditional group health plan makes sense for your business, or call
513-891-9888.

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Disclaimer

Broker’s Desk is a series of observations from more than three decades of helping Ohio small businesses and their owners navigate health insurance. Some articles explain a process. Others examine the tradeoffs behind real employer decisions. Client-identifying details may be omitted or generalized to protect privacy.

CHOICE Arrangement and ICHRA rules, individual-market premiums, plan availability, provider networks, contribution strategies and affordability calculations vary by employer, employee circumstances and location. Federal requirements may also change over time. This article is intended to explain practical considerations involved in evaluating an arrangement and is not legal or tax advice. Employers should review their specific circumstances with appropriate insurance, tax or legal professionals.