In June 2019, the federal government finalized a new type of HRA, called the individual coverage health reimbursement arrangement, or ICHRA.
By offering an ICHRA, you can reimburse your employees tax-free for health insurance bought on the individual market—letting you provide benefits without offering a group health insurance plan.
As of January 1, 2020, you can offer ICHRAs.
The ICHRA is an expansion of an earlier policy, called the qualified small employer HRA, or QSEHRA. If you have 50 or fewer employees, QSEHRA lets you reimburse employees for medical expenses without providing group health insurance.
What does the new HRA rule say?
ICHRAs allow all businesses, regardless of size, to reimburse employees for their health care expenses.
This means your employees can choose a health insurance plan that works best for them. Then you can reimburse them tax-free for their premiums and health care costs.
Through an ICHRA, your employees receive tax benefits that are comparable to those received when employees are enrolled in employer-sponsored health plans. This is because the reimbursable allowances you set for your employees under the ICHRA are tax-free.
If you choose to offer an ICHRA, your employees will be eligible for a special enrollment period so that they have the option to get onto or change individual coverage. This will let your team enroll in an individual health care plan outside of the standard open enrollment period.
What do employee classes have to do with the new rule?
You don’t have to offer all of your employees the same reimbursement amount.
For example, through the ICHRA you may offer a $300 health care reimbursement to your full-time employees and $100 to your part-time employees.
To do this, you’ll need to divide your team into different “employee classes,” each with its own reimbursement amount. You can offer any reimbursement amount to each class.
There are a few rules to make sure your health care offerings don’t discriminate:
- You need to offer the same amount of reimbursement to all employees in a class, although you can increase the amount for workers who are older or have dependents.
- You can’t offer an ICHRA to an employee covered under your group health plan. However, you can offer ICHRAs to one class, such as part-time workers, and group health plans to another, such as full-time employees.
If you do offer a group plan to a class of employees, you’ll need to follow the class size limitations for your entire team. In these cases, classes must be larger than:
- 10 employees if you have fewer than 100 employees total
- 10% of the total number of employees (rounded down to the whole number) if you have between 100 and 200 employees
- 20 employees if you have more than 200 employees
The eligible classes are:
- Full-time employees
- Part-time employees
- Seasonal employees
- Employees covered by a collective bargaining agreement, like a union
- Employees who haven’t met the required group plan coverage waiting period
- Salaried employees
- Nonsalaried employees
- Temporary staffing firm employees
- Nonresident aliens with no income in the United States
- Employees in the same geographic area
- Any group of employees formed by combining two or more of the above classes
What can my employees get reimbursed under an ICHRA?
Not all medical expenses are eligible for reimbursement through an ICHRA. You’ll want to check IRS Publication 502 to determine what is and isn’t eligible.
Employers can only reimburse eligible medical expenses, which is why a third-party administrator can really help here. The administrator will handle all of the claims so you don’t see your team’s sensitive medical information.
What are my ICHRA requirements as an employer?
If you have more than 50 full-time employees, the Affordable Care Act (ACA) requires you to offer health insurance—this is also called the employer mandate.
The ICHRA fulfills that employer mandate, as long as you offer an affordable level of reimbursement.
While the federal government hasn’t issued guidance yet as to what will be considered “affordable” for ICHRA employees, here’s how the ACA classifies affordable plans:
The IRS proposed rules indicate that an ICHRA would be affordable if the remaining amount an employee has to pay for a self-only silver plan on the exchange is less than 9.86% of the employee’s household income.
You’ll also need to provide a notice to any eligible participants about how the ICHRA works with the premium tax credit, which lowers the cost of marketplace plans. In short, employees can’t accept this tax credit if they enroll in your ICHRA. They need to pick between the tax credit and the ICHRA—and they can only claim the premium tax credit if your ICHRA is considered unaffordable.
(You can find a sample notice on page 8 of the ICHRA FAQ.)
At least once a year, employees must be allowed to opt out of your ICHRA to claim the premium tax credit if they can’t afford an individual plan.
The ICHRA requires all participating employees to enroll in either an individual insurance plan or Medicare, and you’ll need to implement an annual process to ensure your employees are registered and to verify their enrollment in your ICHRA.
This can be as simple as having your team fill out a form that states they’re enrolled in an appropriate plan. (There’s a sample form on page 16 of the ICHRA FAQ.) Alternatively, you can ask for third-party documentation or pay their insurance premiums directly.
Most importantly, you’ll need to set up plan documents. Because an ICHRA is an employee benefit, the Employee Retirement Income Security Act (ERISA) requires you to put together documentation to help your employees understand their plan. This document, called a “summary plan description,” must include:
- The name of the ICHRA plan
- Your company’s name, address, and employer identification number (EIN)
- How the plan is administered, and the name, address, and telephone number of the plan administrator. Typically, this will be your company.
- The name and address of a person who can serve legal processes
- Eligibility requirements for participating in the ICHRA plan, including definitions for each class
- A description of the plan’s benefits
- An explanation of any circumstances that may disqualify an employee
- How your ICHRA is funded
- The dates of your company’s fiscal year
- Procedures for making claims
- The required ERISA language, which can be found in the law itself
Putting together plan documents can be complicated. We recommend consulting with a lawyer or third-party administrator who is familiar with ERISA requirements.
How does ICHRA compare with QSEHRA?
QSEHRA was the previous iteration of ICHRA, designed exclusively for small businesses. There are a number of differences between ICHRA and QSEHRA plans.
|Who can offer the plan?||All employers||Employers with fewer than 50 employees|
|Is there a limit to reimbursement payments?||No||$5,250 per year for self-only health care plans or $10,600 per year for family plans (2020 limits)|
|Can I offer a group plan, too?||Yes, to classes of employees that are not offered the ICHRA||No|
|Do my employees need to have an individual health care plan or Medicare?||Yes||Yes|
|Can my employee have premium tax credits, too?||No, unless the ICHRA isn’t affordable||Yes, if the QSEHRA isn’t affordable|
|Can I divide my employees into classes?||Yes, you can divide your employees into a number of different classes||No, the QSEHRA limits your ability to divide your worker base into classes|
Do I have to help my employees find health insurance?
No. One of the nice things about ICHRAs is that they put the burden of finding a plan on your employees. The only requirements are:
- Your employees’ health care plan purchase is voluntary.
- You don’t endorse any particular insurance company.
- You don’t get any cash or gifts when an employee selects or renews a specific plan.
- You notify every employee annually that individual health care plans aren’t subject to ERISA and its requirements.
Great. How do I set up an ICHRA?
Here are a few things you and your employees will need to do before setting up an ICHRA.
- First, you’ll need to distribute the required notice about ICHRA and the premium tax credit, as mentioned above.
- You’ll also need to ensure interested employees sign up for a plan on the health care exchange during open enrollment, which lasts from November 1, 2020, to December 15, 2020, in most states. (If your employee has Medicare, they don’t need to take any action.)
- If you’re not interested in administering your ICHRA yourself, you’ll want to research third-party providers before implementing the program. Administering your own ICHRA plan is extremely difficult, and could leave you vulnerable to liability and legal action. A third-party administrator can help you with setup, plan substantiation and expense verification.
Not sure where to start with ICHRAs? A health insurance broker can help you figure out which plan suits your business best. Many administrators that currently offer QSEHRA plans will likely offer ICHRA plans too.