A few years ago, the federal government finalized a new type of health reimbursement arrangement (HRA), called the individual coverage health reimbursement arrangement or ICHRA.
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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 plan. Like a qualified small employer HRA (QSEHRA), an ICHRA isn’t associated with a group health insurance plan.
What is an ICHRA?
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 premiums and health care costs.
Through an ICHRA, your employees receive tax benefits that are comparable to those received by employees who 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, consider when you make it available to your employees. For example, with a January 1 start date, your employees can participate in open enrollment for the individual health insurance market to select their own plan, since they’re not receiving employer-sponsored health insurance by participating in an ICHRA. Otherwise, if you’re canceling your company’s group health plan, if one is currently offered, it will trigger a special enrollment period for your employees to choose an individual health plan outside of the standard open enrollment period at the end of each calendar year. What are employee classes?
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 are equitable and not discriminatory:
- 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. (Note: One exception is that new employees can be offered an ICHRA within the same class of employees who are already participating in a traditional group health plan.)
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 percent 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
- Non=salaried 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.
For 2021, an ICHRA is affordable if an employee pays (after the employer reimbursement) less than 9.83% of 1/12 of his or her household income for the cheapest self-only silver plan in the area through the health insurance exchange.
You’ll also need to provide a notice to any eligible participants about how the ICHRA works with the premium tax credit (PTC), 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 PTC 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 PTC 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 appropriately registered and to verify their enrollment in your ICHRA.
This can be as simple as having them 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 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?
There are a number of differences between ICHRA and QSEHRA plans. Here’s how they stack up:
|Who can offer the plan?||All employers||Employers with fewer than 50 employees|
|Is there a limit to reimbursement payments?||No||$5,300 per year for self-only health care plans or $10,700 per year for family plans (2021 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 they offer employees the flexibility to select individual health insurance that best meets their needs. The only requirements for an ICHRA 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.
How to evaluate affordability
This HealthCare.gov worksheet provides a 6-step approach to determining if an employer is providing an “affordable” ICHRA offer. Employees can use it to determine if they should use the employer-provided ICHRA or receive the PTC. It can also be useful to employers, who can use it as a tool to help determine what their ICHRA offer should be.
Easily evaluate employer options: health insurance vs. HRAs
To help you determine if you want to offer small group health insurance, a QSEHRA, an ICHRA, or another HRA to your employees, this chart breaks down the basics of what to consider.
|Small group health insurance||QSEHRA||ICHRA||GCHRA||EBHRA|
|Eligibility||Businesses must have 2–50 full-time employees (some states allow small group up to 100 employees).||Businesses must have 1–49 full-time employees.||Businesses must have at least 1 employee who isn't an owner or spouse.||Only offered with a group health plan, regardless of company size.||Only offered with a group health plan, regardless of company size.|
Requires minimum employer contribution, in most cases at least 50% of premiums.
Employer can choose how much to contribute, up to the maximum amount set by the IRS ($5,300 for individual employees and $10,700 for families in 2021).
Employer chooses how much to contribute.
Requires minimum employer contribution, in most cases at least 50% of premiums; for the HRA, employers choose how much to contribute.
Employer chooses how much to contribute, up to the maximum amount set by the IRS ($1,800 in 2021).
|Scope of coverage|
Can include medical, vision, and dental coverage.
Both employees and their dependents can enroll, but enrollment may not be required.
Cannot be offered in conjunction with any group health plan, including vision and dental plans.
QSEHRA must be available to all eligible employees, but employees may choose not to seek reimbursements.
Depending on the QSEHRA administrator, employers may have the option to reimburse all eligible health expenses, or premiums only.
Cannot be offered in conjunction with any group health plan. Employees must be enrolled in individual health insurance on or off an exchange to participate in this HRA.
Employers can offer an ICHRA or a traditional group health plan to different classes of employees, based on specific job-based criteria.
When this happens, there are class minimum size requirements for the number of employees that should be offered ICHRAs.
|Only offered with a group health insurance plan, and cannot be used to reimburse premiums. Used to reimburse out-of-pocket medical expenses associated with a high-deductible health plan.|| |
Cannot be used to reimburse health insurance premiums, but it can be used for medical expenses for premiums for dental and vision plans.
Employees can be reimbursed for medical expenses (including deductibles, copays, etc.) not covered by a primary health plan.
Employers must offer a traditional group health plan if they offer an Excepted Benefit HRA, though the employee doesn’t have to be enrolled in the health plan to participate in the Excepted Benefit HRA.
|Who pays and how much||The employer generally pays 50% or more of the employee premium; the employee covers the rest pre-tax.||Only the employer can make QSEHRA contributions. The employer decides how much money to set aside for each employee, up to the annual maximum set by the IRS.||Only the employer can make ICHRA contributions. The employer decides how much money to set aside for each employee. There are no maximum or minimum annual requirements; however, when determining minimum contributions, employers should calculate ICHRAaffordability, since it impacts whether or not an employee would participate in an ICHRA and the premium tax credits (PTC) they can or can't claim as a result if they get a plan through the health insurance marketplace.||The employer generally pays 50% or more of the employee premium for the health insurance; the employee covers the rest pre-tax. The employer decides how much money to contribute to the HRA, sets the deductible, and determines if the employees need to pay a portion of the reimbursable expenses.||Only the employer can make EBHRA contributions. The employer decides how much money to set aside for each employee, up to the annual maximum set by the IRS.|
|Tax benefits||Employer and employee contributions are free of payroll taxes. Employee contributions are free of income tax. Employer contributions are deductible as a business expense.||Employer contributions are free of payroll tax, and employees don’t pay income tax on contributions as long as employees are enrolled in minimum essential coverage (MEC). Employer contributions are deductible, as well.|
However, if employees purchase individual coverage, premiums are paid with after-tax dollars (unlike SGHI where premiums are paid pre-tax). If an employee receives a premium tax credit (PTC) for a Marketplace Exchange plan, the offering of a QSEHRA could affect the PTC.
Employer contributions are free of payroll tax, and employees don’t pay income tax on contributions as long as employees are enrolled in MEC. Employer contributions are deductible, as well.
With individual coverage, employees pay premiums with after-tax dollars (unlike SGHI where premiums are paid pre-tax). By participating in an ICHRA, employees waive PTC.
|Employer contributions are free of payroll tax, and employees don’t pay income tax on contributions as long as employees are enrolled in MEC. Employer contributions are deductible, as well.||Employer contributions up to the maximum amount are free of payroll tax, and employees don’t pay income tax on contributions. Employer contributions are deductible, as well.|
|Time cost to employers|
Plan selection and plan renewal require employer oversight. Employers must also provide an open enrollment period each year so employees can make changes to their benefits.
Employees find their own coverage either through the individual marketplace or their spouse’s group coverage.
Employers select the reimbursement amounts, and a third-party administrator can handle the rest.
Employees find their own coverage on or off an exchange.
Employers select the reimbursement amounts, and a third-party administrator can handle the rest.
Plan selection and plan renewal require employer oversight. Employers must also provide an open enrollment period each year so employees can make changes to their health benefits.
Group plan selection and plan renewal require employer oversight.
Employers must also provide an open enrollment period each year so employees can make changes to their benefits.
|Ease for employees|
Employees choose between plan options provided by their employer.
Employees have to find the right plan that meets MEC requirements.
Employees have to find their own health insurance plan.
Employees choose between plan options provided by their employer.
Employees can choose between plan options provided by their employer, and can participate in the EBHRA even if they don't choose the group health plan.
*This is only if the employee has individual insurance not purchased through an exchange, and the ICHRA needs to be reimbursing only premiums and not medical expenses, though employees can fund the HSA simultaneously.
Otherwise, if employees want to use the ICHRA and HRA for premium and medical-expense reimbursements at the same time, the employee needs to be on a high-deductible health plan, the employer can't offer a group health plan to other employees, and the ICHRA needs to be set up in a way where additional conditions are met and restrictions apply.
**But if medical expenses are reimbursed through the EBHRA, they can't also be reimbursed through a FSA or HSA.
|Participation requirements||Generally at least 60% of your team must enroll, but this varies by state and carrier.||0% (but all eligible employees must be offered a QSEHRA).||0% if offering only ICHRA; if offering ICHRA and a group health plan to different employee classes, then minimum class sizes apply.||Generally at least 60% of your team must enroll in a small group health plan, but this varies by state and carrier.||0% for the EBHRA, but generally at least 60% of your team must enroll in a small group health plan, though this varies by state and carrier.|
How do I set up an ICHRA?
If you want your ICHRA to begin on January 1, your employees can participate beforehand in open enrollment for individual health plans. . By doing that, their coverage and ICHRA start dates will coincide.
If you choose another start date during the year, it will trigger a special enrollment period. With that, employees will be selecting health insurance on or after the triggering event. This creates a gap in coverage until the ICHRA takes effect on the first day of the month following that plan selection.
In either scenario, there is criteria that needs to be followed:
- First, you’ll need to distribute the required 90-day notice about ICHRA and the PTC, as mentioned above. Certain details need to be included in the notice, including but not limited to:
- ICHRA dollar amount
- Start date for the ICHRA
- Whether the ICHRA applies to dependents
- Contact information as a resource for the ICHRA you’re offering
- Availability to enroll in individual health insurance whether through an exchange or not through one
- ICHRA statement that it’s not a QSEHRA
- You’ll also need to ensure interested employees get individual health insurance if they’re not on Medicare by using the attestation example shared above or one like it. 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.