Can section 125 plans be used with an ICHRA?

Both individual coverage HRAs (ICHRAs) and cafeteria plans (section 125 plans) help employees save on medical costs, but can they be combined? Read more to learn how.

About the plans

Before we discuss whether section 125 and ICHRA plans can be combined, it’s useful to understand how the two plans work. Section 125 plans involve pre-funded accounts. The employee contributes a certain amount to an account every month that is deducted from their gross income, which reduces their taxable wages. ICHRAs are reimbursement plans that don’t use pre-funded accounts. Instead, the employer commits to reimburse expenses up to a predetermined allowance. All reimbursements are free from payroll taxes for the organization and its employees. Reimbursements are also free from income tax for employees if the employee is covered by a policy providing minimum essential coverage (MEC).

For detailed information about the differences, read Section 105 Plan vs. Section 125 Cafeteria Plan - What’s the Difference?

Can employers combine plans?

Employees can combine a cafeteria plan with an ICHRAs if (and only if) the employee purchases a plan outside of a healthcare.gov or a state exchange. In these cases, employees can use cafeteria plan funds to pay for insurance premiums and medical expenses that their ICHRA allowances do not cover.

Conclusion

Most employees will want to purchase individual coverage from healthcare.gov or a state exchange. These employees would not be able to use both an ICHRA and a cafeteria plan. However, as long as employees are purchasing off-exchange plans and are using cafeteria plan funds to cover premium costs not already covered by the ICHRA, it is acceptable to combine the two.

Questions about how ICHRAs work?

Learn more in this demo video.