While traditional group health insurance is the standard route for many employers, it can be too expensive for some organizations, and too rigid for employees who are looking for flexibility and personalization in their health benefit.
The individual coverage health reimbursement arrangement (ICHRA) is a unique health benefit that enables businesses of all sizes to offer affordable health coverage to their workers. But if it’s your first time considering an ICHRA, you probably have questions about its rules and regulations.
If you’re new to the ICHRA, don’t worry! This blog answers 15 frequently asked questions (FAQs) employers have about ICHRAs to help you better understand how it can benefit you and your employees.
What is an ICHRA?
An ICHRA is a formal health benefit that allows organizations of all sizes to reimburse their employees, tax-free, for their individual health insurance premiums and other out-of-pocket costs, like doctor visits, preventive services, and other healthcare items.
ICHRAs can offer substantial health savings for small businesses that can’t afford to offer a group health insurance plan. Additionally, they enable employees to choose the health insurance plan and medical services that work best for them. Employees' reimbursements are free from income tax as long as their qualified health plan meets minimum essential coverage (MEC).
15 ICHRA FAQs
1. Who can offer the ICHRA?
All businesses, nonprofits, churches, local governments, and other groups with at least one W-2 employee can offer an ICHRA. Unlike group health insurance, an ICHRA has no minimum participation requirements, so you don’t need a certain number of employees enrolled in the benefit to offer it.
2. Which employees can participate in an ICHRA?
Employee eligibility depends on federal ICHRA regulations and what the business owner decides. Let’s go over the federal regulations first.
The government requires all employees participating in an ICHRA to have an individual health insurance plan or Medicare. This applies to an employee’s covered dependents, like spouses and children, that also want to participate in the ICHRA. Employees must regularly attest that they’re still enrolled in their individual health plan to continue using the benefit.
Employees covered by group insurance plans, including a spouse’s or parent's plan, COBRA, healthcare sharing ministries, association health plans, Tricare, or who are uninsured, aren’t eligible to participate.
Beyond these requirements, employers can also determine eligibility. As mentioned in the FAQ above, employees can choose which classes of employees they want to offer their ICHRA. Employers can use employee classes to determine eligibility, but they’re not obligated to offer the ICHRA to every class.
Additionally, S-corporation owners and their spouses who own more than 2% of a business can’t participate in an ICHRA. This is because the IRS taxes S-corp owners like shareholders and HRAs are only eligible for W-2 employees. However, employees of S-corp owners can still participate in the benefit.
3. Can employers offer an ICHRA and group health insurance at the same time?
Yes, you can have an ICHRA and a group health insurance policy simultaneously. However, you must decide on employee eligibility beforehand. You can’t give employees in the same class a choice between participating in your traditional group health plan or your ICHRA benefit.
For example, you could offer group health insurance to all your full-time employees and offer an ICHRA to your part-time employees. But you can’t offer your full-time or part-time employees a choice between which benefit they would rather participate in.
4. Can employers offer an ICHRA and a QSEHRA at the same time?
Certain types of HRAs don’t work with each other. Per compliance regulations, you can’t offer both an ICHRA and a qualified small employer HRA (QSEHRA) under any circumstances. Similarly, you’re also not allowed to offer an excepted benefit HRA (EBHRA) alongside an ICHRA.
5. What counts as “individual coverage” for an ICHRA?
Your employees must have an individual health insurance plan to participate in an ICHRA. This can be an individual policy purchased on a public exchange, like the federal Marketplace or a state-based exchange, or a private exchange directly from a health insurance carrier or broker.
Medicare Parts A and B, or Medicare Part C, are also acceptable forms of individual coverage. Remember, as long as your employees have an individual plan that qualifies as minimum essential coverage, they can participate and receive reimbursements on a tax-free basis.
6. How do employees get individual coverage for the ICHRA?
As mentioned above, your employees have a few ways they can shop for coverage in the individual health insurance market. If they use a public health insurance exchange, like the federal Marketplace or a state-based Marketplace, they can browse and compare qualified health plans from various insurance companies all on one convenient website.
A private exchange, such as an insurance carrier or brokerage firm, may offer more private health coverage options for those seeking a more customized shopping experience. Just remember that if you’re offering an ICHRA, you can’t suggest or influence the insurer or policies your employees may purchase.
7. Can an employer have a non-calendar year ICHRA?
You can choose to have your ICHRA begin at any point during the year. If your ICHRA has a mid-year start date, your employees can shop for coverage during a special enrollment period, as becoming eligible for a new health benefit is considered a qualifying life event.
After a qualifying life event, employees have 60 to shop for and purchase individual coverage. Newly hired employees will also trigger a special enrollment period once they’re onboarded and become eligible to participate in the ICHRA.
If your ICHRA is on a non-calendar year, your employees will still have their individual insurance deductibles reset on a calendar year basis, though their ICHRA allowance amounts will reset at the beginning of your particular plan year.
8. What can the ICHRA reimburse?
ICHRAs have rules regarding eligible items for reimbursement. According to IRS regulations, HRA funds can only reimburse an employee for eligible medical expenses outlined in IRS Publication 502.
Qualified expenses can include items incurred by active employees, their spouses, and any eligible dependents on their qualified health plan.
A few eligible expenses from IRS Publication 502 are:
- Individual health insurance premiums
- Family doctor visits, hospital services, vision and dental, chiropractic, and other services.
- Medicare A (if Social Security doesn’t cover you), B, and D premiums
- Over-the-counter items, like cold medicine, sunscreens, asthma medicine, eyeglasses and contacts, allergy medicine, cough syrup, etc.
- Prescription drugs
- Mental health counseling
- Nursing services
- Alcoholism and drug addiction treatment
Additionally, you can restrict what expenses you want to allow for reimbursement, even if the IRS lists the items as eligible. For example, you may offer an ICHRA that only reimburses health insurance premiums.
Whatever you decide, make sure you outline acceptable eligible expenses in your ICHRA notice for your employees’ awareness.
9. How much money can business owners contribute to an ICHRA?
Unlike the QSEHRA, there are no minimum or maximum annual contribution limits with an ICHRA. This means you can choose the allowance amount that works best for your budget and your employees, offering a set amount of money that’s as little or as much as you want.
You can also choose to offer different allowance amounts to different classes of employees, orvary allowance amounts within each class based on age or family status. We’ll go more into this detail in the next FAQ below.
10. What are the ICHRA’s employee classes?
With an ICHRA, you can offer different allowance amounts to different employees based on 11 employee classes. Classes are based on legitimate job-based criteria and enable you control your budget while customizing your benefit to suit your employees’ needs.
You can also adjust your allowance amount within each class based on age and family size. For example, your oldest employees within a certain class can be offered an allowance up to three times higher than the allowance offered to the youngest employees in the same class. Similarly, you can offer more allowance to employees with families than single employees.
Other than age and family size variances, you must offer your ICHRA to each plan participant in the same class on the same terms.
The 11 employee classes you can use to determine eligibility and allowance amounts are:
- Full-time employees
- Part-time employees
- Seasonal employees
- Temporary employees of staffing firms
- Salaried employees
- Hourly employees
- Employees covered under a collective bargaining agreement
- Employees in a waiting period
- Foreign employees who work abroad
- Employees in different geographic locations, based on rating areas
- A combination of two or more of the above
If you’re using an HRA administration software to manage your ICHRA benefit, the number of employee classes you can offer may vary. For instance, with PeopleKeep, only the full-time, part-time, seasonal, salaried, non-salaried, and state-based classes are available.
11. What are an ICHRA’s employee class size requirements?
If you choose to offer an ICHRA and traditional group health plan coverage based on full-time or part-time status, salaried or hourly payment structure, or geographic location, you must ensure your class of employees meets specific size requirements.
The minimum class size requirements by company size are as follows:
- If you have fewer than 100 eligible employees, you need an employee count of at least ten participants in a class.
- If you have between 100-200 employees, you need an employee count of at least 10% of the total number of participants in a class.
- If your employee count is more than 200, you need an employee count of at least 20 participants in a class.
Note: You don’t use employee class size requirements to determine allowance amounts within each class.
12. How does an ICHRA affect premium tax credits?
If an ICHRA allowance is considered affordable, the employee should participate in the ICHRA. That’s because an affordable ICHRA makes employees ineligible to receive premium tax credits even if they decide not to participate in the benefit. If they decide to opt out of your ICHRA, they won’t be able to receive their tax credits, and they’d miss out on the ICHRA’s allowance.
If an ICHRA allowance is considered unaffordable, employees can choose to opt in or out of the ICHRA based on what is best for them. If their premium tax credit exceeds the allowance, they should opt out of the ICHRA and collect their credit.
13. How does an ICHRA compare with a QSEHRA?
While the ICHRA and the QSEHRA have similarities, they also have distinct differences. To make sure you’re making the right decision for your business, you should understand how they compare.
To make it easy, our below chart outlines the differences between these two popular types of HRAs.
Employer eligibility requirements
Available to businesses of any size with or without group health insurance, as long as the group health plan and ICHRA aren’t offered to the same employee classes.
Available to businesses with fewer than 50 full-time equivalent employees (FTE) who don’t offer a traditional group health plan.
ACA employer mandate
May satisfy the employer mandate for ALEs if the health coverage is affordable and offered to more than 95% of full-time employees.
Not available for ALEs with over 50 FTE employees. Only ALEs are subject to the employer mandate.
The business can structure eligibility guidelines based on predefined employee classes, such as full-time, part-time, salaried, hourly, and seasonal. Employees must have qualified individual health insurance to participate.
All full-time employees are automatically eligible. Businesses can choose to extend eligibility to part-time employees but must offer the same allowances to both groups. Employees aren’t required to have individual health insurance.
Annual allowance caps
The following annual allowance limits exist for 2023:
Month-to-month permitted, but no annual rollover.
Month-to-month is permitted, but monthly allowances are capped to prevent total employer contributions from exceeding the annual maximum dollar amount.
Businesses can offer different allowance amounts to employees based on class as well as employee age and family size.
Businesses can offer different allowance amounts to employees based on size status.
Premium tax credit guidelines
Employees can’t have both the premium tax credit and the ICHRA. They may waive premium tax credits and participate in the ICHRA, or opt out of the ICHRA and collect premium tax credits if the HRA allowance amount is considered unaffordable.
Employees with premium tax credits can participate in the QSEHRA, but their premium tax credit will be reduced by the amount of their QSEHRA allowance. Employees cannot opt-out of the QSEHRA.
These types of HRAs are best suited for
14. What are the notice requirements associated with an ICHRA?
According to the ACA and the Department of Health and Human Services (HHS), the ICHRA notice should give eligible employees details about the benefit, including what they can expect and how it impacts their premium tax credits. It also provides your employees with information to help them determine whether they should opt in or out of the ICHRA.
Employers must send the notice once a year to eligible employees 90 days before the benefit plan year begins. New hires or employees who become eligible after 90 days before the start of the plan year should receive notification no later than their benefit’s effective date.
The ICHRA notice requirements include:
- A description of the terms of the ICHRA. This includes the maximum dollar amount available for each participant, which dependents are included in the benefit, whether the allowance amount will vary based on family size or age, the frequency of allowance amounts (i.e., monthly or annually), and the benefit’s effective date.
- A statement on how the ICHRA will affect the participant’s premium tax credit availability.
- A statement that the participant must inform health insurance exchanges that they’re participating in an ICHRA (if they’re applying for premium tax credits).
- A statement that the participant has the right to opt out of the benefit, thus waiving future reimbursements.
- A statement about how the ICHRA differs from other HRAs.
- A statement about the availability of a special enrollment period to enroll in medical coverage for employees and dependents who become eligible for the ICHRA.
- A statement outlining how the participant can get help determining their ICHRA’s affordability.
- A statement explaining that the ICHRA can integrate with Medicare.
- Contact information participants can reach out with questions about their benefit.
15. How can employers offer an ICHRA?
While it’s possible to self-administer your ICHRA, it may not be the best option. Administering an ICHRA requires drafting legal plan documents, storing employee reimbursement requests, and keeping up with changing healthcare regulations so you stay in compliance.
The process can be time-consuming and challenging to understand. Plus, if you make any mistakes, you’ll risk fines from the federal government for compliance violations.
Using an HRA benefits software like PeopleKeep is a much easier way to manage your benefits, so it’s worth the third-party administrative costs. HRA software allows you to manage your HRA online, easily record reimbursements to employees, and create and update legal plan documents with a few clicks of a button.
Most importantly, PeopleKeep helps you stay compliant by keeping your benefits up-to-date with all current government rules and regulations, so you don’t have to worry about missing anything important.
An ICHRA is a great option for business owners looking to break away from traditional group health plans while still supporting their employees’ health and wellbeing. While implementing a new health benefit can be stressful, an ICHRA will empower your employees to take control of their health while you reign in your budget.
If you want to manage your ICHRA easily, PeopleKeep can help! Our HRA administration software makes it simple to set up and manage your ICHRA so you can focus on running your business.
This article was originally published on July 3, 2019. It was last updated on January 23, 2023.