How to set up an individual coverage HRA (ICHRA)

Group health insurance may be the traditional employee health coverage option, but it doesn’t work for everyone. If you’re an employer looking for an affordable and flexible alternative to group plans, a health reimbursement arrangement (HRA) is a great option.

With an HRA, you can provide your employees a monthly allowance and reimburse them for qualifying medical expenses like individual health insurance coverage. Once employees submit proof of an eligible purchase, you reimburse them tax-free up to the allowance amount.

One type of HRA popular with employers is the individual coverage HRA (ICHRA). If you’re new to HRAs, setting up your ICHRA may seem challenging. However, setting up an ICHRA is easier than you think.

In this post, we’ll go over the seven steps of setting up an ICHRA and discuss the advantages of using HRA administration software to help you manage your benefit.

What is an ICHRA?

An ICHRA is a formal health benefit that allows employers to reimburse their employees, tax-free, for their individual health plan premiums and other qualified out-of-pocket medical expenses.

Rather than offering a traditional group health plan, you offer your eligible employees an allowance they use to purchase individual coverage. This saves you money on your health benefits budget and enables employees to have a more personalized health benefit that suits their unique needs.

The following are some key features of the ICHRA:

1. All company sizes can offer an ICHRA.
2. Plan participants must have a qualifying individual insurance plan with minimum essential coverage (MEC) to use the benefit.
3. Employers gain flexibility with the ability to define benefit eligibility and allowances based on 11 employee classes.
4. Unlike the qualified small employer HRA (QSEHRA), employers can offer as much in allowances as they wish since there are no minimum or maximum contribution limits.
5. Employers can offer an ICHRA and a group health insurance plan simultaneously, although not to the same employee class.

Lastly, ICHRAs are particularly beneficial for applicable large employers (ALEs) looking to satisfy the Affordable Care Act’s employer mandate. As long as an ALE’s ICHRA allowance follows affordability rules and their benefit provides minimum value, their ICHRA can meet ACA requirements.

Seven steps to setting up an ICHRA

Before offering an ICHRA to your employees, you’ll design your benefit to ensure it fits your needs. To help get you started, let’s look at the seven steps in the setup process in the sections below.

1. Pick a start date

First, you’ll decide when you want your benefit to begin. You can start an ICHRA any time during the year, so there’s no need to wait until the annual open enrollment period or January 1. Offering an ICHRA is a qualifying event that will trigger a special enrollment period for your employees so they can enroll in health coverage.

If you currently have an employer-sponsored health insurance plan and want to switch to an ICHRA, your benefit start date should be one day after you cancel your group policy.

You must notify eligible employees about their ICHRA at least 30 days prior to the benefit start date, so keep this in mind as you decide.

2. Choose who will be eligible

Next, you’ll determine your benefit’s eligibility requirements. With an ICHRA, employers have a significant degree of freedom in structuring eligibility using different employee classes. For example, you could offer the ICHRA only to full-time employees, salaried employees, or those who live in a specific state.

Remember, you can provide a traditional group health plan and an ICHRA at the same time. But you can’t offer the same class of employees the choice between the two benefits.

There are no minimum class size limitations if you only offer an ICHRA. But, if you offer group health insurance and an ICHRA and structure eligibility based on full- or part-time status, salaried or hourly pay, or geographic location, your classes must meet minimum class size standards.

If you’re offering an ICHRA through PeopleKeep, you can leverage the full-time, part-time, seasonal, salaried, non-salaried, and state-based benefit classes.

3. Determine eligible expenses

You can also customize which expenses are eligible for reimbursement. You can choose to reimburse employees for individual insurance premiums only or reimburse them for premiums and qualifying out-of-pocket medical expenses.

Most employers elect to reimburse premiums and out-of-pocket expenses. Our 2023 ICHRA report found that 56% of PeopleKeep ICHRA customers offered a premium-plus ICHRA from midyear 2022 to midyear 2023.

4. Set your employee allowance amounts

The next step is determining your monthly reimbursement amount, known as an allowance.

Below are three essential things to keep in mind when choosing your allowance:

1. Your overall benefits budget.
   1. Remember that the ICHRA has no minimum contribution requirements or maximum limits.
2. You can offer different allowance amounts to different employee classes.
3. In addition to classes, you can offer different allowance amounts based on an employee’s age or family size.
   1. If you use age to offer different allowance amounts within the same class, you can offer the oldest employees in the class at most three times the allowance of the youngest employees in the class.

5. Provide legal plan documents

Both the IRS and the Department of Labor require that you establish a formal plan document and summary plan description (SPD) to govern any employer-sponsored health benefit, including the ICHRA.

ICHRA plan document requirements can be complex and confusing for employers offering the benefit for the first time. These documents cover a significant amount of information, including eligibility requirements, monthly allowances, expenses eligible for reimbursement, claims processes, and federally required information on HIPAA and other privacy procedures.

Because of this, many employers utilize ICHRA administration software to ensure they’re following all the requirements and aren’t subject to costly penalties. We’ll dive into administration software in a later section.

6. Communicate the ICHRA to employees

The ICHRA is new to you, but it’s also brand new to your employees. Whether you’re switching to an ICHRA or offering a health benefit for the first time, communicating what’s happening is critical. For many employees, the ICHRA will be their first experience with a reimbursement-based health benefit, and they’ll need guidance.

You must notify your eligible employees of their new benefit before the start date and include some required information. For instance, your employees must know eligibility requirements, their allowance, any waiting periods, eligible expenses for reimbursement, how to make claims for reimbursement, their plan administrator, and how the ICHRA affects premium tax credits.

It’s important to educate your employees quickly, transparently, and frequently. During your initial communication, be clear that by offering an ICHRA, you’re giving employees access to better benefits by allowing them to choose their own individual health insurance plan.

If possible, follow up the initial announcement with a series of meetings to go over the ICHRA to address any questions and concerns.

7. Provide resources to help employees choose individual health insurance

All employees participating in the ICHRA must have a qualifying form of individual health insurance. Uninsured employees, individuals with Medi-Share or another healthcare sharing ministry plan, and employees covered under a spouse’s group health insurance policy can't participate in an ICHRA.

Shopping for health insurance may be new for many employees. As their employer, you’re a valuable resource and likely the first place they go if they need help.

Give your employees information on where they can shop for health plan coverage on the individual market, as well as contact information if they need further guidance. Just remember that the federal government prohibits you from directly advising employees on which policy to choose. You can give them general information and support, but compliance regulations dictate that you can’t influence purchasing decisions or endorse any specific issuer or insurance policy.

How to manage an ICHRA with HRA administration software

While it’s possible to self-administer your ICHRA, experts don’t recommend it. Offering and administering an ICHRA requires you to create legal plan documents, collect, process, and store employee reimbursement requests, and monitor the healthcare landscape for changing regulations.

In addition to being tedious and time-consuming, self-administration comes with compliance regulations, which may put some employers at financial risk of expensive penalties if they make a mistake. Additionally, any mistakes made regarding privacy or compliant administration could violate federal law and employees’ trust.

For these and other reasons, many employers use HRA administration software to manage their ICHRA. An HRA software solution will allow you to administer your ICHRA online, easily record reimbursements, and change plan rules and documents while giving employees the required amount of notice. Most importantly, the software will help you stay compliant by keeping your benefit updated with all current rules and regulations.

PeopleKeep’s HRA software offers employers a single-source solution for their ICHRA administration needs. We automatically generate plan documents, help with plan design, and have a third-party insurance concierge service partner that supports your employees when buying an individual health plan.

Additionally, our award-winning support team helps your employees use the benefit, reviews and stores documents for reimbursement, and remains updated regarding any changes to the law so you can focus on running your business.

Conclusion

Employees in today’s workplace want personalized employee benefits. With an ICHRA, you can save money while providing your employees with a customizable and flexible health benefit. It may be an unfamiliar process, but setting up an ICHRA doesn’t have to be complicated. By following the seven steps above, you’ll be on your way to offering your new benefit.

An ICHRA can be tremendously valuable for employers and employees. But you must manage it responsibly for it to be truly beneficial. With benefits administration software like PeopleKeep, you can set up and administer your ICHRA with peace of mind.

If you’re ready to offer an ICHRA, schedule a call with one of our personalized benefits advisors, and we’ll help you get started.

This article was originally published on March 26, 2019. It was last updated on November 6, 2023.