An individual coverage health reimbursement arrangement (ICHRA) is an effective way for employers to attract top talent by providing a personalized health benefit. With an ICHRA, organizations can reimburse employees tax-free for their individual health insurance premiums and other out-of-pocket medical expenses.
If you’re a business owner reading this article, you likely already know you want to offer your employees an ICHRA—you’re just not sure how to get started.
Whether you want to offer your ICHRA as a stand-alone benefit or as a separate option for employee classes that don’t qualify for your traditional group health plan, properly administering an ICHRA that’s IRS compliant is complicated work. That’s why we’re here to help.
Let’s go over the steps you’ll take to set up your plan, administer it compliantly, and avoid the common mistakes that lead to financial penalties.
Create a legal plan document
Because an ICHRA is considered a group health plan, it’s subject to general Employee Retirement Income Security Act (ERISA) requirements. The first of which is a legal plan document outlining the details of your ICHRA plan.
No specific penalties apply for failing to prepare and adopt a plan document. Still, you’ll be subject to fines if individual plan participants request to see your document and you don’t produce it. As such, you need to be able to produce the plan document when you offer an ICHRA.
Your document must include these items to be compliant with ERISA standards:
- A list of named fiduciaries and plan administrators and their responsibilities
- A description of how the ICHRA is funded and how reimbursements are made
- Information on federal mandates, such as the ACA employer mandate.
- The procedure for amending the plan
ERISA doesn’t require these items, but we recommend them to make an even more useful document:
- Eligibility requirements for the ICHRA, such as defining employee classes (ex: part-time employees, full-time employees, seasonal employees, geographic location, etc).
- Effective dates of participation
- A description of benefits provided and excluded
- Claims procedures
- HIPAA privacy officers and rules relating to the use of protected health information (PHI)
- The procedure for plan termination
Notify your employees about the ICHRA
Before the ICHRA’s start date, the plan administrator must notify all employee classes of their eligibility for the benefit. The notice must be provided every year your organization chooses to offer the ICHRA.
For newly eligible employees (newly hired employees or employees who gain eligibility after the initial start of the plan year), your organization can provide the notice up until the first business day the employee’s ICHRA health coverage begins. It’s best to provide notice as soon as possible, so the employee has enough time to review medical coverage options and enroll in an individual plan.
Your notice must include the following:
- A description of the terms of the ICHRA, including your employer contributions
- A statement of the right of the participant to opt-out of and waive future reimbursement under the ICHRA
- A statement on how the ICHRA will affect premium tax credit (PTC) availability, whether the employee opts out or chooses to accept the benefit
- A statement that the participant must inform any exchange to which they apply for APTC (advanced premium tax credit) of certain relevant information
- A statement about how the ICHRA differs from other HRAs
- A statement about how the participant can find assistance for determining their ICHRA affordability calculation based on the lowest cost silver plan in their area
- A statement that the ICHRA can be integrated with Medicare
- Contact information of an individual or a group of individuals who participants can contact with questions regarding their ICHRA
Establish compliant administration procedures
Once you’ve established legal plan documents and communicated your ICHRA to your eligible employees, you’re ready to start administering it.
Remember, administering an ICHRA isn’t like administering a group health insurance plan because there’s no insurance company to take over most of the responsibilities. Instead, you’ll need to administer the plan yourself, which involves a great deal of time.
1. Updating your plan with staff changes
When you gain or lose employees, you need to extend or end ICHRA eligibility appropriately.
If you hire a new employee, you must give them their federally required notice and extend eligibility according to your plan documents. If you implemented a waiting period of 60 days, for example, you must extend ICHRA eligibility only after that time.
If you lose an employee through termination or voluntary departure, you must handle any outstanding reimbursement requests and end eligibility according to your plan documents. Remember, an employee is entitled to payment for all approved reimbursement requests made up to the date of the employee’s departure—any remaining employer contributions stay with the organization.
When gaining or losing employees, you don’t need to update the plan documents, unless the employee is responsible for managing your ICHRA benefit.
2. Receiving and processing reimbursement requests
When your employees are ready to be reimbursed for their individual insurance plan premium or other qualified out-of-pocket cost, they need to submit proof of that expense to you.
The document they provide as proof, such as a receipt or invoice, must include the following:
- The service or product
- The date of the service or sale
- The amount incurred
Some recurring expenses, like a monthly individual health plan premium, only need to be submitted and approved once. This applies as long as the recurring expense matches previously costs approved with the same amount, service provider, and date. For individual health insurance coverage, this information can be found on the explanation of benefits.
Your organization must review your employees’ submissions and either approve or decline the reimbursement request.
You’ll check to see if the charge represents:
- A qualified medical expense under IRS Code Section 213(d)
- The employees’ verifying documents reflect the service or product
- The date of the service or sale, and the amount incurred.
If everything’s in order, you’ll approve the request and the employee will be paid out from their available employer contributions. If not, you’ll decline it and follow the process for adverse claims decisions outlined in your plan documents.
3. Handling declined reimbursement requests and appeals
To be ERISA compliant, your organization must have a specified procedure in place for declining reimbursement requests and appeals.
If you’re declining one of your employee’s reimbursement requests, you must notify them within 30 days of receiving their request. If you declined it because your employee didn’t provide enough information for you to process their request, your employee has 45 days from the day you notified them to get you the missing information.
If the new information has everything you need, you can approve the reimbursement request. If not, your employee has the right to appeal the declined request under ERISA. During the appeals process, you must follow regulations issued by ERISA and the Department of Labor and the procedures outlined in your plan documents. You can move forward with the reimbursement request if the result is in the participant’s favor.
4. Paying reimbursements
Once you’ve approved an employee’s reimbursement request, you must pay it according to the timeline and processes outlined in your plan documents.
ICHRA payments are tax-free to you and your employees, provided they have minimum essential coverage (MEC). However, it isn’t your responsibility to verify this. You can make all reimbursements to employees on a completely tax-free basis—it’s then up to your employees to report their own tax responsibility.
When processing reimbursements to employees, you can use the following:
- Direct deposit
If the reimbursement request was larger than the employee’s accrued allowance, you should pay the employee the full amount of their accrued allowance and continue to make monthly payments toward the balance until it’s paid in full or the employee’s annual maximum allowance is exhausted.
5. Record keeping and storing documentation
The federal government has guidelines for organizations contributing to employees’ IRS-qualified medical expenses, including through an ICHRA.
Your organization must keep an ongoing record of what’s been disbursed through your ICHRA and why. This should include the allowable reimbursement rate, all reimbursement requests, the supporting documentation, and whether those requests were approved or declined.
The IRS has a statute of limitations of seven years, so it’s best practice to safely store this information for at least that long.
6. Sending required notices
Whether your organization is required to comply with HIPAA standards or not, the plan sponsor must certify that employees’ health information will be protected and not used for employment-related actions. For example, initiating any employee action for receiving medical care or medication you may disagree with is illegal.
If you have a HIPAA privacy officer, only this individual should see this information. You can use spreadsheets or other software to track and store this information, but be mindful of your employees’ privacy and standard security procedures.
7. Evaluating allowance amounts
As part of your organization’s annual budget review, you may want to revisit the monthly allowances you give employees through your ICHRA.
If you need to cut costs by lowering these monthly allowances, or if you’d like to increase your benefit’s value by raising them, you should let your employees know before the start of the plan year through the required notice.
Of course, you can also change monthly allowance amounts in the middle of the plan year. If you do this, you must give employees as much notice as possible.
8. Fulfilling tax reporting requirements
As previously mentioned, ICHRA health coverage provides tax benefits for both the organization and the employees because reimbursements are tax-free.
During tax time, use box 12, code FF, on each employee’s W-2 to report the total permitted benefit available to the employee through your ICHRA.
It’s the employees’ responsibility to track any reimbursements for incurred expenses while they didn’t have MEC. They may need to include these amounts as part of their gross income.
Consider the costs of self-administering your ICHRA
While the draw of administering an ICHRA entirely on your own seems promising, it’s important to acknowledge and consider the hidden costs associated with this approach.
For example, drafting legal plan documents isn’t a task you should undertake yourself. It’s highly likely these documents, if challenged, will be found non-compliant and get your organization into legal trouble. If your plan documents operate outside the strict ICHRA definition in Section 9831 of the IRS Code, you face fines of up to $100 per day per employee.
To avoid that risk, many small employers contract with an attorney to draft the plan document and SPD. However, contract drafting costs range between $200-$800 for a simple contract and $1,000-$5,000 for a complex contract.
The cost of your time spent reviewing employees’ reimbursements, submitting payments, record keeping, and sending out annual ICHRA notices is also a significant drain on your organization. Given an average HR representative’s salary, dedicating just 400 hours per year—or 7 hours a week— to ICHRA administration responsibilities could cost $10,000 a year.
Between plan document fees, potential compliance penalties, and the time cost, administering your ICHRA entirely on your own may not be quite the bargain it seemed initially.
Want help administering your ICHRA?
If you like the independence that self-administering gives you, but want to save time, money, and ensure you’ve got all of your legal bases covered, administering an ICHRA using PeopleKeep’s software and award-winning customer support team is a perfect match.
When administering an ICHRA with PeopleKeep, you’ll be able to provide ahealth benefit hassle-free—most customers only need about five minutes per month to administer their benefit, significantly less time than administering traditional group health insurance.
Our software provides an administration platform for managing employee benefits like the ICHRA. It gives your organization a compliant plan design, provides legal plan documents, verifies employee expenses for approval by the plan administrator, and automatically sends required notices.
Here’s the best part—unlike working with a third-party benefits administrator, our software and dedicated team are a support system for self-administrators, so you’re always the one calling the shots.
An ICHRA is an effective alternative to traditional employer-sponsored health insurance. t’s a modern and flexible health benefit for employers looking to hire and keep talented employees. But it needs to be managed responsibly for the benefit to truly deliver value.
Self-administering an ICHRA without support is tempting, but for most small and midsize employers trying to navigate the health insurance industry, it’s an unrealistic option. Though fully manual self-administration may be the right solution for some, the time costs and compliance concerns alone are enough to dissuade many from attempting it.
If you prefer the independence of self-administration, a software solution with plan design flexibility like PeopleKeep’s may be the best choice. Contact our dedicated team of sales professionals, and we’ll get you set up with everything you need and alleviate your administrative burden.
This article was originally published on March 1, 2021. It was last updated on June 27, 2022.