If you’re reading this article, you likely know you want to offer your employees an individual coverage health reimbursement arrangement (ICHRA)—you’re just not sure how to get started. Properly administering an ICHRA that’s IRS compliant is complicated work, but we’re here to walk you through it.
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.
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Create a legal plan document
Even though the ICHRA isn’t a group health insurance plan, it still needs to follow Employee Retirement Income Security Act (ERISA) requirements. The first of which is a legal plan document outlining the details of your ICHRA plan.
Your document must include these items in order 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
- The procedure for amending the plan
These items aren’t required by ERISA, but we recommend them to make an even more useful document:
- Eligibility requirements for the ICHRA
- 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
This next step might seem pretty obvious, but you’ll need to let your employees know about your new ICHRA. Make sure to notify your employees of their eligibility for the benefit between 30 and 90 days before the ICHRA’s start date every year your organization chooses to offer the ICHRA.
Your notice must include the following:
- A description of the terms of the ICHRA
- 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
- 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
After you’ve created a legal plan document and properly notified your employees about your ICHRA, you’re ready to start administering it. Unlike a group health insurance plan, you don’t have an insurance carrier to take on the responsibilities of administering your ICHRA.
That’s why we’ve rounded up eight key components of compliant ICHRA administration procedures you’ll need to keep in mind to avoid penalties.
1. Updating your plan with staff changes
After an employee leaves or you gain a new one, you’ll need to end or extend your ICHRA benefit appropriately.
When you lose an employee, either through termination or because they leave voluntarily, you must handle any of their outstanding reimbursement requests and end eligibility according to your plan documents.
When you gain a new employee, you have up until the first day that the employee’s ICHRA coverage begins to give them notice of their eligibility for the ICHRA benefit. However, it’s better to provide it sooner so they have time to review their coverage options and enroll in a plan.
2. Receiving and processing reimbursement requests
Your employees will need to submit proof of any qualified medical expenses they want reimbursed—your job will be to approve and process them.
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 expenses that are recurring, like a monthly insurance premium, only need to be submitted and approved once. This applies as long as the recurring expense matches previously approved expenses with the same amount, service provider, and date.
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. If not, you’ll decline it and follow the process for adverse claims decisions outlined in your plan documents. This leads us to our next section…
3. Handling declined reimbursement requests and appeals
In order 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 you 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 as well as the procedures outlined in your plan documents. If the result is in the participant’s favor, you can move forward with the reimbursement request.
4. Paying reimbursements
Once a reimbursement request has been approved, you’re ready to pay it according to the timeline and processes set out in your plan documents.
When making a payment, 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 allowance is exhausted.
5. Record keeping and storing documentation
According to federal government regulations, you must keep an ongoing record of what has been disbursed through the ICHRA and why. This should include 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 store this information for at least that long.
6. Sending required notices
Other than notifying your employees about the ICHRA itself, you’ll need to keep them informed about how you’re handling their personal health information.
The plan sponsor must certify that employees’ health information will be protected and not used for employment-related actions. If you have a HIPAA privacy officer, only this individual should see this information.
7. Evaluating allowance amounts
As part of your company’s annual budget review, you may want to revisit the monthly allowances you give employees through the ICHRA. If you’re making any changes, you should let your employees know between 30 and 90 days before the changes are applied.
8. Fulfilling tax reporting requirements
Your organization makes ICHRA payments on a tax-free basis for both the organization and the employees. 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 the ICHRA.
Consider the costs of self-administering your ICHRA
It might seem like administering an ICHRA on your own would be a cost effective choice, however, there are a lot of hidden costs to consider.
For example, it’s unlikely that you’ll be able to draft a plan document without the help of an attorney—that alone can cost an estimated $2,000. What’s worse, if your plan documents operate outside of the strict ICHRA definition in Section 9831 of the IRS Code, you face fines of up to $100 per day per employee.
The cost of your time spent reviewing employees’ reimbursements, submitting payments, record keeping, and sending out annual ICHRA notices is also a huge drain on productivity from your organization. The average HR representative’s salary, just 400 hours—or 7 hours a week in a full-time schedule—dedicated to ICHRA responsibilities could cost $10,000 a year.
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.
Our software provides a platform for administering employee benefits like the ICHRA. It gives your organization a legal plan document, 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 administrator, our software simply acts as a support system for self administrators, so you’re always the one calling the shots.
Self-administering your ICHRA is a big step, but it’s one we can help you make. Whichever solution you choose, be sure your ICHRA is administered appropriately. It can be an effective health benefits solution for employers looking to hire and keep talented employees, so long as it’s managed responsibly.