A key feature of individual coverage HRAs is that all reimbursements are free of payroll taxes (for employers and employees) and income tax (for employees with minimum essential coverage). Here’s what you need to know.
ICHRA reporting for employers
While there are no W-2 reporting requirements for ICHRA, employers should be aware of the following:
All employers who have self-insured plans must pay a yearly fee for Patient-Centered Outcome Research Institute (PCORI). All HRAs are considered self-insured plans, including ICHRA, QSEHRA, and GCHRA. The fee is $2.54 per covered person and is due by July 31st of the year following the plan year. While these fees were initially set to expire in 2019, they have been extended through 2029.
Reporting for Applicable Large Employers (ALEs)
Organizations with 50 or more full-time equivalent employees must meet the employer mandate to provide employees healthcare coverage. ALEs that meet the employer mandate with an HRA must also demonstrate that the amount they are reimbursing employees is enough to make individual health coverage affordable. To be affordable, reimbursement allowances must be enough that the lowest cost silver tier insurance plan on the ACA marketplace or state exchange for employees is no more than 9.78% of the employee’s household income. Note that this increases to 9.83% in 2021.
Employers demonstrate compliance with the mandate as follows:
- Submit form 1094-c to the IRS, which provides information about the coverage they are offering employees. The final 2020 form is here.
- Send employees form 1095-c, which includes codes that tell employees how the employer calculated affordability. Employers must provide this form to all employees that were full-time for one or more months during the tax year. The final 2020 form is here.
ICHRA reporting for employees
Employees using an ICHRA should be aware of the following:
- In order for their reimbursement to be free of income tax, they are required to have minimum essential coverage (MEC). Employees who do not have minimum essential coverage are required to pay income taxes on all reimbursements they receive.
- Employees can typically see reimbursements on their pay stub as an addition to their net earnings (wherever the employer or payroll provider typically lists such additions).
HRAs are an easy way for organizations to give employees a tax-free health benefit.. Best of all, unlike with traditional group insurance plans, employers can achieve these tax savings with just a few tax forms and a fee of $2.54 per covered employee.
Contact your accountant for more detailed tax information.