As the year comes to a close, end-of-year reporting is at the top of many employers’ and plan administrators’ to-do lists—especially for employers administering their own health benefits, like a health reimbursement arrangement (HRA).
One of the most popular types of HRAs is the individual coverage HRA (ICHRA). A key feature of the ICHRA is that all reimbursements for qualifying medical expenses, such as individual plan monthly premiums, are free of payroll taxes for employers and employees. Reimbursements are also free of income tax for employees who have minimum essential coverage (MEC).
Even though the ICHRA is free of payroll and income taxes—making it free of W-2 reporting requirements—there are other requirements that need to be satisfied. This article will answer frequently asked questions about ICHRA reporting requirements.
Are you considering an ICHRA for your organization? Get everything you need to know in our guide
What is ICHRA?
An ICHRA is a self-insured plan that allows organizations of all sizes to reimburse employees for their qualifying medical expenses and individual health insurance premiums. An ICHRA is often a more affordable and personalized option than a traditional group health plan.
With an ICHRA, employers can design their plan with employee classes and establish monthly allowances for reimbursement. This gives employers complete cost control over the benefit while employees have the freedom to choose an individual plan that best fits their needs.
How do you report ICHRA on Form W-2?
First, let’s discuss ICHRA W-2 reporting requirements. While the Affordable Care Act (ACA) requires employers to report the cost of employer-sponsored group health plans, the IRS1 doesn’t require ICHRA reporting on Form W-2.
There’s no need to report your ICHRA benefit on your eligible employees’ W-2s. However, if you offer other types of HRAs, such as a qualified small employer HRA (QSEHRA), there are specific W-2 reporting requirements in place for small employers.
ICHRA reporting requirements for small employers
If you have fewer than 50 full-time equivalent employees (FTEs) at your organization, there are forms you must submit to the IRS to remain compliant.
Small employers must complete the following reporting obligations:
- Submit Form 1094-B2 and Form 1095-B3 to the IRS
- Form 1095-B provides information about the coverage your organization offers to employees. You must submit a Form 1095-B for every employee who had an ICHRA during the plan year.
- Form 1-94-B is a summary sheet that includes the total number of Form 1095-Bs submitted to the IRS.
- Send employees Form 1095-B
- Each Form includes codes that tell your employees how you calculated their affordability. You must provide this form to all full-time employees, including those who were full-time for at least one month during the tax year.
Employers must provide this information to employees by January 31. These forms are due to the IRS by February 28 for paper filers and by March 31 if filing electronically.
ICHRA reporting for applicable large employers (ALEs)
Applicable large employers (ALEs), or organizations with 50 or more FTEs, must meet the ACA’s employer mandate to provide employees with healthcare coverage. ALEs that meet the employer mandate with an HRA must also demonstrate that the amount they are reimbursing employees for 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 is no more than 9.61% of the employee’s household income for 2022 and 9.12% for 2023.
Large employees must complete the following tasks to maintain compliance:
- Submit Form 1094-C4 to the IRS
- This provides information about the coverage you offer to employees
- You must include every full-time employee from the tax year and every part-time employee who was enrolled in your ICHRA
- Send Form 1095-C5 to your employees
- This includes codes that tell employees how you calculated affordability. You must provide this form to all employees that were full-time for at least one month
Employers must provide this information to employees by January 31. These forms are due to the IRS by February 28 for paper filers and by March 31 if filing electronically.
Form 5500
Under the Employee Retirement Income Security Act of 1974 (ERISA), all organizations that offer retirement and welfare benefits, including ICHRAs, must file Form 5500. This details your benefit plan’s financial condition and operations for the year.
PCORI fees
No matter your organization’s size, all employers with self-insured plans like an ICHRA must pay a yearly fee for the Patient-Centered Outcomes Research Institute (PCORI) and submit Form 720.
The PCORI fee amount for plan years ending before October 1, 2022, is $2.66 per covered life. The fee for plan years ending on or after October 1, 2022, is $2.76 per covered life.
This fee is due by July 31 following the plan year. While this fee was set to expire in 2019, the Further Consolidated Appropriations Act of 2020 extended it through 20296.
ICHRA reporting for employees
Employers aren't the only ones with end-of-year reporting and tax responsibilities—there are a few things that are required from employees as well.
Employees using an ICHRA should be aware of the following:
- For their reimbursement to be free of income tax, employees must have minimum essential coverage (MEC). Employees who do not have MEC are required to pay income taxes on all reimbursements they receive.
- Employees can typically see reimbursements on their pay stubs as an addition to their net earnings (wherever the employer or payroll provider typically lists such additions).
Conclusion
HRAs are an easy way for organizations to give employees a tax-free health benefit. Best of all, unlike traditional group insurance plans, employers can achieve these tax savings with just a few tax forms and a small fee per covered employee.
Keep in mind that while we're experts on HRAs and employee benefits here at PeopleKeep, we're not tax professionals. Contact your accountant for more detailed tax information if you have more specific questions about tax reporting.
Ready to offer an ICHRA to your employees? Get in touch with a personalized benefits advisor today
This blog article was originally published on November 22, 2020. It was last updated on December 22, 2022.
1. https://www.irs.gov/affordable-care-act/form-w-2-reporting-of-employer-sponsored-health-coverage
2. https://www.irs.gov/forms-pubs/about-form-1094-b
3. https://www.irs.gov/forms-pubs/about-form-1095-b
4. https://www.irs.gov/pub/irs-pdf/f1094c.pdf
