With the rising cost of traditional group health insurance, many employers are looking for alternatives that meet their employees' diverse needs. Thankfully, health reimbursement arrangements (HRAs) allow organizations to reimburse their employees for the qualifying medical expenses of their choosing while offering budget control.
A popular type of health reimbursement that works for organizations of all sizes is an individual coverage HRA (ICHRA).
If your organization plans to offer an ICHRA, there are some crucial points to consider. When the federal government created the ICHRA, it provided specific regulatory guidelines to ensure the plan is administered compliantly. These guidelines range from employee eligibility to plan documents and employee notices.
This article will explain what an ICHRA is and the important ICHRA rules organizations should know.
What is an individual coverage HRA (ICHRA)?
An ICHRA allows organizations of all sizes to provide tax-free reimbursements to employees for individual health insurance premiums and qualifying out-of-pocket costs.
This gives employees more freedom over their health benefit and lets them choose how they'd like their healthcare allowance to be used, which isn’t possible with a traditional group health plan.
An ICHRA is especially helpful for small to mid-sized businesses and nonprofit organizations that can't afford to provide a group health insurance policy, or for organizations that need more flexibility in their benefits.
Individual coverage HRAs were created in 2019 to address Affordable Care Act (ACA) compliance for applicable large employers (ALEs) with more than 50 full-time equivalent employees (FTEs) and to help control healthcare costs for businesses of all sizes.
An ICHRA isn't the only type of HRA available, though.
Other popular types of HRAs include:
- Qualified small employer HRA (QSEHRA)
- Designed for employers with fewer than 50 FTEs
- Group coverage HRA (GCHRA), also known as an integrated HRA
- Designed to be paired with a group health insurance policy
The ICHRA notice requirement
According to federal regulation, businesses offering an ICHRA must adhere to a 90-day notice period before each plan year. That means 90 days before the ICHRA's start date, HRA administrators must notify employees about the newly available employee benefit and that they are eligible to participate.
The 90-day notice must be provided every year the business chooses to offer the ICHRA.
The notice requirement is different for employees who become newly eligible (like employees who gain eligibility after the beginning of the plan year or newly hired employees). A business has the option to provide the notice any time until the first day the employee's ICHRA coverage begins. It's a good practice to provide notice as soon as possible to ensure the employee has time to review their coverage options and select an insurance plan.
Here's what an ICHRA notice must include:
- 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 HRA
- A statement on how the ICHRA will affect advance premium tax credit (APTC) eligibility, 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 advanced premium tax credit (APTC) of relevant information
- A statement about how the ICHRA differs from other HRAs
- A statement about the availability of a special enrollment period (SEP) for employees and dependents who gain access to the HRA
- A statement about how the participant can find assistance for determining their individual coverage HRA affordability
- A statement that the ICHRA can be integrated with Medicare. Employees must be informed that they can integrate Medicare with the ICHRA
- Contact information of an individual or a group of individuals for the participants to contact with questions regarding their ICHRA
How to set up ICHRA plan documents
An ICHRA is considered an employee health benefit and is therefore subject to the Employee Retirement Income Security Act (ERISA).
Under Section 402 of ERISA1, the regulations state that every employee benefit plan must be “established and maintained pursuant to a written instrument.” This means employee benefit plans must include a formal document defining the plan. ERISA regulation also requires that the plan document is made available to employees and their families.
Along with the formal plan document, an employee health plan must also include a summary plan document (SPD). This is to provide a summary of the complete plan document to eligible employees. In general, the plan document is written in complex legal language. The SPD should be written more simply, allowing an average plan participant to reasonably understand it.
While there aren't any defined penalties for failing to meet these requirements, organizations are subject to IRS fines if participants in an ICHRA ask to see the plan document and the employer doesn't provide one.
Additionally, organizations can be at risk for potential fines if an SPD is not made available to eligible employees within 120 days of the ICHRA's creation. For employees newly enrolled in an existing ICHRA, the organization has only 90 days to deliver the SPD.
ERISA requires several items to be included in the employee health plan documents. In addition, businesses should include several items specific to the ICHRA as a best practice.
Here is a list of items a business should include in their ICHRA plan documents:
- Named fiduciaries and plan administrators and their responsibilities
- Eligibility requirements for the ICHRA
- Effective dates of participation
- Description of benefits, both those provided and those excluded
- How the ICHRA is funded and how it makes payments
- Claims procedures
- HIPAA privacy officers and rules regarding protected health information (PHI)
- Information on federal mandates
- The procedure for amending the plan
- The procedure for plan termination
ICHRA eligibility for employees
Another critical thing to know about an ICHRA is how employee eligibility is defined. According to ICHRA regulations, all participants must be covered by an individual health insurance plan to participate in the benefit.
Employees covered by a group health plan, including a spouse's or parent's plan, can't participate in an ICHRA. This includes COBRA, healthcare sharing ministries, association health plans, and Tricare.
Uninsured employees also can't participate in an ICHRA, meaning they'll need individual health insurance coverage to be eligible.
Additionally, S-corporation owners, their spouses, and 2% shareholders can't participate in an ICHRA. However, employees of an S-corp would still be eligible.
If you're under a spouse's or parent's insurance plan, that doesn't mean you can't purchase individual health insurance coverage. If you purchase your own individual insurance on the individual health insurance market, you can opt-in to the benefit and become "double-covered."
How employee classes affect ICHRA eligibility
In addition, an organization may further structure ICHRA eligibility according to employee classes.
Available employee classes under an ICHRA include:
- Full-time employees
- Part-time employees
- Hourly employees
- Salaried employees
- Seasonal employees
- Employees in a waiting period
- Temporary employees that work through a temp agency
- Employees covered under a collective bargaining agreement
- Employees in different locations, based on rating areas
- Foreign employees who are working abroad
- Any combination of the options above
Keep in mind that if you’re offering an ICHRA through an ICHRA administration software provider, like PeopleKeep, the software may not support all of the above class options.
An organization can limit eligibility to employees that fall into one or more of the 11 categories. Alternatively, an employer can choose to offer the benefit to all employees without using classes. The spouses and dependents of eligible employees can also participate in the ICHRA if the organization allows it.
If you offer a traditional group health plan, it can't be offered to the same classes of employees that are offered the ICHRA. In other words, an employee can't be offered both the group plan and the ICHRA. You must offer the two plans exclusively to remain compliant.
There are minimum class size requirements if you choose to use classes for your ICHRA benefit.
The rules on minimum ICHRA class sizes state:
- If you have fewer than 100 employees, you must have at least 10 employees in class
- If you have between 100 and 200 employees, you must have at least 10% of your employees in a class
- If you have more than 200 employees, you need at least 20 employees in a class
What is individual health insurance coverage?
As discussed above, eligible employees must have a qualifying individual coverage health insurance plan to participate in the ICHRA. That being said, what qualifies as individual coverage?
Individual coverage is an individual health insurance policy, including on-exchange or off-exchange coverage, Medicare Parts A and B, or Medicare Part C. An employee can be the primary policyholder, or they can be covered under a family member's individual policy.
Policies that aren't considered individual coverage include the following:
- Traditional group health plan
- Short-term medical insurance
- Ministry sharing plans
How to substantiate individual coverage
Another essential rule to note is that employers offering an ICHRA must take reasonable steps to ensure that eligible employees and their participating dependents are enrolled in individual health coverage.
These substantiation requirements must be met at the start of each plan year for current employees, each time a reimbursement request is submitted, and on an individual basis when a newly hired employee becomes eligible.
According to ICHRA regulations, individual coverage can be substantiated in one of two ways at the discretion of the plan administrator or employer.
Substantiation option 1: Provide proof of coverage
Employees can directly provide their employer with proof of coverage from an insurance card, explanation of benefits (EOB), or other document stating the employee (and any dependents) will have individual health coverage for the plan year or relevant month. This proof of coverage should come from a third party, like an exchange or the insurance provider.
Substantiation option 2: Employee attestation of coverage
Employees can provide written or electronic attestation of coverage to the employer. This attestation states that the employee and their dependents will be enrolled in individual health coverage for the plan year (or relevant month). The attestation must include the date the insurance coverage begins as well as the name of the coverage provider.
The final rules regarding the ICHRA state that employers or plan administrators can assume the attestation or documentation provided by the employee is valid for substantiation of individual coverage as long as the plan administrator or employer has no knowledge that it is misleading or inaccurate. Because of this, employers are not burdened with having to verify individual coverage for their participating employees directly.
ALEs must provide affordable benefits
The ACA mandates that employers with 50 or more full-time equivalent employees (FTEs) provide health coverage to their employees. An ICHRA satisfies the employer mandate provided it is considered affordable, and every opted-in employee has individual insurance that meets minimum essential coverage (MEC).
Otherwise, employers could decide to offer a $5 per month health benefit just to satisfy the law. However, this means that you must provide affordable coverage to your full-time employees to satisfy the requirements.
An ICHRA is considered affordable if the amount an employee has to pay out-of-pocket for a self-only lowest cost silver plan is less than 9.83% of the employee's household income.
This means that their monthly premium minus their ICHRA allowance can't exceed the 9.83% value for the month.
To determine annual household income, the IRS has established safe harbor methods for calculating affordability:
- W-2 wages for your employees
- Use rate of pay, or your employee's hourly rate multiplied by 130 to get a monthly total
- Federal Poverty Line (FPL)
Other factors can affect affordability, and the URS has established other safe harbors outlined in IRS Notice 2018-882.
These additional safe harbors include:
- Location: Employers can use the primary site of employment to determine affordability
- Calendar year: Employers who offer an ICHRA the following calendar year can use the current year's estimates as a baseline
- Age: Employers can use the age of the employee on the first day of the plan year
If your ICHRA isn't affordable, the employee can opt-out of the benefit and receive a premium tax credit instead. However, if your ICHRA is considered affordable, your employees can't opt out and receive tax credits. Additionally, employees who opt-in to the ICHRA can't continue to collect premium tax credits.
Why offer an ICHRA?
Why might you offer an ICHRA instead of traditional group health insurance with all of these special rules?
Unlike other benefits, an ICHRA has no maximum amounts or minimums, meaning you have complete cost control as an employer. You can set the monthly allowance amounts that work best for your organization. As long as it's affordable for your employees based on their household income, you can also satisfy the ACA's employer mandate.
An ICHRA also allows your employees to get reimbursed for the qualifying medical expenses that matter most to them. Instead of being forced into a one-size-fits-all group health insurance plan, your employees can choose the individual insurance that works best for their needs and use any leftover ICHRA allowance on eligible out-of-pocket expenses of their choice.
This gives your employees more control over their benefits.
While the ICHRA is a fantastic healthcare benefit that can help organizations stay on budget, it's vital for employers offering it to maintain compliance. This ensures your organization and your employees can enjoy the perks of the benefit without being concerned with penalties or fines.
If you're interested in offering an ICHRA to your employees, PeopleKeep can help! Our HRA and employee stipend administration software makes it easy for organizations like yours to set up and manage their benefits in minutes each month.
This blog article was originally published on December 27, 2019. It was last updated on July 19, 2022.