When it becomes available in January 2020, the individual coverage health reimbursement arrangement (ICHRA) will be one of the most valuable alternatives to group health insurance open to businesses.
With the ICHRA, businesses of any size can reimburse employees tax-free for medical care. The ICHRA also allows businesses to make distinctions in eligibility and allowance amounts among employees based on certain characteristics.
In many ways, the ICHRA is the closest restoration of the old stand-alone HRA since IRS interpretation of the Affordable Care Act limited HRAs in 2013.
The ICHRA isn’t without its drawbacks, though, and the benefit may not be the best fit for all businesses.
In this post, we’ll review how the ICHRA works as well as ICHRA pros and cons you should consider while evaluating the benefit.
Let’s dive in.
How the ICHRA works
The ICHRA is a formal, tax-advantaged health benefit that allows businesses of all sizes to reimburse employees for medical expenses, including individual health insurance.
Businesses can structure employee eligibility for the ICHRA based on 11 defined classes:
- Full-time employees
- Part-time employees
- Salaried employees
- Hourly employees
- Seasonal employees
- Temporary employees who work for a staffing firm
- Employees covered under a collective bargaining agreement
- Employees in a waiting period
- Foreign employees who work abroad
- Employees in different locations, based on rating areas
- A combination of two or more of the above
Employees who meet the eligibility requirements must also purchase individual health insurance to participate in the ICHRA. Alternatively, employees can be covered by Medicare Parts A and B or Medicare Part C.
Once eligibility guidelines are set, the business chooses a monthly allowance of tax-free money to make available to employees. This figure represents the maximum amount the business will pay out in reimbursements. There are no minimum contribution requirements or maximum contribution limits, and the business can offer different amounts to different employees based on the above classes as well as age and family size.
Employees then purchase the health care products and services they want, including individual health insurance. Unless the business chooses to limit the list, employees can be reimbursed for any expense listed in IRS Publication 502.
Employees submit proof they incurred an eligible expense and verify that they have individual coverage, the business reviews the proof, and—if all is in order—reimburses employees tax-free.
- It’s tax-free. As a formal, IRS-approved benefit, the ICHRA is free of payroll tax for both the business and its employees. It’s also free of income tax for employees.
- It’s available to businesses of all sizes. Unlike the qualified small employer HRA (QSEHRA), the ICHRA is available to businesses of all sizes. This makes it the first HRA since the stand-alone HRA to allow any sized business to offer the benefit to multiple current employees.
- Businesses can choose eligibility requirements. The ICHRA is the only HRA to allow businesses to make eligibility distinctions. Businesses can use 11 different employee classes to do this.
- It doesn’t come with minimum participation requirements. Unlike traditional group health insurance, there are no minimum participation requirements associated with the ICHRA.
- It gives businesses control over their benefits budget. Businesses can name their employees’ allowance amounts as well as change those amounts during the plan year, according to their budgetary needs.
- There are no maximum contribution limits. Unlike the QSEHRA, the ICHRA doesn’t come with caps on annual allowances for employees. Businesses can offer as much or as little as they choose.
- Businesses can offer different allowance amounts to different employees. Businesses are permitted to differ allowance amounts to different employees based on the 11 defined employee classes, as well as employees’ age and family size.
- Administration is simple with an ICHRA administrator. Unlike group health insurance, the ICHRA doesn’t require businesses to act as a middleman between insurance companies and employees. With a personalized benefits administrator like PeopleKeep, the administration of the HRA can take as little as 10 minutes a month.*
- It allows for employee personalization. Employees aren’t subject to one-size-fits-all health insurance chosen by their company. Instead, they can choose to purchase the health insurance and other health care that best fits their needs.
- It works across state lines. Employees who work out-of-state can participate in the ICHRA without inflicting financial burden or administrative complexity on themselves or the business.
- It gives employees a choice to opt out if they have premium tax credits. Employees who qualify for premium tax credits aren’t forced to see their premium tax credits vanish. Instead, they can choose whether to opt out of the ICHRA and use their premium tax credits (if the HRA allowance is considered unaffordable) or waive the credits and participate in the ICHRA.
*PeopleKeep currently supports in the QSEHRA only. Check back, however, as we prepare for the ICHRA to become available in January 2020, according to federal regulations.
- Employee classes are narrow. Compared to the freedom of the old stand-alone HRA, the employee classes permitted with the ICHRA are narrow. It may be difficult for businesses to use these classes to help them compensate high-value employees differently—and thus use the benefit to hire and keep their most valuable workers. However, the ICHRA is currently the only HRA with any classes permitted.
- It may be unfamiliar to employees. The ICHRA will be a brand-new benefit in 2020, and employees will need a lot of guidance to successfully use it.
- It doesn’t provide benefits to uninsured employees, employees on a spouse’s group plan, or employees with a health care sharing ministry plan. Only employees with individual health insurance and Medicare are permitted to participate in the ICHRA. This restriction makes it impossible for businesses to use the benefit to provide value to workers outside of this paradigm, who may be very valuable to the business.
- Employees must choose between the ICHRA and premium tax credits. For employees, there is no option to participate in the ICHRA while collecting premium tax credits. They must choose one or the other.
- Administration is complex without an ICHRA administrator. Without an ICHRA administrator, businesses must create their own plan documents, review and approve employee reimbursement requests, and keep up with regulatory changes on their own. This may be even more of an administrative commitment than group health insurance.
Is the ICHRA right for your business?
The ICHRA is a great choice for many small businesses. There are fewer rules associated with the ICHRA than the QSEHRA, and it allows for greater employer personalization than any other HRA.
However, businesses with a high number of employees who don’t have individual health insurance may be better off choosing to offer a QSEHRA or group health insurance only.
Have questions? Let us know in the comments below.
Editor's Note: This blog has been updated to reflect new ICHRA details provided in the federal government's final HRA rule, which was released in June 2019.