What is an individual coverage HRA (ICHRA)?

An individual coverage health reimbursement arrangement (ICHRA) is an employer-funded, tax-advantaged health benefit. It's an alternative to traditional group health insurance plans for employers who want more control over their benefits budget. With an ICHRA, you reimburse employees for the insurance they choose rather than choosing a group policy for them.

With an ICHRA, you can also reimburse your workers for their qualified out-of-pocket medical expenses, including their copays and prescriptions.

In this article, we'll explain what an ICHRA is, how it works, and go over eligibility requirements. We'll also discuss how this health benefit compares to other types of health reimbursement arrangements (HRAs).

Download our complete guide to offering an ICHRA

How long have ICHRAs been around?

In 2013, IRS Notice 2013-54¹ seriously limited organizations' ability to offer HRAs. The notice, which provided further guidance on the Affordable Care Act (ACA), essentially prevented HRAs from integrating with nongroup health insurance except in limited circumstances.

Congress provided some relief in December 2016 by creating the qualified small employer HRA (QSEHRA). With a QSEHRA, small employers with fewer than 50 full-time equivalent employees (FTEs) could again offer an HRA for individual health insurance (though with many new restrictions).

In October 2017, then-President Donald Trump issued an executive order asking the Departments of the Treasury, Labor, and Health and Human Services to look into ways to expand the availability and usability of HRAs even further.

The Departments responded with proposed regulations issued on October 23, 2018. These were finalized on June 13, 2019, creating two new HRAs—the ICHRA and the excepted benefit HRA (EBHRA). The ICHRA was first available to employers on January 1, 2020.

How does an ICHRA work?

With an ICHRA, employers offer a monthly allowance to their employees tax-free for eligible medical expenses. Employees then buy the healthcare services and items they want, including individual health insurance coverage, and the organization reimburses them up to their allowance amount. Your employees can compare their individual coverage options on the federal health insurance marketplace².

Unlike the QSEHRA, the ICHRA is available to organizations of any size. There's no annual reimbursement limit for employer contributions, and you can offer various allowance amounts to different classes of employees.

There are two additional things to keep in mind. First, employees and their families are only eligible for the ICHRA if they have coverage under a qualifying individual health insurance policy. If the employee or a participating family member ever loses individual plan coverage, they can no longer receive reimbursements.

Second, the ICHRA comes with premium tax credit restrictions. Specifically, if an employee participates in the ICHRA, they're no longer eligible for premium tax credits. For this reason, employees are free to opt out of the ICHRA as long as their allowance amount is considered “unaffordable” and wouldn't provide minimum value under the ACA.

Here's a step-by-step of how the ICHRA works.

The employer sets the allowance.

Employers decide the maximum amount of tax-free money they want to offer employees for their qualified expenses.

There can be assorted amounts for different classes of employees, including:

• Full-time employees
• Part-time employees
• Seasonal employees
• Salaried employees
• Hourly workers
• Temporary employees working 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

If you offer an ICHRA through PeopleKeep, only full-time, part-time, seasonal, salaried, non-salaried, and state-based classes are available.

In general, HRA allowances should be the same within each class of employees. However, employers can make distinctions based on the employee's age or family size.

Employees make healthcare purchases

With their own money, employees pay for the medical care they need. They can purchase the healthcare products and services that fit their personal needs, including individual health insurance. IRS Publication 502 contains a full list of healthcare expenses that can be reimbursed with an HRA.

Employees submit proof of their eligible medical care expenses

After incurring a medical expense, employees submit proof to their employer through formal documents, such as a receipt or an explanation of benefits from their insurance company.

The employer reviews the documentation

The employer reviews the submitted documents for three things: the service or product, the date of the service or sale, and the amount incurred. If the medical expense meets eligibility criteria, employers can approve it.

The employer reimburses employees

The employer reimburses the employee up to their allowance amount. These reimbursements are tax-free for both the business and its employees. But once the allowance is reached, the employee can't exceed it.

Which organizations can offer an ICHRA?

While the ICHRA is available to organizations of all sizes, in order to offer the ICHRA, the organization can't also offer a QSEHRA or an excepted benefit HRA.

They can offer a traditional group health plan, but they can't offer the same employee class both an ICHRA and a group health insurance policy. For example, the organization could offer full-time employees a traditional group health plan and part-time employees an ICHRA, but they can't give full-time employees a choice between group health coverage and the ICHRA.

ICHRAs are an excellent option for employers with 50 or more employees. Organizations with more than 50 FTEs are considered applicable large employers (ALEs). Under the ACA's employer mandate, you're required to provide health coverage that meets minimum essential coverage (MEC) to at least 95% of full-time employees.

ACA's ten essential health benefits include:

1. Ambulatory patient services
2. Emergency services
3. Hospitalization
4. Pregnancy
5. Mental health and substance abuse
6. Prescription drugs
7. Rehabilitation
8. Laboratory services
9. Preventive care
10. Pediatric services, including oral and vision care

Thankfully, an ICHRA can satisfy the employer mandate.

Which employees can participate in an ICHRA?

To participate in the ICHRA, employees must have coverage through an individual health insurance policy. Eligible policies include on-exchange or off-exchange coverage, Medicare Parts A and B, or Medicare Part C.

Employees' family members are eligible to participate as well, provided they meet the same qualifications and the employer chooses to extend eligibility to spouses and dependents.

Employers can structure eligibility based on the 11 classes of employees covered above. However, if employers also provide group coverage and choose to structure eligibility based on full-time or part-time status, hourly or salaried pay structure, or geographic location, the employee classes must meet a certain size requirement.

The employee class size minimums are:

• Ten employees for employers with fewer than 100 employees
• Ten percent of the total number of employees for employers with between 100 and 200 employees
• 20 employees for employers with more than 200 employees

How does an ICHRA compare to other HRAs?

The ICHRA functions much like other HRAs, especially the QSEHRA. However, there are essential differences among them that may help determine which HRA is best for your organization.

Here's a chart to help you compare the ICHRA, the QSEHRA, and the group coverage HRA (GCHRA).

Conclusion

When it comes to health coverage for your team, it may be a good idea to look beyond traditional group health plans. An ICHRA is a company-funded health benefit that comes with more design flexibility than group policies offer. It gives employers a cost-effective way to offer personalized health benefits to their employees. It also empowers employees by giving them the freedom of choice when it comes to their healthcare services and coverage options.

With an ICHRA, organizations of all sizes can offer tax-free reimbursements to employees for their out-of-pocket medical costs like monthly health insurance premiums and other eligible expenses.

If you want to offer an ICHRA to your employees, PeopleKeep can help! Our HRA and employee stipend administration software makes it easy to set up and manage your benefit in minutes each month.

Schedule a call now with one of our personalized benefits advisors to get started!

This post was originally published January 8, 2019. It was last updated May 10, 2023.

1. https://www.irs.gov/pub/irs-drop/n-13-54.pdf

2. https://www.healthcare.gov/get-coverage/