| Blog
SIGN UP

What is an individual coverage HRA (ICHRA)?

Written by: Caitlin Bronson
April 15, 2021 at 9:09 AM

An individual coverage health reimbursement arrangement (ICHRA), sometimes called an individual integrated HRA, is a company-funded, tax-advantaged health benefit used to reimburse employees for personal health care expenses.

The ICHRA was introduced through new regulations from the Departments of the Treasury, Labor, and Health and Human Services in October 2018, finalized in June 2019, and was first available in January 1, 2020.

In this post, we’ll introduce what an ICHRA is, explain how it works, go over eligibility requirements, and discuss how it compares with other HRAs.

Get the complete guide to offering an ICHRA

Where did the ICHRA come from?

In 2013, IRS Notice 2013-54 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 employees could again offer an HRA integrated with individual health insurance (though with many new restrictions).

In October 2017, 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 the proposed regulations issued October 23, 2018, which were finalized June 13, 2019. Among other provisions, the regulations created a new HRA—the ICHRA.

How does an ICHRA work?

An ICHRA is a health reimbursement arrangement integrated with individual health insurance. 

Unlike other HRAs, the ICHRA is available to organizations of any size. It comes with no allowance caps and permits employers to vary eligibility and allowance amounts among different classes of employees.

With an ICHRA, employers offer employees a monthly allowance of tax-free money. Employees then buy the healthcare services they want, including individual health insurance, and the organization reimburses them up to their allowance amount.

Here’s a step-by-step of how the ICHRA works:

  1. The employer sets the allowance. With an ICHRA, the employer sets a monthly allowance of tax-free money for employees to use on individual health insurance and other healthcare expenses. There are no caps on allowance amounts, and employers can offer different allowance amounts for different classes of employees, including:
    • Full-time
    • Part-time
    • Seasonal
    • Salaried
    • Hourly
    • 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
    In general, HRA allowances should be the same within classes. However, employers can make distinctions based on the employee’s age or family size.
  2. Employees make healthcare purchases. With their own money, employees purchase the healthcare products and services that fit their personal needs, including individual health insurance. IRS Publication 502 contains a full list of expenses that can be reimbursed with an HRA.
  3. Employees submit proof of their expenses. After incurring an expense, employees submit proof to their employer through formal documents, such as a receipt or an explanation of benefits from their insurance company.
  4. The employer reviews the documentation and reimburses the employees. If the documentation is correct and the employee’s expense is a reimbursable one, the employer reimburses the employee up to their allowance amount. These reimbursements are tax-free for both the business and its 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 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 was low enough that any policy would still be considered “unaffordable” and wouldn’t provide minimum value under the ACA.

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 another excepted benefit HRA.

They can offer a group health insurance policy, 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 group health and part-time employees an ICHRA, but they can't offer full-time employees a choice between group health and the ICHRA.

Which employees can participate in an ICHRA?

To participate in the ICHRA, employees must have coverage through an individual health insurance policy, including on-exchange or off-exchange coverage, Medicare Parts A and B, or Medicare Part C. The employee can be the primary policyholder or they can be covered under a family member’s individual policy.

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

Minimum employee class sizes are:

  • 10 employees for employers with fewer than 100 employees
  • 10 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 (see our post on ICHRA vs. QSEHRA for more information). 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).

 

ICHRA

QSEHRA

GCHRA

Business size restrictions

None

Only available to businesses with fewer than 50 full-time employees

None

Employee eligibility requirements

The organization can set eligibility guidelines according to permitted employee classes, but the HRA must be offered on the same terms to all employees in each class. Employees without individual health insurance, including those covered by a spouse’s group policy, cannot participate in the HRA

All full-time employees are automatically eligible. Part-time employees can be included, but the HRA must be offered on the same terms. Employees can participate in the HRA without individual health insurance, but those without MEC must pay income tax on all reimbursements during the time they were uninsured

Only employees covered by the business’s group health insurance policy are eligible for the HRA

Allowance amount restrictions

There are no caps on annual allowance amounts. The organization can vary allowance amounts according to permitted employee classes as well as age and family size

Annual allowance amounts are capped for self-only employees and for employees with a family (annual allowances updated annually). The organization can vary allowance amounts only by family status, age, and family size, but not based on employee classes

There are no caps on annual allowance amounts

Group policy requirements

Employers offering the HRA may offer a group policy, but it cannot offer both the group policy and the HRA to the same employee class

Employers offering the HRA cannot offer a group policy

Employers offering the HRA must offer a group policy

Premium tax credit coordination

Individuals participating in the HRA aren’t eligible for premium tax credits

Individuals participating in the HRA are still eligible for premium tax credits, but the amount of the credit is reduced dollar-for-dollar by the amount of the HRA allowance

N/A

Conclusion

An ICHRA is an important vehicle for organizations interested in offering personalized, account-based health benefits.

For large employers as well as small employers a QSEHRA is not well suited for, an ICHRA is a great solution that allows organizations to set their own budget while offering a formal benefit that enables employees to choose what fits their personal needs.

This post was originally published January 8, 2019. It was last updated April 15, 2021.

Topics: Individual Coverage HRA, Video

Additional Resources

Get everything you need to know about the ICHRA, all in one place.
See what PeopleKeep is all about—watch our ICHRA product demo.

Comments