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 will be available beginning January 1, 2020.
Unlike other HRAs, the ICHRA is available to businesses of any size. It comes with no allowance caps and permits businesses to vary eligibility and allowance amounts among different classes of employees.
With an ICHRA, businesses of any size offer employees a monthly allowance of tax-free money. Employees then buy the health care services they want, including individual health insurance, and the business reimburses them up to their allowance amount.
In this post, we’ll introduce the ICHRA, explain how it works, go over eligibility requirements, and discuss how it compares with other HRAs (including the qualified small employer HRA, or QSEHRA).
Where did the ICHRA come from?
In 2013, IRS Notice 2013-54 seriously limited businesses’ ability to offer HRAs. The notice, which provided further guidance on the Affordable Care Act, 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 the QSEHRA, small businesses with fewer than 50 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 called the individual coverage HRA (ICHRA).
How does the ICHRA work?
The individual coverage HRA (ICHRA) is a health reimbursement arrangement integrated with individual health insurance. It’s available to businesses of all sizes.
With an ICHRA, the business sets an allowance of tax-free money for employees. Employees make health care purchases and the business reimburses them up to their allowance amount.
Here’s a step-by-step of how the ICHRA works:
- The business sets the allowance. With an ICHRA, the business sets a monthly allowance of tax-free money for employees to use on individual health insurance and other health care expenses. There are no caps on allowance amounts, and businesses can offer different allowance amounts for different classes of employees, including:
- 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
- Employees make health care purchases. With their own money, employees purchase the health care 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. You can also check out our blog on ICHRA eligible expenses.
- Employees submit proof of their expenses. After incurring an expense, employees submit proof to the business through formal documents, such as a receipt or an explanation of benefits from their insurance company.
- The business reviews the documentation and reimburses the employees. If the documentation is correct and the employee’s expense is a reimbursable one, the business 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 an 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 businesses can offer the ICHRA?
The ICHRA is available to businesses of all sizes.
To offer the ICHRA, the business cannot also offer the QSEHRA or excepted benefit HRA. They can offer a group health insurance policy, but they cannot offer the same employee class both an ICHRA and a group health insurance policy. For example, the business could offer full-time employees group health and part-time employees an ICHRA, but they cannot offer full-time employees a choice between group health and the ICHRA.
Which employees can participate in the 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 the 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 a business.
Here’s a chart to help you compare the ICHRA, the QSEHRA, the group-coverage HRA, and the excepted-benefit HRA.
|ICHRA||QSEHRA||Group-coverage HRA||Excepted-benefit HRA|
|Business size restrictions||None.||Only available to businesses with fewer than 50 full-time employees.||None.||None.|
|Employee eligibility requirements||The business 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.||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 business can vary allowance amounts according to permitted employee classes as well as age and family size.||In 2019, annual allowance amounts are capped at $5,150 for self-only employees and $10,450 for employees with a family. The business 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.||In 2020, annual allowance amounts are capped at $1,800 per employee.|
|Group policy requirements||Businesses offering the HRA may offer a group policy, but it cannot offer both the group policy and the HRA to the same employee class.||Businesses offering the HRA cannot offer a group policy.||Businesses offering the HRA must offer a group policy.||Businesses 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.||N/A.|
When is the ICHRA available?
The ICHRA will be available for plan years starting on or after January 1, 2020.
The ICHRA is an important new vehicle for businesses interested in offering personalized, account-based health benefits.
For large businesses as well as small businesses the QSEHRA is not well suited for, the ICHRA is a great solution that allows companies to set their own budget while offering a formal benefit that enables employees to choose what fits their personal needs.
Edit: This post has been updated to reflect changes in the final rule regarding the ICHRA, which was released in June 2019.