As the economy heats up and unemployment rates plunge, employers are scrambling to find better ways to attract and retain talented workers.

Although they aren’t new or flashy, health benefits are one of the best ways to invest in your employees. Employees still prize health benefits above other workplace perks, and are likely to leave or turn down a job that doesn’t provide them.

Popular options like group health insurance, health savings accounts (HSAs),  and the qualified small employer health reimbursement arrangement (QSEHRA) are still available. However, beginning January 1, 2020, businesses of all sizes will have a new health benefits option: the individual coverage health reimbursement arrangement (ICHRA).

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What is the ICHRA?

A new type of health reimbursement arrangement (HRA), the individual coverage HRA (ICHRA) is a health benefit for employers of all sizes. With an ICHRA, businesses, nonprofits, churches, and other groups can reimburse employees tax-free for individual health insurance premiums and other medical expenses.

It can be offered as a stand-alone benefit or as another option in a business’s health benefits program, alongside group health insurance.

On this page, we’ll cover everything you should know about the ICHRA, including how it was created, how it works, and how it compares to other health benefits options⁠—including its cousin, the QSEHRA.

We’ll also point you to more in-depth resources where you can dive into an ICHRA-related topic in greater detail.

How was the ICHRA created?

To understand where the ICHRA came from, you need to understand the basic history of health reimbursement arrangements.

HRAs thrived as both stand-alone and supplemental benefits through the early 2000s, until they were seriously limited by a 2013 interpretation of the Affordable Care Act (ACA). That interpretation, issued by the IRS in Notice 2013-54, essentially prevented businesses from offering HRAs that integrated with individual health insurance except in very limited circumstances.

Congress provided some relief for small businesses with the creation of the QSEHRA in December 2016. The QSEHRA, offered exclusively to groups with fewer than 50 full-time employees, was an exception to the IRS Notice and helped thousands of businesses provide a health benefit for the first time. 

In an effort to expand HRAs even further, President Donald Trump issued an executive order in 2017 directing the Departments of the Treasury, Labor, and Health and Human Services to review IRS Notice 2013-54 and find ways to further integrate individual health insurance with HRAs.

The Departments responded with a final rule in June 2019. The rule is a direct revision of the IRS Notice and states that, if certain rules are followed, HRAs may integrate with individual health insurance for businesses of any size.

The result was the creation of the individual coverage health reimbursement arrangement, or ICHRA.

The ICHRA will be available beginning January 1, 2020.

1950s

1954: Section 105 was added to the Internal Revenue Code (IRC). IRC Section 105 allows an employer to offer a plan to reimburse employees' qualified medical expenses, including insurance premiums. Under section 105, amounts received are excluded from employees' income.

1960s

1961: Revenue Ruling 61-146 was issued allowing an employer to pay for or reimburse an employee’s medical expenses tax-free, under IRC Section 106. Revenue Ruling 61-146 set the stage for Employer Payment Plans, where an employer pays directly or reimburses directly for health insurance premiums.

1970s

1974: ERISA was established. ERISA implemented fair and equal treatment requirements for employee benefit plans, including the requirement for formal plan documents. Today, all formal health insurance reimbursement plans must comply with ERISA laws.

1990s

1996: HIPAA Privacy Law was established. HIPAA protects employees’ medically private health information. Today, all formal health insurance reimbursement plans must comply with HIPAA privacy rules.

2000s

2002: The IRS issued Notice 2002-45 which confirmed an employer can offer a plan to reimburse employees’ qualified medical expenses, including insurance premiums. The Notice provided rules and guidance for Health Reimbursement Arrangements (HRAs) including the tax treatment, benefits, and coverage under an HRA.

2010s

2010: The ACA was signed into law. Among other things, the ACA requires group health plans (including health insurance reimbursement plans) to comply with new requirements effective 2014.

2013: The IRS released IRS Notice 2013-54, which limited compliant HRAs to the group-coverage HRA, the one-person stand-alone HRA, and the retiree HRA.

2016: Congress passed the 21st Century Cures Act, which created the qualified small employer HRA (QSEHRA) for small businesses with fewer than 50 employees.

2018: The Health Reimbursement Arrangements and Other Account-Based Group Health Plans (REG-136724-17) proposed the creation of the individual-coverage HRA (ICHRA) and the excepted-benefit HRA.

2020s

2020: The ICHRA and excepted-benefit HRA become available and compliant.

How does the ICHRA work?

The ICHRA is an employer-funded, tax-free health benefit used to reimburse employees for individual health insurance and other medical expenses.

With an ICHRA, the business offers employees a monthly allowance. Employees then choose and pay for individual coverage and other qualified expenses, and their company reimburses them up to their allowance amount.

All ICHRA reimbursements are free of both payroll tax and income tax.

Here’s a six-step breakdown of the ICHRA process:

  1. Businesses choose who is eligible to participate. Businesses have some discretion when setting ICHRA eligibility guidelines for employees.

    Businesses can define eligibility according to 11 different employee classes. They can also offer a group health insurance policy to one class of employees and the ICHRA to another class of employees, provided they meet minimum class size standards.

    For more information on employee classes, see “What are the ICHRA’s employee classes and how do they work?” below.

  2. Businesses set the allowance. A business offering the ICHRA chooses a monthly, per-employee allowance of tax-free money to make available.

    There are no maximum contribution limits, and businesses can offer different allowance amounts to different employees based on the same 11 employee classes.

    Businesses can also differentiate allowance amount within any given class by employees’ family size or age. If you choose to vary allowance amount by age, you can offer up to three times as much for your oldest employees as you do for your youngest employees.

  3. Employees buy health care. With the ICHRA, employees purchase individual health insurance that fits their personal needs. If the business allows, employees can also purchase other health care products and services, including dental or vision policies, prescription drugs, and eyeglasses.

    Generally, all items listed in IRS Publication 502 are eligible for reimbursement through the ICHRA. However, businesses can limit this list if they choose; for example, they may choose to offer a premium-only ICHRA.

  4. Employees attest to having individual health insurance. To participate in the ICHRA, employees must have coverage under an individual health insurance policy. Employees must attest to their company that they have individual coverage before they can collect reimbursements through the ICHRA. Employees must do this at the beginning of the plan year and again each time they want to submit an expense for reimbursement.

  5. Employees submit proof of purchase. After incurring an eligible expense and attesting to their individual coverage, employees submit proof of the expense to the company. For an expense to be approved, employees must submit documentation including three items: a description of the product or service, the cost of the expense, and the date the expense was incurred. Invoices or receipts typically satisfy this requirement, but so do other documents, like an explanation of benefits from the employee’s insurance company.

  6. Businesses review and reimburse employees’ expenses. After receiving an employee’s reimbursement request, the business should review both the employee’s attestation and the documentation of the expense. If the employee is still covered by individual insurance and the expense is qualified, the business must reimburse the employee from their monthly allowance.
All reimbursements are free of payroll tax for both the small business and its employees. They’re also free of income tax for employees.

For more information, check out “How does an individual coverage HRA (ICHRA) work?
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Which businesses can offer an ICHRA?

All employers with at least one W-2 employee can offer an ICHRA. This includes businesses, nonprofits, government entities, and religious organizations.

Businesses can offer the ICHRA as a stand-alone benefit or they can offer it in addition to a group health insurance policy. However, they cannot offer both group health insurance and the ICHRA to the same group of employees. For example, a business could offer group health insurance to full-time employees and an ICHRA to part-time employees, but they can’t offer full-time employees a choice between group health and the ICHRA.

Which employees can participate in the ICHRA?

The federal government requires employees participating in the ICHRA to have individual health insurance. Employees covered by a spouse’s group health insurance plan, employees participating in a health care sharing ministry, or employees who choose to go without insurance coverage cannot participate in the ICHRA.

Beyond that, eligibility requirements are up to the employer offering the ICHRA.

Businesses can base employee eligibility on 11 different employee classes. There are special rules for using these classes to define eligibility that apply to businesses offering both group health and the ICHRA. See “What are the ICHRA’s employee classes and how do they work?” below.

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How can businesses set up an ICHRA?

Businesses can set up an ICHRA in six easy steps:

  1. Choose which employees will be eligible. As discussed above, businesses can base eligibility on 11 employee classes. Businesses can also choose whether or not to extend ICHRA eligibility to employees’ families.
  2. Set employee allowance amounts. There are no minimum contribution requirements or maximum contribution caps associated with the ICHRA, and businesses can use the same 11 employee classes to offer different allowance amounts to different employees. They can also choose to offer different allowance amounts based on an employee's age or family size. 
  3. Pick a start date.  Many organizations choose start dates that align with the calendar year, but you can start an ICHRA at any point. If you’re canceling a group health insurance policy, you should set the ICHRA start date one day after the cancellation takes effect. It’s also best to start the ICHRA on the first of a month; this better aligns with the way individual health insurance plans are structured. 
  4. Create legal plan documents. A formal plan document and summary plan document (SPD) cover a significant amount of information, including eligibility requirements, monthly allowances, expenses eligible for reimbursement, claims processes, and federally required information on HIPAA and other privacy procedures. 
  5. Send ICHRA notice and communicate the ICHRA to employees. All businesses offering the ICHRA are required to send employees a notice of the benefit, including information like the amount of their allowance, what can be reimbursed, and how the benefit affects premium tax credits. Businesses should also take time to educate employees on the ICHRA and how it works, as the ICHRA is a new benefit, and most employees will have many questions.
  6. Help employees choose individual health insurance. Employees will get either the open enrollment period or a 60-day special enrollment period (SEP) to shop for coverage. Businesses should provide employees with resources, such as where they can go to shop for benefits or get private financial advice.

Because setting up an HRA can be difficult, many businesses choose to work with an HRA software provider like PeopleKeep. PeopleKeep automates all of these steps, including creating real-time plan documents, helping businesses choose appropriate allowance amounts, and communicating with employees about the benefit.          

What are the ICHRA’s employee classes and how do they work?

One of the most unique aspects of the ICHRA is its employee classes feature. With it, businesses can refine eligibility and offer different allowance amounts to different employees in order to get the most out of their investment into the benefit.

The 11 allowable employee classes are:

  1. Full-time employees
  2. Part-time employees
  3. Seasonal employees
  4. Temporary employees who work for a staffing firm
  5. Salaried employees
  6. Hourly employees
  7. Employees covered under a collective bargaining agreement
  8. Employees in a waiting period
  9. Foreign employees who work abroad
  10. Employees in different locations, based on rating areas
  11.  A combination of two or more of the above

If businesses that offer both the ICHRA and group health insurance choose to structure eligibility based on full-time or part-time status, salaried or hourly pay structure, or geographic location, they must ensure those groups receiving the ICHRA are of a certain size.

Those minimum employee class sizes vary by employer size. They 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

Businesses that won’t be offering a group policy, or that will make eligibility decisions based on classes outside of the five named above, don’t need to meet a minimum class size threshold.

Similarly, there are no minimum class sizes when using these 11 classes to offer different allowance amounts to different people. Businesses can structure allowance amounts according to any of the 11 class sizes above.

They can also offer different allowance amounts to different employees within the same class, based on the employee’s age or family size. If the business differentiates allowance amounts based on age, it can offer the oldest employees in the class up to three times as much as the youngest employees in the class. There are no similar restraints on increasing allowance amounts based on family size.

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How do employees get coverage for the ICHRA?

All employees who want to participate in the ICHRA must have coverage through an individual health insurance policy. 

There are three primary ways for employees to purchase this coverage:

  • They already have it. Some employees may already have an individual health insurance policy they’re paying for themselves—especially if the business is offering the ICHRA after not having a formal health insurance policy in place. Employees in this situation don’t need to shop for individual health insurance; they can attest to their coverage and start getting reimbursed for their policy’s premiums (as well as other qualified expenses) right away.
  • They can use the open enrollment period. If the business is offering an ICHRA with a January 1 start date, employees will most likely get coverage through the annual open enrollment period. In 2019, this period will take place from November 1 to December 15. Employees can sign on to HealthCare.gov (or their individual state exchange) and start shopping for a policy right away. They can also shop off the exchange during this time period.
  • They can use a special enrollment period (SEP). Becoming newly eligible for ICHRA coverage is a qualifying life event and therefore entitles employees to a 60-day special enrollment period (SEP). The triggering event is the first date the employee could participate in the ICHRA. This gives newly hired employees or employees of a business that starts offering the ICHRA outside of open enrollment 60 days either before or after their first day of eligible participation to shop for and enroll in coverage. Employees will need to verify their qualifying life event with the local exchange before they can begin shopping. During this time, both the public exchange and off-exchange plans are available for employees to purchase.

When employees shop for coverage, they can shop online on their own, through an insurance broker, or through another trusted financial advisor.

The business should make these resources available to employees, but they cannot be involved in helping employees evaluating individual options or advocate on policy over another.

How do businesses manage an ICHRA?

Once a business has set up the ICHRA and employees have purchased qualifying individual coverage, it must manage and administer it appropriately.

There are three key points to keep in mind:

  1. Keep the benefit up to date. As current employees leave the company and new workers join, the ICHRA must reflect staffing changes. This includes assisting new employees with SEPs and verifying individual coverage and helping departing employees wrap up the benefit with any outstanding reimbursement requests or COBRA coverage. 
  2. Process reimbursements and store documentation. The business must review individual coverage verification and reimbursement requests while honoring privacy laws, record them, and store the supporting documents in accordance with IRS and Department of Labor regulations. 
  3. Evaluate allowances, track regulatory changes, and update plan documents. At the end of the year, businesses must evaluate their allowances. They should also track regulatory changes and update plan documents accordingly. This should all be reflected in the new ICHRA employee notice, which must go out 90 days in advance of the next ICHRA plan year.

These steps may look simple, but there are a lot of complicated laws and regulations guiding each. If a business missteps, it could be subject to hefty fines from the federal government. 

To avoid that outcome, as well as to save personal time, businesses will want to work with an HRA software administrator like PeopleKeep. PeopleKeep automates expense verification, updates plan documents with regulatory changes, and answers any and all employee questions.

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How does the ICHRA compare with other health benefits?

The ICHRA is one of several health benefits options available to businesses. Depending on the circumstances of the employer, it might be the right choice.

In this section, we’ll compare the ICHRA to the most common health benefits to help you make the right choice for your business.

ICHRA vs. group health insurance

Group health insurance is by far the most common employee health benefit. Businesses that offer it can expect relatively simple employee onboarding and ease in leveraging the benefit to hire and keep talented workers.

Many businesses are increasingly unsatisfied with group health insurance, however. For most, the biggest sticking point is cost.

In 2018, businesses paid an average $1,635 a month for employer-sponsored family health coverage—an increase of 55 percent since 2008, according to Kaiser’s 2018 Employer Health Benefits Survey. That’s a tough bar to meet for many employers, particularly for smaller groups or nonprofits. 

Similarly, group health insurance puts business owners in a middleman position between their employees and the insurer. While familiarity may make onboarding and administration easier, many businesses struggle with the time required to properly solve these problems and keep the benefit running smoothly.

HRAs, including the ICHRA, largely solve these problems.

With the ICHRA, businesses have complete freedom to dictate their budget. By choosing monthly allowance amounts for each employee, they can ensure health care costs never take them by surprise or lead to an imbalanced budget.

Additionally, the ICHRA allows employees to choose their own health insurance policy. This frees them to choose a policy best suited to their needs, but it also frees their employer from having to negotiate between them and their insurance company.

With an HRA administrator like PeopleKeep, businesses offering an ICHRA could likely reduce their health benefit administration time to just 15 minutes a month.

ICHRA vs. health insurance stipends

Frustrated with the cost and complexity of group health insurance, many businesses opt instead to give employees a health insurance stipend. 

These stipends are the equivalent of increased wages—they’re a flat amount given to all employees with the hope they spend it on health care, but without formal controls to ensure it’s going to the right place. More importantly, all health insurance stipends are subject to payroll and income tax.

While health insurance stipends allow businesses to control their health care budget and eliminate administration, they’re an informal solution to a formal problem.

Employees are unlikely to consider additional wages a real health benefit, and may not put the funds toward their health needs. Additionally, both businesses and employees are paying a combined 35 percent more in taxes on average than they would with an HRA like the ICHRA.

While the ICHRA requires extra administration, it also delivers full tax advantages to both the business and its employees. It also functions as a formal benefit, with controls to ensure employees have individual health insurance and are using their allowances on qualified medical expenses.

The ICHRA vs. the QSEHRA

The ICHRA closely resembles another recently created HRA: the qualified small employer HRA (QSEHRA).

Created in December 2016, the QSEHRA was the first HRA in many years to allow businesses to offer formal, tax-advantaged health reimbursement to all of its employees. It has helped thousands of businesses offer health benefits and will continue to fill a much-needed role in the future.

The ICHRA offers an alternative, though, and for some businesses, it will be the better choice.

Use this chart to quickly digest the biggest differences between the ICHRA and the QSEHRA.

 

ICHRA

QSEHRA

Employer eligibility requirements

Available to any business that doesn’t offer employees a choice between the ICHRA and group health insurance.

Available to businesses with fewer than 50 full-time employees that don’t offer group health insurance.

Employee eligibility

The business can structure eligibility guidelines based on 11 specified employee classes, and employees must have individual health insurance to participate.

All full-time employees are automatically eligible. Businesses can choose to extend eligibility to part-time employees.

Group health insurance integration

Businesses can offer group health insurance, but not to the same class of employees to whom they offer the ICHRA.

Businesses can’t offer group health, dental, or vision insurance.

Annual allowance caps

None.

$5,150 for single employees and $10,450 for employees with a family in 2019.

Rollover guidelines

Month to month and year to year permitted.

Month to month and year to year permitted, but total reimbursements in one year can’t exceed the annual allowance cap.

Budgetary guidelines

Businesses can offer different allowance amounts to different employees based on 11 specified classes, as well as age and family size.

Businesses can offer different allowance amounts to different employees based on age and family size.

Premium tax credit guidelines

Employees cannot have both a premium tax credit and the ICHRA. They may waive premium tax credits and participate in the ICHRA, or opt out of the ICHRA and collect premium tax credits if the HRA allowance amount is considered unaffordable.

Employees with premium tax credits can participate in the QSEHRA, but their premium tax credit will be reduced by the amount of their QSEHRA allowance. Employees cannot opt out of the QSEHRA.

Current availability

Available beginning January 1, 2020.

Available now.


For more information, check out “Individual coverage HRA (ICHRA) vs. qualified small employer HRA (QSEHRA): how do they compare?

Other FAQs on the HRA
The ICHRA is a brand-new benefit and nearly everyone has questions. Here are some of the most frequently asked questions we’ve heard at PeopleKeep regarding the ICHRA.
Which businesses do best with the ICHRA?

The ICHRA is a structurally sound health benefit that delivers real value to both businesses and employees. It’s not for everyone, though.

Generally, the ICHRA is a good fit for businesses that:

  • Can’t afford group health insurance.
  • Don’t have time to administer group health insurance.
  • Want to offer group health insurance to some employees, but an HRA to other employees.
  • Want to offer a premium-only HRA.
  • Want to offer a benefit only to employees not covered by a spouse’s plan.
  • Want to structure eligibility based on certain employee characteristics.
  • Want to offer different allowance amounts to different employees.
  • Have a high number of employees who qualify for premium tax credits.

For more information, check out “The individual coverage HRA (ICHRA): pros and cons.”


What can an ICHRA be used for?

Employees and, if eligible, their families can have medical, dental, and vision expenses reimbursed with the ICHRA.

There are two categories of expenses employees can have reimbursed: individual insurance premiums and medical expenses. Because the ICHRA requires employees to be covered by individual health insurance, the ICHRA must reimburse individual policy premiums. It can also reimburse employees for individual dental or vision policies. Medical expenses include items like copays, deductibles, and prescription drugs.

For a full list of eligible expenses, check out our Small Business Health Reimbursement Arrangement Eligible Expenses Tool. Businesses can reimburse all of these items, or they can choose to limit eligibility to certain expenses.

Businesses can, for example, offer an ICHRA that only reimburses employees for premiums.


Can business owners participate in the ICHRA?

Depending on the business’s corporate filing status, the business owner may be able to participate in the ICHRA.

Generally, if the business owner is considered a W-2 employee, he or she is eligible for the benefit.

For more information, check out “HRA eligibility by type of small business owner.”


How does an ICHRA affect premium tax credits?

Employees who participate in the ICHRA cannot collect premium tax credits. However, employees can make a choice between the ICHRA and their premium tax credits.

If employees qualify for a premium tax credit and the allowance amount of their ICHRA benefit is considered “unaffordable,” they can choose not to participate in the ICHRA and collect their tax credit instead.

The ICHRA is considered affordable if the difference between the highest ICHRA allowance amount for a single employee and the premium of the lowest cost silver plan on the local exchange is less than 9.86% of the employee’s monthly household income.

For more information, including practical examples, check out “The ICHRA and premium tax credits: what are the rules?


Can an ICHRA be used with the QSEHRA?
No. ICHRAs cannot be offered alongside a QSEHRA.

Are there any notice requirements associated with the ICHRA?

Businesses offering the ICHRA must provide notice of the benefit to employees at least 90 days before the beginning of each plan year. For new employees, or for employees of a business offering the ICHRA for the first time, businesses should send the notice no later than the date they’re first eligible for ICHRA coverage.

The annual notice must contain:

  • The HRA terms and conditions
  • The maximum annual allocation for single employees
  • An explanation on how the ICHRA will affect premium tax credit availability
  • Information on how employees can get individual health insurance coverage (including information on the special enrollment period, if applicable)
  • Information on the employees’ obligation to substantiate that they have individual coverage
  • A statement that the ICHRA can’t integrate with short-term limited-duration insurance (STLDI)
  • A statement and explanation regarding the different kinds of HRAs
  • A statement on whether the ICHRA is subject to ERISA
The IRS has provided sample language on the ICHRA annual notice.

Can an ICHRA be used with an HSA?

The ICHRA can be used alongside a health savings account (HSA). It needs to be adjusted to accommodate for the HSA, though.

HSAs require account holders to receive no coverage before they meet their annual deductible, apart from five categories of expenses.

If ICHRA participants or their covered spouses are planning to make or receive HSA contributions, they can only use their ICHRA to reimburse the following:

  • Health insurance premiums
  • Wellness or preventive care, like checkups
  • Dental expenses
  • Vision expenses
  • Long-term care premiums

These adjustments only apply to ICHRA participants that make HSA contributions. Other employees won’t be affected.

For more information, check out “How to Use an HSA with a QSEHRA.” The rules outlined here also apply to the ICHRA.

More reading on the ICHRA
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