Guide to the individual coverage HRA (ICHRA)
This is the ultimate guide for employers, brokers, and HR professionals looking to offer a customizable and tax-free personalized health benefit. With an individual coverage health reimbursement arrangement (ICHRA), you can take back control of your benefits budget.
Want to break free from traditional group health insurance?
While health benefits have traditionally been one-size-fits-all and costly to offer, they don’t have to be. Today, personalization and flexibility are what employees expect—and what will win them over in a tight labor market. So, how do you offer health benefits tailored to your employees’ unique needs without breaking the bank?
By offering an individual coverage HRA (ICHRA), you can reimburse your employees for their individual health insurance premiums and qualifying out-of-pocket medical expenses.
Are you already offering a traditional group health plan? You can also offer an ICHRA to your employees who don’t qualify for your group plan to extend your benefits package to different sets of employees.
This guide will cover everything you need to know about offering an ICHRA. Download a copy below or scroll to continue reading.
Topics covered in this guide include:
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What is an ICHRA?
An individual coverage HRA is a type of health reimbursement arrangement (HRA). It’s a formal group health plan that allows organizations of any size to reimburse their employees tax-free for their individual health insurance premiums and other qualifying medical expenses listed in IRS Publication 502.
For organizations with 50 or more full-time equivalent employees (FTEs)—known as applicable large employers (ALEs)—an ICHRA is an excellent solution for satisfying the Affordable Care Act’s employer mandate.
Whether you choose to offer your ICHRA as a stand-alone benefit to all your employees or as a separate benefit for your employees who don’t qualify for your group health insurance policy (such as remote employees in other states than where your main office is or part-time employees), it can help you meet the requirements of the mandate.
When was the ICHRA created?
In 2013, IRS Notice 2013-54 limited organizations’ ability to offer HRAs. The notice, which provided further guidance on the 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 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.
The Departments responded with proposed regulations on October 23, 2018. These were finalized on June 13, 2019, creating two new HRAs—the individual coverage HRA and the excepted benefit HRA (EBHRA). The ICHRA was first available to employers on January 1, 2020.
What are the benefits of an ICHRA?
There are many benefits to offering an ICHRA to your employees, including how it empowers employees to take control of their healthcare, its customizable nature, no contribution or participation requirements, and tax advantages.
Empower employees to get the coverage and medical services that work best for them
With an ICHRA, instead of the employer choosing one health policy for everyone, each employee can shop for their preferred individual health insurance policy through an insurance broker or on the public and private health insurance exchanges. Now, employees can choose a plan with the network, doctors, and monthly health insurance premiums that work best for them.
If an employee already has a qualifying individual health insurance plan, they can keep their existing policy. And when they leave the organization, they keep their individual policy since it’s not tied to their employment.
Completely customizable plan design
You can tailor an ICHRA in several ways to make it fit the diverse needs of your organization and your employees. By dividing your employees into classes, you can legally offer different benefits and allowances to different groups of employees based on bona fide job-based criteria. For example, you can offer different allowances to full-time and part-time employees or choose only to offer an ICHRA to your salaried employees.
You can also differ allowances based on your employees’ age and family status.
No contribution or participation requirements
Unlike other HRAs, the ICHRA has no minimum or maximum employer contribution limits, so you can offer your employees as little or as much as you choose. This allows you to customize it to fit your budget while eliminating annual rate hikes.
There are also no participation requirements to offer an ICHRA, so you don’t need to have a certain number of employees enrolled in the benefit to offer it. This differs from traditional group health plans, which often require 60-70% of your employees to enroll in the benefit.
With an ICHRA, reimbursements are free of payroll taxes for the employer and free of income taxes for the employee. That means you don’t need to report ICHRA funds as income on employees’ W-2s at the end of the year.
How does an ICHRA work?
With an ICHRA, employers offer a tax-free monthly allowance to their employees 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 their available allowance amount.
If you’re new to offering an ICHRA, we can help. At PeopleKeep, we’re experts on HRA administration and help thousands of employers reimburse their employees daily through our hassle-free ICHRA administration software.
Regardless of how you choose to administer your ICHRA, the following steps and information apply.
Here’s a four-step breakdown of the process:
Step 1: Design your benefit to fit your needs
First, the employer designs their ICHRA benefit so it’s suited to the needs of their employees. When setting up your ICHRA, you’ll decide how much tax-free money you want to offer employees each month in a set allowance, which expenses you’d like to be eligible for reimbursements, and if you’d like to customize allowances and eligibility by employee class.
You can customize your ICHRA with the following classes of employees:
- Full-time employees
- Part-time employees
- Seasonal employees
- Salaried employees
- Hourly employees
- 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, states, or multi-state regions
- A combination of two or more of the above classes
If you offer an ICHRA through PeopleKeep, only full-time, part-time, seasonal, salaried, non-salaried, state-based classes, and a combination of those 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 status.
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 smaller than the state-level, the employee classes must meet a certain size requirement.
The ICHRA minimum class sizes are:
- Ten employees for employers with fewer than 100 employers
- Ten percent of the total number of employees for employers with between 100 and 200 employees
- Twenty employees for employers with more than 200 employees
Step 2: Employees make healthcare purchases
Once you set your benefit up, employees can opt into the benefit, if they choose, and start making healthcare purchases. First, employees must purchase individual health insurance coverage to be eligible for the ICHRA. Then, once they opt-in, employees can submit their premiums and potentially other qualifying medical expenses they want for reimbursement.
Eligible out-of-pocket expenses can include anything listed in IRS Publication 502, although employers can limit some of these items according to their preference.
For example, if you want only to reimburse employees for their premiums, you can offer a premium-only ICHRA.
Step 3: Employees submit proof of incurred expenses
Next, after employees make purchases, they’ll submit documentation showing proof of the incurred expenses when requesting reimbursement.
The IRS requires ICHRA reimbursement documentation to include the following:
- The name of the item or service purchased
- The cost of the item or service
- The name of the vendor or service provider
- The date of purchase
Invoices, receipts, or explanation of benefits from an insurer or healthcare provider typically satisfy this requirement. Depending on the item an employee requests reimbursement for, a doctor’s note or prescription may also be required under the regulations. Remember that this information is subject to HIPAA privacy rules, so you need to handle it carefully if you’re self-administering an ICHRA.
Step 4: Review and reimburse expenses
Finally, the employer reviews expenses, and either approves or rejects the requests. If you use PeopleKeep to administer your ICHRA, our expert team will review your employees’ reimbursement requests for you to ensure compliance with HIPAA and federal laws and regulations. If the expense qualifies under the IRS guidelines, we’ll verify the request. Then, you can reimburse your employees up to their available allowance.
Typically, employers choose to reimburse employees through payroll by adding a non-taxable line item to employees’ paychecks. But you can also pay out ICHRA reimbursements with a separate check, cash, or a bank transfer.
Who 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.
You can offer an ICHRA as a stand-alone benefit or alongside a group health insurance policy. But remember, you can’t offer the same group of employees a choice between group health insurance and an ICHRA.
For example, you could offer group health insurance to full-time employees and an ICHRA to part-time employees, but you can’t offer full-time employees a choice between a group health plan and an ICHRA.
An organization also can’t offer a QSEHRA or an excepted benefit HRA (EBHRA) alongside an ICHRA.
Who can participate in an ICHRA?
To participate in the ICHRA, employees must have coverage through an individual health insurance policy. Eligible policies include qualifying on-exchange or off-exchange coverage, Medicare Parts A and B, or Medicare Part C.
Employees’ family members are also eligible to participate in the ICHRA provided they meet the same qualifications and the employer chooses to extend eligibility to spouses and dependents. If the employee or a participating family member ever loses individual plan coverage, they can no longer receive reimbursements.
Employees covered by any group plan, including a spouse’s or parent’s plan, can’t participate in an ICHRA. Other unacceptable forms of coverage include COBRA, healthcare sharing ministries, association health plans, Tricare, or being uninsured—to name a few.
The ICHRA also comes with premium tax credit restrictions. Specifically, employees who participate in the ICHRA are 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.
Beyond that, eligibility requirements are up to the employer.
Can business owners participate in an ICHRA?
Some types of business owners can’t participate in their organization’s ICHRA. Let’s review each type of business owner below.
Can S-corporation owners participate in an ICHRA?
IRS regulations dictate that S-corporation owners, their spouses, and their dependents who own more than 2% of the business can’t participate in an ICHRA. This is because owners can write off their medical expenses through other means. The IRS also doesn’t consider S-corp shareholders as employees. Fortunately, this rule only applies to owners, and employees can still participate.
Can C-corporation owners participate in an ICHRA?
C-corporations are legal entities separate from the owner. This means the IRS considers owners common-law employees of the corporation. C-corp owners can participate in an ICHRA. As with all employees, this eligibility extends to the C-corp owner’s family as well. All reimbursements paid to the C-corp owner and the owner’s family are tax-free to the company and the owner.
Can sole proprietors participate in an ICHRA?
A sole proprietorship is an unincorporated business owned and run by one person. There’s no distinction between the business and the owner, so the owner isn’t an employee. This means sole proprietors can’t participate.
If the owner is married to a W-2 employee of the business, the owner could gain access through their spouse’s allowance as a dependent. All reimbursements would be tax-free to the sole proprietorship and the owner’s spouse.
Can partners participate in an ICHRA?
A partnership is a pass-through entity, meaning the company isn’t subject to income tax. Instead, the partners are directly taxed individually. Partners in a partnership are self-employed rather than company employees, so they’re not eligible to participate in an ICHRA.
Similar to sole proprietors, partners can access the benefit if they’re married to a W-2 employee of the business, as long as the partner’s spouse isn’t also a business partner.
ICHRA affordability rule
ALEs subject to the employer mandate can use an ICHRA to satisfy the employer shared responsibility provisions of the ACA. The employer mandate requires organizations with 50 or more FTEs to offer affordable health coverage that meets minimum essential coverage (MEC) and minimum value to 95% of their full-time employees.
While affordability is important to employers for compliance reasons, it also impacts employees. If you offer an unaffordable allowance, your employees can opt out of the ICHRA and choose to receive premium tax credits instead.
An ICHRA is affordable in 2024 if an employee isn’t expected to pay more than 8.39% of their household income for a self-only silver plan after using their allowance. This means your ICHRA allowance must be greater than the lowest-cost silver plan monthly premium minus 8.39% of your employee’s household income.
How does an ICHRA compare to other types of HRAs?
The individual coverage HRA functions much like other HRAs, especially the qualified small employer HRA (QSEHRA). But, there are essential differences between them that may help you determine which HRA is best for your organization.
For example, the ICHRA allows for more flexibility than the QSEHRA in that employers can offer different benefits to employees in different classes, and there are no maximum employer contribution limits. However, ICHRAs can also be more complicated with premium tax credit coordination and other factors.
The ICHRA differs from the integrated HRA, also known as the group coverage HRA (GCHRA), in that employers don't have to offer group health insurance in order to offer the HRA. Employers with traditional employer-sponsored health insurance plans use the group coverage HRA to supplement the benefit with an HRA allowance that covers qualifying medical expenses (often because the employer wants to help reduce the risk of a high deductible for their employees).
Here’s a chart to help you compare three of the most popular types of HRAs.
Business size restrictions
The QSEHRA is only available to organizations with fewer than 50 FTEs.
Employee eligibility requirements
The organization can set eligibility guidelines according to permitted classes of employees, but employers must offer the HRA on the same terms to all employees in each class. Employees without individual health coverage, including those covered by a spouse's group policy, cannot participate in the HRA.
All full-time employees are automatically eligible. You can include part-time employees, but you must offer the HRA on the same terms. Employees can participate in the HRA without individual health insurance coverage. Those without minimum essential coverage (MEC) must pay income tax on all reimbursements during the time they were uninsured. Employers report any reimbursements for employees without MEC as taxable income on their W-2s.
Eligible employees must be covered by the business's group health insurance policy.
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 status.
Annual allowance amounts are capped for self-only employees and for employees with a family ( allowances caps are 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 they can’t offer both the group policy and the HRA to the same employee class.
Employers offering the HRA can’t 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.
Individual insurance plan premiums and out-of-pocket costs listed in IRS Publication 502.
Individual insurance plan premiums and out-of-pocket costs listed in IRS Publication 502.
Out-of-pocket healthcare costs listed in IRS Publication 502. A GCHRA can’t reimburse premiums.
How PeopleKeep can help
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 individual health insurance premiums and other eligible expenses.
If you want to offer an ICHRA to your employees, PeopleKeep can help!
At PeopleKeep, we offer employee benefits administration software for:
Our HRA and employee stipend administration software makes it easy to set up and manage your benefit in minutes each month. We can help you ensure compliance with your ICHRA by reviewing your employees’ reimbursement requests, generating required plan documents, and storing your documents.
What makes an ICHRA with PeopleKeep different?
PeopleKeep’s individual coverage health reimbursement arrangement administration software makes offering an ICHRA hassle-free. Learn more about our ICHRA software or book a call with a personalized benefits advisor.
Frequently asked questions
Is an ICHRA allowance considered income?
Reimbursements made through an ICHRA aren’t considered income, and you don't need to report them as such on an employee's W-2.
How do I know if my employees’ health coverage is ICHRA-qualified?
Not all coverage types are created equal. Employees and their dependents who plan to opt in to an ICHRA need a qualifying individual health plan. Generally speaking, as long as your plan has no annual or lifetime limits and covers preventive health services with no cost-sharing, it can work with an ICHRA. Healthcare sharing and direct primary care plans aren’t eligible.
Are ICHRAs good for employees?
An ICHRA is an excellent health benefit for employees because it allows them to choose their own health insurance. Rather than their employer making decisions for them on which health insurance policy they can participate in, employers can give the decision-making power back to employees. This empowers them to shop on the individual market and choose the right plan that fits their budget, network, and health needs.
What if my employees qualify for premium tax credits?
With an ICHRA, employees who qualify for premium tax credits must choose whether they want to participate in the ICHRA or collect their tax credit based on whether or not the ICHRA is considered affordable.
If an ICHRA allowance is affordable, then an employee’s best option is to participate in the ICHRA. Offering an affordable allowance makes employees ineligible for premium tax credits, even if they don’t participate in the ICHRA. So, if they decide to opt out of your ICHRA, they still wouldn’t be eligible for tax credits.
If an ICHRA allowance is unaffordable, employees can opt in or out of the ICHRA based on whether the ICHRA or tax credits will give them more money. If their premium tax credit is larger than your ICHRA allowance, they’ll want to opt out of the ICHRA and collect the tax credit.
Where can my employees find individual plans?
Your employees can shop for an individual health insurance plan directly from an insurance company, through a broker, or on the public exchanges. While individuals can normally only get insurance from the exchanges during open enrollment, offering an ICHRA creates a special enrollment period (SEP) where your employees can purchase individual health coverage.
Most states use the Federal Health Insurance Marketplace, HealthCare.gov, but many states operate their own exchanges.