Individual Coverage HRA (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.

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 while also helping employers with 50 or more full-time equivalent employees (FTE) meet the employer mandate. 

Budget Control

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.

1. 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.
2. Businesses can base employee eligibility on 11 different employee classes (below). There are special rules for using these classes to define eligibility that apply to businesses offering both group health and the ICHRA.

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:

• Full-time employees
• Part-time employees
• Seasonal employees
• Temporary employees who work for a staffing firm
• Salaried employees
• Hourly employees
• 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 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.

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.

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:

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.

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.

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.

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.

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.

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.

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:

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.

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.

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.

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:

1. 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.

2. 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.

3. 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.

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 employers 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 organizations 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.

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