Individual Coverage HRA (ICHRA)

What are the benefits of an ICHRA?

With an ICHRA, you can:

1. Set allowance caps that employees cannot exceed, giving you complete control over your health benefits budget. With an ICHRA, there are no minimums or maximums, but unique rules apply to applicable large employers (ALEs).¹
2. Avoid the annual rate hikes that many experience with their group health insurance plans.
3. Choose who is eligible to participate in the benefit based on employee classes and family statuses that you determine.
4. Empower your employees to purchase the health coverage of their choosing. They can use it toward their own individual policy and out-of-pocket expenses, depending on what you choose to reimburse.

¹ If you are an applicable large employer (ALE) trying to satisfy the employer mandate, then your allowance amounts must be enough to make employees’ health insurance affordable. Learn how to calculate affordability here.

How an ICHRA works

With an ICHRA, you offer employees a monthly allowance. Employees then choose and pay for individual coverage and other qualified expenses, and you reimburse 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. You choose who is eligible to participate

   Employers have significant discretion when setting ICHRA eligibility guidelines for employees. In the PeopleKeep software, you can define eligibility according to the employee classes listed below. You can also offer a group health insurance policy to one class of employees and an ICHRA to another class of employees, provided they meet minimum class size standards.

   The classes our software supports are:

   • Full-time
   • Part-time
   • Salaried
   • Hourly
   • Seasonal
   • State²
   • Any combination of the items

2. You set the allowance

   After setting up your classes, you get to choose a monthly, per-employee allowance of tax-free money to make available.

   Many employers offer an ICHRA because, unlike the qualified small employer HRA, there are no maximum contribution limits. In addition, you can customize allowance amounts based on the employee classes you set up.

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

   You should keep in mind that there are additional rules for employee classes, specifically regarding their size.

   Minimum employee class sizes vary by employer size, such as:

   • 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

3. Employees purchase health care

   With an ICHRA, employees have the power to choose the individual health insurance that best fits their personal needs. If you allow it, employees can also purchase other health care products and services, including dental or vision policies, prescription drugs, and eyeglasses.

   See what’s reimbursable with an ICHRA

   Generally, all items listed in IRS Publication 502 are eligible for reimbursement through an ICHRA. However, you can choose to only reimburse health insurance premiums by offering a premium-only ICHRA. You should clearly state the rules you establish in your plan documents.

   Learn more about the requirements for plan documents

4. Employees attest to having individual health insurance

   To participate in an ICHRA, employees must have coverage under an individual health insurance policy. And they must attest to your HRA administrator that they have individual coverage at the beginning of the plan year—after you start offering an ICHRA, or when they are hired—before they can collect reimbursements through an ICHRA.

5. Employees submit proof of purchase

   After incurring an eligible expense and attesting to their individual coverage, employees submit proof of the expense to your assigned benefit administrator. For an expense to be approved, employees must submit documentation including three items:

   1. A description of the product or service
   2. The cost of the expense
   3. The date the expense was incurred

   Invoices or receipts typically satisfy this requirement, but so do other documents. For example, employees may also use an explanation of benefits from your insurance company. Also, some expenses require a prescription or doctor’s note to be eligible for reimbursement.

6. Employers review and reimburse employees’ expenses

   After receiving an employee’s reimbursement request, PeopleKeep’s documentation review team reviews both the employee’s attestation and the documentation of the expense within two business days.

   After the documentation is reviewed and the expense is verified, you will make a final approval of the expense before reimbursement. Using PeopleKeep’s software, you can track all the submitted and approved expenses and export a spreadsheet of the amount due to each employee. Then simply add a line item on their paycheck or cut them a separate check, and you’re done.

   Learn more about how to set up an ICHRA

² (This works especially well for international and out-of-state employers)

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. However, you cannot offer the choice between group health insurance and an ICHRA to the same group of employees.

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 group health and an ICHRA.

How employees get coverage for an ICHRA

All employees who want to participate in an ICHRA must have coverage through an individual health insurance policy. There are three different coverage statuses you will face:

1. Covered employees

   Some employees may already have an individual health insurance policy they’re paying for themselves. This is more common among employers newly offering an 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. Newly hired employees

   If the employer is offering an ICHRA with a January 1st start date, employees will most likely get coverage through the annual open enrollment period. Employees can sign on to HealthCare.gov, their individual state exchange, or a broker you prefer, and start shopping for a policy right away. They can also shop off the exchange during this time period.

   For employers offering an ICHRA through PeopleKeep, we offer an insurance concierge that helps your employees shop for the policy that best fits their needs. In addition, they can use the same concierge to shop on their own, depending on their preference.

3. Employees that qualify for a special enrollment period

   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 an organization that starts offering an 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.

   During any SEP, you should make these resources available to employees, but you cannot involve yourself in helping employees evaluate individual options or advocate one policy over another.

   Get started on your HRA journey. Sign up for an ICHRA with PeopleKeep

How to manage an ICHRA

After you set up an ICHRA and employees have purchased qualifying individual coverage, you must manage and administer it appropriately. Depending on your preference, bandwidth, and budget, you can manage an ICHRA through a few different methods. Some prefer to manage it themselves, others hire a third-party administrator, and others use a software tool like PeopleKeep to manage it themselves.

There are three key points to keep in mind when managing your ICHRA:

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, 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 employer 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. Manage allowances, track regulatory changes, and update plan documents

   Whenever necessary, you can change allowance amounts for the applicable employee class. To do so, you must update your plan documents and send employees a notice indicating the change. You may also need to update your plan documents in response to any regulatory changes that occur during the life of the benefit.

   While these steps may look simple, there are a number of very complicated laws and regulations guiding each. If the HRA administrator is found out of compliance, the organization could be fined up to $100 per employee per day until corrections are made.

   To avoid that outcome, as well as to save personal time, many employers prefer to work with an HRA software administration software like PeopleKeep. Our software automates expense verification, updates plan documents with regulatory changes, and answers any and all employee questions regarding their benefit.