Guide to the individual coverage HRA (ICHRA)

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.

Tax advantages

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. 

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.

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.