Individual Coverage Health Reimbursement Arrangements (ICHRA) are a game-changer for employers. Introduced in 2020, they are an exciting alternative to traditional group health plans. They allow employers to reimburse employees tax-free for qualified medical expenses, including monthly premiums for individual health insurance. If they choose, employers can also reimburse for copays and deductibles.
An ICHRA can be an excellent option for businesses of any size—allowing employers to provide health benefits without having to offer and administer a group health plan. This can be simpler, easier, and more budget-friendly. No longer stuck with one plan option, an ICHRA gives each employee considerably more choice when choosing a health plan that works for them and their family. It also eliminates the headache and pain of the dreaded annual renewal for the employer.
How does an ICHRA work?
An ICHRA is simply a vehicle for employers to reimburse employees for insurance rather than purchasing it for them, like with a group plan. ICHRA reimbursements are payroll and income tax-free.
Design your plan.
While there are rules that need to be followed, employers have quite a bit of discretion when establishing ICHRA eligibility guidelines. Employees can be divided into classes (such as full-time, part-time, salaried, hourly, etc), with different allowances for each class. Reimbursement amounts can also be modified depending on family status and age. While all items listed in IRS Publication 502 are generally eligible for ICHRA reimbursement, employers can choose to only reimburse health insurance premiums through a premium-only ICHRA.
Employees enroll in a health plan.
With an ICHRA, employees are free to enroll in any individual health plan that fits their needs. If allowed on the plan, they can also purchase other coverage such as dental or vision.
Employees submit claims.
Employees must submit proof of eligible expenses to be reimbursed. This proof must include a description of the product or service, the cost, and the date it was incurred.
The employer reimburses the employee.
When setting up an ICHRA, and reimbursing employees, there are rules and regulations that need to be followed to ensure the plan stays compliant (and the IRS stays happy). Thankfully, there are third-party plan administrators that can help remove a lot of this burden from employers by setting up and administering their plan.
What are the benefits?
- More control over budgets. With an ICHRA, employers set allowance caps for employees. This gives complete control over the budget for health benefits.
- Avoid the inevitable annual rate increase and/or dreaded plan change many businesses experience with their group health plans.
- The ability to choose who is eligible to participate based on employee classes and family status.
- No minimum participation requirements. Most group health plans require a high participation rate, generally around 70%. An ICHRA has no participation requirements.
- For employers that have employees in more than one state, an ICHRA is easier to manage than trying to find a group plan that works in multiple states. And, because insurance rates vary by geographic regions, employers can set up classes by state, with different contribution amounts for each.
- ICHRA plans meet the standards of Minimum Essential Coverage, Minimum Value, and Affordability.
- High employee satisfaction. Employees are happier when given the freedom of choice when it comes to choosing health coverage that actually works for them and their families.
- An ICHRA helps employees pay for their individual health insurance premiums tax free, while not impacting their taxable income.
- While an ICHRA is not portable when an employee leaves (because those covered are on individual health insurance plans) it does alleviate the burden of having to change health plans when they change jobs.
- An ICHRA lets employers get out of the insurance business and back to focusing on their business.
Who can offer an ICHRA?
Any business with at least one W-2 employee can offer an ICHRA.
Who can participate?
Employees must have individual health insurance coverage to participate. Any employee covered by a spouse’s group plan, employees participating in a medical cost-sharing plan, or those that opt-out of health insurance coverage are not eligible. S corp owners and their spouses who own more than 2% of a business also cannot participate, as they are able to write off their medical expenses in other ways and are not considered employees by the IRS.
How do you manage an ICHRA?
Due to rules and regulations from the IRS, it’s imperative that employers manage and administer their ICHRA plan correctly. While employers can certainly manage it themselves, we recommend using a third-party administrator. This can remove a lot of the headache and stress of managing health care benefits–like employee privacy, record keeping, and constantly changing regulations—and further frees up business resources to focus on the business.
ICHRA plans are one of the most exciting changes to hit the employer benefits market in a long time. They allow employers to opt-out of the stressful, time-consuming headache of managing a health plan while giving employees considerably more choice and freedom than ever before.