ICHRA is a game-changer for employers wanting to provide health benefits to their employees. ICHRA’s allow employers to make a per employee per month tax free contribution that employees use to be reimbursed for health insurance and other medical expenses. It represents a new, more modern model of employer-sponsored health insurance.
It allows for greater design flexibility, has no caps on the employer contribution, is tax-free, and is available to employers of all sizes.
ICHRA’s were introduced to the marketplace in 2020 and are seeing rapid adoption by employers of all kinds. This is the new kind of Group Health Insurance – providing the long awaited alternative to traditional group plans.
Employers can choose for their ICHRA to reimburse for:
ICHRA’s give employers a great deal of flexibility in designing ICHRA benefit classes, allowing it to be a customized tailor-made plan for their organization.
A primary point when considering the amount of ICHRA flexibility is that the plan design must be fair to groups of employees. The majority of the regulations regarding ICHRA are meant to prevent discrimination.
Not that large employers are subject to the corporate mandate to provide insurance and can use an ICHRA to satisfy this requirement. See more in the “Affordability” section below.
For employees to participate in ICHRA and receive reimbursements, they must be covered by a qualified individual health plan. For a plan to be considered “qualified”, it must meet two primary requirements
Employees will have many options on the individual market, but the rules do NOT allow for employees to consider getting on their spouse’s group plan.
Individual Open Enrollment varies by state, but is generally between November 1st and December 15th. Outside of Open Enrollment, individuals need a qualifying life event to trigger a special enrollment, such as marriage, having a baby, moving, or divorce. Employers offering an ICHRA automatically qualify their employees for a 60 Special Enrollment.
It’s worth noting there are more alternative plans on the market now that are short-term plans, fixed indemnity plans, and sharing ministries. These plans do NOT work with ICHRA.
Short-Term Limited Duration Insurance
At least once a year employees must be given the option to “opt-out” of participating in the ICHRA. A primary reason for doing this is if they receive premium tax credits on an ACA exchange.
ICHRA can satisfy the ACA’s employer mandate if the contribution amount is “affordable”.
Definition of Affordability. An ICHRA is affordable if the remaining amount an employee has to pay for a self-only lowest cost silver plan on the exchange is less than 9.83% of the employee’s household income (rate applies to 2021)
See IRS Notice 2018-88 and IRS Notice rp-19-29
IRS Notice 2018-88 is https://www.irs.gov/pub/irs-drop/n-18-88.pdf
IRS Notice rp-19-29 is https://www.irs.gov/pub/irs-drop/rp-19-29.pdf
Affordable HRA Contribution > Lowest Cost Silver plan –(9.78% * Employee Household Income)
Offering an “affordable” ICHRA means your employees are not eligible for premium tax credits.
If you’re a large employer with over 50 employees you must offer affordable ICHRA contributions to avoid ACA corporate mandate penalties for not providing health insurance.
Offering an “unaffordable” ICHRA allows your employees to choose between ICHRA or a premium tax credit.
If you’re a small employer (under 50 employees) there may be times you may want to structure your ICHRA to be “unaffordable”.
Affordability is determined on an employee-by-employee basis.
To determine affordability for each employee, their birthdate, zip code, wages, and HRA contribution size are needed. Number of family members is also helpful is the employer is under 50 employees and premium tax credits may be used.
An ICHRA contribution is deemed Affordable if the remaining amount an employee has to pay for a self only silver plan on the exchange is less than 9.78% of the employees household income.
It can be unrealistic for an employer to know a number of variables in the affordability calculation. Hence the IRS has proposed several safe harbors that employers can use to estimate these amounts to make an affordability determination.
The IRS realizes that many employers will want to make affordability decisions this year for their employees that will be purchasing plans next year.
To allow employers to reasonable estimate the lowest cost silver plan, the IRS is proposing the following safe harbors:
|Location||Employers can use employees primary work address instead of their home address when determining the availability of silver plans.|
|Prior year||Employers can use prior year plan rates to determine affordability for the following year (For example, 2019 plans can be used to determine 2020 affordability|
|Age-Based Bands||More information to come from the IRS.|
To allow employers to estimate an employee’s household income, the IRS has proposed the following safe harbors:
|W-2 Wages||For salaried employees, employers can assume their household income is equal to what that employer reports annually in Box 1 of their W-2 form.|
|Rate of Pay||For hourly employees, employers can multiple the hourly rate by 130 hours to estimate a monthly income (regardless of how many hours the employee actually works)|
Federal Poverty Line (FPL) Employers can assume an employee’s income to be equal to the federal poverty level. Read more here: https://aspe.hhs.gov/poverty-guidelines
Special Enrollment Period for Individuals to purchase health insurance. Employees that are newly eligible for an ICHRA will qualify for a Special Enrollment Period. Employees will have 60 days to complete enrollment for individual health insurance from the time they are offered the ICHRA.
Changing from traditional Group Health Insurance to ICHRA. Employers that will be disbanding a traditional group health insurance plan in order to start an ICHRA program must give employees a 90 notice of the change.
ERISA. ICHRA is considered a group health plan and it is subject to ERISA and COBRA. All employers who set up an ICHRA will need to follow ERISA guidelines in regards to their plan documents and notices to employees.
COBRA: Employers with 20 or more employees are required under COBRA to offer continuation of coverage to employees and their dependents when they lose coverage as a result of a qualifying event. Cobra is generally offered for 18 months but can be extended to up to 36 months for certain qualifying events. Please note state requirements vary for COBRA.
ICHRA and Group Health Insurance: Each employer has the option to keep their existing group health insurance for existing employees, but using an ICHRA for new employees only. Hence an employer can grandfather in their group plan participants while offering an ICHRA to new hires. No employees can have the option of either group health insurance or an ICHRA reimbursement.
As more employers are leaving the traditional group health insurance market and instead choosing to go the ICHRA model, ensuring that all the tax advantages are utilized is an important and sometimes overlooked component. An employer can do a stand-alone HRA, but an HRA combined with a Section 125 Cafeteria Plan provides maximum tax advantages.
Learn more by downloading our “Combine your ICHRA with your Cafeteria Plan for maximum tax advantages” white paper.