Individual Coverage Health Reimbursement Arrangement, pronounced “ick-rah”
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 are new in the marketplace in 2020.
Designing an ICHRA for each employer
Reimbursement Rules for Employers
Employers can choose for their ICHRA to reimburse for:
- Insurance Premiums Only, or
- Insurance Premiums + Qualified Medical Expenses, or
- Qualified Medical Expenses only (as defined by the IRS in publication 502)
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.
Employer Contributions: Employers can structure their reimbursements according to the following criteria:
- Give all employees the same amount.
- Vary reimbursements by family size
- Vary reimbursements by employee age
- Vary reimbursements by both family size and age
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.
Employers can base eligibility classes on 11 different categories:
- Salaried employees
- Hourly employees
- Seasonal employees
- Full-time employees
- Part-time employees
- Employees in different locations, based on rating areas
- Employees covered by a collective bargaining agreement
- Employees who have not satisfied a waiting period for coverage
- Temporary employees of staffing firms
- Non-Resident aliens with no US-based income
- A combination of the above
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.
ICHRA Employee Requirements:
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
- Have no annual or lifetime limits
- Cover preventive health services with no cost sharing
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.
Allowed under ICHRA:
- Individual Major Medical Plans (on or off-exchange)
- Catastrophic Plans (limited to under age 30 or qualify for a hardship exemption)
- Medicare Part A + B or Part C
- Student Health Insurance
Not Allowed Under ICHRA
- Short-Term Limited Duration Insurance
- Health Care Sharing Ministries
- Fixed Indemnity Plan
- Expected benefits coverage only (vision, dental, etc
- Association Health Plans
- Multiple Employer Welfare Arrangements (MEWA)
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.
We help you find the most affordable solution for you and your employees
ICHRA “Affordability” Determinations and Consequences
For each employer providing an ICHRA, a key element is understanding if your reimbursement is “affordable” or “unaffordable”.
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)
Consequences of Affordable ICHRA designations
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.
Consequence of Unaffordable ICHRA designations
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”.
How is Affordability calculated?
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.
Determining the Lowest Cost Silver Plan
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.|
Determining Employee Household Income
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
Considering Self Administering an ICHRA?
While it’s possible, it is not recommended.
Self Administering ICHRA
- Employee Privacy – Having employees submit health insurance receipts directly creates a significant problem because of information about employee’s medical expenses. Insurance premiums are considered Protected health Information (PHI) under HIPPA. Employers asking for this is a HIPPA privacy violation.
- Record Keeping – The IRS requires 7 years of record retention. Benafica will keep all digital records organized and secure on your behalf.
- Changing Regulation – Health care regulation continues to change year after year. Benafica will always be up-to-date on regulation changes.
ICHRA Points of Interest:
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.
Pair your HRA with a Section 125 Plan
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.