ICHRA: The Ultimate Guide

What is an Individual Coverage HRA (ICHRA)?

ICHRA, an individual coverage HRA, is an alternative to offering traditional group health insurance. It allows employers to reimburse employees tax-free for individual insurance premiums. So, employees can choose their own individual health plan on the local market and get tax-free reimbursement through the ICHRA.

Why an ICHRA?

ICHRAs evolved from the traditional Health Reimbursement Arrangements (HRAs). HRAs are employer-funded and reimburse employees for out-of-pocket health care expenses. However, a traditional HRA doesn’t allow reimbursement for individual insurance premiums.

ICHRAs are still relatively new. In 2016, Congress took the first step to expand the scope of HRAs. They created a new type of HRA, a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). QSEHRAs allow small employers to integrate an HRA with individual market coverage under certain circumstances.

However, QSEHRAs have a few significant limitations and don’t provide a solution for everyone. Only employers with fewer than 50 full-time employees can offer a QSEHRA, and Employers who offer QSEHRA can’t offer any other health coverage, even vision and dental. Those two major qualifiers and other complex requirements limit its usefulness.

In 2019, the decision was made to expand the scope of HRAs. Two new types were created: the Individual Coverage HRA (ICHRA) and the Excepted Benefit HRA (EBHRA). These two new HRAs remove many of the requirements. Now, employers of all sizes can take advantage of individual market integration.

  • Individual Coverage HRAs (ICHRAs) are integrated with certain individual market coverage and Medicare but not integrated with a group health plan.
  • Excepted Benefit HRAs (EBHRAs) are non-integrated, general-purpose HRAs. EBHRAs are only allowed for employees offered coverage under an employer-sponsored group health plan. This type of HRA can be used to pay expenses like copays, deductibles, dental and vision coverage, etc.

These changes mean employers have more flexibility in plan design. They can establish reimbursement limits and decide which employees are eligible.

How does ICHRA Work?

An ICHRA gives employers greater flexibility in plan design. It allows them to establish reimbursement limits and decide which employees are eligible. It also provides more flexibility for the employees since they can choose a health insurance plan that fits their needs. Here’s how the process works:

Benefits for Employers

  1. ICHRA provides the flexibility that employers need by allowing them to:
    • design the ICHRA to fit their company and goals.
    • set the reimbursement limit (no max).
    • establish employee classes. (Read more about employee classes in the compliance section below.)
    • define eligible medical expenses.
  2. An ICHRA means affordability. Here’s how:
    • Employers can define what affordable means to them and design the plan to fit their budget.
    • In the traditional health insurance model, an employer has to consider rising individual insurance premiums, claims, renewal rates, participation numbers, and administrative costs. With an ICHRA, once the allowable reimbursement rate is set, that’s it.
    • ICHRA helps relieve employers of new fiduciary responsibilities imposed as a result of legislation like the Consolidated Appropriations Act (CAA). Under CAA mandates, employers are responsible for making plan design choices that promote price transparency and reporting, including mental health parity, pharmacy reporting, and more. See CAA details in “What does the Consolidated Appropriations Act (CAA) mean for employers?”
  3. An ICHRA offers convenience:
    • The flexibility and affordability of an ICHRA help relieve many of the administrative responsibilities and make it easier for employers to offer competitive benefits.
    • The time and effort spent setting up and running an ICHRA is minimal. 

Benefits for Employees

  1. Employees benefit from the flexibility of an ICHRA by having the freedom to choose their own health plan. So, employees don’t have to try to mold their family’s needs to fit a cookie-cutter group plan. They can choose a plan that best caters to their family’s health needs and stage of life.
    • Example: Jennifer in Operations has to attend regular doctor visits for her thyroid disease, and her teenage son will need orthodontic care over the next few years. She can choose a plan that best caters to her family’s medical needs.
  2.  Affordability can also be a beneficial aspect for employees. ICHRA funds can be spent on individual insurance premiums, eligible healthcare expenses, or both (depending on how the employer sets it up). So, employees can plan ahead to use their allowance in a way that best fits their family’s needs. 
    • Example: Mark in Marketing can pick a plan that fits his ICHRA allowance and family budget, choosing an option using all of his ICHRA allowance for individual insurance premiums or leaving a portion to use for other expenses.
  3. Sometimes, life happens, and circumstances require employees to switch jobs. Although an ICHRA is not portable, it still offers employees the convenience of keeping their individual plan and paying for it independently. Or, if their employer is required to provide COBRA, the individual insurance premiums could be paid using COBRA reimbursement.
    • Example: Susan in sales is moving out of state and has to find a new job. Susan can keep her individual policy by paying for it on her own or opting for COBRA through her previous employer.

ICHRA Case Study

A Minnesota-based company experienced a 49% rate increase in their fully insured medical plan in 2019. The plan called for a 28% increase in 2020. Another increase would not only hurt the company, but it would also increase their employees’ monthly individual insurance premiums. The company turned to its broker and Ameriflex to implement an Individual Coverage HRA to lower their costs and protect employees from another rate increase.

Read the full case study to see their triple-digit savings.

ICHRA Features Your Clients Will Want to Know About

  • Employers of any size are eligible to offer ICHRA.
  • Employers cannot also offer a QSEHRA or EBHRA. (It’s one or the other.)
  • Employers cannot offer a traditional group plan and ICHRA to the same class of employees.
  • Any class designations set by employers must be fair across employee classes.
  • If an employee buys an individual health insurance plan that costs more than what the ICHRA reimburses, they can have the difference deducted from their paycheck, pre-tax, through a Premium Only Plan (POP). 
  • Employers can decide if the ICHRA reimburses individual insurance premiums only, or a combination of individual insurance premiums and 213(d) qualified medical expenses such as prescriptions, copays and other out of pocket costs. 
  • Employees participating in an ICHRA cannot collect the individual insurance premium tax credit on the public exchange

Set up and Administration

Q. Can employers administer their own ICHRA?

ICHRA means less maintenance once established, but it still requires regular oversight to ensure compliance and substantiation rules are followed. It can be challenging, and even ill-advised, for an employer to manage it themselves. Other than staying updated on changing regulations, there are also practical obstacles to consider daily.

The first obstacle is safeguarding employee privacy. The person responsible for managing the plan must review employee medical expenses to ensure their validity. This information is classified as Protected Health Information (PHI) according to the Health Insurance Portability and Accountability Act of 1996, commonly known as HIPAA.

Even if these requirements are doable for your HR department, there is more to consider. There are compliance regulations to maintain, and since the IRS requires record-keeping for up to seven years, the administrator would have to digitally log all of the paper receipts and keep them organized and safe. 

However, finding a knowledgeable administrator isn’t difficult. Companies like Ameriflex can work with employers to ensure everything runs quietly. 

ICHRA is projected to become a recruiting and retention advantage for employers. Those who bring in an administrator like Ameriflex can maximize the return on that. The Department of Health and Human Services projects that in the next five to 10 years, more than 11 million employees of roughly 800,000 employers will have been offered ICHRA to pay for insurance.

Q. What constitutes a valid claim?

The IRS defines qualified family member(s) and qualified individual insurance premiums in Publication 502. The same list applies to Health Savings Accounts and includes prescriptions, doctor visits, and even dental procedures. A caveat with ICHRA is that employers can reimburse only certain types of medical expenses (for example, valid doctor visits or individual insurance premiums only) as long as it is the same across the employee class.

What are ICHRA Compliance Rules?

Employee Classes and FAQs:

Compliance regulations apply to the entire spectrum of employee benefits, and ICHRA is no exception. Here are some important ICHRA rules and regulations employees, employers, and administrators need to keep in mind to stay compliant: 

  • ICHRA cannot be offered with QSEHRA or EBHRA (It’s one or the other); 
  • The employer cannot offer a traditional group plan and ICHRA to the same class of employees, and… 
  • Any class designations by the employer must be fair across employee classes.

It’s also important to note that ICHRA must be used with an individual plan or Medicare. However, an employer can offer the same employees both an ICHRA and excepted benefits such as vision, dental, or fixed indemnity coverage.

Q. What is an Employee Class?

The beauty of ICHRA is choice. An employer can set reimbursement rules for various employment statuses by establishing employee “classes.” Rules for each will differ to meet the needs of that class.

Classes are set using job-based criteria. They can’t be used to discriminate against any individual employee or employee group or to shift health risks off of an existing plan. The IRS outlines 11 different classes, including: 

  •  Full-time employees
  • Part-time employees
  • Employees working in the same geographic location (generally, the same insurance rating area, state, or multi-state region)
  • Seasonal employees
  • Employees in a unit of employees covered by a specific collective bargaining agreement
  • Employees who have not satisfied a waiting period
  • Non-resident aliens with no U.S.-based income
  • Salaried workers
  • Non-salaried workers
  • Temporary employees of staffing firms
  • Any group of employees formed by combining two or more of these classes

Classes were created to benefit both the employer and the employee. The flexibility employers gain by establishing classes helps them maintain their budget and better serve their employees. Employees also benefit from the flexibility. For example, if an employee lives in a state with higher individual insurance premiums, the employer can make class adjustments to help fill that need.

Employers may not, however, vary ICHRA compensation based on an employee’s compensation or tenure with the company. Within classes, it is possible to vary reimbursements by definitions such as family size or employee age. Older employees or employees with a family could be given a higher (but still fair and reasonable) amount.

Q. Are there limits to how much an employer can offer for reimbursement?

No, there are no limits to how much an employer can offer for reimbursement. Employers can also choose what they want their ICHRA to reimburse. For example: Individual insurance premiums only; Qualified medical expenses only; or A combination of the two

Class designations set by the employer must be fair across all employee classes. 

  1. Classes can’t discriminate against any individual employee or employee group or to shift health risks off of an existing group plan.
  2. There can be age-based and family-size variations in the amount the ICHRA reimburses within a particular class. The age-based variations cannot exceed a 3:1 ratio.

Q. How is the affordability of an ICHRA calculated?

  • If an employer has over 50 employees, the employer is required under the Affordable Care Act (ACA) to provide health insurance to their employees. This means the ICHRA must be considered affordable. (See the calculation below.)
  • If an employer has less than 50 employees, the employer is not required to offer health coverage to their employees and can choose to make the ICHRA “affordable” or “unaffordable” without the risk of any ACA penalties.

Every year, the IRS sets the affordability standards. This establishes the maximum percentage of household income an employee can be expected to pay on individual insurance premiums. The affordability requirement for 2023 was 9.12% and was lowered to 8.39% for 2024. 

How is ICHRA affordability calculated according to those standards? The lowest-cost silver plan on the local exchange is the standard for calculating affordability for ICHRA. 

To calculate affordability, subtract the employee’s ICHRA allowance from the lowest-cost silver plan on the local exchange. If the employee’s remaining portion is 8.39% (or less) of their household income, it meets 2024’s affordability standards. 

Q. Are there other important facts to remember?

  • Employees will need to substantiate at least annually that they have individual health insurance coverage and are using the ICHRA.
  • ICHRA is considered a group health plan and is subject to COBRA; Ameriflex can help make the offering of both seamless.
  • An employer cannot offer a choice between a traditional group health plan and ICHRA to the same class of employees.                         
  • The ICHRA cannot be used to reimburse premiums for an employer-sponsored group health plan.