ICHRA: The Ultimate Guide

What is an Individual Coverage HRA (ICHRA)?

ICHRA is an evolution of the standard HRA that became available January 1, 2020. What makes ICHRA unique is that it can reimburse employees tax-free for individual health insurance premiums. This means employers may choose to forgo offering a traditional group health plan. Instead, employees buy their own individual health insurance plan and get reimbursed, tax-free, by the ICHRA.

Why an ICHRA?

Health Reimbursement Arrangements (HRAs), as they are currently defined, are employer funded accounts that employees can use to pay out-of-pocket health care expenses but may not be used to pay insurance premiums. January 2020 meant new resolutions and new regulations in healthcare that are rewriting that definition.

In 2016, Congress took the initial step to expand the scope of HRAs by creating 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 only go so far.

Not only are QSEHRAs limited to employers that average fewer than 50 full-time equivalents in the prior calendar year (with limited reimbursements), but the employer cannot offer any other health coverage – even vision, dental, or excepted benefits for any other employees. It also has somewhat complex requirements for establishing and maintaining it, which can be prohibitive for some small businesses.

The final regulations handed down from the Departments of Labor, Treasury, and Health and Human Services expanded HRAs beginning in 2019 in ways that could significantly change the health benefits landscape for employers of all sizes by establishing two new types of HRAs:

  • Individual Coverage HRAs (ICHRA): An HRA that is integrated with certain individual market coverage and Medicare, but not integrated with a group health plan.
  • Excepted Benefit HRAs (EBHRA): A non-integrated general-purpose HRA that is considered an excepted benefit. This would be limited to paying premiums for vision and dental coverage or similar benefits. It’s permitted only if employees are offered coverage under a group health plan sponsored by the employer.

These two new HRAs remove many of the integration requirements and allow employers of all sizes to take advantage and be integrated with individual market coverage (ICHRAs) and to offer excepted benefit HRAs (EBHRAs) to employees who are eligible for traditional major medical coverage.

Intro to ICHRA 

As you might have guessed from the name, the Individual Coverage HRA (ICHRA) is all about reimbursing employees for insurance rather than buying it for them. 

In a traditional HRA, individual insurance premiums cannot be reimbursed, but with ICHRA, they can be. A traditional HRA must also be integrated with a group health plan, whereas ICHRA works with individual insurance plans and Medicare. 

An upside of ICHRA is its flexibility. Employers get to design their plan, which includes being able to set which employees are eligible and establishing reimbursement limits.

How It Works

An ICHRA gives employers greater choice and flexibility to pick a health insurance plan that fits theirs needs. It works like this:

Benefits for Employers

  1. Flexibility – Employers, of any size, design the ICHRA to fit their company and goals. Employers set the reimbursement limit (no max), may establish employee classes, and define eligible medical expenses. Employees get the flexibility to choose a plan that works best for them. 
  2. Affordability – ICHRA provides predictability in the employer’s budget, with no surprises. In the traditional health insurance model, an employer must think about rising premiums, claims, renewal rates, participation numbers, and administrative costs. 
  3. Convenience – No need to worry about renewals, participation rates, annual premium networks and cumbersome administrative burdens. The time and effort that goes into setting up and running an ICHRA is minimal. 

ICHRA and small businesses

While ICHRA may be especially appealing to small employers for the below reasons, it can be offered by any size employer and has no annual dollar limit on the amount of reimbursable tax-free dollars.

As shown, small businesses are having a tough time providing coverage under the traditional group plan model, which is why ICHRA provides an advantage that may appeal to these employers. 

First, the employer can provide the employee with a better choice in healthcare. The employee chooses their own plan, which shifts the choice from the employer to the employee. This is a great benefit when weighed against a cookie-cutter plan that is meant to fit all employees’ life, economic and family status. 

Second, it offers better cost control. There is no need for employers to worry about group plan premiums increasing. Once the allowable reimbursement rate is set, that’s it. The employer can easily forecast it into the budget. Plus, if employees don’t use all of their allotted funds, the money can be rolled into the next year for the business size in order to keep that participation number up. If employees choose not to take advantage of ICHRA, there is no cost or risk to the overall plan. 

Last, ICHRA helps to relieve administrative burden. Employers no longer have to worry about renewals, participation rates, doctor networks and annual premium networks – employers can now just set it, and let it go. From that point on, employees choose what plans they want for themselves, and everyone can get back to work. 

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 premiums. The company turned to their broker and Ameriflex to implement an Individual Coverage HRA to lower their costs and protect their employees from another rate increase.

Check out 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 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 insurance premiums only, or a combination of 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 premium tax credit available on the public exchange.

Set up and Administration

Q: Can I administer my own ICHRA? 

While ICHRA is relatively hands-off once set up, it still needs someone keeping an eye on its compliance and substantiation. It can be tricky, if not totally unadvisable, for an employer to administer their own. Aside from staying on top of evolving regulations and requirements, there are more practical, day-to-day hurdles to consider. 

The first of those is employee privacy. Whoever is administering the plan would need to review employee medical expenses in order to approve them as valid. That information is considered Protected Health Information (PHI) under the Health Insurance Portability and Accountability Act of 1996 — better known as HIPAA. 

Even if you are able to get around this, you may need some extra filing cabinets around the office, because the IRS requires record keeping for up to seven years. Meaning the administrator would have to digitally log all of the paper receipts, and keep them organized and safe for that length of time. 

However, finding a knowledgeable administrator is not difficult – companies like Ameriflex can work with employers to ensure that everything runs as quietly as possible. 

In the coming years, ICHRA will become a recruiting and retention advantage, and those who bring in an administrator like Ameriflex can maximize 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? 

Qualified premiums are defined by the IRS in publication 502, which also defines what constitutes a qualifying family member. It is the same list that applies to health savings accounts, and includes prescriptions, doctor visits, and even dental procedures. A caveat with ICHRA is that employers can choose to only reimburse certain types of medical expenses (for example, valid doctor visits only or insurance premiums only) as long as it is the same across the employee group.

Employee Classes and Compliance Considerations

In order to stay compliant, there are some important ICHRA rules and regulations employees, employers, and administrators need to keep in mind: 

Employers of any size are eligible to offer ICHRA; 

  • The employer cannot also offer a 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 while ICHRA must be used with an individual plan or Medicare, an employer can offer the same employees both an ICHRA and excepted benefits such as vision, dental, health FSA or fixed indemnity coverage. 

Q: What is an employee class? 

The beauty of ICHRA is choice. An employer offering it can choose to set reimbursement rules that fit all employees no matter their status, or that employer can set up employee “classes” where the rules differ depending on what group someone is classified into. Obviously, these classes cannot be used to discriminate against any individual employee or employee group, or to shift health risk off of an existing plan. However, the flexibility it offers allows employers to give full-time employees a specific offering that differs from part-time employees, or employees who are still in the waiting period for coverage. Even seasonal employees can be set up as an employee class. 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. Employees who are older, 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, and employers can also choose what they want their ICHRA to reimburse. For example:

  • Insurance premiums only;
  • Qualified medical expenses only; or
  • A combination of the two

However, it’s important to note that if an employer is making age-based variations in ICHRA benefits within a certain class, the amount cannot exceed the 3:1 ratio allowed for individual market premium differences based on age.

Class designations set by the employer must be fair across all employee classes. A few items to note: 

  1. Classes cannot be used to discriminate any individual employee or employee group, or to shift health risk off of an existing group plan.
  2. 11 classes to choose from including: full time, part time, salary vs. hourly, seasonal, geographical location, and more.
  3. There can be age-based and family-size variations in the amount the ICHRA reimburses within a certain class. The amount cannot exceed a 3:1 ratio.

Q. What does “Affordable” mean as it relates to the ICHRA employer contribution? 

  1. 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. Refer to the calculation below.
  2. 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.
  3. Affordability calculation:
    • Affordable ICHRA Contribution > Lowest Cost Silver Plan – (9.78%*Employee household income)
    • An “affordable” ICHRA contribution must be greater than the lowest cost silver plan an employee can purchase minus 9.78% times the employee’s household income.
    • While this calculation seems complicated, it’s not. There are several safe harbors to help make it easy.

Q. What else do I need to keep in mind?

  1. Employees will need to substantiate at least annually that they have individual health insurance coverage and they are using the ICHRA for such.
  2. ICHRA is considered a group health plan and is subject to COBRA; Ameriflex can help make the offering of both seamless.
  3.  An employer cannot offer a choice between a traditional group health plan and ICHRA to the same class of employees. 

How It Works with Ameriflex

  1. Payment – Employees pay their individual insurance premiums with the Ameriflex Debit Mastercard®, or pay out of pocket and request reimbursement. Employees will need to substantiate at least annually that they are using the Ameriflex Debit Mastercard® for individual health insurance premiums. 
  2. Reimbursement – Ameriflex sends reimbursements to employees monthly or as needed via ACH.