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Section 125 Cafeteria Plan and ICHRA

Section 125 Cafeteria Plan and ICHRA

Wondering how Section 125 cafeteria plans work with ICHRA? Let's walk through how it works and what rules to follow (like purchasing off-exchange plans only!). 

What is Section 125 of the Internal Revenue Code?

Also known as a “Cafeteria Plan,” Section 125 allows participants to pay certain expenses on a pre-tax basis, such as insurance premiums, medical, or dependent care expenses by reducing their gross income, therefore reducing their State, Federal, and Social Security taxes.

Cafeteria Plans allow employees to be reimbursed for qualified medical expenses that exceed their contributions during the designated plan term.

As of Jan. 1, 2020, employees can use employer-funded ICHRAs to buy individual market insurance, thanks to an executive order on HRAs.

Through the Individual Coverage HRA (ICHRA) employers set an allowance to reimburse employees for health insurance and medical expenses. This flexibility empowers individuals to take more control over what health insurance benefits they obtain.

How does the Section 125 Cafeteria Plan work with ICHRA?

Employers may set up tax-preferred cafeteria plans alongside ICHRA for their employees. There are a few special restrictions to keep in mind:

  • Employees may make salary reduction contributions to cafeteria plans to cover insurance premiums that are not reimbursed by ICHRA allowance
  • The employee must purchase an Off-Exchange health plan (not from or the state exchange) to participate in the cafeteria plan

Ready to learn how much you can reduce benefits cost?

Learn more about Section 125 Cafeteria Plans and ICHRA

An ICHRA may be integrated with individual health plan coverage in order to reimburse individual coverage premiums and qualified medical out-of-pocket expenses, provided that the ICHRA satisfies a few conditions that we talk about below.

  • A business cannot offer any employee a choice between an ICHRA and employer-sponsored group health plan coverage.
  • Employees and their dependents must be enrolled in health insurance coverage purchased in the individual market or Medicare Parts A and B, or C.
  • Employee and dependents must be covered by individual health insurance for every month a claim is made. 
  • The employer must offer the ICHRA on the same terms to all employees in an “ICHRA class
  • Employees must have the ability to opt-out of receiving the ICHRA so that they may receive a premium tax credit for coverage purchased in the individual marketplace.  

Ask us how your local insurance market works for ICHRA!

Additional resources on ICHRA



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