What is an Individual Coverage HRA (ICHRA)?
ICHRA is a game-changer for employers looking to provide health benefits to their employees. It represents a new, more modern model of employer-sponsored health insurance.
ICHRA uses a reimbursement model that is much simpler than traditional group benefits.
What is an ICHRA plan?
ICHRA (we pronounce it “ick-rah”) stands for “Individual Coverage Health Reimbursement Arrangement” (not the common misnomer of individual coverage health reimbursement accounts) and is available for employers to start using as of January 2020.
ICHRA is an evolution of another type of HRA, called a QSEHRA, that was created in 2017. Both allow employers to reimburse employees tax-free for individual health insurance, but ICHRA represents a “super-charged” version of QSEHRA with higher limits and greater design flexibility that will appeal to more employers.
How does ICHRA work?
As the name implies, ICHRA is based on reimbursing employees for insurance rather than buying it for them. At a high-level, the way ICHRA works is very simple:
- Employers design their plan, including defining which employees are eligible and establishing reimbursement limits
- Employees purchase the individual plans they want
- Employees submit claims for reimbursement
- Employers reimburse employees for valid claims
To stay compliant and keep employees and the IRS happy, there are some important rules and regulations we’ll get into later in this guide.
ICHRA reimbursement has several advantages over traditional group plans that may be appealing to some employers. For instance, the reimbursement model (sometimes called a “defined contribution”) gives employers greater ability to control costs and provides employees with more options to choose from. This is very different from the current model of group insurance (sometimes called a “defined benefit”) where employers must choose a one-size-fits all plan for the group and employees are limited to options sponsored by the employer.
In addition, ICHRA takes the burden of managing a health plan and underlying health risks off of the employer. You or your clients won’t have to hassle with renewals, worry about participation rates, stress about what doctor networks your employees want, or be surprised by annual premium increases. Instead, with ICHRA employers can decide which employees qualify, set their monthly allowances, and get back to managing their business while employees get to choose the plans they want.
In this guide, we provide a summary overview of ICHRA’s benefits and basic ICHRA requirements. We’ll share practical tips for evaluating if the ICHRA health insurance model would be a good fit for you or your client, ideas on how to design and optimize an ICHRA solution, and important details on administration and compliance.
Who is this guide for?
We wrote this ICHRA reimbursement guide for employers, HR professionals, and benefit consultants interested in learning more about the Individual Coverage HRA.
After reading this ICHRA guide, you'll understand:
- What is ICHRA and where did it come from
- Who will benefit the most from ICHRA
- How to design an ICHRA plan to fit a range of needs & budgets
- How the ICHRA classes work
- What ICHRA tax benefits are
- How to calculate the affordability of an ICHRA
- What is required in order to be eligible to use ICHRA
- What goes into ICHRA setup
- What it takes to administer an ICHRA
- How to maintain important ICHRA rules
We’re licensed health insurance agents, ICHRA plan administrators, and experienced HRA practitioners, but we are not licensed tax professionals—please don’t treat our advice as such. Practical knowledge and links to relevant IRS regulations and legal resources are provided throughout this guide.
How does an ICHRA plan work?
We've addressed how an ICHRA plan works at a high level, but let's share a few more details before we move on. First, the business owner sets the monthly reimbursement amount and designs the reimbursement structure with rates based on classes, age, or family size. The next step is notifying employees of their new benefit and making sure they understand how to get the most out of it. After that, employees purchase an individual health plan that works best for them, hopefully with the help of an enrollment team like we have at Take Command.
After an employee submits receipts for specific qualified medical expenses or sets up a recurring premium payment, the business owner simply reimburses them. The funds aren't subject to payroll tax from an employer standpoint and aren't considered income for the employee and taxed accordingly.
Plus, the employer can skip the hassle of choosing and administering a group plan that would bring with it premium hikes and participation rate requirements.
Background: Where did the individual coverage HRA come from?
Although it's brand new, ICHRA feels like something that’s been a long time coming. We’ve watched the retirement industry move from defined benefit to defined contribution models (think pension plans to 401k), so it was only a matter of time before the health insurance industry followed suit. Let's dig in a little deeper to the history behind employer-subsidized health insurance.
Traditionally, HRAs are commonly used with group health plans. Before the Affordable Care Act (a.k.a. “Obamacare") passed in 2010, it was common for small employers to use HRAs to reimburse for individual health insurance. However, unintended regulations that spun out of the ACA put a halt to the practice of reimbursing (and even penalized employers who continued doing it).
Although it took a while, congress finally addressed the problem. In December 2016, a hodge-podge bill called the 21st Century Cures Act was passed by a Republican Congress and signed by President Obama. The bill created the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), which again makes it permissible for small employers to reimburse for individual insurance as long as the employers (and employees) met several strict guidelines.
With QSEHRA gaining traction, the Trump Administration issued additional guidance to expand the use of HRAs. In October 2018, the U.S. Departments of the Treasury, Health and Human Services (HHS), and Labor proposed new regulations to expand the usability of health reimbursement arrangements (HRAs). The rules were finalized in June 2019 and created two new types of HRAs: the Individual Coverage HRA and the Excepted Benefit HRA.
HHS projects that in the next 5-10 years, roughly 800,000 employers will offer Individual Coverage HRAs to pay for insurance for more than 11 million employees. We think if market conditions break the right way, it could be much, much higher.
Take Command estimates that as many as 50 million employees and family members could participate in an ICHRA plan in the coming years.
ICHRA vs. Group Plans: Which is better?
Is ICHRA health insurance better than a traditional group plan?
At a high-level, these new health reimbursement arrangements are a superior model compared to traditional employer-based plans. How it might be implemented for a particular client will depend on a lot of local market factors and what you or your client care most about when it comes to benefits.
The following chart provides a summary of where ICHRA wins and loses compared to a traditional group plan. We'll then dive into a few key areas below.
|ICHRA Wins||ICHRA Loses|
Define your benefit budget and stick with it. No more surprise group increases year after year.
Plan customization & flexibility
Design a plan that fits your team vs being locked into what an insurance company offers
On average, individual plans are usually 10-20% more expensive than traditional group plans
Take managing your employees' health risk out of your business plan
Give your employees the ability to choose plans and doctors that work for them
Employees own their health plan and can take it with them if they change jobs.
Plan choice & Personalization
Employees select individual plans that fit their needs: doctors and RX coverage.
Individual insurance companies provide a superior experience (apps, concierge, etc)
ICHRA key benefits (vs. traditional group health plans)
- Transfers employer responsibility for health risks
- More personalized plan choices for employees
- Simpler and more flexible plan design options
- Greater budget control
- No participation concerns
Transfers employer responsibility for health risks
Do you or your clients want to play in the insurance risk management game? For any client that is over 50 employees (100 employees in NY, VT, CA & CO), whether they are currently self-insured or fully-insured, they are effectively responsible for their employees’ healthcare spend. Self-insured clients will feel changes right away; fully-insured clients will feel it next year when their plan renews at a higher rate.
Some employers are figuring out how to manage costs effectively: they are invested in wellness programs, engaged in high-performance network design, and interested in helping employees with chronic conditions effectively manage costs.
Other employers would rather not try to manage employee healthcare spend. If that’s you or describes your client, ICHRA could be a great solution. You can still offer generous benefits (or not generous, up to you) and your costs are fixed because you have no risk to manage.
ICHRA allows employers to “get out” of managing employee health risks.
Personalized plan choices
Traditional group plans rely on a “one-size-fits-all” model. For example, if you or your client choose a Blue Cross plan, the employees may get to choose from a few flavors of Blue Cross, but networks and formularies are the same. Is that really the best fit?
ICHRA is much more personalized than employer-provided group plans and allows employees to choose their own plan.
If one employee wants Blue Cross because it has his doctor in network, great! If another employee wants to move to Aetna because it handles her prescription better, no problem! Finally, if another employee already gets great coverage through their spouse, they can stay on that plan and opt-out of the individual coverage health reimbursement arrangement benefit.
If the plan is designed to allow for medical expense reimbursement too, employees can spend it on whatever they need (contacts, prescriptions, dental care, etc). Reimbursements go directly towards meeting employee needs, not into a pit of group plan deductibles and premiums.
Simple and flexible design options
Traditional group plans come in all sorts of crazy shapes and sizes—a dizzying and confusing concoction of deductibles, coinsurance rates, employee vs. employer contributions, single versus family limits, etc. Then you get to hassle with census uploads and comparing quotes you have no control over. Employers are forced to guess on plan designs that’ll keep employees happy and fit the budget.
ICHRA allows employers to use their time focusing on what they do best--serving their customers--and not on managing complex group plans.
Furthermore, an ICHRA can be customized and designed to achieve you or your clients’ goals. We’ll cover this more in our ICHRA Design section, but you can offer different rates of reimbursement for full-time vs part-time employees, single vs. family employees, etc. Super easy.
The Individual Coverage HRA’s biggest selling point is that it has eleven different classes that can be used to divide employees into different benefit levels. While employers have to treat employees fairly, there are a lot of levers they can pull on how much to reimburse and who gets to participate.
If you or your client are tired of constant premium increases for your group health plan, then ICHRA should be an option to consider. You or your clients set the allowable reimbursement rates and your costs will never be greater than that. And if employees don’t buy insurance or don’t use all of their allowance? The employer keeps the money.
No minimum participation requirements
Most group plans require employers to maintain a high participation rate--typically around 70%. This can force employers to offer more generous and expensive benefits than they may have otherwise in order to keep the plan intact. With ICHRA, there are no participation requirements. If employees decide not to use the benefit, there is no cost or concern for the plan.
Are ICHRA plans good for employees?
ICHRA plans are great for employees! For starters, many times, an ICHRA is an individual's first help that they are receiving from their employer for benefits. In fact, 80% of our small business clients are new to benefits altogether.
What's more, remember that group plans typically only cover around 83% of premiums for singles and 74% of premiums for families (with the rest coming out of their employees’ paychecks). Based on our own client data, the average national reimbursement rates of our clients based on 45-year-old employees was $448.39 per employee per month for 2021, which covers 147% of lowest cost bronze plans and 122% of lowest cost silver plans. This varies per state, but an overwhelming majority reimbursed more than local plan premiums with the exception of five states that still had percentages well above group plan premium coverage. For those on small group plans, the burden on employees is even greater, with more than 35% of employees footing more than half the bill, according to The Employer Health Benefits 2019 Summary of Findings. This all goes to show that ICHRA is great for employees.
Here are three more reasons why ICHRA benefits employees:
Choice: Instead of choosing from a limited number of options, employees can choose any ACA-compliant plan on the market (about 75% of companies only offer one plan).
Portability: The individual health insurance selected with an ICHRA is portable, meaning if an employee loses their job, they don’t lose their health insurance.
Flexibility: ICHRA works great for employees that are hard to keep on a group plan, like part-time or remote workers (two groups that are really having a moment since the onset of COVID-19).
What is the difference between ICHRA and HRA?
Breaking it down to the simplest of terms, an individual coverage HRA (ICHRA) is merely a type of health reimbursement (HRA).
Specifically, ICHRA is a type of Integrated HRA (more on that in a minute). There are a lot of types of HRAs and understanding the difference—and the purpose of each—is important. What makes ICHRA different than the rest is there is no annual reimbursement limit, no limit on company size, and the option to offer different benefit rates to different classes of employees. Alongside QSEHRA, ICHRA is the only HRA that can be used to reimburse for individual health insurance premiums. Both of these “new” HRAs can be used to replace a group plan and ICHRA can satisfy the employer mandate in the event the employer is an ALE.
Traditional HRAs, we believe, have been superseded by ICHRA and QSEHRA. While they are nothing new, regulations that have historically (and still) govern traditional HRAs come from Tax Code Section 105. Because of this you’ll hear tax geeks and insurance brokers refer to “Section 105 HRAs”. You’ll also hear people talk about Integrated HRAs and Standalone HRAs.
Here’s the difference:
Integrated HRAs are “integrated” with a traditional group health insurance plan and used to help reimburse out-of-pocket medical expenses not paid for by the group health plan. Typical examples would be co-pays, co-insurance, deductible payments, etc. ICHRA falls into this category, as does the Qualified Smaller Employer HRA.
Standalone HRAs are not required to be tied to a group plan. They have a complicated history and can be even more complicated to implement based on tangled federal and state insurance regulations. A few common types that still linger around are Spousal HRAs, Retiree HRAs, or Medicare HRAs.
ICHRA gives employers an incredible ability to design and customize a plan that’s tailor-made for their organization. We’ll cover some of the key ICHRA rules and ICHRA requirements in this section and dive-deeper on key topics (like ICHRA employee classes and ICHRA affordability) in later sections.
A key principal to keep in mind when considering design options is that while there’s a great amount of flexibility, plans have to be offered fairly to groups (ie, “classes”) of employees. Most of the ICHRA rules and ICHRA regulations are meant to prevent discrimination. With that in mind, let’s dive in!
ICHRA Requirements for Reimbursement
There are no limits to how much an employer can offer for reimbursement under ICHRA. This is a big difference with QSEHRA which has rather restrictive limits. With ICHRA, employers can offer as much or as little as they’d like as long as it’s offered fairly to each class.
In addition, employers can choose what they want their ICHRA to reimburse:
- Insurance Premiums Only
- Insurance Premiums + Qualified Medical Expenses
- Qualified Medical Expenses Only
We’ll cover what counts as a “qualified premium” later when we discuss employee requirements. “Qualified medical expenses” are defined by the IRS in publication 502. If you’re familiar with Health Savings Accounts (HSAs), this is the same list. It includes things like doctor visits, co-pays, prescriptions, medical equipment, dental procedures, etc. Employers can choose to only reimburse certain types of medical expenses (ie, only prescriptions) as long as whatever elections are made are offered fairly to employees (there’s that “fair” thing again!)
Furthermore, employers can choose how to structure reimbursements to employees:
- Give all employees the same amount: This one is easy. For example, you could give all employees $200/mo.
- Vary reimbursements by family size: Since individual market plans cost more for families, employers can offer more for larger families. Unlike QSEHRA, it does not have to be tied to a reference plan but does have to be “reasonable”. For example, an employer could offer $200 for single employees, $300 for married employees, and $600 for employees with families. Or they could offer $100 for each additional dependent.
- Vary reimbursements by employee age: Similarly, since individual plans typically cost more for older employees, employers can elect to offer higher reimbursement amounts to older employees. Reimbursements must be structured using a 1:3 ratio from the youngest to the oldest employee. We strongly recommend setting it using the age range from 21 to 64. For example, you could give a 21 year old $100/mo and a 64 year old $300/mo.
- Vary by both family size and age: Combo of the above to options. Math gets a little funky but isn’t too bad.
ICHRA Employee Classes
The above ICHRA reimbursement rules can be applied to all employees, or employers can choose to create different reimbursement rules for different types of employees, referred to as employee “classes”. For example, you could offer one set of reimbursement rules to full-time employees and a separate set of rules for part-time employees.
Classes cannot be used to discriminate or adversely shift health risk off of an existing group plan. However, they still provide incredible flexibility that can help employers really fine-tune their offering. We’ll cover classes in detail in the next section, but here’s a quick list of how you can segment employees:
- Full-Time Employees
- Part-Time Employees
- Seasonal Employees
- Employees covered by a collective bargaining agreement
- Employees who have not satisfied a waiting period for coverage
- Salaried Employees
- Non-Salaried Employees
- Temporary employees of staffing firms
- Non-Resident aliens with no US-based income
- Employees in the same geographic rating area
- Any combination of two or more classes from above.
Affordability (at a glance)
Large employers that are subject to the corporate mandate to provide insurance (typically employers with over 50 lives) can design their HRA to satisfy the mandate and avoid any penalties. The catch is the HRA must be designed to be “affordable”. We’ll talk about what that means in the Affordability Section.
Similarly, employees purchasing their own insurance from the individual marketplace will want to know if they can accept premium tax credits (PTC) to help pay for their coverage. If an HRA is considered “affordable”, then they are not eligible for tax credits (PTC). However, if an ICHRA is “unaffordable” then employees can choose between tax credits or the ICHRA.
There are instances where small employers (under 50 employees) that are not subject to the mandate may want to purposefully design an “unaffordable” ICHRA so that their employees can receive tax credits.
At least once a year, employees must be given the option to “opt-out” of receiving reimbursements through an ICHRA. In this instance, employees forfeit the ability to claim reimbursements for the year. They may want to do this if the ICHRA is “unaffordable” and they wish to claim premium tax credits (PTC).
Special Enrollment Periods (SEP)
To participate in an ICHRA, employees will need to maintain coverage in a qualified individual health plan. Open Enrollment for individual plans varies by state, but in general runs from November 1st to December 15th each year. Outside of Open Enrollment, individuals need a qualifying life event to trigger a Special Enrollment Period to purchase a plan; events such as marriage, divorce, having a baby, and moving qualify.
But good news! Now, employers offering an ICHRA or QSEHRA will trigger a special enrollment period for employees, giving them 60 days to buy a plan. This is key so employees can purchase qualifying plans, and allows employers to set up an ICHRA year-round.
Can an individual contribute to an HRA?
Individuals cannot contribute their own funds to their employer-sponsored ICHRA. This is a responsibility of the employer only. And remember, unlike an HSA that employees and employers can contribute to and that grows over time, an HRA is simply a reimbursement. There is no pre-funded account; funds are only available for reimbursement at the time the expense is incurred.
Is ICHRA considered income?
No! That’s what’s so great about it. Reimbursements from ICHRA aren't subject to payroll tax from an employer standpoint and aren't considered income for the employee and taxed accordingly.
Is an ICHRA a qualified health plan?
ICHRA works with qualified health plans and must be accompanied by a qualified health plan. This requirement ensures that individuals have high quality health insurance that meets their needs. As outlined in the Affordable Care Act, a qualified health plan (QHP) provides essential health benefits, follows established limits on cost-sharing (like deductibles, copayments, and out-of-pocket maximum amounts), and meets other requirements under the ACA. All qualified health plans meet the ACA requirement for having health coverage, known as “minimum essential coverage.”
The 10 essential benefits include:
ambulatory patient services
maternity and newborn care
mental health and substance use disorder services including behavioral health treatment
rehabilitative and habilitative services and devices
preventive and wellness services and chronic disease management
pediatric services, including oral and vision care
ICHRA Employee Classes
What are the classes and how do they work?
Employee classes are part of the magic of ICHRA. Employers can design unique benefit solutions to fit their workforce. For example, employers could offer $500/mo to full-time employees and $200/mo to part-time employees.
ICHRA’s class structure gives employers more freedom to design a plan that best suits their needs.
To take it a step further, employers can also mix-and-match traditional group plans with ICHRA implementations. For example, you could offer employees in Colorado a traditional group plan and employees in New York an ICHRA.
The one-catch? Employee classes have to be based on legitimate job-based criteria like hours worked or geographic location.They cannot be used to discriminate against unhealthy employees (i.e., you can’t create a “diabetic” class, etc).
Here’s a summary table of the classes employers can use to design their plans:
|Full-Time🔒||A business can define whether this means 30 hours or 40 hours a
week, but keep in mind that to satisfy the employer mandate, it will need to be at least 30 hours a week.
|Part-Time🔒||Depending on the employer's needs, this can be defined as either less than 30 or less than 40 hours a week.|
|Seasonal||Employees who are hired on a short-term basis or for a particular season.|
|CBA Class||This includes employees who are part of a Collective Bargaining
Agreement which signifies a written agreement between an
employer, employee, and their trade union on the basis of
employment, pay rate, work hours, and other working conditions.
|Waiting Period Class||Employees that just joined an employer. This is standard practice
when new employees come on board. Businesses can choose up to 90 days before an employee’s health benefits kick in.
|Rating Area Class🔒||This class can be broken up by employees located in different
geographic locations. It is generally thought of as employees whose
primary site of employment is in the same rating area.
|Non-Resident Alien Class||Employees who are non-resident aliens with no US-based income,
including foreign employees who work abroad.
|Salaried🔒||Employees who receive a salary as wages.|
|Non-Salaried🔒||Employees, such as hourly workers, who do not receive a salary
|Staffing Firm||Employees placed for temporary assignments.|
|Combination Classes||Employers can combine two or more of the above classes to create
a new class based on their needs.
🔒 Subject to Class Size Minimums if one class is getting a group plan
In addition to multiple classes, employers can also offer an ICHRA to new employees while keeping current employees on a group plan. Essentially, an employer can “grandfather” in their group plan participants while offering an ICHRA to the new hires. The employer has to set an applicable date to being the delineation and then treat each case fairly. Employers can have multiple subclasses unless those classes are used to offer different ICHRA amounts.
Here are a few scenarios where utilizing ICHRA’s class structure would be helpful for you or your client:
Is your business concerned about hiring and retaining full-time employees but can't afford benefits for part-time employees?
Then your benefits budget will be best spent on offering an ICHRA to full-time employees only. Employers can then set different allowance ratings for full-time single employees, full-time married employees, and full-time employees with families. Employers can exclude: part-time or seasonal.
Do you have employees working in more than one state?
Instead of trying to find a group plan that works in multiple states, offer employees an ICHRA and let employees purchase plans in their local markets that best fit their needs. Since insurance rates vary by geographic locations, you can set your classes up by state. For example, employees that live in California will get $600 and employees living in Texas will get $500. There is no limit to the number of classes you set up! Employers can set up varying rates for each state employees live in and then further increase allowances by marital status or age.
Can you offer a group plan and an ICHRA together? It depends.
Employers can offer an ICHRA and traditional group plan to employees as long as two conditions are met:
- Employees in each class are only offered one solution. For example, an employer cannot offer employees within a class an ICHRA and a group plan.
- Certain classes being offered reimbursement through an ICHRA must meet class size minimums. This is to avoid adverse risk shifting from employers trying to unload unhealthy risk off of their group plan and onto the individual market.
How does this work? Here are a few design examples:
|Part-Time or Hourly Employees
An employer likes his or her group plan, but has been struggling to maintain minimum participation based on part-time or hourly employees opting-out due to interest or expense.
|Full-Time Employees can remain on the group plan||Part-Time and/or Hourly Employees can be “classed-out” of the group plan (and therefore out of the participation requirements) and offered an ICHRA (which does not have participation requirements)|
An employer’s plan has gotten increasingly expensive because of remote workers and the need to maintain a large, national PPO network
|Maintain the group plan for “Local Employees” based on rating area criteria.||“Remote Employees” can be offered an ICHRA to purchase individual plans in their local market.|
How do you design benefits for the home office as well as employees assigned to different clients?
|Offer “permanent” or home-office employees a group plan or ICHRA.||Temporary employees assigned to clients can be put into the temporary employee class and offered ICHRA.|
Remember, benefits have to be distributed fairly to employees that fall within each class, but each class can be broken down further by age and family size. That means that employees with families can be offered a higher amount per month and rates can be scaled by age. This makes sense given that family health expenses cost more than singles, and health insurance costs rise with age.
ICHRA features a new hire rule which will allow employers to offer new employees an Individual Coverage HRA while grandfathering existing employees in a traditional group health plan. This is a great way to transition your workforce from a group plan to an individual coverage HRA.
Take Command's design consultants can help you strategize a plan that fits your budget and needs best.
Minimum Class Size Requirements
Employers who plan to offer a traditional group health plan to at least one class of employees and an Individual Coverage HRA (ICHRA) to another class of employees will need to keep in mind the minimum class size requirements. These requirements were put in place to prevent the individual market from being saturated with high risk individuals.
Minimum class size requirements apply to the following classes:
- Salaried Employees
- Non-Salaried Employees
- Full-time Employees
- Part-time Employees
- Employees in the same geographic rating area
The minimum number of employees to be included in a class ultimately depends on the size of the employer based off the employee count on the first day of the plan year.
|Size of Employer||Class Size Minimum|
|less than 100 employees||10|
|100-200 employees||10% employees rounded down to whole number|
A few other class size notes:
- Combo Classes: Minimum class size applies to any combo-classes that include one of the classes listed above unless it’s a combo with the waiting-period class, in which case there is no restriction
- Rating Area Classes: Minimum class sizes only apply to rating areas smaller than a state. For example, if you or your client has one employee in a remote state, you could have a class of one without violating the rules. However, if you’re using a narrower rating area design (typically at the “county” level) then minimum class sizes apply.
Important Reminder: Minimum class sizes only apply when at least one class is being offered a traditional group plan. If an employer is offering multiple ICHRAs to different classes, there are no minimum class size restrictions.
The Affordable Care Act (ACA) requires employers with more than 50 full-time equivalent (FTE) employees to provide health insurance to their employees. This is known as the “employer mandate." Employers that don’t provide affordable insurance are subject to steep penalties.
ICHRA can satisfy the ACA’s employer mandate if the offer is “affordable.
A cool feature of ICHRA is that it can satisfy the employer mandate. Employers that have been stuck using complicated group plans to meet the mandate have a new, much simpler option with ICHRA!
The catch? The ICHRA has to be “affordable” to meet the mandate and clear the employer of any penalties. This makes sense, as otherwise employers could offer $1/mo and escape the penalty which would be unfair to employees.
How is ICHRA affordability calculated?
Note: The following section explains how to calculate affordability in detail. Just need to get some quick numbers? We've created an online ICHRA Affordability Calculator you can use and then skip this section. If you like to know the details, the read on!
Thankfully, the IRS has proposed a clear-as-mud description of affordability:
“An ICHRA is affordable if the remaining amount an employee has to pay for a self-only 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)
Dusting off our algebra skills, we get:
Affordable HRA Contribution > Lowest Cost Silver Plan - (9.83% * Employee Household Income)
This means that an affordable contribution must be greater than the lowest cost silver plan an employee can purchase minus 9.83% times the employee’s household income.
The two variables highlighted above that go into the affordability equation are not difficult to understand, but could be very hard for an employer to know. Thankfully, 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 lowest cost silver plan an employee could purchase on the public marketplace is based on two factors: the employee’s age and where they live (rating area). It may be hard for employers to keep up with employees that move, have birthdays during the year, etc. The IRS also recognizes 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 reasonably 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|
|Age-Based Bands||(TBD: coming soon!)|
|Prior Year||Employers can use prior year plan rates to determine affordability for the following year (For example, 2019 plans can be used to determined 2020 affordability)|
A few important notes:
- For affordability, it’s the lowest cost silver plan for the employee-only that matters. This is unfortunate because silver plans for families cost much more. This is a result of the “family loop hole” that Congress needs to fix!
- Calculations for premium tax credits (PTC) use the second lowest cost silver plan (SLCSP) while ICHRA affordability uses the lowest cost silver plan. The reason for this is around actuarial value and what the ACA’s employer mandate requires employers to provide to employees.
Determining Employee Household Income
It would not be reasonable for an employer offering an ICHRA to be able to estimate an employee’s household income—what if their spouse works? Or a dependent kid has a summer job?
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 the employer reports
annually in Box 1 of their W-2 form
|Rate of Pay||For hourly employees, employers can multiply the hourly
rate by 130 hours to estimate a monthly income
(regardless of how many hours the employee actually
|Federal Poverty Line (FPL)||Employers can assume an employee’s income to be equal
to the federal poverty level. (learn more about FPL)
ICHRA Affordability Example
As you’ve probably caught on from the section above, “affordability” will vary by which safe harbor an employer uses and may be different for each employee.
Let’s look at some examples to see how the safe harbors apply and how they can shift the affordability line.
Hourly Workers Example:
Let’s say Tom wants to provide an affordable ICHRA plan to his two employees, Steve and Stacy. Steve and Stacy both work at Tom’s office in Dallas, TX and are both paid $15/hr. Steve is 30 years old while Stacy is 60 years old.
To keep things simple, Tom will use the location safe harbor, and look at plans available in Dallas (even if Steve and Stacy are driving in from nearby suburbs). The lowest cost silver plan offered in Dallas in 2019 is the “Ambetter Balance Care 5” plan.
Steve’s premium is $365/mo. Stacy’s premium is $872/mo since she’s older. Those are the lowest cost silver plan numbers we can plug into our formula.
Next, we need to determine household incomes for Steve and Stacy. Because Tom doesn’t know much about their family life (he just met them!), he’s going to use either the “rate of pay” or “federal poverty level” safe harbor. [Note: The “W-2 Wages” safe harbor does not apply in this case since the employees are hourly and not salaried.]
With “rate of pay”, you assume employees work 130 hours a month regardless of how many hours they actually work. For both Steve and Stacy, this is $15/hr * 130 hours = $1,950.
With “federal poverty level” (FPL), look-up the FPL rate in your state here. For 2019, the FPL for one-person in Texas is $12,140/yr. To get that on a monthly basis, we’ll divide by 12 to get $1,012/mo.
We have all of the numbers we need for our formula now:
An Affordable ICHRA > Lowest Cost Silver Plan - (9.83% * Employee Household Income)
Calculated with “rate of pay” for income:
|Lowest Cost Silver Plan Premium||$365/mo||$872/mo|
|Minimum Affordable ICHRA||$173/mo||$680/mo|
Calculated with "federal poverty level" for income:
|Lowest Cost Silver Plan Premium||$365/mo||$872/mo|
|Minimum Affordable ICHRA||$265/mo||$772/mo|
A few important observations from this example:
- “Affordability” for Steve and Stacy varies by nearly $100/mo based on which safe harbor the employer, Tom, chooses to use
- What’s affordable for Steve and what’s affordable for Stacy is very different no matter which safe harbor Tom chooses
“Affordability” and premium tax credits
Large employers have to offer “affordable” ICHRAs if they want to satisfy the corporate mandate, but what about small employers (typically under 50 employees) not subject to the mandate?
Affordability is still important for small employers because it impacts the ability for employees to secure premium tax credits (PTC) (aka Obamacare subsidies) to help pay for their premiums:
- If an ICHRA is “affordable”, employees are not eligible for tax credits (PTC)
- If an ICHRA is “unaffordable”, employees can choose either the ICHRA or tax credits (PTC)
Recall from the Design Rules discussion above that employees must be allowed to “opt-out” of an ICHRA at least once a year. If an employer is offering an unaffordable ICHRA and an employee is eligible for a substantial tax credit (PTC) based on their income and family size, “opting out” can be a smart strategy (and good for the employer too). If you’re familiar with the “offset” approach from QSEHRA, this is a little different.
Here’s an example to illustrate how this works:
Meet Bob the employee. If Bob was shopping alone on the individual market, he’d qualify for a $300/mo premium tax credit (PTC) based on his income and family size. Bob’s employer wants to help out, and is going to contribute $200/mo through either an ICHRA or a QSEHRA. Here’s what that looks like:
|QSEHRA||"Affordable" ICHRA||"Unaffordable" ICHRA|
|Offsets||Not eligible for PTC||Employee Chooses|
|Bob’s PTC is reduced by $200/mo to $100/mo. Bob still gets $300/mo (assuming he claims his full QSEHRA), but his employer is now paying money Uncle Sam would have paid.||Bob is not eligible for the PTC. He should take the ICHRA and call it a day.||Bob can choose once a year to “opt-out” of the ICHRA and take the PTC, or he can take the ICHRA. If he chooses the PTC, then Bob’s company doesn’t have to pay anything.|
So is the $200/mo Bob receiving “affordable” or “unaffordable”? The answer is it depends. Looking back at the hourly worker example above with Steve and Stacy, if Bob was just like Steve, $200/mo could be deemed affordable or unaffordable based on which income safe harbor Bob’s employer wants to use.
A few important notes:
- Large employers should use the safe harbors to make an “affordable” offer to avoid the employer mandate penalties (use our online ICHRA Affordability calculator to get quick results)
- However, employees will be able to test the affordability of their ICHRA on the public exchanges using their actual data, which may lead to differing results
- If employees can prove their ICHRA is actually unaffordable, they could “opt out” and claim tax credits (PTC)
We’re still waiting finalized guidance on Safe Harbors from the IRS, but we believe in this case, a large employer would still not be subject to penalties because they followed the rules based on the information they had to implement the safe harbors
|Employee location||Allowing ALEs to base HRA rates based on their primary
business location instead of every employee's actual address.
|Calendar & non-calendar years||Provisions for HRA plan years that are different from
individual insurance plan years.
|Affordability||Allowing ALEs to estimate an employee's household wages
using one of three different methods: Form W-2 Wages, Rate
of Pay, or Federal Poverty Line. There are more details on this
in the next section, so keep on reading!
ICHRA is a major overhaul of HRAs as we have known them up until this point. Compared to other HRAs, it is king in terms of flexibility. Three key elements make the new HRA very appealing.
- No Size Restrictions
An organization can be a 5-person startup, a midsized 50-person team, or a 500-person corporation. ICHRA is a scalable benefit for all sizes of businesses.
- Unlimited Contribution Amounts
There are no annual contribution caps. That means the sky’s the limit for this tax-friendly benefit.
- Flexible Class Options
An employer can choose to treat different classes of employees differently based on different available class distinctions. Everyone does not have to be treated equally across the board.
In addition to this tremendous flexibility, the new HRA has pretty straight forward requirements for both employers and employees.
Employee Requirements for ICHRA Plan
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 (PHS 2711)
- Cover preventive health services with no cost sharing (PHS 2713)
While employees will have many options on the individual market, unfortunately the rules do not allow for employees to consider getting on their spouse’s group plan (if offered by the spouse’s employer). This is a big bummer, especially since QSEHRA works great with employees on their spouse’s group plan.
In addition, we know there are a lot of enticing alternative plans on the market now based on short-term plans, fixed indemnity plans, and sharing ministries. Although these alternative plans may provide great coverage, they will not work with ICHRA.
Here’s a summary of the major plan types and how they work with ICHRA:
What if employees don’t have individual insurance?
Good news! Employees that are newly eligible for an ICHRA plan 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 Individual Coverage HRA.
Can an ICHRA reimburse Medicare premiums?
To qualify for an ICHRA, the employee eligible for Medicare must have coverage of Part A and Part B together or Part C - Part B by itself doesn't qualify as Minimum Essential Coverage.
ICHRA may be used to reimburse premiums for Medicare and Medicare supplemental health insurance (Medigap), as well as other medical care expenses. (Premiums for Parts A,B, C, D, and Medigap policies are all eligible for reimbursement).
Who is eligible for ICHRA?
Wondering how to know if your business can offer an ICHRA? The IRS has made it fairly easy — employers are eligible if they have at least one W2 employee. That includes businesses, governmental bodies and religious organizations. This means businesses of any size can participate; there's no maximum limit for size or reimbursement rate.
Ultimately, employer eligibility rests on how a company is set up, as you’ll see below.
Partnerships: Partners are directly taxed, making them self-employed and not eligible for participation in an ICHRA.
Corporations: (Including C-Corps, B-Corps, Non-Profits, and LLCs taxed as C-Corps - anything where the entity is separate from ownership.) Corporations are the easiest entity type to handle when it comes to health insurance because owners are considered employees and can benefit from the company’s ICHRA. Their dependents and any W2 employees can benefit as well.
S-Corps: An S-Corp owner that owns more than 2% of the company is considered self-employed and not an employee, therefore typically cannot participate in ICHRA. However, self-employed individuals can already deduct some health insurance expenses without an HRA.
Sole proprietors: These unincorporated businesses are owned and operated by one individual with no distinction between the business and owner. In a nutshell: The sole proprietor is not an employee and will not qualify for an ICHRA.
Wondering about ICHRA eligibility for employees? The most important thing for employees to do to use a company ICHRA plan is to sign up for a qualified health plan, which basically means it provides coverage of essential benefits such as preventative and wellness services and emergency services, as well as limits on cost-sharing. Employees can purchase individual coverage plans on or off the Affordable Care Act exchange. ICHRA-qualified plans include:
Setting up and administering an ICHRA is not rocket science, but there are certain ICHRA rules and ICHRA requirements that can't go overlooked:
- Legal Plan Documents (subject to ERISA)
- COBRA Administration (if not exempt)
- Process to substantiate employee claims
- Reimbursement mechanism
- Record-keeping and Tax Reporting
Can I administer my own ICHRA?
It’s a question we get asked a lot. While it’s possible, ICHRA administration is definitely not something we’d recommend you or your client do on your own for a few practical reasons:
- Employee Privacy – Leveraging an administrator provides a necessary layer of privacy. For reimbursements to be tax-free, employers have to substantiate that employees are using funds to pay for health insurance and medical expenses. However, having employees submit receipts directly creates a significant problem because information about employees’ medical expenses (including individual insurance premiums) is considered Protected Health Information (PHI) under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Employers asking for employee medical records is a HIPAA privacy violation.
- Record Keeping – Because the IRS requires small businesses to keep records up to 7 years, record keeping can be problematic when small paper receipts are concerned. An administrator will keep all digital records organized and secure on your behalf providing peace of mind.
- Changing Regulations – In recent years, healthcare policy consistently proves to be evolving. Therefore, as ICHRA evolves, an administrator will always be up-to-date on regulation changes.
For more on reporting requirements for small businesses (<50 employees) offering an ICHRA, please click here.
For larger clients considered "Applicable Large Employers (ALEs)" by the federal government (generally >50 employees), please click here.
COBRA and ERISA
Since the Individual Coverage HRA is considered a group health plan 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 notice to employees.
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 the result of a qualifying event, such as an employee’s death, divorce, or job loss. Cobra is generally offered for 18 months but can be extended to up to 36 months for qualifying events.
Employers exempt from COBRA include:
- Less than 20 employees
- Church Plans
- Government Plans (state and local)
*Please check your state requirements for any state specific rules regarding COBRA.*
The Process for Setting Up an ICHRA
Ready to design and launch your ICHRA? Setting up an HRA is easy. Over the last few years, Take Command has helped over 1,000 clients setup and administer their own reimbursement programs. The process begins by finding the best ICHRA administration partner and then walking through these 6 basic steps:
Step 1: Pick a start date
The first step is pretty easy—establish a start date! Many companies tend to think about benefits on a calendar year basis during open enrollment, but the awesome part about ICHRA is that it can start any time of year and will trigger a special enrollment period so your employees can find plans on the individual market outside of the open enrollment dates with ease.
Step 2: Design classes for eligible employees
One of the best parts about the Individual Coverage HRA is the ability to divide employees into eleven+ custom classes to determine what kind of benefit they receive (ICHRA to all employees, ICHRA to certain classes, no benefit to certain classes, or a traditional group benefit to certain classes). These classes include full time, part time, seasonal, salaried, non-salaried, employees working abroad, employees in a waiting period, employees working under a collective bargaining agreement, temporary employees in a staffing firm, employees in a specific geographic location, or a combination of any of those.
Step 3: Determine a budget and set allowances
Your next step is to determine how much you’ll give employees to reimburse them for premium costs and medical expenses. You can set a different monthly allowance for varying classes that you choose to include, and can even integrate this option with a traditional group plan if you choose. From there, you can further increase allowances based on age or number of dependents.
Step 4: Establish legal plan documents
The IRS and Department of Labor have a variety of rules to follow regarding HRAs. Failure to comply with the rules will result in penalties. Your legal plan documents, which will include a formal plan document and summary plan document, must include the ICHRA policies including monthly reimbursement amounts, class structure, claims processes, reimbursement eligibility, and information on HIPAA and other procedures involving privacy.
Step 5: Communicate your new benefit to employees
Since you are going through the work to set up the ICHRA employee benefit, you’ll want to make sure your employees know how to use it. Practical information to include: start date, annual HRA allowance, and how to obtain coverage including information regarding a special enrollment period and how premium tax credits interact with ICHRA. Our team at Take Command can help onboard your team for you.
Step 6: Provide resources for employees to purchase individual health insurance
Choosing a health insurance plan on the individual market is a daunting task, especially if this is new territory for your employees. As an employer, you can provide your employees with tools and information to guide their decision making. Just beware, federal rules prohibit employers from being involved in the actual decision making when it comes to choosing a provider or policy. As the only HRA administrator that also offers shopping support on the individual market, Take Command can provide the best on- and off-market options for your employees based on their needs, their budget, their preferred doctors and their prescriptions.
How much does an ICHRA cost?
ICHRA administration with Take Command costs $15 per employee per month, with an additional $20 platform fee. From there, the costs are up to the business owner. Each company can decide what budget works for their specific situation.
You can read more on our ICHRA pricing page.
Frequently Asked Questions
The most common questions we hear
We hope this guide has been helpful for you! We want to remind you again that we are not licensed tax professionals, please don’t construe the information we’ve provided as official tax advice.
If you’re looking for more information, we recommend you check-out our Frequently Asked Questions (FAQ) database on ICHRA. As we receive more questions, we update this page.
Do you have a question we haven't answered? Please reach out and let us know.
General ICHRA Questions
Basic questions ranging from the HRA origins to how the practical functions of the HRA.
Questions pertaining to what employees much do to participate in a company's ICHRA
Affordability & PTC
Want to know more about ICHRA affordability and how the premium tax credits factor in?
ICHRA & Other Plans
There are multiple plans that function alongside ICHRA. Do you have questions about other HRAs or HSAs?