ATTENTION: As of 6/13/2019 at 4:15p EST, the new ICHRA rules have been announced. We are currently reading and discussing the 497-page document and working to update all of our information accordingly.
ICHRA (we call it “ick-rah”) is a potential game-changer for employers looking to provide health benefits to their employees. We know what you’re thinking. "Great! Another clunky acronym to remember."
But trust us, you’ll want to remember this one.
Here’s what to know: An ICHRA allows employers to reimburse their employees tax-free for individual insurance and medical expenses. No more hassling with renewals, participation rates, stressing about doctor networks, or getting constant annual increases—just decide which benefits go to which classes of employees, set your monthly allowance for each, and you’re done. Employees get to choose any plan they want and flexible design criteria allows employers to customize their ICHRAs to suit their needs.
ICHRA, pronounced "ick-rah", stands for "Individual Coverage Health Reimbursement Arrangement".
What is an ICHRA anyway?
ICHRA stands for “Individual Coverage Health Reimbursement Arrangement” and is an evolution of another type of HRA, called a QSEHRA, that was created in 2017. [We wrote a great practical guide for small employers considering QSEHRA that you can read here.] While QSEHRA has provided a practical benefits solution for small employers, ICHRA represents a “super-charged” version of QSEHRA that is applicable to employers of any size. It extends the benefits of QSEHRA’s tax-free reimbursement to a larger pool of employers and has built in a higher degree of customization and flexibility in terms of design.
Who is this guide for?
We wrote this guide for employers, HR professionals, and benefit consultants interested in learning more about ICHRA to see if it may work for their firms or clients.
After reading this guide, you'll understand:
- What an ICHRA is and where it originated
- Why ICHRA is better than group insurance
- All the benefits of an ICHRA
- How to design an ICHRA to fit your needs & budget
- The affordability of an ICHRA
- How to set up an ICHRA and get started
- What exactly is reimbursable with an ICHRA
We’re licensed health agents 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.
Where did ICHRA come from?
Wondering where this HRA talk all got started? Let’s start at the beginning.
HRAs have been around a long time. However, when the Affordable Care Act (a.k.a. “Obamacare") passed in 2010, the law had the unintended consequence of disallowing tax-free reimbursement for small companies. The primary hang-up was an interpretation that any company that reimbursed for health insurance (including individual) was technically a group plan. According to the ACA, group plans are required to provide preventive care at no cost. Since employers that reimbursed for individual plans did not meet the preventive care requirements, they would be subject to group plan penalties of up to $100 per employee per day. Yikes! See IRS Notice 2013-54.
The IRS, recognizing the adverse impact this interpretation would have, issued guidance to small business owners saying “Hey! We see this problem but we’re not going to enforce it until June 2015. Congress—you all need to fix this before then or we’ll have no choice but to enforce.” As you know, the political atmosphere around Obamacare prevented any of these fixes from taking place.
As a result, in late 2015 the IRS started enforcing the provision and leveraging hefty fines and penalties for companies caught reimbursing for individual health insurance. See IRS Notice 2015-17.
The insurance environment looked bleak for small employers in 2015 and 2016. Thankfully, however, the Small Business Administration and others continued to lobby congress to fix this problem. As a result, at the very end of President Obama’s 2nd term in December of 2016, a hodge-podge bill called the 21st Century Cures Act was passed and the Qualified Small Employer Health Reimbursement Arrangement was born.
We’re so jazzed up about QSEHRA that we even wrote a guide for it.
The 21st Century Cures Act was endorsed by both parties and was largely seen as a fix to the unintended consequences of the ACA and a “small business friendly” provision. Similar “defined contribution” structures were included in most major Republican healthcare reform plans. We think this is important for prospective ICHRA users to know—while healthcare reform efforts could pick up again and things could change, the highly bi-partisan nature of support for the 21st Century Cures Act means it’s probably not going away anytime soon.
With QSEHRA still gaining traction, there have been additional directives from the White House to expand accessibility to HRAs. In October 2018, the U.S. Departments of the Treasury, Health and Human Services, and Labor proposed new regulations to expand the usability of health reimbursement arrangements (HRAs). This is the 3rd and final part of President Trump's Executive Order from October 2017 (E.O. 13813) to reform the health system through regulatory changes. You can see the press release, accompanying fact sheet, and proposed rule itself here. In addition to the individual coverage HRA, another type of HRA was created from these proposed rules called an "Excepted Benefit HRA."
The next piece of information we got about Individual Coverage HRAs and Excepted Benefit HRAs was on November 19th when the IRS and Treasury released Notice 2018-88. This notice provides initial guidance and likely safe harbors as well as requests for comments. This information provides us a great glimpse into how these new HRAs may actually function. The next step was submitting our comments, case studies and proprietary research to the HHS, Treasury and IRS so they can finalize these rulings.
We believe the proposed rules, if finalized, present a great opportunity to provide employers additional flexibility to assist employees with health coverage. We have seen first-hand how the HRA approach promotes consumer choice and market competition and we believe these proposed rules will also help return healthy risk to the individual market.
However, we’ve also seen first-hand how some employers that genuinely want to help their employees hit unexpected roadblocks and how others try to game the rules to discriminate unfairly. In response to the call for comments, we shared our experience, data, and case studies with HHS, the IRS, and The Treasury to assist them as they finalize the rules.
As a market leader in HRA solutions and an advocate for small businesses and startups alike, we are excited to see HRAs gain more traction.
As a market leader in HRA solutions and an advocate for small businesses and startups alike, we are excited to see HRAs gain more traction through the recent executive order from President Trump directing the HHS, IRS and Treasury to identify ways to give HRAS more flexibility and accessibility in the market.
With bipartisan support, most folks are on the same page about liberating these tax-advantaged tools. There’s no one opposing the idea of giving small businesses an affordable, flexible solution to offer personalized health benefits to their staff.
That’s why we are confident in the future of HRAs as long-term benefit solutions.
Key benefits: Is ICHRA better than a group plan?
The simple answer is yes!
Is ICHRA right for you or your client? Maybe.
At a high-level, ICHRA is 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, but here’s why you or your client should consider an ICHRA over a group plan:
ICHRA key benefits (vs. employer-based plan)
- Transfer of Risk
- Personalized Plan Choice
- Greater Tax Efficiency
- Simple and Flexible Design Options
- Budget Control
Transfer of risk
Do you or your clients want to play in the insurance risk management game? For any client that is over 50 employees, 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 is the way to go. You can still offer generous benefits (or not generous, up to you) and your costs are fixed because you have no risk to manage.
Let’s repeat that—ICHRA allows employers to “get out” of the insurance risk game.
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.
In contrast, ICHRA is much more personalized 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 his spouse, he can stay on that plan and use the reimbursements to help with medical bills.
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.
Pro-Tip: Wondering about the individual market in your area? There are often more ICHRA-compatible options than what you can find on Healthcare.gov or your state exchange. Our enrollment software can help each employee optimize for his or her needs. This ensures your dollars are being spent efficiently and that your employees are buying plans they are happy with.
Greater tax efficiency
Traditional group plan premiums can often be deducted from an employees’ payroll tax-free. ICHRA allows tax-free reimbursements for premiums and qualified medical expenses (if allowed by the ICHRA plan design). To do that with a traditional group plan, you’d have to add an HSA or a traditional HRA which adds all sorts of complexity.
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. You and your clients are forced to guess on plan designs that’ll keep employees happy and fit the budget.
Unlike a group plan, there's no minimum or maximum contributions required or cumbersome participation rates to maintain.
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. ICHRA’s biggest selling point is that it has nine different proposed 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.
Finally, unlike a group plan, there’s no minimum or maximum contributions required or cumbersome participation rates to maintain.
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 just keeps the money.
ICHRA will be used to reimburse for premiums and qualified medical expenses, just like a QSEHRA. You can find the full list of qualified medical expenses here.
Classes & affordability
ICHRA classes and how they work
One of the biggest advantages and differentiators for ICHRA is the increased number of classes that are proposed. To help employers prioritize their health benefits budget, employee classes separate employees into groups by legitimate job-based criteria like tenure, hours worked, job title, or location.
ICHRA gives employers more freedom to design a plan that best suits their needs.
More classes mean more flexibility and affordability for the employer, letting a company focus their health benefit dollars on the employees that matter most.
Here’s how the proposed classes break down:
|Full-Time Employees||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 Employees||This can be defined as either less than 30 or less than 40 hours a week.|
|Seasonal Employees||This one is what it sounds like. Employees are hired on a short-term basis or a season.|
|Employees covered by a collective bargaining agreement||This signifies a written agreement between an employer, employee, and their trade union on the basis on employment, pay rate, work hours, and other working conditions.|
|Employees who have not satisfied a waiting period||This is pretty standard practice when new employees come on board. Businesses can choose up to 90 days before an employee’s health benefits kick in.|
|Employees who live in a different rating area than primary site of employment||In other words, if an employee works remotely and their actual address is different from the primary business location, they can be separated into a different class than their counterparts who work in the same geography as the company, based on insurance rating areas.|
|Non-Resident aliens with no US-based income||These include employees who work outside of the country.|
|Salaried Employees||Employees who receive a salary as wages.|
|Such as hourly workers.|
|Of staffing firms|
|Custom Classes||Combine two or more of the above to create a new class, like remote, part-time employees. ICHRA gives employers more freedom to design a plan that suits their needs best.|
Is your business concerned about hiring and retaining full-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, seasonal, and employees under age 25.
Do you have employees working in more than one state?
Instead of trying to find a group plan that works in multiple states, offer an ICHRA and employees can purchase a plan that fits their needs best. Since insurance rates vary by state, 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 segment by marital status if they wish.
Do you want to offer a group health plan and ICHRA together?
No problem! ICHRA can be combined with group plans. There are several great ways you can do this:
|Example A||Full-Time Employees||Part-Time Employees|
|Example B||Local Employees||Remote Employees|
|Example C||Members Collective Bargaining Unit||Non-Members|
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 will also feature a new hire rule which will allow employers to offer new employees an Inidvidual Coverage HRA while grandfathering existing employees in a traditional group health plan.
Take Command Health’s design consultants can help you strategize a plan that fits your budget and needs best.
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.
One of the biggest points of confusion (and opportunity!) for this new HRA is the issue of affordability as it relates to premium tax credits and satisfying the employer mandate. The main takeaway is that ICHRA satisfies the mandate if it is affordable. If it’s not affordable, the employee can opt out and receive premium tax credits instead. It’s still up in the air on what affordability means. Check back soon for details!
There are also some built-in safe harbors to help the ICHRA be more practical and less administratively burdensome for large employers. These include:
|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!|
How to set up an ICHRA in 7 steps
We anticipate the administrative aspect of ICHRA to closely follow QSEHRA. Building on what we’ve learned from QSEHRA, our team is currently working on innovative tools to help ICHRA administration be as easy and integrated as possible for our clients.
Setting up an ICHRA will be just as easy as setting up a QSEHRA. A quick application on our website will get you there and our team will be around to help clear up any questions along the way. We always recommend discussing any HRA tools like QSEHRA or ICHRA with your accountant first.
Here are the basic 7 steps it takes to set up an ICHRA:
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 happen 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.
Step 2: Set a cancellation date for your group policy (if applicable)
This step is only for business owners currently offering group health insurance. You will need to cancel the group plan coverage before the start date of the new ICHRA. In order to avoid any gaps in coverage, ensure the group plan ends one day before the ICHRA begins.
Step 3: Decide who will be eligible
One of the best parts about ICHRA is that you can divide employees into nine classes to determine what kind of benefit they receive. These classes include full time, part time, seasonal, employees working abroad, employees in a waiting period, employees under 25, employees working under a collective bargaining agreement, employees working outside the geographical area of the business, or a combination of any of those.
Step 4: 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 even divide each class by family size or age if you so choose. And remember, there’s no minimum or maximum limits on contributions!
Step 5: 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 6: 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. Our team at Take Command Health can help onboard your team for you.
Step 7: 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 Health can provide the best on- and off-market options or even faith-based plans for your employees based on their needs, their budget, their preferred doctors and their prescriptions.
How to design an ICHRA
We’re still waiting on the final ruling for ICHRA, which we expect in the coming months. We will update this guide as more information becomes available.
How to determine which employees are eligible
Let’s talk about what it takes for a company to be eligible to participate in ICHRA and how to determine which employees are eligible, but before we jump in, we want to underscore that there are a lot of things ICHRA doesn’t require. Specifically, things that have been required in the past with a QSEHRA or other form of HRA.
Business size doesn’t matter.
It can be a 5-person startup, a midsized 50-person team, or a 500-person corporation. ICHRA is a scalable benefit for all of these.
The amount doesn’t matter.
There are no contribution caps each year. That means the sky’s the limit for this tax-friendly benefit.
Everyone does NOT have to be treated equally across the board. An employer can choose to treat different classes of employees differently based on the nine divisions of classes proposed in the new law.
Now for requirements for ICHRA. There’s nothing too tricky here but these are important to know when considering an ICHRA for your business or a client’s.
For a company to implement an ICHRA, it would need to meet the following requirements:
- Cannot offer a traditional group plan and ICHRA to same class (does not preclude group dental and vision like QSEHRA)
- ICHRAs can meet the employer mandate for employers with greater than 50 full-time Applicable Large Employers (ALEs) if the offer is “affordable” and meets minimum value (MV)
If your company (or your client’s company) qualifies based on the above criteria, the next step is to determine which employees are eligible to participate.
Employees can participate in an ICHRA if they:
- Maintain health coverage that meets PHS 2711 & 2713 requirements ($0 preventive and no annual or lifetime limits). In other words, they need to meet Minimum Essential Coverage.
That’s it! Just that one thing.
What's next for ICHRA
With new policies on the horizon, change is coming to the world of traditional group health insurance plans. We’ll be the first to say that this is going to be a really, really good thing for anyone hoping to streamline their benefits options and cut costs without reducing value when it comes to health insurance for their employees.
We are pretty fired up about these policy changes that affect HRAs because it gives small and mid-sized businesses a way to afford benefits for their teams, and the new HRA structure has a chance to help return healthy folks to the individual market by eliminating the need for group plans.
The new HRA structure has a chance to help in the return of healthy folks to the individual market by eliminating the need for group plans.
Up until now, QSEHRA has been the HRA option of choice for small businesses, but change is coming. The good kind of change. QSEHRA won’t go away, but there are not one but two new options on the horizon that will benefit small businesses and large corporations alike. We think of ICHRA as a tool to extend the benefits that make QSEHRA great in the first place. The impact of these two new HRAs on the group benefits market means that there will be another great reason to skip the group health plan altogether.
The comments period is over, so that means until the IRS, HHS and Treasury come to an agreement on the details, it will be a waiting game until later in the year. With the proposed regulations coming into effect January 2020, we expect to hear updates soon.
Frequently Asked Questions
What types of businesses will the ICHRA help?
We envision the target businesses to be between 20 and 200 employees who have traditionally offered employer-sponsored plans.
Does the ICHRA allow for more participation from owners like S Corp, etc that haven’t been able to participate in the past?
Once the final ruling for ICHRA comes through, we will update this guide.
What are the requirements for an Individual Coverage HRA?
The proposed rules would require that several conditions be met for the Individual Coverage HRA to work:
- Individual employees (and their dependents) must be covered by a health insurance plan
- The design of the HRA does not intentionally or unintentionally discriminated (to prevent risk shifting
- Employees in the same "employee class" are offered an HRA on the "same terms"
What are the proposed "employee classes?”
• 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
• Employees under age 25
• Non-Resident aliens with no US-based income
• Employees whose primary site of employment is in the same rating area
What can the ICHRA help pay for?
The Individual Coverage HRA is designed to help employees pay for individual health insurance premiums. In addition, it can also help pay for medical expenses provided that the employee has substantiated he or she has health insurance coverage. This is similar to the rules in effect governing QSEHRA.
Is there a minimum or maximum number of employees needed?
No, there are no minimums and no maximums. Employers over 50 full-time employees may have to meet a minimum contribution in order to avoid ACA corporate mandate penalties.
What are the contribution limits?
No limits have been provided and none were suggested in the initial rule. Traditional 105 HRAs are only limited by employee wages and the "fair terms" requirements.
Can large employers offer an Individual Coverage HRA to meet the corporate mandate?
Yes. The IRS is expected to provide calculations and benchmarks to help large employers (ALE) subject to the corporate mandate determine what their minimum HRA contributions will have to be in order to satisfy the mandate.
Can funds be rolled over at the end of the year?
There’s a 90 day run off period into the new year, and after that, the funds expire.
What happens to unused funds?
Any unused funds remain with employer at the end of the year.
Can employees participate in the HRA and receive Premium Tax Credits (PTC)?
No, employees cannot receive both HRA contributions and tax credits (PTC). However, provisions in the proposed rule would allow employees to "opt out" of the HRA permanently for at least a year, in which case employees would be eligible for tax credits.
Can an Individual Coverage HRA work with other types of HRAs?
Because an Individual Coverage HRA requires no group health plan be offered to the same class of employees, we know it will not work with the new Excepted Benefits HRA or with traditional Section 105 HRAs integrated with a group health plan. It may be able to work with QSEHRA but the benefits would likely be redundant.
However, the proposed rules do allow employers to offer different benefit solutions to different classes of employees (assuming the classes are defined in a fair manner). An employer could offer an Individual Coverage HRA to one class (say, part-time employees) and a QSEHRA to full-time employees.
When will we learn more about the final rules?
Comments for the proposed rules as well as the IRS and Treasury guidance were due on December 28, 2018. We will likely see the final rule and guidance issued a few months into 2019.
When can I set up an Individual Coverage HRA?
The proposed rules recommend that these new HRAs become effective January 1st, 2020. That means starting in Q4 2019, you can start setting these up for your firm or client for 2020. We expect the set up process and administrative process to be very similar to QSEHRA. We will be working around the clock to help you get yours set up!
Can an employee on a spouse’s plan benefit from ICHRA?
Once the final ruling for ICHRA comes through, we will update this guide.
How can I learn more about ICHRA?
We are hosting a series of upcoming webinars on this subject with our team of small business HRA experts. Click the button below to be notified when the next one will take place. Alternatively, our team is online every day fielding questions from professionals just like you. Just click the chat icon in the lower righthand corner.