Attractive benefits plans are essential in today’s labor market. Smaller businesses in particular often struggle to find affordable group health insurance plans that comply with ACA regulations. Take a look at how an Individual Coverage Health Reimbursement Arrangement, or ICHRA, can help businesses.
What is an ICHRA?
ICHRAs are an attractive option for both employers and their employees. Under an ICHRA, employers reimburse employees for their individual health insurance premiums instead of sponsoring a group health plan. The ICHRA can also cover other IRS-approved expenses, chosen by the employer.
There are two important differences between an ICHRA and a regular HRA. ICHRA funds can pay for individual healthcare insurance premiums (non-group policy) whereas standard HRAs cannot. Also, regular HRAs must be integrated with a group health plan, while ICHRAs work with individual insurance plans – hence the name Individual Coverage HRA.
Businesses of all sizes can offer the benefit as long as employees do not have the ability to choose between a group policy or the ICHRA. These programs may also offer more flexibility in terms of how much an employer may reimburse an employee. And even large employers can use ICHRAs to satisfy ACA insurance mandates, provided the contribution is sufficient to make individual coverage affordable for the employees who choose this option.
How does an ICHRA work?
With an ICHRA, the employer funds the account. Contributions can be made weekly, monthly, quarterly, semi-annually, or some other time frame arrangement, depending on the plan design. The employer determines how much to contribute, and there are no minimum or maximum limits. ICHRA participants can then use these funds to pay for premiums, along with IRS-approved healthcare products and services, if the employer has designed the plan to allow for this.
Employees pay for the expenses out-of-pocket first and then submit a claim. The claim paperwork should include receipts or other documentation to verify the purchase. Once the expense is approved, the employee is reimbursed. ICHRA reimbursements do not count toward an employee’s taxable income.
Who is eligible for an Individual Coverage HRA?
Employees must have coverage through an individual health insurance policy to participate in an ICHRA. This can include on- or off-exchange coverage, Medicare Parts A and B, or Medicare Part C. Participation in a group health insurance plan automatically disqualifies anyone from eligibility for an ICHRA.
Employees can be the primary policyholder of the individual insurance plan, or they can have coverage under an individual policy held by another family member. Family members also qualify under the employee’s ICHRA if they meet two conditions. First, they must meet the same criteria as the employee. Second, the employer must extend eligibility to spouses and dependents as well.
What ICHRA healthcare expenses are IRS-approved?
There is a broad scope of healthcare products and services that qualify as tax-free expenses. However, it is important to know that the employer can decide which expenses are qualified. Eligible expenses can include:
- Doctor visits, hospital services, vision and dental, chiropractic and other types of services
- Medicare Parts A (if you aren’t covered by Social Security), B, and D premiums
- Long-term care payments
- Nursing services
- Alcoholism and drug addiction treatment
- A wide array of healthcare products such as crutches, eyeglasses, hearing aids, and much more
Refer to IRS Publication 502 for a full list of eligible expenses. If you have questions about expenses, be sure to contact your benefits administrator.
ICHRA Rules in Summary
As with all tax-advantaged health plans, ICHRAs have a number of strict guidelines:
- Only the employer can contribute to an ICHRA
- ICHRAs can be used to reimburse for individual health insurance premiums and for IRS-approved healthcare products and services selected by the employer
- ICHRA reimbursements for eligible premium and health expenses are tax-free to the employee
- Any ICHRA funds spent for non-approved purchases must be reported as taxable income to the employee
- Employers can vary contributions within the same class of employees based on age or family size
- Employers can contribute different amounts to different employee groups, such as full-time, part-time, seasonal, salaried, and hourly employees
- Companies can offer group insurance to some classes of employees and ICHRAs to other classes of employees that do not participate in the group plan
- Businesses that offer ICHRA can’t offer a Qualified Small Employer HRA (QSEHRA) or Excepted Benefits HRA (EBHRA) at the same time
- If an employee loses their individual health coverage, they are no longer eligible for the ICHRA
Another important ICHRA rule involves premium tax credit restrictions. If the employee has an Individual Coverage HRA, they are not eligible for any premium tax credits. However, the employee can decline to participate in an ICHRA if the amount being offered is not sufficient to purchase individual coverage sufficient to meet the employee’s needs.
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