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What is ICHRA? Guide for Employers – ICHRA 101

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What is ICHRA?

ICHRA is an acronym that stands for Individual Coverage Health Reimbursement Arrangement. It is a formal group health plan that allows businesses of all sizes to reimburse their employees for healthcare expenses and health insurance premiums. The reimbursement is in the form of a tax-free monthly allowance. ICHRA has been available for businesses of all sizes since 2020. Employees can use their ICHRA reimbursement to buy healthcare services that suit their unique coverage needs while ensuring compliance with ACA (the Affordable Care Act).

Besides businesses, ICHRAs are available for nonprofit organizations, churches, and other employers. Companies are using the ICHRA as a marketing tool to attract top talent to fill positions in their staff. An ICHRA serves as a stand-alone benefit or as a part of your business’s health benefit in addition to your standard group insurance. In this way, you can provide maximum healthcare coverage to your employees.

How does an ICHRA work?

ICHRA is a modification of another type of HRA plan, called a QSEHRA (Qualified Small Employer Health Reimbursement Arrangement), which started in 2017. Both ICHRA and QSEHRA provide a tax-free allowance for employees to help with their healthcare payments. However, ICHRA is more like a “super-charged or next-generation” version of QSEHRA as it comes with higher limits and greater flexibility appealing to more employees.

An ICHRA works through a straightforward process:

  • Employers have the freedom to design their own ICHRA plans. They are allowed to determine the eligibility criteria for their employees and establish reimbursement limits.
  • Employees buy the individual plans that best suit their coverage needs and pay their premiums or other healthcare costs.
  • Employees then submit reimbursement claims.
  • Employers process these claims and reimburse their employees for qualifying healthcare expenses.

It is important to note that all ICHRA payments you make are on a pre-tax basis, which means payroll or income tax payment is not required.

Once the employer has set the monthly reimbursement limits and designed the reimbursement structure, the next step is to notify the employees about this new benefit. Employers should make sure that the employees completely understand how to get benefits from the ICHRA plan.

Employees can purchase any individual health insurance plan that meets their needs, whether it is from health insurance suppliers or through the Marketplace via open enrollment. To get reimbursed, employees must submit receipts for qualified medical and healthcare expenses.

Advantages of an ICHRA

The following are seven significant advantages of an ICHRA:

Empowers employees to choose their own Health Insurance plan

With an ICHRA in place, each employee has the freedom to shop for their preferred health insurance policy coverage with the network, doctors, and health insurance premiums that suit them. Employees can buy their health insurance coverage through a broker, an online insurance agency, or a supplier. If an employee has a qualifying individual health insurance plan before the ICHRA starts, they are allowed to keep their existing policy.

Highly customizable

An ICHRA may be customized in several ways to meet the healthcare needs of your employees. You can divide your employees into classes depending on their coverage needs, job-based criteria, age, and family status. It helps meet your employees’ coverage needs more efficiently. Employees can add other benefits to their health insurance plans, like vision or dental insurance. They are entitled to be reimbursed for all healthcare expenses qualified for ICHRA.

Tax Advantage

As we mentioned earlier, reimbursements in an ICHRA plan are free of income and payroll taxes. Therefore, an ICHRA plan provides a tax advantage for both employers and employees.

Flexible limits

Contrary to other HRAs, the ICHRA has no fixed monthly allowance limits. It means you can offer your employees as little to as much as you want. Furthermore, there are no participation or contribution limits for employers to offer an ICHRA to their employees. Employers do not need to have a certain number of employees enrolled to offer the ICHRA.

ACA (the Affordable Care Act) Compliance

ICHRA plans are compliant with both mandates of minimum value and affordability. As an employer, an ICHRA plan allows you to subsidize healthcare coverage for your employees while ensuring ACA compliance.

Risk & Cost Control

An ICHRA plan empowers employers to control their healthcare benefit budget and stick to it. It helps employers manage their insurance spending, contributions, and risk in a more efficient way to avoid any potential financial irregularities. With an ICHRA plan, you will not face any surprise group coverage increase year after year.

Plan portability

An ICHRA plan ensures health insurance plan portability for the employees. Employees own their health insurance plan like an asset. They can take it with them when they leave a job and change their employer. Employees can enroll in the ICHRA plan of their new employers with the existing health insurance plan.

Which businesses and companies are eligible for an ICHRA?

Businesses of all sizes with at least one W-2 employee are eligible for an ICHRA. So ICHRAs are available for a wide range of businesses nationwide.

Based on company structure, the following businesses are available for an ICHRA:

  • Nonprofit organizations
  • Government and Municipal entities
  • Private sector companies and businesses
  • Churches
  • Public firms

Only one W-2 employee is required for the basic ICHRA plan. As we mentioned earlier, there is no limit on the number of employees enrolled in an ICHRA plan. An ICHRA plan covers both full-time and part-time employees. It is also available for organizations with temporary or seasonal staff. Sole proprietorships and S-corporations can participate in an ICHRA Plan.

An ICHRA is a great solution for an ALE (Applicable Large Employer) to satisfy the ACA’s employer mandate. You can offer the ICHRA to your employees in the form of a stand-alone benefit to all your employees or a separate benefit to those employees who do not qualify for your group health insurance plan.