How Does an ICHRA Work?
An Individual Coverage Health Reimbursement Arrangement (ICHRA) is a fairly new arrival on the health insurance scene, making its debut in 2020. But we are seeing more interest in these products from our clients, and we have already begun implementing ICHRAs.
First, a little history. The Health Reimbursement Arrangement (HRA) itself has been around since 2001. The ICHRA (ick-rah) is an evolution of another type of HRA, a QESHRA, which arrived on the scene in 2017. While it's a similar product, an ICHRA has no contribution limits and is meant to offer greater flexibility.
What’s an ICHRA?
An ICHRA is an employer-funded, tax-free health benefit that allows employers of any size to subsidize individual health coverage that employees buy on their own. To establish an ICHRA, an employer needs just one W-2 employee. Under an ICHRA, employees are reimbursed for individual health insurance premiums and other medical expenses. By offering an ICHRA, employers are able to define contribution limits and have more flexibility in plan design that fit the unique needs of their employees.
With an ICHRA, employers reimburse employees for individual health insurance premiums and other medical expenses, up to an established amount. Eligible expenses include things like doctor visits, co-pays, prescriptions, medical equipment and dental procedures.
You could think of an ICHRA as a 401(k)-style contribution model compared to a pension plan. The reimbursement model (sometimes called a “defined contribution”) gives employers the ability to control costs and provides employees with more options. This differs from the 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.
The ICHRA plan design is established at the start of a plan year and remains intact for 12 months. The benefit design (specifically the allowance amount) impacts employees’ decisions to opt in or out of the benefit.
How an ICHRA works
Employers offer employees a monthly allowance. Employees then choose and pay for individual coverage and other qualified expenses and are reimbursed up to their allowance amount. All ICHRA reimbursements are free of both employer payroll tax and employee income tax. An ICHRA has no annual allowance or contribution limits. Employers may choose to allow contributions to carry over to the next year or keep unused funds at the end of the year.
The process generally works like this:
- Employer chooses who is eligible to participate.
If an employer offers a group health plan with an ICHRA, employees may set eligibility by employee class, such as full time and part time, salaried, hourly, seasonal, by state or a combination of these.
- Employer sets the allowance.
The employer chooses a monthly, per-employee allowance of tax-free money. There are no minimum or maximum contribution limits. These amounts can be customized based on employee classes, or even by age.
- Employee purchases health care.
Employees can choose the individual health insurance that best fits their needs. If permitted by the employer, employees can also purchase other health care products and services, including dental or vision policies, prescription drugs and eyeglasses.
- Employee must prove they have insurance.
To participate in an ICHRA, employees must have coverage under an individual (not a group) health insurance policy. Enrollment is available at the beginning of the plan year or when an employee is hired. Outside of that, a qualifying life event (losing health coverage, moving, getting married, having a baby or adopting a child, etc.) entitles employees to a 60-day Special Enrollment Period (SEP).
- Employee is reimbursed for eligible expenses.
After incurring an eligible expense, employees submit proof of the expense. Employees must submit these three items:
- A description of the product or service
- Cost of the product or service
- The date the expense was incurred
Invoices or receipts typically satisfy this requirement, but so do other documents such as an Explanation of Benefits from an insurance company. Some expenses require a prescription or doctor’s note to be eligible for reimbursement.
An ICHRA must satisfy certain conditions to be considered integrated with individual health insurance coverage, according to KIG partner Mineral.
- All employees covered by an ICHRA must be enrolled in individual market health coverage. An employee and any dependents must be enrolled in individual market coverage for each month they are covered by an ICHRA. Anyone covered by an ICHRA who loses individual market coverage cannot be reimbursed by the ICHRA for expenses incurred after their coverage has ceased. Any remaining balance in the employee’s ICHRA is forfeited,
- The same class of employees cannot be offered a choice between a traditional group health plan and an ICHRA. Employers cannot offer an ICHRA to a class of employees if they offer a traditional group health plan to the same class of employees.
- Employers offering an ICHRA to a class of employees must offer the arrangement in both the same amount and on the same terms and conditions to all employees within the same class, with specific exceptions.
- Eligible participants and their dependents must be allowed to opt out of and waive future reimbursements from the ICHRA once each plan year and must be provided prior to the first day of the plan year.
- An ICHRA is used to reimburse individual medical premiums, as opposed to a group health plan.
- Employers may offer both an ICHRA and a group health insurance plan, but not to the same class of employees.
- Employers of all sizes may offer an ICHRA.
- The employer sets contribution allowances with no mandated minimum or maximum.
- Employers define the benefit eligibility.
When does it make sense?
Implementing an ICHRA may make sense for large employers seeking more affordable health care options and for small employers that may not be able to afford to provide health care coverage. Some examples:
Large employer: Acme Company is based in Pennsylvania, but it also maintains smaller operations in two other states. Acme provides a group health plan to its employees in Pennsylvania. But the few employees in the other two states find it difficult to obtain group insurance coverage in those areas. So, the company decides to maintain the health plan for its PA-based employees while at the same offering a new ICHRA to its employees in the other two states. As a result, the company can now extend health coverage to all of its employees, regardless of location.
Small employer: A company cannot afford to provide a group health plan to its 10 employees. Instead, it decides to offer an ICHRA to all employees to help defray some of the cost of purchasing individual health insurance from a health exchange.
90-day notice period
According to federal regulations, businesses offering an ICHRA must provide a 90-day notice before each plan year. That means 90 days before the ICHRA's start date, the administrator must notify employees about this newly available benefit and that they are eligible to participate. The 90-day notice must be provided every year that the business chooses to offer the ICHRA.
This rule does not apply if the employer did not previously offer health benefits.
This requirement is different for newly eligible employees. This includes newly hired employees or those who become eligible after the beginning of the plan year. An employee may provide the notice any time until the first day that the employee's ICHRA coverage begins. (You'll want to provide notice as soon as possible to ensure the employee has time to review their coverage options and select an insurance plan.)
An ICHRA notice must include:
- A description of the terms of the ICHRA
- A statement of the right of the participant to opt out of and waive future reimbursement under the HRA
- A statement on how the ICHRA will affect advance premium tax credit (APTC) eligibility, whether the employee opts out or chooses to accept the benefit
- A statement that the participant must inform any exchange to which they apply for advanced premium tax credit of relevant information
- A statement about how the ICHRA differs from other HRAs
- A statement about the availability of a special enrollment period (SEP) for employees and dependents who gain access to the HRA
- A statement about how the participant can find assistance for determining their individual coverage HRA affordability
- Contact information for the participants to contact with questions regarding their ICHRA
ICHRAs can be a good tool for some, but they are not right for everyone, and there is a lot to consider. If you’d like to learn more or discuss your specific situation, give us a call.