Attractive benefits plans are essential in today’s labor market. Smaller businesses often struggle to find affordable group health insurance plans that comply with ACA regulations. Let’s look at how an Individual Coverage Health Reimbursement Arrangement, or ICHRA, can offer big benefits for all businesses.
What is an ICHRA?
ICHRAs are an attractive option for both employers and employees. Under an ICHRA, employers reimburse employees for 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 crucial differences between an ICHRA and a regular HRA. First, ICHRA funds can pay for individual healthcare insurance premiums (non-group policy), whereas standard HRAs cannot. Also, regular HRAs supplement group health plans, 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 cannot choose between a group policy or the ICHRA. These programs may also provide more flexibility regarding how much an employer may reimburse an employee. Large employers can also use ICHRAs to satisfy ACA insurance mandates, provided contributions are 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. Depending on the plan design, employers contribute funds weekly, monthly, quarterly, semi-annually, or some other time frame arrangement. 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 their premiums, as well as IRS-approved healthcare products and services if the employer has designed the plan to allow for this.
Employees pay for qualified 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 employer reimburses the employee. 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. Eligible plans 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 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?
A broad scope of healthcare products and services qualify as tax-free expenses. However, knowing that the employer can decide which expenses are permitted is essential. 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 complete list of eligible expenses. If you have questions about expenses, contact your benefits administrator.
ICHRA Rules in Summary
ICHRAs big benefits come with some strict guidelines:
- Only the employer can contribute to an ICHRA.
- ICHRAs can be used to reimburse individual health insurance premiums and IRS-approved healthcare products and services selected by the employer.
- ICHRA reimbursements for eligible premiums and health expenses are tax-free to the employee.
- Any ICHRA funds spent for non-eligible purchases become taxable income to the employee. Be sure to include them in your annual tax return calculations.
- 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 health 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 provide a Qualified Small Employer HRA (QSEHRA) or Excepted Benefits HRA (EBHRA) simultaneously.
- 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 offered is insufficient to purchase individual coverage to meet the employee’s needs.
DataPath Administrative Services has been serving Arkansas businesses with comprehensive, professional, compliant benefits administration since 1996.