Since January 1, 2020, employers have been able to offer their employees an alternative to traditional group health plans: an Individual Coverage Health Reimbursement Arrangement (ICHRA).
Some employers are bringing ICHRA plans on board to save costs and to take advantage of tax benefits. For employees accustomed to typical health insurance procedures and rules, the benefits may not be immediately apparent.
ICHRA plans center on qualified medical expense reimbursements. Employers might refer to these plans as "Health Reimbursement Arrangements," "Health Reimbursement Accounts," or by another similar name.
Employers can choose to offer reimbursement for:
Individual health coverage premiums
Qualified medical expenses
Both premiums and qualified medical expenses
Reimbursement payments are free from payroll and income tax.
ICHRA accounts are supplemental to individual health insurance coverage or Medicare Part A (hospital coverage), Part B (medical insurance), or Part C (Medicare Advantage). Part D Medicare Supplement plans are not eligible. To take advantage of an ICHRA, employees must enroll in one of these health insurance options.
If an employee is enrolled in a group health plan through another entity or covered by a spouse or partner's group health plan, they are not eligible for an ICHRA. These plans can only reimburse individual medical care expenses.
Employees can enroll in an individual health insurance plan through the federal government Marketplace (healthcare.gov) or by applying directly with a commercial health insurance provider. Enrollees are restricted to a specific enrollment time frame each year, typically a few weeks in the fall, unless they have experienced a Qualifying Life Event, allowing them to enroll outside this period.
For more, read our guide to Health Insurance enrollment
Short-term plans or other limited plans that are not ACA-compliant — those that do not meet the minimum requirements outlined in the 2010 Affordable Care Act legislation — are not eligible to be used with an ICHRA.
Each company offering an ICHRA program can decide how to set up its reimbursement process.
Generally, the cycle includes these steps:
The company sets a maximum reimbursement limit per employee and communicates the limit with participants.
Employees incur medical expenses like health insurance premiums, deductibles, and other out-of-pocket costs.
Employees submit reimbursement requests along with verification that qualifies their purchases as HRA-compliant. For example, employees might submit receipts or a financial statement from their health insurance policy.
Employers review employee documentation and approve HRA-qualified expenses up to the monthly allowable reimbursement allowance.
The company reimburses employees by check, direct deposit, or via a debit card issued by a third party ICHRA administrator.
Some companies streamline the process further by adopting more automation or through a self-service portal.
For many companies, the primary advantage of offering an ICHRA instead of a group health plan is cost. By shifting some healthcare cost burdens to employees, employers can significantly reduce overall costs. Considering the 2019 average annual cost of over $20,000 per family plan and an average employer contribution of 71 percent, it's no wonder employers are looking for cost savings.
ICHRA funds are tax-free for both employers and employees. No payroll tax comes out of reimbursements on either side. Other employer advantages of ICHRA plans include:
No size restrictions; companies of any size can offer ICHRA plans
No minimum participation requirements, unlike traditional group health insurance restrictions
Flexibility in allowance settings; can be changed throughout the year if needed
No maximum contribution or reimbursement limits
Ability to set different allowances for different employees, for example, by family size
Streamlined administration versus following group health insurance requirements and procedures
Employee choice opens up to Marketplace options instead of being restricted to whatever their employer offers
Employees can choose between enrolling in an ICHRA or applying their premiums to their annual taxes
The US Department of Labor has issued several publications aimed at helping employers set up ICHRA programs. Employers can find these publications on the agency's website.
The Employee Benefits Security Administration is a useful resource for understanding how ICHRA plans work with Medicare and Medicaid.
When setting up an ICHRA plan, employers will need to evaluate several overarching guidelines:
Employers cannot allow employees to choose between an ICHRA or a group health plan. These plans are well-suited for employers who do not offer group health benefits or for employees who are not eligible for employer-sponsored group health plans for a variety of reasons.
While ICHRA plans offer employers a good deal of flexibility in allowance setting, there are some restrictions to keep in mind. ICHRA plans must provide coverage on the same terms to every enrollee within a "permitted class." Classifications could include groups like full- and part-time employees, salaried or non-salaried workers, employees working in the same geographical area, seasonal employees, and many others.
Employers of any size can offer ICHRA. However, they must meet minimum group sizes for each permitted class designation. Every permitted class must be comprised of at least ten employees if the employer has fewer than 100 employees. Employers with more than 100 workers must include at least 10 percent of the total number of employees in each class.
Employers cannot use ICHRA funds to reimburse all medical expenses. IRS Publication 502 lists eligible and ineligible expenses. Employers may want to use a third-party administrator to make eligibility determinations so that the privacy of sensitive employee health data is protected.
Whether you are an employee evaluating whether you should sign up for an ICHRA or an employer considering offering this benefit, this is a good time to take stock of how you are handling medical expenses.
ICHRA plans hold significant financial benefits for many employees, but others may find that they could save more money by declining an invitation to participation. Tax complexities, in particular, can vary widely by individual.
These same tenets hold for employers. Offering ICHRA plans might provide potential cost savings, but in some circumstances, a group health plan may make more sense. The permitted class rules, for example, may present complications that make these plans less appealing for some employers.
When in doubt, both employees and employers should consider reaching out to a trusted financial advisor or insurance expert to evaluate all options. To review health insurance options, you can start a quote with PolicyScout today.