WHAT IS AN ICHRA?
ICHRA is short for Individual Coverage Health Reimbursement Arrangement. ICHRAs allow employers to reimburse employees a fixed amount of money each month for health insurance premiums and healthcare expenses. These arrangements are an alternative way of providing quality health insurance benefits to employees with the same tax benefits of a traditional group plan.
WHO CAN OFFER AN ICHRA AND WHO CAN PARTICIPATE?
Employers of any size may offer an ICHRA to any eligible employee.
WHAT MAKES AN ICHRA DIFFERENT?
When using an ICHRA, employers simply determine how much they want to contribute towards healthcare benefits and employees select their own insurance company and plan. Plan rates are community rated and not subject to underwriting, claims experience, or health conditions.
ADVANTAGES OF AN ICHRA
Many employers and employees realize immediate, often significant, cost savings when transitioning to an ICHRA. Because employees are free to choose their own insurance company and plan, employers don’t have to choose between reducing benefits or increasing employee costs to keep budgets intact.
When offering an ICHRA, employers must do the following:
- have an ICHRA plan document prepared and made available to employees,
- provide employees notice of the ICHRA plan prior to the initial effective date,
- give employees the option to “opt out” of the plan with notice, and
- have a section 125 plan in place that allows employee contributions to be deducted pre-tax.
To receive benefits under an ICHRA, employees must:
- purchase a qualified plan, and
- submit proof of expense when requesting reimbursement of a qualified expense.
HEALTH PLANS THAT QUALIFY FOR ICHRA REIMBURSEMENT
In most states, there are several dozen unique plan designs available to employees, including HSA-eligible and traditional Co-Pay plans, that qualify for ICHRA reimbursement. In addition, Medicare Parts A, B, C, and D, and Medicare Supplements also qualify unless specifically excluded in the plan document.
OUT-OF-POCKET EXPENSES THAT QUALIFY FOR ICHRA REIMBURSEMENT
Out-of-pocket medical, dental, and vision expenses (defined by IRS Code §213(d))—including co-pays, deductibles, and co-insurance—qualify for reimbursement at the discretion of the employer.
Employers may pay insurance companies on behalf of each employee and payroll deduct the employee contribution in a traditional “group plan” format. Alternatively, employers may require employees to pay the entire premium and submit a reimbursement request for the employer contribution.
FSA AND HSA COMPATIBILITY
ICHRAs are compatible with both health care flexible spending accounts (FSAs) and health saving accounts (HSAs).
DETERMINING THE EMPLOYER CONTRIBUTION
Because individual premiums for qualified plans are “age-rated” (i.e., they increase with age), the most equitable approach is to calculate age-specific contributions. This ensures younger and older employees are paying the same on a percentage-of-premium basis.
AFFORDABLE CARE ACT (ACA) AND COBRA COMPLIANCE
ICHRA plans are considered ACA compliant as all qualified plans provide minimum essential coverage and employer contributions can be structured to be affordable.
KEYS TO A SUCCESSFUL TRANSITION
Although the ICHRA plan year resets on January 1, employers can transition to an ICHRA any time during the year. The keys to success are effective employee education, making it easy for employees to find and purchase their plan, and paying premiums on behalf of employees with a payroll deduction process to capture employee contributions.
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Barry Fields has over 30 years of employee benefits experience advising clients in a wide range of industries, professional and industrial, public and private, throughout the United States and worldwide.
Barry specializes in providing full-service benefits consulting to clients including program design, compliance, plan funding, underwriting, wellness programs, employee communications, benefits administration, employee advocacy and the use of effective strategies in benefits management.