Individual coverage health reimbursement arrangement (ICHRA)

Conventional business practice is to offer health benefits only to full-time employees. Adding part-time or seasonal workers to traditional group health plans is often cost-prohibitive. But there is a relatively new option that allows employers to extend benefits to more types of employees, helping attract and retain talent in the process without overextending budgets. It’s called an individual coverage health reimbursement arrangement (ICHRA).

What is an ICHRA plan?

Employers offering an ICHRA reimburse employees with pretax dollars to cover the cost of individual health insurance premiums and qualified medical expenses. ICHRAs first became available in 2020, preceded by qualified small employer HRAs in 2017. Until then, the Affordable Care Act (ACA) prohibited employers from reimbursing employees for individual market premiums.

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How does an ICHRA work?

1. Employers determine how much they will reimburse employees via an ICHRA health insurance plan. The same terms must apply to all workers within a given class, though reimbursements may be increased for older employees and those with more dependents. Unlike a QSEHRA, there is no yearly reimbursement limit.
2. Employers issue a notice annually and at least 90 days before the effective date of coverage through an ICHRA. Among other topics, it must describe the interaction of the ICHRA with the premium tax credit. A model notice is available for this purpose.
3. Employees purchase individual health insurance directly from a provider or through the ACA exchange. They may also enroll in Medicare if eligible. Employers may ask employees to certify that they and any eligible dependents have individual coverage each time they request reimbursement.
4. If the ICHRA does not cover the entire cost of the individual coverage premium, employees may agree to pretax salary reductions via a cafeteria plan to make up the difference. This rule applies only to insurance plans purchased outside the ACA exchange.
5. At least once per year, participants eligible for insurance coverage under an ICHRA must be permitted to opt out of and waive future reimbursements for themselves and their dependents.

Who can offer an ICHRA?

Businesses of all sizes may offer an ICHRA. For applicable large employers (ALEs), an ICHRA may satisfy the ACA employer mandate if the reimbursements are large enough to make individual coverage affordable for employees.

Who can participate in an ICHRA?

Only employees not offered a group health insurance plan may participate in an ICHRA. That is not to say, however, that an employer can’t sponsor a cafeteria plan and an ICHRA. They just can’t offer both to the same class of employees. For example, all full-time employees may be eligible for group health coverage, and all part-time employees may be eligible for an ICHRA.

ICHRA pros and cons

What are the benefits of an ICHRA?

Benefits can help businesses attract new talent and retain top employees, but group health insurance may be too expensive for some. An ICHRA is often a more affordable option because employers can dictate how much they’re willing to spend on employee reimbursements. This flexibility is best for employers who don’t already offer health care insurance due to cost and those who want to expand benefits to more of their workforce in an economical way.

Potential disadvantages of ICHRA plans

Employees who receive an ICHRA offer from their employer and purchase their health insurance through the Marketplace may become ineligible for the premium tax credit. To maintain eligibility, they must fulfill two specific criteria:

1. The employer’s ICHRA offer does not meet affordability standards
2. The employee rejects or opts out of the ICHRA

Frequently asked questions about ICHRA

What is considered an eligible expense for an ICHRA?

With an ICHRA, employers may reimburse employees for only health insurance premiums or for both premiums and qualified medical expenses. Such expenses include the costs to diagnose, treat and prevent disease, as well as the equipment and supplies needed for those purposes. A full definition of qualified medical expenses is available in IRS publication 502.

What's the difference between an ICHRA and other types of HRAs (ICHRA vs. QSEHRA)?

Compared to other HRAs, ICHRAs are more flexible because employers can choose how much they’re willing to reimburse, and there’s no reimbursement maximum. ICHRAs are also available to organizations of all sizes, unlike QSEHRAs, which are limited to employers with less than 50 employees.

Is an ICHRA allowance considered income?

Reimbursements that employees receive through an ICHRA are generally not subject to income tax or Federal Insurance Contribution Act (FICA) taxes.

How do I know if my employees' health coverage is ICHRA-qualified?

Subtract the monthly amount reimbursed to the employee from the monthly premium for the lowest-cost Silver plan for self-only coverage in the employee’s area. If the result exceeds 9.12% of 1/12 of the employee’s household income for the tax year, the ICHRA does not meet ACA affordability standards.

What alternatives to ICHRA are available to employers?

Depending on the size of their company, employers may offer a traditional HRA or a QSEHRA. They may also sponsor group health insurance, though they may not allow employees to choose between a cafeteria plan and an ICHRA.

This article is intended to be used as a starting point in analyzing ICHRA and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.