It’s no secret that providing traditional group health benefits to employees can be complicated and costly. Health Reimbursement Arrangements (HRAs) have helped to address the situation and control costs; however, when the Affordable Care Act (ACA) became law in 2010, the ability for businesses to offer HRAs to employees for individual policies became limited. The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) came later in 2016 but still has its roadblocks by only allowing businesses with less than 50 employees to qualify and limiting how much employers can reimburse employees each year.
In the summer of 2019, an Executive Order was released to offer more flexibility and budget control for businesses and organizations of all sizes through the Individual Coverage Health Reimbursement Arrangement (ICHRA), an HRA option first offered on January 1, 2020.
What is an ICHRA?
As briefly mentioned above, an ICHRA is an ACA-compliant federal ruling that allows companies to reimburse employees for their individual health insurance through a monthly, tax-free allowance.
With ICHRAs, you can choose how to distribute your funds, whether on an individual basis or based on various classes (i.e., full-time, part-time, and seasonal employees, geographical location, etc.).
Any business, non-profit, organization, etc., with at least one W-2 employee that does not already offer a QSEHRA or an Excepted Benefit Health Reimbursement Arrangement (EBHRA) can offer an ICHRA to their employees.
Employers cannot offer both an ICHRA and a QSEHRA because the former is considered a group health plan, and thus, is not compatible with the latter. An ICHRA and an Excepted Benefit Health Reimbursement Arrangement (EBHRA) can both be offered by the same employer, but not to the same class of employees. This is because EBHRAs must be offered with a traditional group plan.
Unlike the QSEHRA contribution limitations, the ICHRA offers businesses the flexibility to choose how much they contribute to individual monthly premiums and out-of-pocket medical costs for each 12-month plan year. There is neither a minimum nor maximum annual contribution requirement you have to meet with this type of HRA nor a minimum participation requirement.
How does ICHRA work?
Under an ICHRA plan, employers determine each employee’s or class’ reimbursement allowance. Employees then opt to purchase an individual health plan of their choice (ICHRAs can also reimburse Medicare plans, either Part A and B or Part C) and pay for their own insurance premiums and medical expenses.
Employees can submit claims for their medical costs like copays and deductibles for employer reimbursement up to their allowance amount. Employers only pay funds after they have approved an employee’s reimbursement claim, and all reimbursements are payroll and income-tax-free. Unused allowances accrue from month to month; however, any unused funds at the end of the year are kept by your company or organization. You have the option to carry over those funds or reset them annually.
To best strategize contributions and group health benefits overall, employers can offer different classes of employees different group health plan options. For example, an employer can offer ICHRA to full-time employees and a traditional HRA to part-time employees, but no one employee or class of employee can receive both plan options.
There are several benefits of incorporating ICHRA plans into your overall group benefits package for both employers and employees.
ICHRA Benefits for Employers
- Great for All Company Sizes: Unlike the QSEHRA, an ICHRA is not limited to companies with 50 or fewer employees.
- Cost Savings: With an ICHRA in place, you don’t have to provide a traditional healthcare plan.
- Control of Costs: Employers pre-define their allowance budgets for each employee or class of employees.
- Flexible Plan Options: Design and strategize your health plan with no minimum contribution requirements or participation requirements.
- Tax Benefits: All reimbursements given to employees are tax-free and are 100% deductible as a business expense.
- Attract & Retain Top Talent: By offering more flexible health coverage options and reimbursements, your company can attract and retain high-quality candidates.
- ACA Compliance: These plans meet ACA requirements such as minimum essential coverage, affordability, and minimum value.
ICHRA Benefits for Employees
- Cost savings: Reimbursements from employers help make individual health plans more affordable for employees.
- Tax Benefits: Health insurance premiums under an ICHRA are tax-free.
- Flexible Plan Options: Employees have the freedom to select an individual health insurance policy that best suits their needs.
- Transferrable Plans: Because the individual purchases his/her own plan, they can take the health plan with them if they change careers.
- Quick & Easy Reimbursements: The process to submit a claim and receive reimbursement for eligible medical expenses is quick and easy.
Offering the right group benefits is essential to attracting and retaining top talent. But our team at Morin Associates LLC also knows you want to offer group health benefits in a cost-effective and efficient way. Give our local Groton agents a call to discuss whether an ICHRA is right for your company or organization.