The Individual Coverage Health Reimbursement Arrangement (ICHRA, pronounced “ick-rah”) is a shift in the way health insurance is delivered. For many businesses, an ICHRA will provide a welcome alternative to traditional group health benefits.
ICHRAs represent a modern model of employer-sponsored health insurance. Now employers of any size can use pre-tax dollars to create a group health plan that pays for part or all of an employee’s individual health plan premiums.
Employees are given the opportunity and flexibility to shop for and purchase individual coverage that best fits their unique needs. While employers are able to control their costs of providing health benefits to their employees.
Download the A Guide to Understand ICHRA PDF for more detailed information.
Want to dig deeper into the details? Read the Internal Revenue Service (IRS), the Employee Benefits Security Administration, and the Health and Human Services Department Final Rule here.
What is an ICHRA?
An ICHRA is an employer-funded, tax-advantaged health benefit used to reimburse employees for individual health insurance premiums and other qualified medical expenses.
ICHRAs are centered on a reimbursement model (sometimes referred to as a defined contribution approach). This provides an employer greater cost control and predictability. Plus, employees have more coverage options to choose from, allowing them to select a plan that best suits their needs.
With a defined contribution approach, a health benefit package is designed around a set dollar amount, not around a set of plans – and Trovia, the marketplace for ICHRA, makes it simple.
There are two primary differences between an ICHRA and a traditional HRA:
- An ICHRA can reimburse individual medical insurance premiums, while most traditional HRAs cannot.
- Most traditional HRAs must be “integrated” with a group health plan, whereas an ICHRA works with individual insurance plans.
Going a little deeper, this section explores how ICHRAs function from the point of view of employers and employees.
How does an ICHRA work?
- Decide how to structure eligibility and contributions for employees
- Define the fixed monthly amount to contribute tax free to the ICHRA. The amount:
- Can be as little or as much as you want (minimum or maximum contribution amounts are not required with an ICHRA)
- Represents the maximum amount available to an employee
- Choose what is reimbursable under the ICHRA:
- Insurance premiums only
- Individual insurance premiums for coverage that makes employees ICHRA eligible*
- Other permitted individual insurance premiums (e.g., Medicare Part D, Medigap/Medicare Supplement, dental, vision, etc.)
- Insurance premiums and qualified medical expenses
- All Section 213(d) expenses
- Certain Section 213(d) expenses
- Qualified medical expenses only
- No individual insurance premiums
- Must establish coverage under individual insurance to be ICHRA eligible
- Insurance premiums only
- Determines the frequency (e.g., annually, monthly) and whether the contributions will roll over
- Purchase individual health insurance and must attest to the HRA administrator that they have individual coverage at the beginning of the plan year—after you start offering an ICHRA, or when they are hired—before they can collect reimbursements through an ICHRA.
- Submit proof of the expense for reimbursement (after incurring an eligible expense and attesting to their individual coverage). For an expense to be approved, employees must submit documentation including:
- A description of the product or service
- The cost of the expense
- The date the expense was incurred
Trovia supports these contributions and reimbursements:
- Employer contributions:
- Monthly with no carry over from month to month or year to year
- Amounts not used for that month’s premium expenses are forfeited
- Employee reimbursable expenses:
- Include insurance premiums only
- Payroll deducted on a pre-tax basis, no reimbursement submissions required
All supporting documentation is provided through the Trovia portal.
*Coverage that makes the employee ICHRA eligible is individual insurance coverage that is Minimum Essential Coverage (on or off exchange); Medicare Part A and Part B; or Medicare Part C (Medicare Advantage). To be eligible to participate in the ICHRA, the employee must be covered under one of these categories at all times.
ICHRA Legal Requirements and Guidelines
An ICHRA is a group health plan and is subject to the same general legal requirements that govern traditional group health plans. An ICHRA, like all HRAs, must comply with all of the general Employee Retirement Income Security Act (ERISA) requirements applicable to traditional group health plans, including:
• Reporting requirements (e.g., Form 5500),
• Disclosure requirements (e.g., distributing Summary Plan Descriptions and Summaries of Material Modification), and
• Requirements regarding claims and appeals procedures (unless a specific exemption applies).
An employer adopting an ICHRA, such as the ERISA plan administrator, is responsible for ensuring the ERISA requirements are satisfied and will have ERISA fiduciary duties with respect to operation of the ICHRA. Furthermore, ICHRAs are generally subject to other laws that apply to group health plans, such as COBRA and HIPAA. In most cases ERISA and the other laws apply only to the ICHRA itself and the individual health insurance policies purchased through the ICHRA are not considered to be a group health plan for purposes of these rules.
An ICHRA, like all HRAs, has a number of required processes and guidelines. This section will examine at a high level the following guidelines:
1. Definition of plan design and employee eligibility (employer)
When an employer offers an ICHRA, it must be offered on the same terms to all individuals within a class of employees.
Employers can choose to structure the eligibility and contribution criteria using the 11 employee classes defined by the ICHRA regulations:
- Full-time employees*
- Part-time employees*
- Seasonal employees
- Salaried employees*
- Non-salaried employees (such as hourly)*
- Employees covered by a particular collective bargaining arrangement (different bargaining units can be separate classes)
- Employees who have not satisfied a waiting period
- Temporary employees of staffing firms
- Non-resident aliens with no U.S.-based income
- Employees working in the same insurance rating area* (i.e., the same geographic location such as state or multi-state region)
- Any combination of two or more of the above
*Subject to class size minimums if offered a group health plan
There are a few rules to ensure the offerings do not discriminate, including:
- An ICHRA may be offered to one employee class, such as part-time workers, and group health plans to another, such as full-time employees. However, an employer cannot offer both an ICHRA and a group plan to the same employee class.
- Employers, through a new hire rule, can offer new employees an ICHRA while grandfathering existing employees in a traditional group health plan.
Minimum class size requirements
Should an employer offer a group health plan to a class of employees, class size limitation guidelines must be followed if the employer uses any of the following classes: Full-time employees, part-time employees, salaried employees, non-salaried employees, and employees working in the same rating area. In these cases, classes must be larger than:
- 10 employees, for an employer with fewer than 100 employees
- 10 percent of the total number of employees, for an employer with 100-200 employees
- 20 employees, for an employer with more than 200 employees
Additional noteworthy considerations
- Combination of classes: Minimum class size applies to any combination of classes that include one of the classes listed above, unless it’s a combination with the waiting-period class, in which case there is no restriction.
- Rating area classes: Minimum class sizes only apply to rating areas smaller than a state. For example, if there is one employee in a remote state, the employer could have a class of one without violating the rules. However, if using a narrower rating area design (typically at the “county” level) then minimum class sizes apply.
It is important to note that minimum class sizes only apply when at least one class is being offered a traditional group plan. If an employer is offering multiple ICHRAs to different classes, there are no minimum class size restrictions.
2. Establishment of the contribution allowance (employer)
Employers define the monthly amount they want to contribute tax-free to the ICHRA; it can be as little or as much as they want. This represents the maximum amount for which employees can be reimbursed through the benefit. With an ICHRA, there are no minimum or maximum contribution limits.
Employers choose what they want the ICHRA to reimburse:
- Insurance premiums only
- Insurance premiums and qualified medical expenses*
- Qualified medical expenses only
Trovia allows for reimbursement of premiums only.
An employer may also offer different contribution allowances to employees based on the 11 classes. However, the employer must offer the same amounts to all within an employee class. Contribution allowances offered may be increased based on age or family status, as long as contributions based on age do not exceed amounts three times greater for the oldest employees versus the youngest employees in the class.
*Qualified medical expenses are defined by the IRS in publication 502
Contribution allowance examples
- Provide all employees with the same amount: Give all employees $300 per month
- Vary amounts by full-time and part-time workers: An employer may offer a $300 per month health care contribution allowance to their full-time employees and $100 per month to their part-time employees.
- Vary amounts by employee age: Individual market plans for older people typically cost more, so employers may elect to offer higher contribution allowances to older employees. Contribution allowances must be structured using a 1:3 ratio from the youngest to the oldest employee. An employer, for example, may offer a 24-year-old $100 per month and a 64-year-old $300 per month.
Out of state employees
Offering an ICHRA opens the doors for employers to meet the needs of employees who live across the country. Insurance rates and coverage typically vary by geographic location. With an ICHRA, employers can set classes by insurance rating area, giving employees the opportunity to purchase plans in their local market. In addition, employers can provide different contribution allowances for each state in which their employees live. Employees can keep their local doctor and hospitals and not worry about limited coverage or network issues.
3. Selection and purchase of individual health insurance plan (employee)
An employee falling within one of the designated classes defined by the employer is eligible to participate in the ICHRA. Employees purchase a health insurance policy that best suits their needs. All employees participating in the ICHRA (and any covered dependents) must have individual health insurance coverage, which includes Medicare Parts A and B or Medicare Part C.
Employees must provide proof of such coverage (e.g., by submitting an attestation) on an annual basis. If the employee loses or cancels their individual health insurance, coverage under the ICHRA ends.
An employer may allow ICHRA participants to pay any premiums for the individual health coverage on a pre-tax basis through a Section 125 cafeteria plan, provided the individual’s health insurance plan policy has not been purchased on a federal or a state-based health insurance exchange. Trovia is designed to support this model.
4. Premium reimbursement (employee)
After incurring an expense, employees submit proof of the expense to their employer for approval. To be approved, the documentation submitted must include the following items:
- A description of the product or service,
- The cost of the expense, and
- The date the expense incurred.
Invoices and receipts typically satisfy the requirements, as well as other documents such as an explanation of benefits from the insurance carrier.
Before an employee can receive a reimbursement from the ICHRA, they must show proof that the person who incurred the eligible expense (i.e. the employee and/or a covered dependent) continues to have the required health insurance coverage.
Generally, all items listed in the IRS Publication 502 are eligible for reimbursement through an ICHRA. Employers have the option to limit this list and some employers may even opt to only cover individual health insurance premiums.
With an ICHRA, all reimbursements are tax-free, including premiums.
Trovia’s reimbursement process is simple! Trovia supports these contributions and reimbursements:
Gathering receipts and filling out reimbursement forms is not necessary. With Trovia:
• The employer defines the monthly contribution allowance that will be available to each employee class
• The allowance amount will be applied directly to the monthly insurance premiums of the plan selected by each individual employee
• Any remaining premium balance due is taken care of via employee pre-tax payroll deduction
Trovia takes care of directing premium payments to each individual insurance carrier.
5. Approval and reimbursement of claims (employer)
The employer must approve the employee’s request and reimburse them up to the monthly contribution allowance. The expense is eligible for reimbursement if the documentation provided by the employee meets the requirements and they have the appropriate insurance coverage. Should the expense not qualify, the employer must follow the procedure for denied claims according to its ICHRA plan documents. Typically, employers include the tax-free reimbursements in the employee’s paycheck.
This section examines some of the unique aspects to ICHRAs and the ACA laws.
Affordability Rules and Premium Tax Credit Eligibility
Under the Affordable Care Act, employers with more than 50 full-time equivalent employees must offer health insurance to their employees (known as the “employer mandate”). Within this mandate, there are two requirements:
- The health insurance is offered to substantially all full-time employees (95% or more), and
- The offering must be affordable.
An ICHRA is considered affordable for an employee if the monthly premium for the lowest-cost silver plan for self-coverage only (on the exchange in the employee’s primary site of employment), minus the monthly amount made available to the employee under the ICHRA (not including any increased amount made available under the ICHRA based on the number of covered dependents), is less than 9.83% of 1/12 of the employee’s annual household income. The percentage rate applies in 2021 and is indexed yearly.
An individual may pay more than 9.83% of their household income on premiums if they enroll in the exchange coverage with a spouse or other household member. Note that affordability is determined only by the amount paid by the individual for self-only coverage.
The employer can use certain safe harbors to determine annual household income. The IRS has proposed the following safe harbors:
- W-2 Wages – For salaried employees, employers can assume the employee’s household income is equal to what the employer reports annually in Box 1 of their W-2 form
- Rate of Pay – For hourly employees, employers can multiply the hourly rate by 130 hours to estimate a monthly income (regardless of how many hours the employee actually works)
- Federal Poverty Line (FPL) – Employers can assume an employee’s income to be equal to the federal poverty level. (learn more about FPL)
In 2021, Green Garden Nursery is offering an ICHRA and set a contribution allowance of $350 to all of its employees.
Mary has an annual household income of $50,000. The lowest-cost silver plan in her area is $600. The affordability calculation in Mary’s situation is:
$50,000 ÷ 12 x .0983 = $409.58
$600 – $409.58 = $190.42
The lowest allowance that can be considered affordable for Mary is $190.42.
The employer contribution allowance must be equal to or greater than $190.42 to be considered affordable. The employer’s contribution is set at $350, which is above the affordability limit. Mary will pay any difference for the coverage she selects.
Jack has a household income of $35,000. The lowest-cost silver plan in his area is $650. The affordability calculation in Jack’s situation is:
$35,000 ÷ 12 x .0983 = $286.70
$650 – 286.70 = $363.30
The lowest allowance that can be considered affordable for Jack is $363.30. The company’s contribution allowance of $350 is below the affordability limit. Jack can opt out of the ICHRA and claim his premium tax credits instead, in which case the company will be assessed a shared responsibility payment by the IRS.
Premium Tax Credits
If an employee is offered an ICHRA, are they still eligible for the premium tax credit?
It depends. Should the ICHRA benefit offered by the employer be deemed unaffordable under the definition laid out by the Affordable Care Act, employees may waive enrollment in the ICHRA and may claim the premium tax credits for use through a federal or state-based health insurance exchange.
If the ICHRA is deemed affordable, employees may not claim premium tax credits for exchange coverage, even by opting out of the ICHRA.
Employees who are otherwise eligible for a premium tax credit may choose to waive access to those credits and participate in the ICHRA. Additionally, if an employee does not opt out of their ICHRA, they will not be eligible for a premium tax credit for exchange coverage, regardless of whether the ICHRA is affordable.
At least once a year, employees must be provided the option to “opt-out” of receiving reimbursements through an ICHRA. In this instance, employees forfeit the ability to claim reimbursements for the year. An employee may decide to do this if the ICHRA is unaffordable and they wish to claim premium tax credits.
Setting up an ICHRA
1. Pick a start date – Many employers think about benefits on a calendar-year basis and align with open enrollment. An ICHRA can be started on any date and will trigger a special enrollment period so employees can easily find plans on the individual market outside of the open enrollment dates. When cancelling an existing group health insurance plan, the ICHRA start date should begin one day after the cancellation takes effect.
2. Design Classes for Eligible Employees – Flexibility in designing the program to better fit the needs of employees is one of the valuable features of an ICHRA. Employers have the ability to split employees into 11 different classes and tailor the specific benefits to be provided to each custom class. Employers can decide to offer an ICHRA:
- To all employees,
- Only to certain classes and not offer a benefit to certain classes, or
- Only to certain classes and offer a traditional group benefit to certain classes.
Special Enrollment Period
Generally, individuals enroll in or change their individual health insurance coverage during annual Open Enrollment which runs from November 1 to December 15. To purchase a plan outside of Open Enrollment, individuals need a qualifying life event (e.g. marriage, divorce, job change, moving, or having a baby) to trigger a Special Enrollment Period.
Now, employers offering an ICHRA will trigger a Special Enrollment Period for employees, providing them 60 days to purchase qualified health insurance coverage. The triggering event is the first date the employee is able to participate in the ICHRA. Employers may set up an ICHRA any time during the year.
3. Determine Budget and Set Contribution Allowance – The next step for the employer is to determine the annual budget and how much they will provide employees on a monthly basis for insurance premiums and medical expense reimbursement, keeping in mind the following:
- There are no minimum or maximum contribution allowance requirements
- Different contribution allowances may be offered to different employee classes
- Different contribution allowances may be offered to an employee based on age and family size
4. Provide Legal Plan Documents – The Internal Revenue Code and ERISA (if applicable) require employers to establish a formal written plan document. In addition, ERISA requires presentation and distribution of a Summary Plan Description (SPD). These legal documents cover a significant amount of information and must include the terms and conditions of the ICHRA including monthly reimbursement amounts, class structures, claims processes, reimbursement eligibility, and federally required information on HIPAA and other procedures involving privacy. There are potentially significant adverse consequences if an employer fails to adopt a written plan document or, if subject to ERISA, to present and distribute an SPD.
5. Communicate and Provide Resources to Employees – Employers are required to provide a 90-day notice before the ICHRA start date, including key information about the ICHRA and benefit eligibility. Additionally, employers will want to provide guidance with such a new plan, as this will be many employees’ first experience with ICHRA!
The triggering event is the first date the employee is able to participate in the ICHRA. Employers may set up an ICHRA any time during the year. It is important to note that employers subject to ERISA should not directly or indirectly advise or influence employees when it comes to selecting insurance. In order to ensure the insurance policy is not part of the employer’s ERISA plan (which would create a number of compliance issues), employers must refrain from endorsing a particular insurance company or insurance coverage.
Special Enrollment Period
• Be clear an ICHRA is being offered and outline the benefits
• Get the word out; socialize the ICHRA around the office – from posters to lunch-n-learns to direct communications from leaders, and beyond
• Anticipate questions and be prepared to answer
• Craft a welcome letter customized for each individual
• Engage an administrator to help guide employees through the enrollment process and answer questions along the way
Administration of an ICHRA
There are several components to an ICHRA that require management, including:
- Written Plan Document
- Summary Plan Description (if subject to ERISA)
- Compliance with general HRA and group health plan requirements
- Contribution Allowance Evaluation
- Claim Processing
- Reimbursement Mechanism
- Record Keeping
- Tax Reporting
- HIPAA privacy and security compliance
- COBRA and ERISA Administration
The items listed above, and other administrative tasks, are often time consuming and labor intensive. Self administration may also leave an employer vulnerable to liability and legal action. Following are a number of areas where an outside administrator may be of great value and service:
Employee Privacy – For reimbursements to be tax free, employers must substantiate that employees are using funds to pay for health insurance and medical expenses. Having an employee submit receipts directly to the employer for review creates a significant privacy issue. Information about an employee’s medical expenses (including individual insurance premiums) is considered Protected Health Information under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). In most cases, employers asking for and reviewing such Protected Health Information must ensure the privacy and security of that information to comply with HIPAA.
Leveraging an administrator provides a necessary layer of privacy.
Record Keeping and Document Storage – Before submitting an expense for approval, an employee must attest that they are covered under an individual insurance policy. The IRS and Department of Labor require that employees submit proper documentation verifying their expenses and that supporting documentation be kept on file for up to seven years. Record keeping can become problematic considering the sheer volume of claims, documentation required, and whether those requests were approved or rejected. An administrator can provide an automated technology solution that keeps all digital records organized and secure, while complying with guidelines and regulations.
The administrator should review employee reimbursement requests, approve qualified expenses, and store all related documentation on a monthly basis.
Contribution Allowance Evaluation – Employers may change monthly contribution allowances, provided adequate notice is given to employees. For most businesses, it makes sense to complete the evaluation as part of an annual benefits review.
Annual ICHRA Opt Out Requirement – At least once a year, employees must be allowed to opt out of the ICHRA to claim the premium tax credit if they cannot afford an individual plan. An ICHRA requires all participating employees to enroll in either an individual insurance plan or Medicare, and employers need to implement an annual process to ensure employees are registered and to verify their enrollment in the ICHRA.
This can be as simple as having employees fill out a form that states they are enrolled in an appropriate plan. Alternatively, employers may leverage an administrator for documentation or pay their insurance premiums directly.
Changing Regulations – Healthcare policy continues to evolve. As the landscape shifts and changes, an administrator will stay up to date on regulation changes.
COBRA and ERISA Administration – For employers offering group health plans, including offering an ICHRA, must comply with annual reporting regulations and requirements. ICHRAs are considered group health plans and are subject to ERISA and COBRA.
All employers who set up an ICHRA need to follow ERISA guidelines in regard to their plan documents and notice to employees. Annual reporting and regulation requirements will apply.
Employers with 20 or more employees are required under COBRA to offer continuation of coverage to employees and their dependents when they lose coverage as the result of a qualifying event, such as an employee’s death, divorce, or job loss. COBRA is generally offered for 18 months but can be extended up to 36 months for qualifying events.
Employers exempt from COBRA include:
- Those with fewer than 20 employees
- Church plans
*Check your state requirements for any state specific rules regarding COBRA.