A shift in the way health insurance is delivered.

For many businesses, an ICHRA will provide a welcome alternative to traditional group health benefits.

An Individual Health Reimbursement Arrangement (ICHRA) is an employer-funded, tax-free health benefit used to reimburse employees for individual health insurance premiums and other qualified medical expenses. With an ICHRA, the choice and responsibility shift from employer to employee—it is the employee who determines where and how to spend the employer’s pre-determined contributions.

By offering an ICHRA:

  • Employers define contribution limits and have more flexibility in plan design, and employees may choose the coverage that best fits their unique needs. The employer establishes the reimbursement allowance per employee class.
  • Employees shop the marketplace and purchase the individual health insurance policy that works best for them. Employees provide proof of coverage, and the employer reimburses them up to the pre-determined contribution allowance. Anything owed above and beyond the contribution amount, the remainder, is the employee’s responsibility and may be payroll deducted by their employer.
ICHRAs are centered on a reimbursement model (sometimes referred to as a defined contribution approach). This gives employees greater cost control and predictability, and offers employees more coverage options to choose from. This is very different from the traditional group insurance market model (sometimes referred to as a defined benefit approach) where employers select a one-size-fits-most group plan, and employees are limited to options selected by the employer.

With a defined contribution approach, a health benefits package is designed around a set dollar amount, not around a set of plans—and Nexben’s ICHRA Solution makes it simple.

Download the ICHRA Guide for more detailed information.

Want to dig deeper? Read the official federal rule.

What’s the difference between an ICHRA and a traditional HRA?
There are two primary differences between an ICHRA and a traditional HRA:

  1. An ICHRA can reimburse individual medical insurance premiums, while most traditional HRAs cannot.
  2. Most traditional HRAs must be “integrated” with a group health plan, whereas an ICHRA works with individual insurance plans.
  1. Pick a start date
    Many employers think about benefits on a calendar year basis, aligning the ICHRA start date with Open Enrollment on the marketplace.An ICHRA may also be started at any other time of the year. Once you pick a date, it will trigger a Special Enrollment Period allowing employees to purchase coverage on the individual market outside of the Open Enrollment period. If an employer terminates an existing group health insurance plan, the ICHRA start date should be carefully coordinated to avoid gaps in coverage. 

    Note: Under Nexben’s ICHRA, for ICHRAs established for a short plan year (a start date other than Jan. 1), all subsequent ICHRA plan years will follow the calendar year.

  2. Structure employee eligibility by class
    Flexibility in designing the benefits package to better fit employee needs is one of the most valuable features of an ICHRA.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: 

    1. Full-time employees*
    2. Part-time employees*
    3. Seasonal employees
    4. Salaried employees*
    5. Non-salaried employees* (such as hourly)
    6. Employees covered by a particular collective bargaining arrangement (different bargaining units can be separate classes)
    7. Employees who have not satisfied a waiting period
    8. Temporary employees of staffing firms
    9. Non-resident aliens with no U.S.-based income
    10. Employees working in the same insurance rating area* (i.e., the same geographic location such as a state or multi-state region)
    11. 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 prevent discrimination and misuse, including:

    • Employers must offer the same amount of reimbursement to all employees in a class, although amounts can be increased for workers who are older or have dependents.
    • Employers cannot offer an ICHRA to an employee to whom the employer also offers a traditional group health plan. However, an ICHRA may be offered to one class, such as part-time workers, and a traditional group health plan to another, such as full-time employers.

    Should an employer offer a traditional group health plan to a class of employees and an ICHRA to another class, class size guidelines must be followed if the employer uses any of the following classes:

    • Full-time employees
    • Part-time employees
    • Salaried employees
    • Non-salaried employees
    • Employees working in the same rating area

    In these cases, the ICHRA class must be larger than:

    • Ten employees, for an employer with <100 employees.
    • Ten percent of the total number of employees, for an employer with 100-200 employees.
    • Twenty employees, for an employer with >200 employees.
  3. Define the tax-free, monthly contribution amount
    The next step for the employer is to determine the annual budget and how much it will provide employees on a monthly basis for reimbursement, which represents the maximum amount for which the employees can be reimbursed through the ICHRA.Keep in mind: 

    • There are no minimum or maximum contribution allowance requirements.
    • Different contribution allowances may be offered to different employee classes.
    • Within a class, different contribution allowances may be offered to an employee based on age and family size.1

    1Individual 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. Age-banded rates, through the marketplace, use a 1:3 ratio.

    Want to learn how the ICHRA affordability calculation works? Click here.

    Affordability Calculation of the ICHRA

    The Affordable Care Act (ACA) generally requires Applicable Large Employers (ALEs) employers with 50 or more full-time equivalent employees, to offer comprehensive health coverage to their full-time employees (30 hours per week) and dependent children known as the “employer mandate.” Employers may be subject to steep penalties (i.e., shared responsibility payments) for failing to offer health coverage to substantially all of their full-time employees or for not offering full-time employees coverage that is affordable and provides a certain minimum level of coverage.

    An ICHRA can help ALEs satisfy the employer mandate.

    • First, by offering an ICHRA to substantially all (generally 95%) of its full-time employees, the employer can avoid the larger of the two employer mandate penalties.
    • Furthermore, if the ICHRA offered by an employer to substantially all full-time employees is “affordable,” then the employer can also avoid the second type of employer mandate penalty. If the ICHRA is deemed unaffordable, the employer may be subject to the second type of employer mandate penalty.

    Note on “Affordability”
    Affordability is a key term for two separate purposes:
    (1) a group health plan, and
    (2) the marketplace.

    A formula is used to determine whether an employer-sponsored group health plan, including an ICHRA, provides coverage on an affordable basis. The formula is different from the way the marketplace determines affordability for purposes of subsidies.

    An ICHRA is considered “affordable” for an employee if the monthly premium for the lowest-cost silver plan for self-coverage only (available through the marketplace in the employee’s area of residence), 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 8.39% of 1/12 of the employee’s annual household income. The percentage rate applies in 2024 and is indexed yearly.

    For purposes of the calculation described above, an employer chooses one of three safe harbors to determine annual household income (e.g., the W-2 safe harbor, the rate of pay safe harbor, or the federal poverty line safe harbor) for purposes of affordability under the employer shared responsibility provisions. (Note: These safe harbors are not used by the marketplace to determine affordability for subsidies. The marketplace looks at the individual’s household income.)

  4. Define what is reimbursable under the ICHRA plan
    In addition, employers can choose what is reimbursable under the ICHRA: 

    • Insurance premiums only (Nexben’s ICHRA solution only supports this option)
      • Individual insurance premiums for coverage that makes employees ICHRA eligible include individual major medical, Medicare Part A and Part B, Medicare Part C, Part D, and Medicare Supplement.
      • 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 only2

    1Individual 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. Age-banded rates, through the marketplace, use a 1:3 ratio.
    2Must establish coverage under individual insurance to be ICHRA eligible.

  5. Invite employees to start shopping for benefits
    Learn more about how employees shop for and purchase coverage.
  6. Processing Reimbursements and Remainders
    ICHRAs require a process for verifying that employees meet the requirement of being enrolled in appropriate individual health insurance coverage. The administrator of the ICHRA must review and approve the employee’s request for reimbursement. If approved, the ICHRA reimburses the employee up to the monthly contribution allowance.Should the expense not be approved, the procedure for denied claims is followed. Typically, for a standard reimbursement model ICHRA, reimbursement is made by issuing a check, making an ACH deposit, or including the amount in an employee’s payroll check.
    Nexben solves an often-cumbersome reimbursement process by facilitating premium payments directly to the insurance carrier and capturing the required verification information. 

    • The employer defines the monthly contribution allowance available to each employee class.
    • The contribution will be applied directly to the monthly individual insurance premiums of the policy selected by each individual employee.
    • Any remaining premium balance due by the employee may be taken care of via employee payroll deduction.*
    • Review and approve the monthly consolidated statement to transfer premium payments to each carrier—with one click.

    *An employer may allow ICHRA participants to pay any premiums for individual health coverage through a Section 125 cafeteria plan. Nexben’s ICHRA solution is designed to support this model.

Selecting and Purchasing Coverage
An employee falling within one of the designated classes defined by the employer is eligible to participate in the ICHRA. All employees participating in the ICHRA (and any covered dependents) must be covered under one of the following categories at all times: individual insurance coverage that is minimum essential coverage (MEC); Medicare Part A and Part B; or Medicare Part C (Medicare Advantage).

Employees must provide proof of such coverage on an annual basis. If the employee loses or cancels their individual health insurance, coverage under the ICHRA ends.

By offering an ICHRA:

  • Selection and purchase of individual health insurance plan
    • Employees work with an enrollment advocate to shop for and purchase individual health insurance that fits their needs—using a unique account number.
  • Premium payments to the insurer
    • Nexben directs premium payments to each individual insurer. Employees do not need to front the cost of insurance premiums or wait for reimbursement of the employer contribution.
  • Payment of the remainder, if any
    • Any amount exceeding an employer’s contribution may be payroll deducted.

NOTE: An employer may allow ICHRA participants to pay any premiums for individual health coverage through a Section 125 cafeteria plan. Nexben’s ICHRA solution is designed to support this model.

Legal requirement considerations

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 general Employee Retirement Income Security Act (ERISA) requirements applicable to traditional group health plans, including:

By offering an ICHRA:

  • Reporting requirements (e.g., Form 5500, Forms 1094/1095, PCORI)
  • Disclosure requirements (e.g., distributing Summary Plan Descriptions, Summary of Benefits and Coverage, and Summaries of Material Modification)
  • Written Plan Document
  • 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 the 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.

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