15 Individual Coverage HRA (ICHRA) FAQs

Traditional group health insurance is the standard route for many business owners looking to offer a health benefit. However, its rate increases and one-size-fits-all design put it out of reach for small employers. Because of this, employers are seeking more flexible, affordable, and personalized health benefits.

The individual coverage health reimbursement arrangement (ICHRA) is one health benefits option that enables employers to offer affordable health coverage to their workers. But if it’s your first time considering an ICHRA, you may have questions about its rules and regulations.

If you’re new to the ICHRA, don’t worry! This blog post answers 15 frequently asked questions (FAQs) employers have about the ICHRA to help you better understand how it can support you and your employees.

In this blog post, you’ll learn:

• What an ICHRA is and how it allows businesses to provide flexible health benefits to employees.
• The eligibility requirements for employees and businesses to participate in an ICHRA.
• Key differences between ICHRAs and the qualified small employer HRA (QSEHRA).
• How to effectively administer an ICHRA for your workforce.

What is an ICHRA?

An ICHRA is a formal health benefit that allows organizations of all sizes to reimburse their employees, tax-free, for their individual health insurance policy premiums and other out-of-pocket medical expenses.

ICHRAs offer significant tax savings for small businesses that can’t afford a group health insurance plan. They also allow employees to choose the health insurance coverage and medical services that work best for them.

ICHRA reimbursements aren’t taxable income. Employers also pay no payroll taxes on reimbursements and can deduct reimbursements as a business expense.

Lastly, applicable large employers (ALEs) can use an ICHRA to satisfy the Affordable Care Act’s (ACA) employer mandate as long as their benefit is affordable.

15 ICHRA FAQs

Now that we’ve covered the basics of the ICHRA, let’s answer 15 common queries to help you understand even more about how the benefit works.

1. Who can offer an ICHRA?

All businesses with at least one W-2 employee can offer an ICHRA. This includes nonprofits, religious organizations, local governments, and other groups.

Unlike a traditional group plan, an ICHRA has no minimum participation requirements. So you don’t need to enroll a certain number of employees in the benefit to offer it.

2. Which employees can participate in an ICHRA?

Employee eligibility depends on federal ICHRA regulations and a business owner’s preferences. Let’s go over the federal rules first.

The ICHRA can only cover W-2 employees and their eligible dependents. Business owners who the IRS considers common law employees are eligible for the benefit. This means C corporation owners can participate while S corp owners can’t.

The government requires all employees participating in an ICHRA to have a qualifying form of individual health coverage. This also applies to covered dependents who want to participate in the benefit. Employees must regularly attest that they’re still enrolled in their individual insurance plan to continue using the ICHRA.

Beyond these requirements, business owners can decide who can participate in the benefit. Employers can use job-based employee classes to determine eligibility. But they’re not obligated to offer the ICHRA to every class.

3. Who isn’t eligible for the ICHRA?

Sole proprietors, uninsured employees, and those with traditional group coverage, such as a spouse’s or parent’s plan, can’t use an ICHRA. Employees with a spouse’s group plan can decline their group coverage and get an individual insurance plan if they want to participate in the ICHRA.

Other ineligible healthcare coverage includes:

• COBRA
• TRICARE
• Healthcare sharing ministries
• Association health plans
• Short-term medical plans
• Fixed indemnity plans
• Medicaid

Additionally, S corporation owners and their spouses who own more than 2% of a business can’t participate in an ICHRA. This is because the IRS taxes S corp owners like shareholders, and HRAs are only for W-2 employees. But, employees of S corp owners can still participate in the benefit.

4. Can employers offer an ICHRA and other health benefits at the same time?

You can offer an ICHRA and group health insurance coverage simultaneously, but not to the same employees. You must set employee eligibility criteria beforehand. You can’t give employees in the same class a choice between participating in your traditional group plan or your ICHRA benefit.

For example, you could offer group coverage to your salaried workers and provide an ICHRA for your hourly workers. But you can’t offer employees a choice between the two benefits.

You may also wonder if you can offer multiple types of HRAs simultaneously, such as an ICHRA and a qualified small employer HRA (QSEHRA).

Certain types of HRAs don’t work with each other. Per compliance regulations, you can’t offer an ICHRA and a QSEHRA together under any circumstances. You’re also not allowed to provide an excepted benefit HRA (EBHRA) alongside an ICHRA.

5. What counts as “individual coverage” for an ICHRA?

Your employees must have an individual health insurance plan to participate in an ICHRA.

The following are eligible individual health plans under an ICHRA:

• Qualified individual plans from a public health exchange. Public exchanges are the federal Health Insurance Marketplace or a state-based marketplace
• Individual policies from a private exchange, like an insurance company, broker, or licensed agent. Private exchange policies only qualify if they provide minimum essential coverage (MEC.
• Medicare Parts A and B together
• Medicare Part C, also known as Medicare Advantage plans
• Most student health insurance plans, except for self-insured student health coverage
• Catastrophic plans for those younger than 30 or who have a hardship exemption

As long as your employees have an individual plan that qualifies as MEC, they can participate

6. How do employees get individual coverage for the ICHRA?

As mentioned above, your employees have several ways to shop for coverage on the individual market. One option is to enroll via a public health insurance exchange, where they can browse and compare plans from various insurance companies on one convenient website.

A private exchange offers more health coverage options for those seeking a more customized shopping experience. Just remember that if you’re offering an ICHRA, you can’t suggest or influence the insurer or policies your employees may buy.

If you use PeopleKeep to administer your ICHRA, your employees can shop for a qualifying health plan right from their account. This makes it easy for employees to see which plans are available in their area.

Your employees can enroll in individual coverage if they qualify for a special enrollment period or during the annual Open Enrollment Period.

7. Can an employer have a non-calendar year ICHRA?

You can begin your ICHRA benefit at any point during the year. If your ICHRA has a mid-year start date, your employees can shop for coverage during a special enrollment period. The federal government considers becoming newly eligible for a health benefit a qualifying life event.

After an eligible life event, employees have 60 days to shop for and buy qualifying individual coverage. Newly hired employees will also trigger a special enrollment period once you onboard them and they become eligible to participate in the ICHRA.

If your ICHRA is on a non-calendar year, your employees’ health insurance deductibles will still reset on a calendar year basis. But, their HRA allowance amounts will reset at the beginning of your plan year.

8. What can the ICHRA reimburse?

ICHRAs have rules that dictate which medical expenses are eligible for reimbursement. According to IRS regulations, HRA funds can only reimburse an employee for eligible healthcare expenses outlined in IRS Publication 502¹ and the CARES Act².

Qualified medical costs can include items incurred by current employees, their spouses, and any eligible dependents on their qualified health plan. Dependents must have coverage through a qualifying individual health plan.

A few eligible out-of-pocket expenses for reimbursement are:

• Individual health insurance policy premiums
• Family doctor visits and hospital services
• Medicare Part A and Part B medical premiums
• Medicare supplement insurance premiums
• Over-the-counter items and healthcare costs, such as:
  • Cold medicine
  • Sunscreens
  • Asthma medicine
  • Eyeglasses and contacts
  • Allergy medicine
  • Cough syrup
• Prescription drugs
• Mental health counseling
• Nursing services
• Alcoholism and drug addiction treatment

You can restrict what types of medical costs you want to allow for reimbursement. For example, you may offer an ICHRA that only reimburses health insurance premiums for better cost control.

Whatever you decide, outline acceptable qualified expenses in your ICHRA notice.

9. How much money can business owners contribute to an ICHRA?

The ICHRA has no minimum or maximum annual contribution limits. This means you can choose the allowance amount that works best for your benefits budget. There’s no need to pre-fund an account. And unlike health savings accounts (HSAs)any funds that your employees don’t use before they leave your company stay with you.

10. What are the ICHRA employee classes?

With an ICHRA, you can offer different allowances to different employees based on 11 job-based classes. This gives you even more control over your budget and benefit design.

You can also adjust your allowance amount within each class based on age and family size. For example, you can offer your oldest employees within a class an allowance up to three times higher than the amount you give your youngest employees in the same class. You can also offer a higher allowance to employees with families than single employees.

Other than age and family size variances, you must offer your ICHRA to each plan participant in the same class on the same terms.

The 11 classes of employees you can use to determine eligibility guidelines and allowances are:

1. Full-time employees
2. Part-time employees
3. Seasonal employees
4. Temporary employees of staffing firms
5. Salaried workers
6. Hourly employees
7. Employees covered under a collective bargaining agreement
8. Employees in a waiting period
9. Foreign employees who work abroad
10. Employees in different geographic locations, based on rating areas
11. A combination of two or more of the above

If you’re administering your ICHRA benefit through PeopleKeep, only the full-time, part-time, seasonal, salaried, non-salaried, and state-based classes are available.

11. What are the ICHRA’s employee class size requirements?

If you choose to offer an ICHRA and a group health plan, you must ensure the class of employees meets specific size requirements. Minimum class size requirements only apply if you vary eligibility based on full-time or part-time status, salaried or hourly pay structures, or geographic location.

The class size minimums are as follows:

• If you have fewer than 100 eligible employees, you need an employee count of at least ten participants in a class.
• If you have between 100 and 200 employees, you need an employee count of at least 10% of the total number of participants in a class.
• If your employee count is more than 200, you need an employee count of at least 20 participants in a class.

Class size requirements don’t apply if you’re using classes to determine reimbursement allowance amounts.

12. How does an ICHRA affect premium tax credits?

Another popular question is whether employees can opt out of the ICHRA. While employees have the choice to participate in the benefit or not, the best way for them to decide depends on whether they qualify for premium tax credits and how their ICHRA allowances impact the subsidy.

If an employee’s ICHRA allowance is affordable, they should opt into the ICHRA. That’s because an affordable ICHRA makes employees ineligible to receive premium tax credits even if they decide not to participate in the benefit. If they opt out of your ICHRA, they won’t be able to receive their tax credits, and they’ll miss out on the ICHRA’s allowance.

If an ICHRA allowance is unaffordable, employees can choose to opt in or out of the ICHRA based on the better option. For example, if their premium tax credit exceeds the allowance, they can opt out of the ICHRA and collect their credit.

Learn more about the ICHRA and premium tax credits

13. How does an ICHRA compare with a QSEHRA?

While the ICHRA and the QSEHRA have similarities, they also have distinct differences. You must know how they compare to ensure you’re making the right decision for your business.

To make it easy, the chart below outlines the differences between these two popular types of HRAs.

14. What are the ICHRA notice rules?

When the federal government created the ICHRA, it provided specific rules to administer the plan compliantly. One such rule is the notice requirements.

According to the Departments of Treasury, Labor, and Health and Human Services, the ICHRA notice should provide eligible employees with details about the benefit. It should also include what they can expect and how they can determine whether to opt in or out of the ICHRA.

The ICHRA notice requirements include:

• A description of the terms of the ICHRA, including:
  • The maximum dollar amount available to each employee
  • Eligible dependents
  • Eligible out-of-pocket costs for reimbursement
  • Whether the allowance amount will vary based on class, family status, or age
  • The frequency of allowance amounts
  • The benefit’s effective date
• A statement on how the ICHRA will affect premium tax credit availability
• A statement that the participant must inform health insurance exchanges that they’re participating in an ICHRA
• A statement that the participant can opt out of the benefit
• A statement about how the ICHRA differs from other HRAs
• A statement about the availability of a special enrollment period to enroll in qualifying health plan coverage to participate in the ICHRA.
• A statement outlining how the participant can get help determining ICHRA affordability.
• A statement explaining that the ICHRA can integrate with Medicare.
• Contact information if participants have questions about their benefit.

Employers must send the notice once a year to eligible employees 90 days before the plan year begins. New hires or newly eligible employees can receive notice up until the first day the employee’s ICHRA coverage begins. But, it’s best to provide notice as soon as possible so the employee can review medical coverage options and enroll in a plan.

15. How can employers offer an ICHRA?

While it’s possible to self-administer your ICHRA, it’s not the best option. Compliantly administering an HRA requires drafting legal plan documents, storing employee reimbursement requests, and keeping up with healthcare regulations. The process can be time-consuming and challenging to understand. Plus, you’ll risk fines for compliance violations if you make mistakes.

Using HRA software—like PeopleKeep—is a much easier way to manage your benefits despite the administrative costs. HRA software allows you to administer your benefit from one cohesive platform, approve and record reimbursements to employees, and create and update legal plan documents with a few clicks of a button.

Most importantly, PeopleKeep helps you stay compliant by keeping your benefit updated with current government regulations, so you don’t have to worry about missing anything critical.

Conclusion

An ICHRA is an excellent option for business owners looking to break away from traditional group health plans. Implementing a new health benefit can be stressful. But with an ICHRA, you can empower your employees to take control of their health while reigning in your budget.

If you want to avoid the administrative burden of managing an ICHRA, PeopleKeep can help! Our HRA software makes setting up and managing your ICHRA simple so you can focus on running your business. Book a call with an HRA specialist today, and leave the time-consuming task of administrating your ICHRA to us.

This article was originally published on July 3, 2019. It was last updated on November 1, 2024.

1. IRS Publication 502

2. IRS Cares Act