ICHRA administration for first-timers

Offering an individual coverage health reimbursement arrangement (ICHRA) is an effective way for employers to attract and retain top talent. With an ICHRA, organizations can reimburse employees tax-free for their individual health insurance premiums and other qualified out-of-pocket medical expenses.

If you’re an employer offering or looking to offer an ICHRA, you need to know how to administer it. Whether you’re offering an ICHRA as a stand-alone benefit or as a separate affordable option for employee classes that don’t qualify for your traditional group plan, properly administering an IRS-compliant ICHRA can be tricky.

Let’s go over the steps you’ll take to set up your plan, administer it compliantly, and avoid the common mistakes that lead to financial penalties.

Create a legal plan document

Because the federal government considers an ICHRA a group health plan, it’s subject to Employee Retirement Income Security Act (ERISA) requirements. The first of these requirements is a legal plan document that outlines the details of your ICHRA plan.

No specific penalties apply for failing to prepare and adopt a plan document. Still, you’ll be subject to fines if plan participants request to see your document and you don’t produce it.

Your document must include these items to comply with ERISA standards:

• A list of named fiduciaries and plan administrators and their responsibilities
• A description of how you fund the ICHRA and the reimbursement rules
• Information on federal regulations, such as the Affordable Care Act’s employer mandate if you’re an applicable large employer (ALE)
• The procedure for amending the plan

ERISA doesn’t require these items, but we recommend them to provide an even better document to employees:

• Eligibility requirements for the ICHRA, such as defining employee classes
• Effective dates of participation
• A description of benefits provided and excluded
• Claims procedures
• HIPAA privacy officers and rules relating to the use of protected health information (PHI)
• The procedure for plan termination

Notify your employees about the ICHRA

Before the ICHRA’s start date, the plan administrator must notify each class of employees of their eligibility at least 90 days before the plan year begins. You also must provide the notice every year you offer the ICHRA.

For newly eligible employees, which are newly hired employees or employees who gain eligibility after the initial start of the plan year, your organization can provide the notice up until the first business day the employee’s ICHRA coverage begins.

It’s best to provide notice as soon as possible so employees can review medical policies and enroll in individual health coverage.

The notice must include the following to comply with federal regulations:

• A description of the terms of the ICHRA, including your employer contribution amounts
• A statement of the participant’s right to opt-out the benefit and waive future reimbursement under the ICHRA
• A statement on how the ICHRA will affect premium tax credit (PTC) eligibility, whether the employee opts out or chooses to accept the benefit
• A statement that the participant must inform any health exchange to which they apply for APTC (advanced premium tax credit) of certain relevant information
• A statement about how the ICHRA differs from other HRAs
• A statement about how the participant can find assistance for determining ICHRA affordability based on the lowest-cost silver plan in their area
• A statement explaining how the ICHRA can integrate with Medicare
• Contact information of an individual or a group of individuals whom participants can contact with questions regarding their ICHRA
• A statement explaining an ICHRA’s substantiation process and attestation

Another critical message to communicate to your employees is the enrollment guidelines for the ICHRA based on timing.

For example:

• If an ICHRA starts on a date other than January 1 or if a newly hired employee joins the benefit during the plan year, they can enroll in individual health insurance coverage outside of open enrollment using a special enrollment period.
• If an employee becomes eligible for an ICHRA that would start at the beginning of the plan year, they’ll need to enroll in an individual coverage plan within the 60-day period before the first day of the plan year.
• If an employee becomes eligible for HRA coverage that would start mid-year (as with a new employee or an employee with a change in hours), they may enroll in an individual plan up to 60 days before the first day that their ICHRA can begin or up to 60 days after this date.

Establish compliant administration procedures

Once you’ve established legal plan documents and communicated your ICHRA to your eligible employees, you can start administering it.

Remember, administering an ICHRA differs from administering a group health insurance plan because there’s no insurance company to take over most of the responsibilities. Instead, you must manage the plan yourself, which involves a great deal of time.

1. Updating your plan with staff changes

You must appropriately extend or end ICHRA eligibility when you gain or lose employees.

If you hire a new employee, you must give them their federally required notice and extend eligibility according to your plan documents. If you implemented a waiting period of 60 days, for example, you must extend ICHRA eligibility only after that time.

If you lose an employee through termination or voluntary departure, you must handle any outstanding reimbursement requests and end eligibility according to your plan documents. Employees must receive payment for all approved reimbursement requests made until they leave your organization—any remaining employer contributions stay with the organization.

You don’t need to update the plan documents when gaining or losing employees unless the employee manages your ICHRA benefit.

If you have 20 or more employees, your ICHRA is subject to the federal Consolidated Omnibus Budget Reconciliation Act (COBRA). Depending on your state, your benefit may be subject to state COBRA laws even if you have fewer than 20 employees. In these cases, organizations must provide all covered individuals with the option to elect COBRA coverage.

2. Receiving and processing reimbursement requests

When your employees make a reimbursement claim for their individual insurance premiums or other qualified out-of-pocket expenses, they need to provide you with adequate proof of purchase.

The documentation, such as a receipt or invoice, must include the following:

• The service or product
• The date of the service or sale
• The amount incurred

Employees only need to submit some recurring eligible expenses, like a monthly premium, once. This applies as long as the recurring reimbursement request matches previous reimbursements you approved with the same amount, service provider, and date. For individual health insurance plans, employees can find this information in their explanation of benefits.

Your organization must review your employees’ submissions and approve or decline the reimbursement request.

You’ll check to see if the documentation includes:

• A qualified medical expense under IRS Code Section 213(d)¹
• The service or product
• The date of the service or sale and the amount incurred.

If everything’s in order, you’ll approve the request and reimburse the employee from their available allowance funded by your employer contributions. If not, you’ll decline it and follow the process for adverse claims decisions outlined in your plan documents.

3. Handling declined reimbursement requests and appeals

To be ERISA compliant, your organization must have a specific procedure for declining reimbursement requests and appeals.

If you’re declining one of your employee’s reimbursement requests, you must notify them within 30 days of receiving their request. If you declined it because your employee didn’t provide enough information for you to process their request, your employee has 45 days from the day you notified them to get you the missing information.

You can approve the reimbursement request if the new information has everything you need. If not, your employee can appeal the declined request under ERISA. During the appeals process, you must follow regulations issued by ERISA and the Department of Labor and the procedures outlined in your plan documents.

You can proceed with the reimbursement request if the result favors the participant.

4. Paying reimbursements

Once you’ve approved an employee’s reimbursement request, you must pay it according to the timeline and processes outlined in your plan documents.

Employees must have a qualified individual health insurance plan with minimum essential coverage (MEC) to participate in an ICHRA. Any employee reimbursements for qualifying medical expenses are tax-free for you and your employees. If an employee loses MEC during the plan year, they can’t participate in the ICHRA until they enroll in qualifying coverage again.

When processing reimbursements to employees, you can use the following:

• Payroll
• Direct deposit
• Check
• Cash

Suppose the reimbursement request was larger than the employee’s accrued allowance. In that case, you should pay the employee the total amount of their accumulated allowance and continue to make monthly payments toward the balance until it’s paid in full or the employee’s annual maximum allowance is gone.

5. Recordkeeping and storing documentation

The federal government has guidelines for organizations contributing to employees’ IRS-qualified medical expenses, including through an ICHRA.

Your organization must keep an ongoing record of your ICHRA payments and substantiation. This should include the allowance, all reimbursement requests, the supporting documentation, and whether you approved or declined those requests.

The IRS has a statute of limitations of seven years, so it’s best practice to store this information for at least that long.

6. Keeping PHI safe

Regardless if your organization must comply with HIPAA standards, the plan sponsor must certify that employees’ PHI is safe and not used for employment-related actions. For example, initiating any employee action for receiving medical care or medication you may disagree with is illegal.

If you have a HIPAA privacy officer, only this individual should see this information. You can use spreadsheets or other administration software to track and store this information, but be mindful of your employees’ privacy and standard security procedures.

7. Evaluating allowance amounts

As part of your organization’s annual budget review, you may want to revisit the monthly allowances you give employees through your ICHRA.

If you need to lower your monthly allowance for cost control or you’d like to increase your benefit’s value by raising it, you should let your employees know before the start of the plan year through the required notice.

8. Fulfilling tax reporting requirements

As previously mentioned, ICHRA health coverage provides tax advantages for you and your employees because reimbursements are tax-free. Therefore, there are mandatory reporting requirements you must follow.

During tax time, use box 12, code FF, on each employee’s W-2 to report the total permitted benefit available to the employee through your ICHRA.

Employees are responsible for tracking any reimbursements for incurred expenses while they didn’t have MEC. They may need to include these amounts in their gross taxable income.

Organizations that offer an ICHRA must also complete Form 1095 each year.

Consider the costs of self-administering your ICHRA

While the draw of administering an ICHRA entirely on your own seems promising, it’s important to acknowledge and consider the hidden costs associated with this approach.

Drafting legal plan documents isn’t a task you should undertake yourself. Due to the structure of the arrangement, a non-compliant ICHRA will likely violate these reforms and subject your organization to the excise tax outlined in IRC Section 4980(d)².

The Departments of the Treasury, Health and Human Services, and Labor may assess the excise tax, which could charge your organization up to $100 per employee per day for violating market reforms.

Many small business owners contract with an attorney to draft the plan document and SPD to avoid that risk. However, contract drafting costs range between $200-$800 for a simple contract and $1,000-$5,000 for a complex contract³.

The cost of your time spent reviewing employees’ reimbursements, submitting payments, record keeping, and sending out annual ICHRA notices is also a significant drain on your organization. Considering an average HR representative’s annual salary of roughly $59,000, dedicating just 400 hours per year—or 7 hours a week— to ICHRA administration responsibilities could cost more than $11,000 annually⁴.

Between plan document fees, potential compliance penalties, and the time cost, administering your ICHRA entirely on your own may not be quite the bargain it seemed initially.

Want help administering your ICHRA?

If you like the independence that comes with self-administration but want to save time and money and avoid potential compliance pitfalls, administering an ICHRA using PeopleKeep’s software and award-winning customer support team is a perfect match.

When administering an ICHRA with PeopleKeep, you can provide your health benefit quickly and easily. In fact, most customers only need about 15 minutes per month to administer their benefit, significantly less time than managing a group health insurance plan.

Our software solution provides an administration platform for managing employee benefits like the ICHRA. It gives your organization a compliant plan design, provides legal plan documents, verifies employee expenses for approval by the HRA administrator, and automatically sends required notices.

We handle the most time-consuming tasks, like preparing and updating legal documents, reviewing reimbursements, and even sending you a weekly email report with any reimbursements you need to approve. That way, you stay in complete control without having to worry about the fine print.

Here’s the best part—unlike working with third-party administrators, our software and dedicated team simply support self-administrators, so you’re always calling the shots.

Conclusion

An ICHRA is an effective alternative to group health insurance coverage. It’s a modern and flexible health benefit plan for employers looking to hire and keep talented employees. But, you need to manage it responsibly for the benefit to provide value.

Self-administering an ICHRA without support is tempting, but it's unrealistic for most small and mid-size employers. Though fully manual self-administration may be the right solution for some, the time costs and compliance concerns alone are enough to dissuade many from attempting it.

If you prefer the independence of self-administration but want a helping hand, a software solution with plan design flexibility like PeopleKeep may be the best choice for your needs.

This article was originally published on March 1, 2021. It was last updated on November 27, 2023.

1. https://www.law.cornell.edu/uscode/text/26/213
2. https://www.law.cornell.edu/uscode/text/26/4980
3. https://www.contractscounsel.com/b/average-cost-of-hiring-a-lawyer-to-draft-a-contract
4. https://www.payscale.com/research/US/Job=Human_Resources_(HR)_Generalist/Salary