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.
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:
ERISA doesn’t require these items, but we recommend them to provide an even better document to employees:
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:
Another critical message to communicate to your employees is the enrollment guidelines for the ICHRA based on timing.
For example:
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.
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.
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:
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:
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.
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.