Offering an individual coverage health reimbursement arrangement (ICHRA) is an effective way for employers to attract and support talented workers. 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 considering an ICHRA at your company, you must know how to administer it. Whether offering an ICHRA as a stand-alone benefit or for your employee classes that don’t qualify for your traditional group plan, setting up and administering a compliant ICHRA on your own can be challenging.
In this blog post, you’ll learn:
- How to create a compliant ICHRA plan that meets ERISA and other federal regulations.
- Employee notification and administration best practices
- The costs and challenges of self-administering an ICHRA
The federal government considers an ICHRA a group health plan. That makes it subject to Employee Retirement Income Security Act (ERISA) requirements. The first of these requirements is drafting a legal plan document outlining 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 so you can provide a more useful document to employees:
Before the ICHRA’s start date, the plan administrator should 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.
“Newly eligible workers” to the benefit are newly hired employees or employees who gain eligibility after the plan year's initial start. Your organization can provide notice to this group 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 their policy options 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.
Let’s look at some timeline examples below:
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The ICHRA starts on a date other than January 1, or a newly hired employee joins the benefit mid-plan year |
An employee becomes eligible for an ICHRA that would start at the beginning of the plan year |
An employee becomes eligible for ICHRA coverage that starts mid-year (such as an employee with a reduction of work hours) |
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They can use a 60-day special enrollment period to enroll in individual health insurance coverage outside of Open Enrollment. |
They must enroll in an individual coverage plan within the 60-day period before the first day of the plan year. |
They can enroll in an individual plan up to 60 days before the first day that their ICHRA begins. They can also enroll in coverage up to 60 days after this date if they weren’t provided at least 60 days of notice. |
Once you’ve created legal plan documents and notified your eligible employees, you can start administering it.
Remember, administering an ICHRA differs from administering a traditional group health insurance plan. There’s no insurance company to handle most of the responsibilities. Instead, you must manage the plan yourself, which can take substantial time. But, you can use an HRA administration platform to make the process easier.
You must appropriately extend or end ICHRA eligibility when you gain or lose employees.
Here are the rules:
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 to continue to access their ICHRA.
When your employees make a reimbursement claim for their individual insurance premiums or other qualified out-of-pocket expenses, they must provide you with adequate proof.
The documentation, such as a receipt or invoice, must include the following:
Employees only 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. Employees can find this information for individual health plans in their explanation of benefits (EOB).
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. If not, you’ll decline it and follow the process for adverse claims decisions outlined in your plan documents.
This involves having a good grasp of IRS rules. Otherwise, you could risk your ICHRA becoming noncompliant. You can work with an HRA administration platform like PeopleKeep to take this task off your plate.
To be ERISA compliant, your organization must have a specific procedure for declining reimbursement requests and appeals.
Here are the timelines:
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 employee.
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 qualifying form of individual health insurance that provides 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 qualifying coverage during the plan year, they can’t participate in the ICHRA until they enroll in coverage again.
When processing reimbursements to employees, you can use the following:
Suppose the reimbursement request was more than the employee’s accrued allowance. In that case, you should pay the employee the total amount of their accumulated allowance. Then, you can 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.
Whether your organization must comply with HIPAA standards or not, the plan sponsor must certify that employees’ PHI is safe and not used for employment-related actions. For example, initiating any action against employees who receive medical care or medications you may disagree with is illegal.
If you have a HIPAA privacy officer, only this individual should see this information. You can track and store this information using spreadsheets or other administration software. 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, 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. So, there are mandatory reporting requirements you must follow.
Employees are responsible for tracking any reimbursements they accidentally made for incurred expenses while they didn’t have MEC. They will need to include these amounts in their gross taxable income or pay you back for those reimbursements.
Organizations that offer an ICHRA must also complete Form 1095 each year. This is how you’ll report your ICHRA benefit to the federal government.
Need more specific reporting information for your ICHRA? Read our blog.
Before you try to self-administer your ICHRA, it’s essential to understand the hidden costs of this approach.
Here’s a look at the potential costs:
Between plan document fees, potential compliance penalties, and the time cost, administering your ICHRA on your own may not be the bargain you think.
If you like the freedom that comes with self-administration but want to save money and avoid potential compliance pitfalls, administering an ICHRA using PeopleKeep’s HRA software is a perfect match.
Here are the perks of using our HRA software:
Here’s the best part—unlike working with third-party administrators, you aren’t giving up control of your benefit. Our software and award-winning customer support team are here to help you.
An ICHRA is a modern and flexible solution that can support all your employees’ medical needs. However, you must manage it correctly for the benefit to provide value. Self-administering an ICHRA is tempting, but it's unrealistic for most small and mid-size employers. While it may be the right option for some, the time-consuming compliance considerations of self-administration make many employers avoid it.
If you prefer the independence of self-administration but want help, an HRA software solution with plan design flexibility, like PeopleKeep, is an excellent choice. Contact our HRA specialists, and we’ll ease your administrative burden.
This article was originally published on March 1, 2021. It was last updated on February 10, 2025.
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