As the year comes to a close, end-of-year reporting is at the top of many employers' and plan administrators' to-do lists—especially for business owners administering their own health benefits, like a health reimbursement arrangement (HRA).
One of the most popular types of HRAs is the individual coverage HRA (ICHRA). A key feature of the ICHRA is that all reimbursements for qualifying medical expenses, such as individual policy monthly premiums, are free of payroll taxes for employers and employees. Reimbursements are also free of income tax for employees with a qualifying individual health plan that offers minimum essential coverage (MEC).
Even though the ICHRA is free of payroll and income taxes—making it free of W-2 reporting requirements—you need to satisfy other requirements. This article will answer frequently asked questions about ICHRA reporting requirements.
An ICHRA is an employer-funded plan that allows organizations of all sizes to reimburse employees for their qualifying medical expenses and individual health insurance plan premiums. An ICHRA is often a more affordable and personalized option than a traditional group health plan.
Employees pay for their health plan coverage and medical care costs. They provide proof of those purchases to their employer as claims for reimbursement. Then, their employer reimburses eligible expenses up to their allowance amount.
With an ICHRA, employers can establish monthly reimbursement amounts and design their plan with classes of employees. For example, you can offer different allowances to seasonal employees and temporary employees or choose only to offer an ICHRA to your salaried employees.
This gives employers complete cost control over the benefit while employees have the freedom to choose an individual health plan that best fits their needs.
First, let's discuss ICHRA W-2 reporting requirements. While the Affordable Care Act (ACA) requires employers to report the cost of employer-sponsored group health plans, the IRS1 doesn't require ICHRA reporting on Form W-2.
There's no need to report your ICHRA benefit on your eligible employees' W-2s. However, if you offer other types of HRAs, such as a qualified small employer HRA (QSEHRA), there are specific W-2 reporting requirements in place for small employers.
If you have fewer than 50 full-time equivalent employees (FTEs) at your organization, there are forms you must submit to the IRS to remain compliant.
Small employers must complete the following reporting obligations:
Employers must provide this information to employees by January 31. These forms are due to the IRS by February 28 for paper filers and by March 31 if filing electronically.
Applicable large employers (ALEs), or organizations with 50 or more FTEs, must meet the ACA's employer mandate to provide employees with healthcare coverage. ALEs that meet the employer mandate with an HRA must also demonstrate that the amount they’re reimbursing employees for is enough to make individual health coverage affordable.
To be affordable, reimbursement allowances must be enough that the lowest cost silver tier insurance plan on the ACA marketplace or state exchange is no more than 9.02% of the employee's household income for 2025 and 8.39% for 2024.
Large employees must complete the following tasks to maintain compliance:
Employers must provide this information to employees by January 31. These forms are due to the IRS by February 28 for paper filers and by March 31 if filing electronically.
Under the Employee Retirement Income Security Act of 1974 (ERISA), all organizations that offer retirement and welfare benefits, including ICHRAs, must file Form 5500. This details your benefit plan's financial condition and operations for the year.
No matter your organization's size, all employers with self-insured plans like an ICHRA must pay a yearly fee for the Patient-Centered Outcomes Research Institute (PCORI) and submit Form 720.
The PCORI fee amount for plan years ending before October 1, 2024, is $3.22 per covered life. The fee for plan years ending on or after October 1, 2024, is $3.22 per covered life.
This fee is due by July 31 following the plan year. While this fee was set to expire in 2019, the Further Consolidated Appropriations Act of 2020 extended it through 20296.
Employers aren't the only ones with end-of-year reporting and tax responsibilities—there are a few requirements for employees as well.
Employees using an ICHRA should be aware of the following:
With HRAs, organizations can save on healthcare costs by giving employees a tax-free health benefit. Best of all, unlike traditional group health insurance plans, employers can achieve these tax savings with just a few tax forms and a small fee per covered employee.
Keep in mind that while we're experts on HRAs and employee benefits here at PeopleKeep, we're not tax professionals. Contact your accountant for more detailed tax information if you have more specific questions about tax reporting.
This blog article was originally published on November 22, 2020. It was last updated on December 13, 2023.