An individual coverage HRA (ICHRA) is a type of health reimbursement arrangement that allows employers to reimburse their employees tax-free for personal healthcare expenses. With an ICHRA, instead of offering employee health care coverage from a single provider, you offer a monthly allowance for eligible healthcare costs. It’s up to you whether you want to cover both insurance premiums and qualified medical expenses. This allows employees to buy the healthcare services they want – including individual health insurance coverage, and your business reimburses them up to a certain amount.
Section 125 of the Internal Revenue Code, also known as a “Cafeteria Plan” allows employees to pay certain expenses on a pre-tax basis, such as insurance premiums and medical or dependent care expenses, thereby reducing their gross income. This in turn reduces an employee’s State, Federal and FICA (Social Security and Medicare) taxes.
Employees who have an ICHRA and a section 125 plan available. When individual insurance premiums, from a plan purchased off the exchange, exceed the amount of the employer contribution, an employee whose employer has a Cafeteria Plan can submit the remainder of the insurance premium for pre-tax deductions to gross income.
The logistics of recording this Section 125 plan can vary from company to company. One method is it can be documented by your ICHRA administrator, like Benafica, and reported to the employer. Then the employer can record it on their payroll as a non-cash deduction for a Section 125 expense. This will lower the employee’s taxable income, without lowering their paycheck.
The maximum savings can vary, in many cases the savings can be quite significant as an Individual Coverage HRA amount has no annual contribution limits. For example: a 42 year old male who has a family health insurance plan with his wife and two kids pays $1098 per month for a silver level family health insurance plan. He has a $55,000 salary, and a $300 a month HRA Contribution from his employer. In this case, due to the additional deduction from a Section 125 Plan, the employee saves $2533 annually in taxes from the reduction in a taxable income, and his employer saves $733 in reduced employer FICA taxes.
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At Benafica, it’s our mission to educate companies and individuals on the healthcare benefits available to them, so they can make the coverage decisions that best meet their needs. If you’re ready to learn more about your business’s health benefits options, feel free to give our team a call today at 651-287-3253 or send us a message, and we’ll be in touch promptly.