ICHRA 101: Everything You Need to Know About Individual Coverage Health Reimbursement Arrangements

As an employer, the health benefits you provide are key to attracting and retaining top talent at your organization. Providing comprehensive health coverage not only gives your employees peace of mind, but also helps you establish a strong company culture.

Your company’s size, budget requirements, and related insurance preferences all play a role in selecting the most suitable health benefits for your business. Benafica works with companies like yours to determine which benefits you should offer. In this blog, our experts break down everything you need to know about individual coverage health reimbursement arrangements (ICHRAs), an exciting alternative to traditional group health insurance.

What Is an ICHRA?

An ICHRA is a type of health reimbursement arrangement or HRA that allows employers to reimburse their employees tax-free for personal healthcare expenses. It’s similar to a qualified small employer health reimbursement arrangement (QSEHRA), but with higher limits and greater flexibility.

With an ICHRA, instead of offering employees health insurance from a single provider, you offer a monthly allowance for eligible healthcare costs. It’s up to you whether you want to cover insurance premiums, qualified medical expenses, or both. This allows employees to buy the healthcare services they want – including individual insurance, should you choose to cover it – and your business reimburses them up to a certain amount.

Here’s what the process looks like:

  1. Your business sets an allowance.

ICHRAs allow employers to make a per-employee, per-month, tax-free contribution to reimburse health insurance costs and other medical expenses. There are no caps on contributions, and employers can allow different amounts for different employee classes (full-time vs part-time, for example).

  1. Employees make healthcare purchases.

With their own money, employees make healthcare purchases that fit their personal needs. (IRS Publication 502 (IRC Section 213(d)) has a full list of all eligible expenses.)

  1. Employees submit proof of healthcare expenses.

Formal documents, such as receipts or explanations of benefits from insurance companies, must be submitted in order for employees to be reimbursed.

  1. Your business reviews receipts and reimburses employees.

As long as the employee-submitted documents are legit, your business reimburses the employees up to their monthly allowance. Reimbursements are tax-free for both parties.

Which Businesses Can Offer ICHRAs?

Unlike other HRAs, ICHRAs are available to businesses of any size. To offer an ICHRA, your business cannot also offer a QSEHRA or excepted-benefit HRA.

You can still offer a group health insurance policy, but you cannot offer the same employee class both an ICHRA and a group health insurance policy. For example, you could offer full-time employees a group health plan and part-time employees an ICHRA, but you cannot offer full-time employees a choice between the group health plan and the ICHRA.

Who Is Eligible for an ICHRA?

Employees are only eligible for an ICHRA if they have coverage under a qualified individual health insurance policy. For a plan to qualify, it must have no annual or lifetime limits and cover preventative health services with no cost sharing.

If an employee loses coverage, they can no longer receive reimbursements. You can also choose to extend eligibility to employees’ spouses and dependents, provided they meet the same qualifications. Read more about ICHRA employee requirements here.

Designing the Ideal ICHRA for Your Business

Employers are granted a great deal of flexibility in designing ICHRA benefit classes, allowing you to tailor the plan to your organization’s unique needs. You can give all employees the same contribution allowance, or vary reimbursements based on family size, employer age, or both.

However, your ICHRA plan must be fair to all employees within the same class. The 11 permitted ICHRA employee classes are:

  1. Salaried employees
  2. Hourly employees
  3. Seasonal employees
  4. Full-time employees
  5. Part-time employees
  6. Employees in different locations, based on rating areas
  7. Employees covered by a collective bargaining agreement
  8. Employees who have not satisfied a waiting period for coverage
  9. Temporary employees of staffing firms
  10. Non-resident aliens with no US-based income
  11. A combination of the above
Key Benefits of ICHRAs

Let’s summarize the main advantages. With an ICHRA, you can:

  • Set reimbursement allowances for employees, giving you total control over your health benefits budget.
  • Avoid annual rate increases that are often associated with traditional group health plans
  • Choose which employees are eligible to participate based on classes that you determine
  • Empower your employees to purchase the best healthcare products and services for their specific needs. (Remember, they can use reimbursements toward their own individual policy and out-of-pocket expenses, depending on what you choose to reimburse.)

One of the most confusing parts of establishing an ICHRA is understanding whether your reimbursement is affordable. If it’s not affordable, the employee can opt out and receive premium tax credits instead. Calculating affordability, record keeping, maintaining employee privacy, and staying updated on regulations are all critical to the success of your ICHRA. This is why self administering your own ICHRA is not recommended.

If you’re a large or small employer interested to learn more about ICHRAs, contact Benafica! Our mission is to teach companies and individuals about the benefits options available and help them make informed decisions. To learn more about our services or request a quote, give us a call at 651-287-3253  or send us a message.