Wondering how Section 125 cafeteria plans work with ICHRA? Let's walk through how it works and what rules to follow (like purchasing off-exchange plans only!).
Also known as a “Cafeteria Plan,” Section 125 allows participants to pay certain expenses on a pre-tax basis, such as insurance premiums, medical, or dependent care expenses by reducing their gross income, therefore reducing their State, Federal, and Social Security taxes.
Cafeteria Plans allow employees to be reimbursed for qualified medical expenses that exceed their contributions during the designated plan term.
As of Jan. 1, 2020, employees can use employer-funded ICHRAs to buy individual market insurance, thanks to an executive order on HRAs.
Through the Individual Coverage HRA (ICHRA) employers set an allowance to reimburse employees for health insurance and medical expenses. This flexibility empowers individuals to take more control over what health insurance benefits they obtain.
Employers may set up tax-preferred cafeteria plans alongside ICHRA for their employees. There are a few special restrictions to keep in mind:
An ICHRA may be integrated with individual health plan coverage in order to reimburse individual coverage premiums and qualified medical out-of-pocket expenses, provided that the ICHRA satisfies a few conditions that we talk about below.