ICHRA Plan Overview
An Individual Coverage Health Reimbursement Arrangement, or ICHRA, is a new type of HRA in which employers of all sizes can reimburse their employees for a designated amount of health insurance premiums. ICHRA's simple and modern health insurance reimbursement model has been a game-changer for employers looking to provide health benefits to their staff.
Evolving from another type of HRA, the QSEHRA, ICHRA appeals to more employers by offering greater design flexibility and higher tax-free employee reimbursement limits.
ICHRA uses a reimbursement model that is much simpler than traditional group benefits.
How does ICHRA work?
As the name implies, ICHRA is based on reimbursing employees for insurance rather than buying it for them. At a high-level, the way ICHRA works is very simple:
- Employers design their plan, including defining which employees are eligible and establishing reimbursement limits
- Employees purchase the individual plans they want
- Employees submit claims for reimbursement
- Employers reimburse employees for valid claims
To stay compliant and keep employees and the IRS happy, there are some important rules and regulations we’ll get into later in this guide.
ICHRA reimbursement has several advantages over traditional group plans that may be appealing to some employers. For instance, HRA insurance (sometimes called a “defined contribution”) gives employers greater ability to control costs and provides employees with more options to choose from. This is very different from the current model of group insurance (sometimes called a “defined benefit”) where employers must choose a one-size-fits all plan for the group and employees are limited to options sponsored by the employer.
In addition, ICHRA takes the burden of managing a health plan and underlying health risks off of the employer. You or your clients won’t have to hassle with renewals, worry about participation rates, stress about what doctor networks your employees want, or be surprised by annual premium increases. Instead, with ICHRA employers can decide which employees qualify, set their monthly allowances, and get back to managing their business while employees get to choose the plans they want.
In this guide, we provide a summary overview of ICHRA’s benefits and basic ICHRA requirements. We’ll share practical tips for evaluating if the ICHRA health insurance model would be a good fit for you or your client, ideas on how to design and optimize an ICHRA solution, and important details on administration and compliance.
Although it's still new, ICHRA feels like something that’s been a long time coming. We’ve watched the retirement industry move from defined benefit to defined contribution models (think pension plans to 401k), so it was only a matter of time before the health insurance industry followed suit. Today, we've seen the ICHRA market grow exponentially year over year and we expect that trend to continue to gain momentum. Let's dig in a little deeper to the history behind employer-subsidized health insurance.
Traditionally, HRAs are commonly used with group health plans. Before the Affordable Care Act (a.k.a. “Obamacare") passed in 2010, it was common for small employers to use HRAs to reimburse for individual health insurance. However, unintended regulations that spun out of the ACA put a halt to the practice of reimbursing (and even penalized employers who continued doing it).
Although it took a while, congress finally addressed the problem. In December 2016, a hodge-podge bill called the 21st Century Cures Act was passed by a Republican Congress and signed by President Obama. The bill created the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), which again makes it permissible for small employers to reimburse for individual insurance as long as the employers (and employees) met several strict guidelines.
With QSEHRA gaining traction, the Trump Administration issued additional guidance to expand the use of HRAs. In October 2018, the U.S. Departments of the Treasury, Health and Human Services (HHS), and Labor proposed new regulations to expand the usability of health reimbursement arrangements (HRAs). The rules were finalized in June 2019 and created two new types of HRAs: the Individual Coverage HRA and the Excepted Benefit HRA.
HHS projects that in the next 5-10 years, roughly 800,000 employers will offer Individual Coverage HRAs to pay for insurance for more than 11 million employees. We think if market conditions break the right way, it could be much, much higher.
Take Command estimates that as many as 50 million employees and family members could participate in an ICHRA plan in the coming years.
| ICHRA Wins | ICHRA Loses |
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 Cost controlDefine your benefit budget and stick with it. No more surprise group increases year after year. |
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| Plan customization & flexibility Design a plan that fits your team vs being locked into what an insurance company offers |
 Premium PricingOn average, individual plans are usually 10-20% more expensive than traditional group plans |
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Risk de-management Take managing your employees' health risk out of your business plan |
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Network flexibility Give your employees the ability to choose plans and doctors that work for them |
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Plan portability Employees own their health plan and can take it with them if they change jobs. |
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Plan choice & Personalization Employees select individual plans that fit their needs: doctors and RX coverage. |
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Employee experience Individual insurance companies provide a superior experience (apps, concierge, etc) |
When evaluating ICHRA vs a group plan for your firm or your client, it’s important to complete this analysis on a class-by-class basis. For example, a group plan may be better for full-time employees that want a large provider network, but ICHRA might be better for part-time employees that are network agnostic and value choice and portability.
Wondering about the individual market in your area? There are often more ICHRA-compatible options than what you can find on Healthcare.gov or your state exchange. Our enrollment software can help each employee optimize for his or her needs and find an ICHRA-compliant plan. This ensures your dollars are being spent efficiently and that your employees are buying plans they are happy with.
If a client is very budget conscious there are a few design options that will help them reign in costs while still providing a quality benefit. We provide some practical tips below, but make sure to reach out to our experienced design consultants. We’re happy to help!
Advantages of ICHRA Plans
ICHRA allows employers to customize the health plan to meet their budget and company goals while providing employees with the necessary coverage. With ICHRA, employers reimburse employees for insurance premiums and qualified medical expenses.
Here's what to know about ICHRA pros and cons.
ICHRA Pros
One of the major benefits of ICHRA is the flexibility it offers employers. Employers can customize the plan to meet the needs of their business and their employees. The employer can choose the type of coverage they want to offer, the amount of the reimbursement, and the eligibility requirements.
This allows employers to tailor the plan to their specific needs, budget, and objectives. Additionally, employers can also choose to offer different levels of coverage to different classes of employees, such as full-time, part-time, or seasonal employees. This flexibility is the type of health coverage employers need to provide health benefits to the modern mixed workforce.
Cost Savings
Since employers decide on the maximum reimbursement allowances, they control how much is spent on health coverage. And any unused HRA account funds can roll over at the employer's discretion annually; otherwise, the funds stay with the employer. They also roll over month over month.
ICHRA Tax Advantages
ICHRA offers tax benefits to employers and employees – everyone loves a win-win! Employers can deduct reimbursements made to employees through ICHRA, reducing their overall tax liability. And reimbursements given to employees through ICHRA are not considered taxable income, so employees won’t have to pay taxes on reimbursements. This helps reduce healthcare costs for employers and employees and everyone benefits.
Attract and Retain Talent
ICHRA offers a more customized health plan than other employer-sponsored plans, making it more attractive to potential employees. The plan can provide employees with the coverage they need, helping employers retain top talent by ensuring employees have access to the health care they need. This can help employers save money in the long run by reducing turnover costs. Employers can demonstrate their commitment to their health and well-being by offering a health plan that gives employees the freedom to choose the individual health coverage that works best for them and then reimbursing them for expenses, including premiums.
ACA Compliance
ICHRA also helps employers comply with the Affordable Care Act (ACA). The plan meets the ACA’s minimum requirements for employer-sponsored health plans, allowing employers to avoid potential penalties. This can help employers save money in the long run by avoiding any fines or penalties associated with non-compliance.
Administration Simplicity
The plan can also help employers simplify their administrative processes. ICHRA does not require employers to manage a large group insurance plan, which can help reduce the administrative burden. This can help employers save time and money by streamlining their administrative processes.
We’ll cover what counts as a “qualified premium” later when we discuss employee requirements. “Qualified medical expenses” are defined by the IRS in publication 502. If you’re familiar with Health Savings Accounts (HSAs), this is the same list. It includes things like doctor visits, co-pays, prescriptions, medical equipment, dental procedures, etc. Employers can choose to only reimburse certain types of medical expenses (ie, only prescriptions) as long as whatever elections are made are offered fairly to employees (there’s that “fair” thing again!)
Furthermore, employers can choose how to structure reimbursements to employees:
- Give all employees the same amount: This one is easy. For example, you could give all employees $200/mo.
- Vary reimbursements by family size: Since individual market plans cost more for families, employers can offer more for larger families. Unlike QSEHRA, it does not have to be tied to a reference plan but does have to be “reasonable”. For example, an employer could offer $200 for single employees, $300 for married employees, and $600 for employees with families. Or they could offer $100 for each additional dependent.
- Vary reimbursements by employee age: Similarly, since individual plans typically cost more for older employees, employers can elect to offer higher reimbursement amounts to older employees. Reimbursements must be structured using a 1:3 ratio from the youngest to the oldest employee. We strongly recommend setting it using the age range from 21 to 64. For example, you could give a 21 year old $100/mo and a 64 year old $300/mo.
- Vary by both family size and age: Combo of the above to options. Math gets a little funky but isn’t too bad.
To take it a step further, employers can also mix-and-match traditional group plans with ICHRA implementations. For example, you could offer employees in Colorado a traditional group plan and employees in New York an ICHRA.
The one-catch? Employee classes have to be based on legitimate job-based criteria like hours worked or geographic location.They cannot be used to discriminate against unhealthy employees (i.e., you can’t create a “diabetic” class, etc).
Here’s a summary table of the classes employers can use to design their plans:
| Employee Classes | |
|---|---|
| Full-Time🔒 | A business can define whether this means 30 hours or 40 hours a week, but keep in mind that to satisfy the employer mandate, it will need to be at least 30 hours a week. |
| Part-Time🔒 | Depending on the employer's needs, this can be defined as either less than 30 or less than 40 hours a week. |
| Seasonal | Employees who are hired on a short-term basis or for a particular season. |
| CBA Class | This includes employees who are part of a Collective Bargaining Agreement which signifies a written agreement between an employer, employee, and their trade union on the basis of employment, pay rate, work hours, and other working conditions. |
| Waiting Period Class | Employees that just joined an employer. This is standard practice when new employees come on board. Businesses can choose up to 90 days before an employee’s health benefits kick in. |
| Rating Area Class🔒 | This class can be broken up by employees located in different geographic locations. It is generally thought of as employees whose primary site of employment is in the same rating area. |
| Non-Resident Alien Class | Employees who are non-resident aliens with no US-based income, including foreign employees who work abroad. |
| Salaried🔒 | Employees who receive a salary as wages. |
| Non-Salaried🔒 | Employees, such as hourly workers, who do not receive a salary as wages. |
| Staffing Firm | Employees placed for temporary assignments. |
| Combination Classes | Employers can combine two or more of the above classes to create a new class based on their needs. |
🔒 Subject to Class Size Minimums if one class is getting a group plan
In addition to multiple classes, employers can also offer an ICHRA to new employees while keeping current employees on a group plan. Essentially, an employer can “grandfather” in their group plan participants while offering an ICHRA to the new hires. The employer has to set an applicable date to being the delineation and then treat each case fairly. Employers can have multiple subclasses unless those classes are used to offer different ICHRA amounts.
Here are a few scenarios where utilizing ICHRA’s class structure would be helpful for you or your client:
Is your business concerned about hiring and retaining full-time employees but can't afford benefits for part-time employees?
Then your benefits budget will be best spent on offering an ICHRA to full-time employees only. Employers can then set different allowance ratings for full-time single employees, full-time married employees, and full-time employees with families. Employers can exclude: part-time or seasonal.
Do you have employees working in more than one state?
Instead of trying to find a group plan that works in multiple states, offer employees an ICHRA and let employees purchase plans in their local markets that best fit their needs. Since insurance rates vary by geographic locations, you can set your classes up by state. For example, employees that live in California will get $600 and employees living in Texas will get $500. There is no limit to the number of classes you set up! Employers can set up varying rates for each state employees live in and then further increase allowances by marital status or age.
Can you offer a group plan and an ICHRA together?
It depends.
Employers can offer an ICHRA and traditional group plan to employees as long as two conditions are met:
- Employees in each class are only offered one solution. For example, an employer cannot offer employees within a class an ICHRA and a group plan.
- Certain classes being offered reimbursement through an ICHRA must meet class size minimums. This is to avoid adverse risk shifting from employers trying to unload unhealthy risk off of their group plan and onto the individual market.
How does this work? Here are a few design examples:
| Scenario | Group Plan | ICHRA |
|---|---|---|
| Part-Time or Hourly Employees An employer likes his or her group plan, but has been struggling to maintain minimum participation based on part-time or hourly employees opting-out due to interest or expense. |
Full-Time Employees can remain on the group plan | Part-Time and/or Hourly Employees can be “classed-out” of the group plan (and therefore out of the participation requirements) and offered an ICHRA (which does not have participation requirements) |
| Remote Team An employer’s plan has gotten increasingly expensive because of remote workers and the need to maintain a large, national PPO network |
Maintain the group plan for “Local Employees” based on rating area criteria. | “Remote Employees” can be offered an ICHRA to purchase individual plans in their local market. |
| Staffing Firms How do you design benefits for the home office as well as employees assigned to different clients? |
Offer “permanent” or home-office employees a group plan or ICHRA. | Temporary employees assigned to clients can be put into the temporary employee class and offered ICHRA. |
Remember, benefits have to be distributed fairly to employees that fall within each class, but each class can be broken down further by age and family size. That means that employees with families can be offered a higher amount per month and rates can be scaled by age. This makes sense given that family health expenses cost more than singles, and health insurance costs rise with age.
ICHRA features a new hire rule which will allow employers to offer new employees an Individual Coverage HRA while grandfathering existing employees in a traditional group health plan. This is a great way to transition your workforce from a group plan to an individual coverage HRA.
Take Command's design consultants can help you strategize a plan that fits your budget and needs best.
Benefits have to be distributed fairly to employees that fall within each class, but each class can be broken down further by age and family size.
What if you’re not sure how many employees will be in one class or another? Minimum class size is based on a reasonable estimate at the start of the plan year. Employers will want to document and demonstrate reasonable assumptions when designing their plan that they will meet minimum class sizes. If at the end of the year, actual participation in a class dipped below the minimum, the employer will want to make changes to their ICHRA to boost participation.
Owners of multiple companies will want to be aware of the difference between how affordability requirements are determined and minimum class size rules. While an employer's requirement to satisfy the employer mandate is subject to common ownership rules (IRS Code 414(b), (c), (m) or (o), minimum class size requirements are based only on the common-law employer level.
Employers can use different safe harbors to manipulate the affordability threshold. However, safe harbors must be applied on a uniform basis to all employees. Our design consultants can help you and your client figure out the best methods to use.
If you or your client are implementing an ICHRA, older employees are likely to experience sticker-shock with their premium prices because the individual market is age rated. We suggest varying reimbursement amounts by age to account for this and ensure a smooth transition. In the example above, if Steve and Stacy were the youngest and oldest employees respectively, instead of giving them each $400/mo, Tom could offer Stacy 3x the reimbursement he offers Steve. Tom could give Steve $200/mo and Stacy $600/mo which would cost the same and feel more “fair” to employees.
Small employers may want to intentionally design an “unaffordable” ICHRA so that certain employees can take advantage of tax credits without costing the employer money. Our design consultants can help you or your client model out these scenarios.
If you or your client are interested in alternative plans or have many employees with access to spouse plans, you may want to consider QSEHRA as it can work with a wider variety of plan types. See our Guide on QSEHRA Reimbursements.
If employees are interested in using a Health Care Sharing Ministry (HCSM), alternative taxable arrangements can be offered alongside an ICHRA. Contact our design consultants to learn more.
For clients using Take Command as their ICHRA plan administrator, we will automatically generate the documents your employees need and can help them search for and enroll in a plan online.
ICHRA administration features for employees, employers, admins and consultants
ICHRA administrator features for employees:
- Robust on-boarding and online support.
- An employee welcome letter and other employee communications.
- Resources to help employees decide which policy to purchase.
- Online and mobile access to their account with instant receipt upload feature.
- HSA compatibility.
- A simple way for employees to make reimbursement requests.
- A way for employees to track reimbursements over time.
ICHRA administration features for employers and consultants:
Whether you're the plan administrator on staff or a benefits consultant helping a client, an ICHRA administration tool or HRA partner should make it easy to manage the ICHRA, track reimbursements, and comply with all reporting requirements.
- Easy setup
- Support for understanding affordability and premium tax credits and how those affect employees.
- Cloud-based account access.
- Real-time access to accounting information.
- An easy way to manage employee enrollment in the ICHRA.
- A way to track and record reimbursements (and send automatic notice of reimbursement decisions to employees).
- Online, automatic annual renewal.
Can I administer my own ICHRA?
It’s a question we get asked a lot. While it’s possible, ICHRA administration is definitely not something we’d recommend you or your client do on your own for a few practical reasons:
- Employee Privacy – Leveraging an administrator provides a necessary layer of privacy. For reimbursements to be tax-free, employers have to substantiate that employees are using funds to pay for health insurance and medical expenses. However, having employees submit receipts directly creates a significant problem because information about employees’ medical expenses (including individual insurance premiums) is considered Protected Health Information (PHI) under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Employers asking for employee medical records is a HIPAA privacy violation.
- Record Keeping – Because the IRS requires small businesses to keep records up to 7 years, record keeping can be problematic when small paper receipts are concerned. An administrator will keep all digital records organized and secure on your behalf providing peace of mind.
- Changing Regulations – In recent years, healthcare policy consistently proves to be evolving. Therefore, as ICHRA evolves, an administrator will always be up-to-date on regulation changes.
The Process for Setting Up an ICHRA
Ready to design and launch your ICHRA? Setting up an HRA is easy. Over the last few years, Take Command has helped over 1,000 clients setup and administer their own reimbursement programs. The process begins by finding the best ICHRA administration partner and then walking through these 6 basic steps:
Step 1: Pick a start date
The first step is pretty easy—establish a start date! Many companies tend to think about benefits on a calendar year basis during open enrollment, but the awesome part about ICHRA is that it can start any time of year and will trigger a special enrollment period so your employees can find plans on the individual market outside of the open enrollment dates with ease.
Step 2: Design classes for eligible employees
One of the best parts about the Individual Coverage HRA is the ability to divide employees into eleven+ custom classes to determine what kind of benefit they receive (ICHRA to all employees, ICHRA to certain classes, no benefit to certain classes, or a traditional group benefit to certain classes). These classes include full time, part time, seasonal, salaried, non-salaried, employees working abroad, employees in a waiting period, employees working under a collective bargaining agreement, temporary employees in a staffing firm, employees in a specific geographic location, or a combination of any of those.
Step 3: Determine a budget and set allowances
Your next step is to determine how much you’ll give employees to reimburse them for premium costs and medical expenses. You can set a different monthly allowance for varying classes that you choose to include, and can even integrate this option with a traditional group plan if you choose. From there, you can further increase allowances based on age or number of dependents.
Step 4: Establish legal plan documents
The IRS and Department of Labor have a variety of rules to follow regarding HRAs. Failure to comply with the rules will result in penalties. Your legal plan documents, which will include a formal plan document and summary plan document, must include the ICHRA policies including monthly reimbursement amounts, class structure, claims processes, reimbursement eligibility, and information on HIPAA and other procedures involving privacy.
Step 5: Communicate your new benefit to employees
Since you are going through the work to set up the ICHRA employee benefit, you’ll want to make sure your employees know how to use it. Practical information to include: start date, annual HRA allowance, and how to obtain coverage including information regarding a special enrollment period and how premium tax credits interact with ICHRA. Our team at Take Command can help onboard your team for you.
Step 6: Provide resources for employees to purchase individual health insurance
Choosing a health insurance plan on the individual market is a daunting task, especially if this is new territory for your employees. As an employer, you can provide your employees with tools and information to guide their decision making. Just beware, federal rules prohibit employers from being involved in the actual decision making when it comes to choosing a provider or policy. As the only HRA administrator that also offers shopping support on the individual market, Take Command can provide the best on- and off-market options for your employees based on their needs, their budget, their preferred doctors and their prescriptions.
