There’s no doubt about it: the majority of employees value health insurance. A survey conducted by SHRM found that 88 percent of employees rank health-related benefits as “very important” or “extremely important,” prioritizing it above retirement savings, leave, family care, education and transportation benefits.
Some employees value the benefits they receive from the companies for which they work even more than salary alone. Polls have shown that 80 percent of workers were more inclined to take a job with benefits than one without benefits that included 30 percent more salary.
In the past few years, an increasing number of employers have started offering their employees an alternative to traditional group health coverage options. We’re referring to an individual coverage Health Reimbursement Arrangement, commonly referred to as an ICHRA.
What Is an ICHRA?
First available for employers to offer on January 1, 2020, an ICHRA is a newer option for companies to finance health insurance coverage for their employees. It enables employers to make a per employee per month tax-free contribution to reimburse employees for personal healthcare expenses, including individual market coverage.
ICHRAs are especially useful for companies that employ a mix of salaried and hourly workers or experience high employee turnover. They’re also beneficial for employers whose employees work remotely in multiple regions across the United States.
How Do ICHRAs Work?
Employers offering an ICHRA can choose for it to reimburse employees for insurance premiums only, insurance premiums and qualified medical expenses or qualified medical expenses only (as defined as defined in the Internal Revenue Code (IRC) Section 213(d)).
There are requirements that must be met for employees to participate in an ICHRA. The biggest of these is that the employee must purchase and be covered by a qualified individual health plan. What exactly does this mean? A qualified plan is one that doesn’t have any annual or lifetime limits and covers preventive health services — with no cost sharing.
ICHRAs do not apply to short-term coverage, including fixed indemnity plans, association health plans, TRICARE, healthcare sharing ministries, multiple employer welfare arrangements and expected benefits coverage only. Employees must be given the option at least once per year to opt out of participating in the ICHRA and are not allowed to use both pre-tax ICHRA funds and tax credit discounts.
Allowance Distribution Among Types of Employees
Employers are not required to offer the same monthly contribution or reimbursement amount to all employees. The amount can vary between various groups of employees based on how many hours they work and the type of job they perform. Employers can even choose to scale IHCRA rates based on employee age and family size.
Overall, there are up to 11 different permissible classes of employees employers can choose from when deciding how to structure their ICHRA reimbursements, including:
- Full-time employees
- Part-time employees
- Seasonal employees
- Salaried employees
- Hourly workers
- Temporary employees working for a staffing firm
- Employees covered under a collective bargaining agreement
- Employees in a waiting period
- Employees working abroad
- Employees in different locations based on rating areas
- A combination of two or more of the above
Whatever ICHRA plan design an employer selects must be fair to groups of employees and be offered on the same terms to all individuals within a class of employees. Also, they aren’t allowed to offer both an ICHRA and group health plan to the same employee class.
ICHRA Pros and Cons
This alternative is especially advantageous to employers new to providing health benefits. Not only does it offer more flexibility for employers, but it also reduces the administrative burden of managing a traditional group health plan. Other perks include:
- Lets employers offer healthcare budgets rather than plans
- Allows employees to choose their own plan
- Increases portability of coverage
- Offers flexible allowance amounts
No Monthly or Annual Minimum or Maximum Employer Contribution
No Participation Requirement
- Businesses of all sizes can participate
- Employers have control over their contributions and spending
- Avoids high medical claims that result in a substantial rate increase
- Contribution selected by employer doesn’t change unless by choice
- Enables employers to decide how much they’re willing to spend
- Contributions are tax-free and not subject to employer-matching payroll taxes
- Reimbursements do not add to an employee’s gross income
Now, onto the drawbacks of ICHRAs. First, they require an employee to invest in an individual health plan. And, employees participating in an ICHRA are not eligible for premium tax credits. Those not participating in an “affordable” ICHRA also aren’t able to receive tax credits with a Marketplace plan.
Some ICHRAs have limited provider networks. Also, because an employer typically doesn’t have access through an ICHRA to their employees’ individual health plans, they aren’t able to advocate on that individual’s behalf.
Because ICHRAs have only been available for about three years, many employees are not aware of them. That means employers might have to spend more time educating their employees about this type of health insurance coverage.
ICHRA Vs. HRAs
An ICHRA, as its name implies, is a type of HRA. Therefore, it works similarly to a traditional HRA. Both options allow employers to decide on their contribution and how often employees receive it. Funds in these plans cannot be rolled over to a new employer, and it’s up to the employer to decide whether any unused funds will be rolled over to the following year. Also the same in both ICHRAs and HRAs is that each request for reimbursement must be substantiated as an eligible expense before payment can be made.
Here are a few of the prominent differences between an ICHRA and a traditional HRA:
- Unlike other HRAs, the ICHRA has no minimum or maximum employer contribution limits.
- For ICHRAs, employers with 50 or more employees must offer “affordable” reimbursement amounts.
- Traditional HRAs are integrated with typical health insurance plans.
- With ICHRAs, employers must provide a written notice to eligible employees at least 90 days before the start of the plan year.
- An ICHRA does not impact HSA eligibility if it only pays for individual health insurance premiums.
Although ICHRAs are fairly new, they offer a less traditional option for employers who want to provide their employees with health insurance coverage but deem other choices unaffordable. Understanding the details of such plans, though, can certainly be confusing, which is why it’s best to enlist the help of professionals.
At StenTam, our multidisciplinary team will leverage our vast knowledge of tax incentives and programs to help you maximize your benefits and leverage available strategies to mitigate cost. We provide industry-specific solutions for your workforce, ongoing compliance reviews and consulting and much more. Contact us today to get started!
What Is the Average ICHRA Reimbursement?
The average reimbursement amount for insurance premiums submitted over the last year was $573.14. The average monthly allowance employers offered their employees between July 1, 2022, and June 30, 2023, was $908.80, and the median monthly allowance employers offered was $550. Businesses with one to four employees offered an average monthly allowance of $1,144, and those with more than 50 employees offered an average allowance of $434.
What Is the ICHRA Enrollment Period for Employees?
When an employer enrolls in an ICHRA, its employees are eligible for special enrollment and don’t have to purchase individual health insurance during the typical enrollment period. Those employees, however, have only 60 days to complete their enrollment in a new individual plan.
What Qualifies an ICHRA as Affordable?
ICHRA contributions are considered affordable if the remaining amount an employee has to pay for a self-only Silver Plan on the Marketplace exchange is less than 9.78 percent of his or her household income. If an ICHRA is not deemed affordable, employees can decline participation and instead keep their tax credit.
Does ICHRA Get Reported on Employees’ W-2?
No. The Internal Revenue Service (IRS) does not require ICHRA contributions to be reported on employee W-2s. However, there are some reporting requirements for ICHRAs that differ between small employers (fewer than 50 full-time equivalent employees) and large ones.
For example, small employers must submit Form 1094-B2 and Form 1095-B3 to the IRS for every employee who had an ICHRA in the previous year and send each of those employees by January 31 a Form 1095-B explaining how their ICHRA affordability was calculated. Large employers are required to submit to the IRS Form 1095-C4 for every employee who was employed full-time in the previous year and every part-time employee who was enrolled in an ICHRA. They also must send each of those employees by January 31 a Form 1095-C5 explaining how their ICHRA affordability was calculated.
Another tax form to be filed for ICHRAs or any welfare benefit plan is Form 5500, although this is only required for companies with 100 or more employees. Employers offering ICHRAs also are required to pay a yearly fee for the Patient-Centered Outcomes Research Institute (PCORI) by July 31 of the year following the plan year. This fee is paid to the IRS, and employers who fail to pay it may be penalized.