Understanding ICHRAs: A Guide for Employers

In the evolving landscape of employer-sponsored health benefits, the Individual Coverage Health Reimbursement Arrangement (ICHRA) has emerged as a viable option. Designed to offer greater flexibility and control, ICHRA allows employers to reimburse employees for individual health insurance premiums and qualified medical expenses on a tax-free basis. This blog delves into what ICHRAs are, how they work, and who they benefit.

What Does ICHRA Stand For?

ICHRA stands for Individual Coverage Health Reimbursement Arrangement. It's commonly referred to as an ICHRA plan. Unlike traditional group health insurance plans, ICHRAs provide a unique approach to employee health benefits by leveraging individual health insurance policies.

What is an ICHRA?

An ICHRA is an account-based healthcare plan that enables employers to reimburse employees for individual health insurance premiums and qualified medical expenses without tax implications. This innovative plan is designed to offer more personalized and flexible health coverage options to employees, while also providing employers with a scalable and predictable benefits model.

How Does an ICHRA Work?

The mechanics of an ICHRA are straightforward, making it an attractive option for both employers and employees. Here’s a step-by-step look at how an ICHRA operates:

1. Employer Establishes a Budget: The employer determines a budget for health benefits. This budget is allocated to each eligible employee as a reimbursement allowance.
2. Employees Choose a Health Plan: Employees select individual health insurance plans that best suit their needs. These plans can be purchased through the Health Insurance Marketplace or directly from insurance providers.
3. Reimbursement Process: Employees pay their health insurance premiums and any qualifying medical expenses out-of-pocket. They then submit proof of these expenses, such as receipts, to their employer.
4. Employer Reimburses Employees: Upon verifying the submitted expenses, the employer reimburses the employees up to the pre-determined allowance. These reimbursements are made tax-free and can appear directly in employees’ paychecks.

This model shifts the responsibility of choosing health coverage to employees, empowering them to find plans that best fit their personal and family needs. Meanwhile, employers benefit from a predictable and controlled cost structure for providing health benefits.

Who is an ICHRA For?

ICHRA plans are versatile and can be adopted by employers of any size ; however, they are particularly appealing to two types of employers:

1. Companies New to Providing Benefits: Employers that are either new to offering health benefits or have recently qualified as an Applicable Large Employer (ALE) find ICHRA plans to be a straightforward and manageable way to comply with health insurance mandates.
2. Employers Facing Challenges with Traditional Group Plans: Businesses experiencing high renewal costs, low employee participation in group health plans, or budget constraints often turn to ICHRA as a viable alternative. The flexibility of ICHRA allows these employers to maintain a benefits program without the complexities and high costs associated with traditional group plans.

Advantages of ICHRA

The ICHRA model presents several notable benefits for both employers and employees:

• Flexibility: Employees can choose health plans that meet their specific needs rather than being limited to a one-size-fits-all group plan.
• Cost Control: Employers have predictable costs as they set reimbursement limits. This helps in budget management and financial planning.
• Tax Benefits: Reimbursements are tax-free for both employers and employees, providing significant savings.
• Customization: Employers can design the ICHRA to include various classes of employees, offering different reimbursement levels based on job roles, locations, or other factors. (Subject to any limitations and/or tax considerations under IRC Sections 105(h), and 125).
• Compliance: ICHRAs can be tailored to meet the requirements of the Affordable Care Act (ACA), ensuring that employers remain compliant with federal regulations.

Considerations and Compliance

While ICHRAs offer numerous benefits, there are some considerations and compliance requirements to keep in mind:

• Minimum Essential Coverage (MEC): Employees must have health insurance that meets MEC standards to participate in an ICHRA.
• Documentation and Administration: Employers need to establish clear documentation processes for reimbursements and ensure timely processing of claims.
• Communication: Clear communication is vital to ensure employees understand how to use their ICHRA, what expenses are eligible, and how to submit claims.
• Usage of an ICHRA vendor: when looking for a partner to administer your ICHRA program, determine what assistance will be most useful. From design tools to employee shopping experience to advanced payment/reimbursement methods to compliance reporting, a vendor will help ease the administrative burden off of HR or broker/consultant teams.
• Nondiscrimation concerns: Internal Revenue Code Sections 105(h) for any self-funded plans and 125 (for any pretax) plans may be impacted if/when/where an ICHRA exists with a company’s controlled group alongside traditional plans.

Conclusion

The Individual Coverage Health Reimbursement Arrangement (ICHRA) represents a significant shift in how employers can offer health benefits. By providing a flexible, cost-effective, and employee-centered approach, ICHRAs empower employees to make personalized health insurance choices while allowing employers to manage their benefits budget effectively. As healthcare continues to evolve, ICHRAs stand out as a promising solution for modernizing employee health benefits.

For more information on ICHRAs or to evaluate whether an ICHRA is a good fit for your organization, please reach out to your AssuredPartners team.