The individual coverage health reimbursement arrangement (ICHRA) is a new way for small businesses and other organizations to offer employees group style health benefits. It has been said to offer the most flexibility for employers and employees alike, the “ best of both worlds” if you will. This allows the employer to help fund the cost of healthcare but not take on the administration of the benefits. It gives the employee more freedom to choose a plan that works with their provider of choice, but to ensure that the employee understands the plan and benefits, it is helpful to work with an independent broker. The broker will educate and assist your employee to find the right plan for them
- Allows businesses to reimburse employees tax-free for health care, including individual health insurance policies which was previously disallowed and maintains the tax-free cost.
- Allows the employee the flexibility to enroll on the coverage of their choosing
The basic ICHRA structure works like any HRA, but there are unique guidelines businesses should consider when considering it for themselves.
How the ICHRA works
Like all HRAs, the ICHRA follows a simple, four-step process:
- The company chooses an allowance
- Employees obtain health insurance,
- Employees submit proof of incurred expenses,
- The company approves and pays the reimbursement.
Look at the steps in more detail to examine regulations specific to the ICHRA.
- The business sets an allowance (contribution) amount for employees.The business offering the ICHRA chooses a monthly amount of tax-free money it will make available to employees. This represents the maximum amount for which employees can be reimbursed. With the ICHRA, there are no minimum contribution requirements or maximum contributions. Additionally, businesses can offer different allowance amounts to different employees based on different employee classes: full-time employees, part-time employees, seasonal employees, salaried employees, hourly employees, temporary employees, employees in a waiting period, employees covered under a collective bargaining agreement, foreign employees who work abroad, employees who live in different geographic locations, and a combination of any of the above classes. However, there are minimum number of employees required to be in each class. Businesses can also vary allowance amounts within each class by employee age or family status, if contributions based on age don’t exceed amounts three times greater for the oldest employees vs. the youngest employees in the class per ACA guidelines.
- Employees buy their health insurance.Using their own money, employees purchase the health care that fits their personal needs. This includes an individual health insurance policy; in fact, all employees and their family members who participate in the ICHRA must be covered by an individual policy. Commonly, all items listed in IRS Publication 502 are eligible for reimbursement through the ICHRA. However, businesses can limit this list if they choose.
- Employees submit proof of purchase.After incurring an expense, employees submit proof of it to their company’s administrator. To be approved, this documentation must include three items: a description of the product or service, the cost of the expense, and the date the expense was incurred. Invoices or receipts typically satisfy this request, but so do other documents, including an explanation of benefits from the employee’s insurance company. Employees must also attest to having individual health insurance every time they submit a reimbursement request before it can be approved.
- The business reimburses the employees.If the documentation provided by the employee meets requirements, the expense is eligible for reimbursement, and the employee has the appropriate insurance coverage, the business must approve the employee’s request and reimburse employees up to their allowance amount. If the expense doesn’t qualify, the business must follow the procedure for denied claims according to its plan documents Typically, businesses include the tax-free reimbursement in the employee’s next paycheck.
It’s easy to understand how the ICHRA works; it’s a simple, predictable and flexible benefit with appeal to both businesses and their employees.
However, administering it isn’t so simple. Like all alternative funding options, the ICHRA must meet the same set of federal requirements outlined in HIPAA, ERISA, and tax code. Because these conditions can be complex (and costly if ignored), we recommend the business choose to administer their H.R.A with a qualified and experienced third-party administrator (TPA).
With your TPA handling the transactions they can reduce their administration time, avoid privacy issues, ensure they follow federal guidelines, and stay on top of changing health care policies.
The ICHRA is an exciting new health benefits option for small businesses, nonprofit organizations, and other groups. The broker’s role is a key to its success because they can pull it all together between the business, the families and the administrator making it a smooth process for all parties involved.
It allows organizations to control their benefits budget while providing employees with the freedom to make their own health insurance plan choices. Basically, the employer is subsidizing the plan purchase while the employee gets to choose (with the professional help of a broker like Total Benefit Solutions, Inc.) the coverage that is the best fit for their own family.
Another key benefit is that when an employer creates the ICHRA it’s employees do get a qualified SEP for choosing a plan even if it’s in the middle of a calendar year.
Questions or concerns about an ICHRA or this bulletin? Please reach out to us at Total Benefit Solutions, Inc (215)355-2121 and we will do our best to assist.