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ICHRA Rules: What are Individual Coverage HRAs?

One Minute Takeaway

  • Individual Coverage Health Reimbursement Arrangements (ICHRAs) are among a variety of healthcare coverage options business can offer employees
  • ICHRAs provide employees with tax-free monthly allowances for individual coverage
  • Employers need to be aware of IRS rules for providing ICHRAs

Employees need options when it comes to covering the cost of healthcare. Group health insurance unfortunately doesn’t always work for everyone. When you offer new and nontraditional alternatives, you can retain individuals with unique situations that fall outside of the norm.

Recent healthcare reforms have provided employers with new options, including the ICHRA or Individual Coverage Health Reimbursement Arrangement, which is now available for organizations of all sizes. If you’re planning to provide an ICHRA to your employees, it’s important that you understand how the rules vary from traditional HRAs.

What is an ICHRA?

An ICHRA or Individual Coverage Health Reimbursement Arrangement allows businesses to offer employees a monthly tax-free allowance to buy individual health coverage and cover expenses for their unique needs. This enables employees to shop for insurance outside of an employer’s group health plan or when an employer does not offer health insurance at all.

The ICHRA was originally created in 2019 to help control costs and address ACA compliance for applicable large employers, but in January 2020 it became available for businesses of all sizes. (For more information, read IRS guidance.)

How is an ICHRA different from an HRA?

Unlike an HRA, an ICHRA allows for the reimbursement of individual insurance premiums. It’s also designed to work with individual insurance plans, while HRAs are often used for group health plans. The individual coverage plan requires that employees purchase insurance plans independently from the Health Insurance Marketplace/Exchange or outside of the Exchange, and submit proof of incurred expenses to their employer. The employer then pays the reimbursement directly to the employee. The reimbursements do not count towards employees’ taxable wages. Also, in an ICHRA, an employer can allow unused funds to roll over from year to year.

ICHRA Rules: What Employers Need to Know

Employers can offer ICHRAs to any specific class of employees: full-time, part-time, seasonal, salaried, etc. The amounts offered may be increased for older workers or for workers with more dependents. An employer can offer group health plans to other classes of employees, but an employee is not eligible for an ICHRA if they are a part of the employer’s group health plan. In order to be eligible for an ICHRA, an employee must be covered by an individual health insurance plan.

Employers can contribute the amount of their choice to an employee’s ICHRA. If the individual’s premium costs are not covered by an ICHRA, the IRS has specific rules about what employers can allow employees to pay through a salary reduction arrangement.

As an employer, it’s your responsibility to provide a notice to eligible employees and inform them of how the individual coverage option affects the premium tax credit. The premium tax credit is a refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace, also known as the Exchange. An employee (or any member of the employee’s family) cannot collect premium tax credits if they participate in the ICHRA.

Employers of any size can offer an ICHRA as long as they have one employee who isn’t a self-employed owner or the spouse of a self-employed owner. HRAs are only for employees, not self-employed individuals.

Benefits of ICHRAs

One of the main benefits of the ICHRA is to increase options for health insurance coverage, allowing workers to shop for plans that best meet their unique needs. This option also helps small employers who must pay large administrative costs to offer coverage to their employees. Additionally, an offer of an ICHRA counts as an offer of coverage under the ACA employer mandate.

How Paycor Helps with ICHRAs

It may seem like a chore to manage varying benefits and healthcare reimbursement arrangements, but Paycor can help. Paycor’s payroll system can accommodate employers who provide contributions to an individual coverage health reimbursement arrangement through the non-taxable earning HRA option. We also provide up-to-date ACA compliance tools you can trust including:

  • IRS Filing: Paycor can help you generate and file 1094-C and 1095-C forms, which are required by the IRS.
  • ACA Reports: Easily access reports including the Affordability report, Applicable Large Employer report and ACA Employee Eligibility report.
  • Hourly Tracking: Use this feature to determine which employees are eligible for benefits.
  • Benefits Administration: The Paycor benefits platform integrates with payroll, time and our ACA IRS Filing service.
  • Online Resource Center: Find resources including guides, checklists, calculators and more.
  • Live Support: Get your questions answered by an HR professional at any time.

If you’d like to learn more about how these tools can help you offer an ICHRA and manage compliance, take a Paycor Product Tour today.