What is an Individual Coverage Health Reimbursement Arrangement (ICHRA)?

An Individual Coverage Health Reimbursement Arrangement (ICHRA) is a type of employer-sponsored health benefit that allows businesses to reimburse employees for individual health insurance premiums and qualified medical expenses tax-free. Introduced in 2020 as a flexible alternative to traditional group health insurance, ICHRAs provide greater choice and customization for both employers and employees.

Here's a breakdown of how ICHRAs work and their key benefits:

1. How ICHRAs Work

• Employer Sets Up the ICHRA: The employer decides how much tax-free money to contribute to each employee's ICHRA account every month or year.
• Employee Chooses Health Insurance: Employees can use ICHRA funds to buy their own individual health insurance plan, which can be purchased through the ACA marketplace or directly from an insurance provider.
• Reimbursement for Eligible Expenses: Employees submit proof of their qualified expenses, such as premiums or out-of-pocket costs, and are reimbursed tax-free up to the allowance amount set by the employer.

2. Key Benefits of ICHRAs

• Flexibility for Employees: Employees have the freedom to choose a plan that best suits their personal health needs, rather than being limited to one group plan.
• Cost Control for Employers: Employers can set a fixed budget for health benefits, allowing them to control costs without worrying about annual premium increases associated with group insurance.
• Tax Advantages: Contributions to an ICHRA are tax-free for both employers and employees, reducing taxable income and increasing take-home pay.
• Customizable Eligibility: Employers can offer different reimbursement amounts to various classes of employees (e.g., full-time, part-time, seasonal) based on company needs and regulations.

3. ICHRA Eligibility and Regulations

• Individual Coverage Requirement: Employees must have individual health insurance to participate in an ICHRA. If they don't have a qualifying plan, they are not eligible for reimbursements.
• Class-Based Designation: Employers can designate different classes of employees for customized allowances and eligibility, such as by full-time or part-time status, geographic location, or seasonal employment.

4. Differences Between ICHRA and Traditional HRAs

• Unlike traditional HRAs, which are typically offered alongside a group health plan, ICHRAs allow employees to buy their own individual coverage.
• ICHRAs provide more flexibility and control, especially beneficial for small to mid-sized businesses seeking affordable alternatives to group plans.

5. Ideal for Various Employer Sizes

• ICHRAs are particularly popular with small and medium-sized businesses, as they offer a way to provide health benefits without the high costs and administrative burden of managing a group health plan.

In summary, an ICHRA offers a modern, flexible approach to employer-sponsored health benefits, allowing employers to offer health coverage options that align with budgetary and employee needs.