There’s a new acronym in the world of health benefit options that may appeal to household employers who wish to provide a tax-free health benefit to their employees.
ICHRA stands for Individual Coverage Health Reimbursement Arrangement and is available for employers and their workers starting in January 2020.
While ICHRAs are available to businesses of all sizes, we’ll focus on how they impact household employers who may only have one or two employees.
How ICHRAs work
ICHRAs are similar to QSEHRAs (Qualified Small Employer Health Reimbursement Arrangement) as they are both employer-funded Health Reimbursement Arrangements (HRAs) that reimburse employees tax-free for health insurance premiums and/or medical expenses.
The major difference is that there are no annual contribution limits with an ICHRA while QSEHRAs are restricted to a set amount each year.
A family can provide an ICHRA to their employees as long as they don’t already offer a QSEHRA or EBHRA. They also can’t provide a traditional group health insurance plan as well as an ICHRA at the same time.
With an ICHRA, employees pay for their individual health insurance premiums and/or medical expenses and then submit receipts for reimbursement from their employer.
IRS Publication 502 lists qualified medical expenses (skip to page 5), which include annual physical exams, doctor visits, co-pays, prescriptions, dental treatments, vision care, inpatient hospital services, medical equipment, and more. An employer can select which expenses qualify for their worker’s ICHRA so all expenses listed may not be reimbursable. For example, an employer can choose to only reimburse prescriptions through the ICHRA.
Employee health insurance
An employee must show proof of existing, qualified health insurance coverage before they can receive reimbursements from an ICHRA. If the employee loses or drops coverage at any point, then they are no longer able to claim reimbursements through an ICHRA.
If an employee doesn’t have health insurance, they will have a special enrollment period of 60 days from the time their employer offers an ICHRA to buy a plan. This means an employer can set up an ICHRA at any point during the year and not wait for an employee to purchase health insurance through an open enrollment period.
Qualified health plans
For a health plan to be considered “qualified,” it must meet two primary requirements:
- Have no annual or lifetime limits
- Cover preventive health services with no cost-sharing
An employee isn’t allowed to use an ICHRA to pay for coverage while on their spouse’s group health insurance plan. However, if the spouse purchased coverage through the individual marketplace, then the employee can submit the family premium rate for reimbursement through an ICHRA.
Major plan types that will work with an ICHRA:
- Individual major medical plans (privately purchased or through the exchange)
- Catastrophic plans (limited to under age 30 or qualify for a hardship exemption)
- Medicare Part A + B or Part C
- Student health insurance
Plans that are not allowed with an ICHRA:
- Short-term limited-duration insurance
- Health care sharing ministries
- Fixed indemnity plans
- Excepted benefits coverage only (such as vision or dental)
- Association health plans
- Multiple employer welfare arrangements
Throughout the year, an employee’s unused funds accrue. If an employee doesn’t use all their reimbursement funds, the employer can simply keep that money and reset the contribution limit for the following year. Employers also have the option to allow unused funds to carry over into the next year.
TL; DR step-by-step summary
This is basically how an ICHRA works in four steps:
- Employers decide whether to reimburse insurance premiums and/or qualified medical expenses and establish reimbursement limits (no limit on this amount).
- Employees purchase their qualified, individual health insurance coverage.
- Employees then submit claims for reimbursement (either for insurance premiums, medical expenses or both depending on how the employer set up the ICHRA)
- Employers reimburse employees for valid claims. Reimbursements are tax-free to the employee.
In December 2016, the 21st Century Cures Act created the QSEHRA, which allowed small employers to reimburse their employees for individual health insurance coverage under certain criteria.
In October 2017, President Trump issued an Executive Order asking the departments of the Treasury, Health and Human Services, and Labor to expand the usability of HRAs.
One year later new regulations were proposed to create two additional types of HRAs, the ICHRA and EBHRA (Excepted Benefit HRA).
The new rules were released in June 2019.
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