If you’re like most business owners, choosing the right healthcare plan for you and your employees can seem like a daunting task. How do you pick one that has good coverage, but isn’t too much of a financial burden on entry-level employees? Enter ICHRA, which stands for individual coverage health reimbursement arrangement. It’s a group plan that allows you to cut healthcare costs for employees and continue to receive business tax breaks.
Brandi Hymel with Premier Benefits Partners has been helping businesses navigate these complex decisions for 20 years. She says many companies don’t know about ICHRA because it’s brand new for 2020. Before ICHRA, if a business offered employer sponsored benefits, uninsured employees were required to take them and would not qualify for a Marketplace subsidy. Now, with ICHRA, some employees can decline the group plan, choose a Marketplace plan instead, receive a healthcare contribution from their employer and may also qualify for government assistance to bring their healthcare costs down even more.
For example, if an employee chooses a Marketplace plan that costs $1,000 per month, their employer decides to contribute $500 and he also qualifies for a $400 subsidy from the Marketplace, that puts him at only $100 out of pocket for insurance -and- his employer would still get the tax benefit on their $500 contribution and not face penalties.
The other benefit is that ICHRA allows employees to choose their own level of coverage, whereas most group plans only offer one or maybe two choices. If they’re young and healthy, employees could choose the low cost Bronze Plan. Other employees with health issues or who take medications regularly would need to choose a plan that costs more, but includes more benefits.
What is an ICHRA?
ICHRA stands for individual coverage health reimbursement arrangement. The ICHRA is a health benefit for employers of all sizes that allows businesses, nonprofits, churches, and other groups to reimburse employees tax-free for qualified medical expenses.
How does it work?
With an ICHRA, the business offers employees a monthly allowance. Employees then choose and pay for individual coverage, and their company reimburses them up to their allowance amount. All reimbursements are free from both payroll tax and income tax. This allows employers to cut healthcare costs and still get business tax breaks. The ICHRA process can be broken down into six steps:
- Businesses choose who is eligible to participate.
- Businesses set the allowance.
- Employees buy health care.
- Employees attest to having individual health insurance.
- Employees submit proof of purchase.
- Businesses review and reimburse employees’ premiums.
Who is eligible for the ICHRA?
All employers with at least one W-2 employee are eligible to offer the ICHRA. This includes businesses, nonprofits, government entities, and religious organizations.
The federal government requires employees participating in the ICHRA to have individual health insurance. Employees covered by a spouse’s group health insurance plan, employees participating in a health care sharing ministry, or employees who choose to go without health insurance coverage cannot participate in the ICHRA.
Beyond that, eligibility requirements are up to the employer offering the ICHRA. Employers can base eligibility on seven different employee classes:
- Salaried employees
- Hourly employees
- Seasonal employees
- Full-time employees
- Part-time employees
- Employees in different locations, based on rating areas
- A combination of the above classes.