The U.S. departments of Health and Human Services, Labor and Treasury have issued a final rule that enables employers of all sizes to fund a new type of HRA called the individual coverage HRA (ICHRA).
How do ICHRAs work?
On a fundamental level, an ICHRA works like any other HRA in that it is funded entirely by the employer and reimburses employees on a tax-free basis for qualified health care expenses.
Here's the primary difference: With an ICHRA, employees can be reimbursed for individual health coverage purchased either on or off the Affordable Care Act's marketplace. (Prior to the final rule, employers could not offer stand-alone HRAs that allow employees to be reimbursed for coverage bought on the individual health insurance market.)
The ICHRA administration process includes these four steps:
- The employer determines how much tax-free money it will make available to employees on a monthly basis. The ICHRA has no minimum or maximum contribution caps.
- The employee pays for his or her health care expenses, including an individual health insurance policy, out of his or her own pocket.
- The employee submits proof of his or her health care expenses, such as invoices or receipts, to his or her employer.
- The employer reimburses the employee, provided enough documentation has been submitted and the health care expenses are eligible for reimbursement. The reimbursements are tax free for both the employer and the employee.
What are the eligibility requirements?
Employers with at least one W-2 employee can offer an ICHRA. However, the ICHRA cannot be offered to employees who have access to the group health plan. In other words, any employee who qualifies for group health coverage cannot be eligible for an ICHRA.
The ICHRA permits employers to create classes of employees and then make the ICHRA available to certain classes and the group health plan available to other classes. Permissible ICHRA classes are as follows:
- Full-time employees.
- Part-time employees.
- Salaried employees.
- Non-salaried employees, including hourly workers.
- Seasonal employees.
- Temporary employees.
- Employees covered by a collective bargaining agreement.
- Employees who are still in a waiting period for medical coverage.
- Employees who work in the same geographic area.
- Nonresident aliens who do not have U.S.-based income.
- A combination of two or more of the above classes.
Employers can, for example, offer full-time employees a group health plan and part-time employees an ICHRA.
To be eligible for an ICHRA, the employee (and any dependents) must have individual health insurance.
What is the ICHRA new hire rule?
This is a special feature that allows employers to keep offering a group health plan to current enrollees and an ICHRA only to new hires.
When does the ICHRA take effect?
Employers can start providing ICHRAs on January 1, 2020.
To learn more about this new employee benefit — including whether it's a good fit for your business — consult with a benefits adviser.