ICHRA Basics: A Guide To Individual Coverage HRAs For Employers
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Individual coverage health reimbursement arrangements give employers a flexible, cost-controlled alternative to traditional group health plans. Here's how they work and what compliance rules apply.
Rising group health premiums have many employers searching for a more predictable way to support their workforce. An individual coverage health reimbursement arrangement (ICHRA) offers one answer. Instead of sponsoring a traditional group health plan, employers provide a monthly allowance that employees use to buy their own individual health insurance, with reimbursements made on a tax-free basis.
At The Siekmann Company, we help organizations weigh whether an ICHRA fits their goals and, when it does, manage the day-to-day administration. Here's a clear breakdown of how these arrangements work.
What Is An ICHRA?
A health reimbursement arrangement (HRA) is an account-based group health plan funded solely by employer contributions that reimburses employees for eligible medical expenses, up to a set maximum for a coverage period.
An ICHRA takes that concept a step further. It lets employers give eligible employees a monthly allowance for tax-free reimbursement of individual health insurance premiums and qualifying medical costs. The key distinction is that ICHRA coverage replaces traditional group health coverage for eligible classes of employees rather than supplementing it.
A Brief History Of ICHRAs
ICHRAs are a relatively recent option, born out of evolving federal guidance:
2014: The IRS prohibits employer reimbursement of individual health insurance premiums under the Affordable Care Act (ACA), subject to limited exceptions.
2017: Qualified small employer HRAs (QSEHRAs), the predecessor to ICHRAs, become available so small employers can reimburse individual premiums tax-free, subject to annual dollar limits.
2019: A final rule creates the ICHRA framework, allowing employers of all sizes to reimburse individual premiums tax-free with no annual dollar limit.
2020: ICHRAs become available to employers of all sizes.
How ICHRAs Work In Four Steps
The mechanics of an ICHRA are straightforward for both the employer and the employee:
The employer sets the allowance. The employer defines a monthly reimbursement amount per employee class. No minimum or maximum is required.
The employee buys a plan. Employees shop independently on the ACA marketplace or off-exchange and choose any qualifying plan that fits their needs.
The employer reimburses tax-free. Employees submit proof of coverage, and the employer reimburses up to the allowance on a tax-free basis.
The employer complies with requirements. ICHRAs carry unique notice requirements along with other obligations, including ERISA reporting and disclosure rules, COBRA continuation coverage, and the ACA affordability threshold for full-time employees.
Understanding The 11 Employee Classes
One of the most powerful features of an ICHRA is class-based design. Employers can divide their workforce into up to 11 approved classes and offer different contribution amounts to each. Each employee belongs to exactly one class.
The approved classes include:
Full-time
Part-time
Seasonal
Salaried
Hourly
Temporary employees of staffing firms
Employees in a waiting period
Foreign employees who work abroad
Employees grouped by primary geographic location
Union employees
Employees by employment start date
Employee Class Rules Employers Must Follow
Class flexibility comes with guardrails. To stay compliant, employers must:
Keep group plans and ICHRAs separate. An employer cannot offer both a traditional group plan and an ICHRA to employees in the same class at the same time.
Apply equal treatment within a class. Every employee in the same class must receive the benefit under the same terms, and amounts cannot vary within a class.
Vary amounts across classes. Different classes can receive different allowance levels, such as $600 per month for full-time employees versus $300 per month for part-time employees. Within a class, amounts can vary by employee age (up to a 3-to-1 ratio) and family status to reflect premium differences.
Weighing The Pros & Cons
ICHRAs are not the right fit for every organization. The trade-offs are worth a candid look.
Potential advantages include defined cost controls, flexibility to tailor contributions by employee class, and meaningful tax advantages. On the other side, ICHRAs may feel unfamiliar to employees, follow different compliance rules than group plans, and in some cases lead workers to enroll in coverage that is less comprehensive than a group offering.
Because administering an ICHRA can be complex, many employers partner with a third-party administrator to handle the day-to-day work and reduce compliance risk.
Frequently Asked Questions
What is the difference between an ICHRA and a traditional group health plan? A traditional group plan is sponsored directly by the employer. An ICHRA reimburses employees tax-free for individual coverage they buy themselves, replacing group coverage for eligible classes.
Is there a contribution limit for an ICHRA? No. Unlike its QSEHRA predecessor, an ICHRA has no annual dollar limit on employer contributions.
Can an employer offer both a group plan and an ICHRA? Yes, but not to the same class of employees. An employer cannot offer both options to employees within the same class simultaneously.
Partner With The Siekmann Company On Your ICHRA Strategy
An ICHRA can deliver cost predictability and flexibility, but only when it is designed and administered correctly. From defining employee classes to meeting ERISA, COBRA, and ACA requirements, the details matter.
The Siekmann Company helps employers evaluate whether an ICHRA fits their goals and manages the ongoing administration so you can stay focused on your business. If you want to explore an ICHRA or strengthen your broader benefit plan design and administration, our team is ready to help. Email The Siekmann Company at info@siekmannco.com for more information or to discuss your benefit plan strategy.
You can also review the final rules on ICHRAs and the accompanying FAQs, model substantiation form, and model annual notice issued by the U.S. Departments of Labor, Health and Human Services, and the Treasury.