This past month, the Trump administration finalized a new rule that allows for expansion in the use of Health Reimbursement Arrangements (HRAs). Starting January 1, 2020, employers can fund premiums for their employees in the individual health insurance market by providing their workers with a fixed amount of money each year in a tax-preferred “individual coverage HRA,” or ICHRA.
What is an ICHRA?
An ICHRA is a company-funded, tax-advantaged health benefit used to reimburse employees for individual health insurance. It also permits businesses to vary eligibility and allowance amounts among different classes of employees.
Which businesses can offer the ICHRA?
The ICHRA is available to businesses of any size.
Under the final rule, employers can offer funds to employees through an ICHRA to cover premium expenses or other medical care expenses specified by the employer as eligible for reimbursement. Employers have the choice to offer coverage through a traditional group health plan or an ICHRA, but they cannot offer both to the same class of employees. Employers can structure eligibility based on 11 employee classes. However, if an employer also provides group coverage, certain minimum employee class size requirements must be met. For example, an employer with fewer than 100 employees may not have fewer than 10 employees in each class of employees.
How does the ICHRA work?
The ICHRA is a health reimbursement arrangement integrated with individual health insurance. Employees and their families are only eligible for the ICHRA if they have coverage under an individual health insurance policy. If the employee or participating family member ever loses individual coverage, they can no longer receive reimbursements.
The ICHRA also comes with premium tax credit restrictions. Specially, if an employee participates in the ICHRA, they are no longer eligible for a premium tax credit.
If an employer offers employees an ICHRA, it must meet the affordability threshold and be available to entire classes of employees, such as full-time, part-time, or seasonal workers. Employees can opt out of an ICHRA if they are eligible for premium tax credits on the marketplace. The total funds offered in an ICHRA can vary in two instances—as the age of the participants increases (not to exceed a 3:1 age band) or based on the number of dependents covered.
Which employees can participate in the ICHRA?
To participate, employees must have coverage through an individual health insurance policy, including on-exchange or off-exchange coverage, Medicare Parts A and B, or Medicare Part C. The employee can be the primary policyholder, or they can be covered under a family member’s individual policy. Employees’ family members are eligible to participate as well, provided they meet the same qualifications and the employer chooses to extend eligibility to spouses and dependents.
To learn more about ICHRAs, click on the IRS link.