What Is ICHRA? A Guide to Individual Coverage HRAs

Employers continue facing challenges in providing quality healthcare options for valued employees. Between rising health insurance costs, employee retention pressures, and ACA compliance requirements, employers need meaningful alternatives to traditional group coverage.

Many employers have explored both traditional and non-traditional healthcare options with varying degrees of success. One option that has grown steadily since its launch is the Individual Coverage Health Reimbursement Arrangement (ICHRA).

ICHRA has been available since January 2020 to businesses of all types and sizes, giving employers a new way to provide high-quality, affordable healthcare to employees. If you're evaluating whether it fits your company, our guide to ICHRA for small business covers the rules, costs, and decision factors in detail.

What is ICHRA?

Pronounced "ick-rah," ICHRA is a health reimbursement arrangement, or HRA, that has been available to employers since January 1, 2020. It represents a newer model of employer-funded coverage designed to better meet the health needs of employees and the budgets of employers.

As an alternative to traditional group health insurance, ICHRA reimburses employees for individual health insurance premiums and, depending on plan design, other qualified medical expenses such as copayments and deductibles.

ICHRA is an employer-funded arrangement with tax advantages that make it possible to reimburse employees for medical expenses tax-free.

ICHRA was introduced through federal regulations from the Departments of Health and Human Services (HHS), Labor (DOL), and the Treasury. The rule was proposed in October 2018, finalized in June 2019, and took effect in January 2020.

ICHRA distinguishes itself from other HRAs through its availability to organizations of every size. It has no federal contribution caps, and it allows businesses to vary allowances and eligibility among different employee classes.

A Review of the HRA Definition to Better Understand ICHRA

It is important for benefits managers to better understand what an HRA is — the HRA rules, the HRA tax rules, and more — before diving headlong into ICHRA and its exciting industry potential.

ICHRA is one of a few offshoots of the HRA, which is an employer-funded health plan that allows for reimbursements to employees for all qualified medical expenses. Sometimes employees receive reimbursements on paid premiums. 

Employers may also claim a tax deduction for any reimbursements they made through qualifying HRAs, per Investopedia. These reimbursed dollars go to employees and are often tax-free.

How Does an HRA Work?

Once an employer chooses to provide insurance through an HRA plan to cover medical expenses for employees, they decide how much to put into the plan. Once the employer sets the amount, employees may request reimbursement for all medical expenses incurred and paid up to that decided amount. All employees classified the same must receive the same HRA contribution from employers.

An important HRA definition to remember is that it is not an account. Employees may not and cannot withdraw health funds in advance. They must first incur and pay health expenses then submit documentation for reimbursement. The way HRA coverage works is that employees must first incur a healthcare expense and pay for it themselves. Employees will receive reimbursement later.

However, employees may receive reimbursement at time and point of service if their employer provides them with an HRA debit card to use for such purposes.

An employee has access to allocated funds for one year. If an employee uses all the allocated funds in their employer's HRA before the end of the year, they will need to pay for any additional health bills out of pocket. For this reason, many employers also offer a Flexible Spending Account (FSA) or Health Savings Account (HSA). Our overview of FSA vs HSA explains how these accounts differ.

Another alternative payment method for times when employees run low on allocated funds at year’s end is the Health Savings Account (HSA), which is intended for employees who need a High-Deductible Health Plan (HDHP).

Take a moment to review these alternative payment options and surrounding matters:

Flexible Spending Account (FSA)

A flexible spending account, or an FSA, is available to employees to fund deductibles, pharmaceuticals, copayments and some additional healthcare costs, depending on the plan. FSAs often reduce employee taxes. The FSA works as a special account in which employees can put money intended for certain out-of-pocket healthcare costs and when they have exceeded their annual allocated HRA budget. Employers may contribute to FSAs, but they have no obligation to do so.

Health Savings Account (HSA)

A health savings account (HSA) is a savings account for employees that allows them to set aside pre-tax funds to pay for any qualified medical expenses. With these untaxed dollars, employees can settle copayments, deductibles, coinsurance, pharmaceuticals, and other qualifying healthcare expenses. In most cases, HSA funds may not move toward premium costs. The best part is that an HSA often allows employees to lower their overall healthcare costs.

Employees can access and use funds in an HSA as needed for qualifying healthcare costs, but only employees carrying a HDHP may contribute to an HSA. Such plans only cover preventive services before the application of the deductible. Employees should check with their employer to determine whether their health insurance company offers HSAs for their HDHP customers. Employees may open their own HSA through participating banks and other financial institutions.

High Deductible Health Plan (HDHP)

A high deductible health plan (HDHP) is a plan that features a higher deductible than a traditional insurance plan. Employees pay a lower monthly premium but pay healthcare costs out of pocket before the insurance company begins to pay its share, which is the employee’s deductible.

Many employees combine an HDHP with a HSA to allow employees to pay for certain medical expenses with tax-free funds.

The IRS sets minimum deductible and maximum out-of-pocket amounts for HSA-qualified HDHPs each year, so employers should confirm current thresholds when designing plans.

The Benefits of a Base HRA

The sheer number and type of qualified medical expenses covered under a base HRA is reason enough for many employers and employees to consider this healthcare option.

Here are a few qualifying medical expenses:

• Prescription medications such as insulin
• Annual physical examination
• Birth control pills
• Crutches and other support devices
• Psychology and psychiatry care
• Substance abuse treatment
• Meals during treatment at a medical facility
• Transportation costs spent to get medical care

Traditional group-integrated HRAs still can't reimburse individual health insurance premiums, which is exactly the gap ICHRA and QSEHRA were created to fill.However, under the rules set forth by the Obama administration, HRA funds may not pay for individual health insurance premiums.

HRAs offer more flexible options for both employers and employees in accessing high-quality healthcare at reasonable prices.

Here are a few final points on general HRA rules:

• Who funds an HRA? Employers fund HRAs, not employees.
• Is an HRA a portable benefit? No. Employees can't take their HRAs with them when they leave a company.
• What types of expenses do HRAs fund? It depends on the type of HRA. Most reimburse qualified medical expenses, while ICHRA and QSEHRA can also reimburse individual health insurance premiums.
• Can employers customize HRA rules? Yes. Employers can determine which eligible expenses are reimbursable within federal guidelines.
• Are the rules the same for all types of HRAs? No. The rules for each type of HRA, including ICHRA and QSEHRA, differ substantially.

QSEHRA Was the Inspiration and Model for ICHRA

ICHRA was inspired by and evolved from another type of HRA, the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), created in 2017. Like ICHRA, QSEHRA allows employers to reimburse employees tax-free for individual health insurance and qualified medical expenses. ICHRA builds on that model with no federal contribution caps and greater flexibility.

QSEHRAs were designed and deployed to help small employers help employees when they don’t offer any form of traditional health coverage. With a QSEHRA, an employer helps employees pay for healthcare expenses.

When an employer offers employees a QSEHRA plan, they may use it to pay for their entire household’s healthcare and qualifying products and services, which includes the monthly premium.

Employees offered a QSEHRA may still be eligible for a tax credit through the Marketplace. The amount of the tax credit will depend on the amount of each employee’s plan. The information is not available to employees at the time of application; therefore, there are times employees do not know the accurate amount of their available credit until after incurring expenses. With that in mind, employees should refrain from using any tax credit information shown on the Marketplace eligibility notice to guide their spending choices.

How Do Employees Use QSEHRA?

Employees use their QSEHRA to pay for their health costs throughout the year. If the Marketplace finds an employee’s family eligible for savings, the employee should use none, or as little as possible, of their tax credit when prompted by the Marketplace.

Employees may use the Healthcare.gov QSEHRA worksheet PDF to calculate and determine the amount of tax credit the employee should take in advance to lower their monthly premium, which is based on their QSEHRA. It is important to use less than the amount of the available tax credit to avoid the need to pay some or all of it when the employee files their federal income tax return.

Ideally, employees refrain from using their tax credit throughout the year to avoid needing to pay anything back to the government.

How Does ICHRA Stand Out From QSEHRA and Other HRAs?

Often described as a "super-charged" version of QSEHRA, ICHRA gives employers and employees more options for addressing rising healthcare costs.

One of the premier markers of ICHRA is that it allows employers to offer employees tax-free reimbursement for health insurance available on the individual market, allowing employers to offer benefits without offering a group health plan.

This expansion HRA from the QSEHRA provides higher limits and greater flexibility, which alone is more appealing to employers.

How Does ICHRA Work?

Like other HRAs, ICHRA focuses on the common theme of reimbursing employees for incurred medical costs instead of buying an insurance plan for them.

Here is a basic layout of how the ICHRA works:

• Employers choose and design their health plan, including their means of defining which employees may participate and determining reimbursement limits.
• Employees review their available options and purchase the individual plans that appeal to them.
• Employees visit doctors and pay other health bills upfront, and then submit claims for reimbursement.
• Employers review claims and reimburse employees for all valid and qualifying claims.

Employers can define unique reimbursement amounts and rules for different groups, or "classes," of employees. Federal rules permit several classes, including:

• Full-time, part-time, seasonal or temporary status
• Salaried or non-salaried pay conditions
• Coverage waiting periods
• Geographic rating areas

Using these distinctions to classify employees within the ICHRA ecosystem offers employers a broad range of flexibility. With this tool, employers can create a unique plan that works for every employee’s unique circumstances within the organization.

State rules and pricing also shape how ICHRA works in practice. California employers can see how ICHRA works in California for state-specific guidance.

What Are the Benefits of ICHRA?

The many advantages of ICHRA are already clear to industry experts and employers who have reviewed it.

Here are a few key benefits of ICHRA:

• Many employers and employees want more flexibility in their health plans, and ICHRA comes through. ICHRA offers impressive new levels of flexibility for employers of all types and sizes, which alone levels the playing field for smaller businesses. Employers may choose the contribution amount that best suits their budgets without any caps. The previously mentioned employee classes give employers and employees the freedom to tailor their ICHRA to each employee’s unique situation in the organization.
• Employee attraction and retention. Given the choice between working for a small business with healthcare and one without, employees are likely to choose the former. The workplace becomes increasingly competitive as the environment itself changes constantly. Further, talented employees have become more selective as the business landscape continues to change in their favor. Younger generations of workers, which are becoming an increasingly large demographic in the workforce as baby boomers retire, are far more likely to leave an organization that does not have benefits for one that does. ICHRA helps employers provide benefits as unique as their employees.
• ACA compliance. When the allowance is designed to be affordable, an ICHRA can satisfy the ACA employer mandate for employers with 50 or more employees. Affordability is based on factors such as employee age and location.
• Controlled costs and risks. One primary benefit of ICHRA for employers is that it gives employers the opportunity to control the spiraling costs of benefits in the medical industry, thereby controlling their cost risks to ward off the ever-increasing premium increases. Basically, employers can choose to cover as much or as little as aligns with their budget and operating costs.
• Tax efficiency. ICHRA offers several tax-related benefits, starting with the feature that any amount an employer contributes does not count as employee wages, meaning that they are not subject to payroll taxes. Additionally, employer payments for features like a health and welfare plan qualify as a business expense. For employees, employers’ contributions do not count as gross income, meaning the funds are tax-free. Finally, if an employee owes any amount over the employer’s contribution, and the employee's remaining premium for off-exchange coverage may be paid pre-tax.
• Simplified plan structure. ICHRA allows businesses to offer health benefits without sponsoring a traditional group policy, typically with support from an ICHRA administration partner.

Is There a Downside to Choosing ICHRA?

While the benefits of ICHRA are impressive, it's important to consider potential downsides:

• Employees must be enrolled in individual health coverage or Medicare. Those covered only through a spouse's group plan can't participate.
• Health care sharing ministries, such as Samaritan Ministries and MediShare, don't count as individual health insurance, so they can't be used with an ICHRA.
• TRICARE coverage alone doesn't satisfy ICHRA's individual coverage requirement.
• When an ICHRA is considered affordable, employees generally can't claim premium tax credits for Marketplace coverage.

Is ICHRA Right for Your Business?

Since launching in 2020, ICHRA has become a mainstream option for employers seeking more predictable health benefits spending. Whether it's the right fit depends on your workforce, locations, and budget, which our guide to ICHRA for small business walks through step by step.

Our KBI Benefits team can help you evaluate ICHRA alongside your current plan. Contact us to learn more about ICHRA and how it can benefit your business.

Related ICHRA Reading: ICHRA for Small Business · How ICHRA Works in California · ICHRA Administration