9 Insights on the Individual Coverage HRA for Small Businesses

Does your business have fewer than 50 employees?

Would you like to help your employees with some of their health insurance expenses?

If you answered “yes” to both questions, you should consider the individual coverage HRA (ICHRA) that you can learn about at ICHRA: Game Changer for Small Business Health Benefits.

You will likely find the ICHRA a superior alternative to the qualified small employer HRA (QSEHRA) because the ICHRA has far more flexibility, as you will see from the nine insights described below.

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Insight 1: Application of the Class Size Rule

The class size requirement applies only if you (a) offer a traditional group health plan to at least one other class of employees and (b) offer an ICHRA to at least one class of employees.

With no group health plan, you can have classes of employees, but you face no class size requirement.

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Insight 2: Minimum Class Size Requirement (Example)

If your business wants to offer some employees a traditional group health plan, you must meet the requirement for a minimum class size in order to use an ICHRA.

Facts

You have 16 employees.

• You cover your four full-time employees with group health coverage.
• You offer your 12 part-time employees coverage of $400 a month under an ICHRA.
• Eight part-time employees accept the ICHRA; four employees decline.

Results

1. Because you have a group plan, you face the class size requirement when you offer an ICHRA to any class of employees.
2. Because of the size of your company, your minimum-class-size requirement is 10 employees.
3. You are good to go with this plan because you abide by the “same terms” rule: you offered the ICHRA to all 12 employees in the class. The fact that only eight accepted the ICHRA is irrelevant.

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Insight 3: No Minimum Class Size Requirement (Example)

With no traditional group health plan, no minimum class size requirement exists. Here’s an example of how this works for the benefit of a small business.

Facts

• You have seven employees—two salaried and five hourly.
• You offer the two salaried employees an ICHRA that reimburses up to $1,500 a month in medical expenses.
• You offer the five hourly employees an ICHRA that reimburses up to $300 a month.

Results

1. You meet the same-terms requirement because salaried employees may be treated as a different class from hourly employees.
2. You face no minimum-class-size requirement because you do not offer group health insurance to any class or person.
3. You are good to go because you satisfy the rules.

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Insight 4: Carryover Rules (Example)

Your ICHRA can provide that covered employees who have unused amounts at the end of a plan year may carry them over to the next plan year, with no restrictions on using the carryover amounts compared to the use of newly available amounts.

Facts

• You have 11 employees, and you offer all 11 employees a $7,500 ICHRA.
• Your ICHRA allows employees to roll over unused amounts to the next year.
• At the end of Year One, some employees have used all $7,500 and some have not.
• For Year Two, you again offer a $7,500 ICHRA to all employees.

Results

1. In Year One, your ICHRA satisfies the same-terms requirement because you offered all 11 employees the same $7,500 ICHRA.
2. In Year Two, you continue to satisfy the same-terms requirement because the regulations allow for the carryover.
3. Thus, the employee who carried over $3,000 from Year One to Year Two now has $10,500 in available ICHRA benefits for Year Two.
4. You are good to go because you satisfy the rules.

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Insight 5: Reimbursement for Individually Purchased Insurance Only (Example)

Facts

• You have five employees, and you offer all five employees an insurance-premium-only ICHRA reimbursement of up to $10,000.
• You allow the carryover of unused amounts.
• Employee A enrolls in a $5,000 insurance plan, and your ICHRA reimburses $5,000. Employee B enrolls in an $8,000 plan, and your ICHRA reimburses $8,000.

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Results

1. Your ICHRA satisfies the same-terms requirement because it offers the up-to-$10,000 ICHRA insurance premium reimbursement to all employees.
2. The fact that Employee A got less reimbursement than Employee B does not violate the same-terms requirement.

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Insight 6: Section 125 Plan Strategy

The ICHRA participant who purchases individual health insurance coverage outside of a public health insurance Exchange may use a cafeteria plan (Section 125 plan) to pay pretax the portion of the individual health insurance coverage premium that is not covered by the ICHRA.

Say you have a Section 125 plan that allows this. For the dollar amount your employee uses to pay for his or her individually purchased health insurance, your employee saves income, Social Security, and Medicare taxes.

You (the employer) save the employer’s portion of the Social Security and Medicare taxes.

Planning note. The Section 125 plan strategy does not allow a pretax deduction for a QSEHRA.7 Thus, there’s no benefit for the Section 125 plan QSEHRA participant as there is for the ICHRA participant.

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Insight 7: Avoiding the $100-a-Day-per-Employee Penalty

Under the Affordable Care Act, you are a small business when you have fewer than 50 employees. And when you are a small business, you avoid all tax law penalties when you offer zero health care benefits to your employees.

But should you want to help your employees with their health care, as most small businesses do, your good deed could subject you to the $100-a-day-per-employee penalty.

The ICHRA allows you to reimburse employees for some or all of their individually purchased health insurance and other medical expenses without worrying about the $100-a-day-per-employee penalty.

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Insight 8: Not Subject to Affordability Rules

The small-business ICHRA is not subject to the affordability rules under Section 4980H. For this purpose, you are a small business when you have fewer than 50 employees.

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Insight 9: Insurance That Qualifies for the ICHRA

Individual health insurance coverage that qualifies an individual for the ICHRA includes

• individual coverage purchased through an Exchange,
• individual coverage purchased on the open market, and
• Medicare.

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Takeaways

As a small business, you have much to like in the ICHRA, including

• the ability to discriminate by class;
• no limit on the ICHRA reimbursements available, other than what you impose;
• flexibility as to what can happen inside a class, such as different reimbursements for employee purchases of individual insurance;
• employees’ freedom to use the cafeteria plan for pretax payments of individually purchased insurance that are not reimbursed by the ICHRA;
• avoiding the $100-a-day-per-employee penalty;
• not being subject to the affordability rules; and
• treatment of Medicare as individually purchased insurance, without complications.

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