ICHRA: Game Changer for Small Business Health Benefits

The individual coverage health reimbursement arrangement (ICHRA) enables businesses of all sizes, from Fortune 500 corporations to small mom-and-pop shops, to reimburse employees for personal health insurance purchases—and avoid the potential penalty of $100 per day for each employee that could otherwise be imposed.

Example 1. Ben operates a business with seven employees. He offers an ICHRA that will reimburse employees upto $600 a month for health insurance and other medical expenses, provided they have qualifying health insurance.

With the ICHRA:

• Ben does not have to worry about the $100-a-day penalty, which—with his seven employees—couldequal $255,500.
• Ben knows his fixed cost of providing health benefits to his employees.

Know this. Because Ben has fewer than 50 employees, he does not have to provide any health benefits to his employees. The Affordable Care Act (ACA) requirement to provide health benefits applies to employers with 50 or more employees.

Crazy, right? If Ben gives his seven employees no health benefits, he faces no possible penalties. But if Ben decides to give his employees benefits, he exposes himself to the $100-a-day penalty—per employee.

Solution. Ben uses the ICHRA to provide health benefits and avoid the penalty problem.

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Possible Fly in the Ointment

The ICHRA is a creature of Executive Order No. 13813, dated October 12, 2017, and implemented by the IRS for plan years beginning in 2020 and later.

Executive Order No. 14009, dated January 28, 2021, revokes Executive Order No. 13813 and orders a review of its agency actions to see whether they are inconsistent with the policy to protect and strengthen the ACA.

The latest order means that the IRS or other agencies could make regulation changes that could impact the ICHRA. Of course, that’s possible with all government laws and regulations.

So far, we don’t see any substantive changes that would affect the small employer and the ICHRA. And since this plan does so many good things for both the small employer and the employee, we would expect small employers with fewer than 50 employees to escape any serious ICHRA changes.

The bottom line: If the ICHRA fits what you want in a medical plan, use it. If the rules change in four or five years, change your plan.

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Overview of the ICHRA

The ICHRA allows (but does not require) you to

• reimburse (free of payroll and income tax) employees’ individual health insurance and care premiums and other permitted medical expenses, up to a dollar limit you choose—not one imposed by the government;
• offer a regular group health plan to certain employees and ICHRAs to other employees;
• let employees pay for coverage, beyond the amount you reimburse, via a cafeteria plan if those employees have off-Exchange individual insurance coverage;
• offer higher reimbursement levels to older workers and workers with more dependents;
• let employees roll over excess ICHRA funds from year to year, without limitation; and
• help employees with their health care costs without fear of running afoul of the ACA and its dreaded $100-per-employee-per-day penalty.

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Business Owner Eligibility

The ICHRA is a plan for employees, which means different things for different types of businesses.

C corporation. If you own a C corporation, you (as an employee-shareholder) and your employees are eligible to participate in the ICHRA.

S corporation. More-than-2-percent S corporation owners and their family members are not considered employees and therefore cannot participate in the ICHRA. 

Form 1040, Schedule C taxpayers are also not employees12 and cannot participate in the ICHRA. But if you’re a Schedule C taxpayer who’s married, you can go through the back door by employing your spouse as a W-2 employee and accessing (as a dependent) his or her ICHRA.

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Employee Eligibility

ICHRAs are available only to employees enrolled in

• individual Exchange coverage,
• other individual insurance coverage, or
• Medicare.

If you already offer a traditional group health plan, you cannot offer an ICHRA to the employees who are eligible for the group plan. Employers are legally barred from giving employees a choice between a group plan and the ICHRA.

But you can offer a traditional group health plan to some classes of employees and offer the ICHRA to other classes of employees. Classes15 may be distinguished according to the following factors:

• Full-time employees
• Part-time employees
• Employees working in the same geographic location
• Seasonal employees
• Employees covered by the same collective bargaining agreement
• Employees who have not satisfied a waiting period
• Non-resident aliens with no U.S. income
• Salaried workers
• Non-salaried (i.e., hourly) workers
• Temporary employees
• Any group formed by a combination of two or more of the groups listed above

You also have the option of grandfathering existing employees who are members of (or offered) a traditional group health plan, and the option of offering new employees the ICHRA.

Members within a given class must be treated comparably,18 though the dollar amounts offered can be increased for older employees19 and employees with more dependents.

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Minimum Class Size

Minimum class size requirements apply if you are offering a traditional group health plan to some employees and the ICHRA to other employees. When you offer a group health plan, the minimum class sizes are

• 10 employees, for employers with fewer than 100 employees;
• 10 percent of the total number of employees, for employers with 100 to 200 employees; and
• 20 employees, for employers with more than 200 employees.

Example 2. You have 15 employees and don’t have a group health insurance plan. You look at the class rules and see that you can create, on January 1, 2024 (the ICHRA plan beginning date), three classes, as follows:

• Class 1 (two employees)
• Class 2 (eight employees)
• Class 3 (five employees)

You set up different reimbursement ceilings for each group.

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Example 3. You have the same 15 employees as above, but you offer group health insurance to five employees and the ICHRA to 10 employees.

• For the group to whom you offer a traditional group health plan, the IRS sets no class size requirements. You can have the group plan for the five employees.
• For the remaining 10 employees, you put them in an ICHRA. They meet the minimum class size of 10; therefore, you can offer the ICHRA.

Key point. Note how the ICHRA broadens the small employer’s ability to provide health benefits. With 15 employees and no ICHRA ability, you likely would not have a group plan for anyone, and it’s possible you would offer no health benefits to your employees.

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Integration with Cafeteria Plans

What happens if the reimbursement amount you provide is insufficient to cover an employee’s premiums? Can you allow the employee to pay the balance pretax through a cafeteria plan?

Yes, but only if the employee has a non-Exchange health plan. The tax code prohibits employees from making salary reduction contributions to a cafeteria plan to purchase coverage offered through the Exchange.

But if the employee has a non-Exchange plan, this is permissible, subject to the existing rules that govern cafeteria plans.

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ICHRA Eliminates the Premium Tax Credit

The government offers a premium tax credit (PTC), based on income level and household size, to help offset the cost of purchasing health insurance on the government Exchange.

Employees eligible for a PTC can still take advantage of it if they are participating in a qualified small employer HRA (QSEHRA) plan, but their credit is reduced by the amount of the QSEHRA reimbursement.

The ICHRA, on the other hand, eliminates the PTC: any employee offered an ICHRA is ineligible for the PTC, even if he or she ultimately declines the ICHRA.

The one exception is if the ICHRA is deemed “unaffordable” under the terms of the ACA. In that instance, an employee would be able to turn down the ICHRA and receive the PTC.

Annual and Ongoing Certification Requirements

The ICHRA requires plan sponsors to keep track of two types of substantiation:

• Annual coverage: All ICHRA participants and covered family members must certify that they are enrolled in individual health insurance coverage or Medicare.
• Ongoing substantiation: Before receiving a reimbursement, participants must certify that the person who incurred the charge (whether it was the participant or a family member) was covered by individual health insurance or Medicare during the month the charge was incurred.

The U.S. Department of Labor has provided a model notice and a model attestation.

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The Clock Is Ticking

If you are going to either offer your ICHRA on January 1, 2024, or continue with an existing ICHRA, you generally must give notice of the ICHRA to your employees at least 90 calendar days before the beginning of the plan year.

With the 90-day requirement, you are looking at October 2, 2023, or earlier for the notice. That’s only two months away. Time flies, so it’s a good idea to get started now.

For employers newly established within 120 days of the plan year, the notice can be as late as the first day of the plan year.

But keep in mind that your employees need individual insurance coverage, and many may need to use the open enrollment period that runs from November 1 through December 15. This means that to help your employees, you should have your notice to the employees before November 1.

October 2 is a great target date.

New employees who are not eligible to participate in an ICHRA at the beginning of a plan year, or not eligible when the notice is otherwise provided, may be notified of the ICHRA up to the first effective day of when they can participate in the ICHRA.

You need to give an ICHRA notice to employees every year. The annual notice ensures that you are 

• giving your employees the opportunity to opt out of the ICHRA and waive the right to future reimbursements, and
• notifying employees that their purchasing of individual insurance does not fall under the Employee Retirement Income Security Act (ERISA).

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ERISA

An employer ICHRA plan is subject to the requirements of ERISA, including the responsibilities to provide a plan document, a summary plan description (SPD), a summary of benefits and coverage (SBC), and other required notices and disclosures. The good news is that the model notice linked above gives you much of what you need here.

The new law provides that the individual health plans purchased by your employees are not subject to ERISA, as long as the following safe-harbor requirements are met:

1. An employee’s purchase of any individual health insurance coverage is voluntary. (The fact that individual health insurance coverage must be purchased in order to participate in an ICHRA does not make it involuntary.)
2. The employer does not endorse any specific issuer or insurance coverage, though employers may provide general information, such as directing employees to HealthCare.gov or a state insurance commissioner’s office.
3. Reimbursement for individual health insurance premiums is limited to individual health insurance coverage that does not consist solely of excepted benefits.
4. The employer does not receive cash or other kickbacks in connection with the employee’s selection or renewal of coverage.
5. All plan participants are notified annually that their individual health insurance coverage is not subject to ERISA (this statement is included in the model notice described above).

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Takeaways

The ICHRA has two major benefits:

1. It allows businesses to reimburse employees for personal health insurance purchases without triggering the $100-a-day-per-employee penalty.
2. It allows companies to know the fixed cost of providing health benefits to their employees.

Even though the ICHRA is a product of Executive Order No. 13813, which has been revoked, no significant changes have been made to the ICHRA that would affect small businesses as of now.

The ICHRA offers multiple benefits: it allows employers to choose their reimbursement limits, offer different plans to different employees, and let employees pay pretax for additional coverage via a cafeteria plan.

The ICHRA doesn’t work for most owners:

• C corporation owners and their employees are eligible.
• More-than-2-percent S corporation owners and their family members are not eligible.
• Form 1040, Schedule C taxpayers are not eligible but can gain access through a W-2 employee spouse.

Employee eligibility is restricted to those enrolled in individual Exchange coverage, other individual insurance coverage, or Medicare.

Employers can set up different reimbursement ceilings for different classes of employees, but they need to consider minimum class sizes if they are also offering a traditional group health plan.

For the employee, the ICHRA eliminates the premium tax credit unless the ICHRA is “unaffordable” under the PTC rules.

If planning to offer an ICHRA, employers should provide at least 90 days’ notice to their employees before the beginning of the plan year.

Employer ICHRA plans are subject to ERISA requirements, but the individual health plans purchased by employees are not, provided certain conditions are met.

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