In June 2019, various entities of the Federal government namely the US Department of Labor, Health and Human Services and the Treasury unveiled the Individual Coverage Health Reimbursement Arrangement (ICHRA). This new health reimbursement arrangement will be available to businesses from January 1st, 2020. ICHRA is based on the expansion of the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA).
QSEHRA was brought into effect in 2016 for aiding companies with less than 50 full-time employees and not having a base medical plan with a health insurance solution and thereby making them capable of reimbursing employees for medical expenses. QSEHRA is indispensable for small businesses as it gives them the ability to set fixed, tax-free allowance amounts and employees can choose the coverage as per their unique health needs.
QSEHRA is considered as a boon for small businesses as it enables them to offer employer-sponsored healthcare and this made them more attractive to talented employees, giving them a level playing field considering the large companies.
What is ICHRA?
The ICHRA aims to make available a new health reimbursement arrangement to businesses of any size starting from January 1st, 2020. This allows companies to offer their employees a set allowance of money. The employees can purchase an individual health insurance policy and depending on their employers, they can also buy other healthcare services. Employees have to submit the proof of their healthcare expenses, and the employer reimburses them as per the available allowance amount. ICHRA is designed in such a manner than employers can vary employee eligibility through 11 employee classes, choose the appropriate amount of allowance to offer, and offer a group health insurance plan simultaneously (not to the same classes of employees). ICHRA also allows employers to give different allowance amounts to different employees based on their classification. ICHRA is beneficial for businesses as it allows them to offer personalized health coverage offerings in terms of budget and employee eligibility.
Businesses can choose to offer the ICHRA to all of their employees or they can limit the eligibility to specific employee classes. Any employee that is offered the plan must possess individual health insurance to participate. Under the ICHRA, the 11 classes of employees are as follows:
- Full-time employees
- Part-time employees
- Hourly employees
- Seasonal employees
- Temporary employees working for a staffing firm
- Salaried employees
- Employees in a waiting period
- Unionized employees
- Foreign employees working abroad
- Employees working in different locations based on rating areas
- A combination of two or more of the above
Important conditions to follow
If a business decides to offer the ICHRA, they must notify their employees of the upcoming benefit at least 90 days prior to the plan start date or the first day the employees become eligible. For example, in case of plans starting by January 1st, 2020, the employers must provide notice to employees on or before October 3rd, 2019. A model notice is being provided to the employers which they can use to inform their employees, however, the use of the model notice is not mandatory.
While offering the ICHRA, employers must have a legal plan document that explains the structure of the benefit in detail. This document specifies the functioning of the plan, eligibility and defines the policies and procedures regarding the plan.
It should be noted that the ICHRA doesn’t have a cap on the contribution limit. Employers can offer allowances to their employees as large as they choose. When finalizing allowances, the business should establish which employees will be included in the benefit as per their class settings. After that, employers should finalize the total amount they are offering to each employee per year. Allowance amounts are variable within each class and depend on the age of the employee or their family status. However, allowances based on age shouldn’t be greater than three times the amount for the oldest employees as compared to the youngest employees in the class. Also, rollover allowances are added to the allowances offered in the following year.
An employee has to submit the proof of expenses to the employer and such type of documentation must include a description of the service or the product, the billed amount and the date of the expense. In addition, before submitting an expense for approval, employees must attest that they are covered under an individual coverage policy.
Employers can offer their employees the chance to be in an ICHRA class or a traditional group plan, but not both. An employer employing over 50 employees can offer an ICHRA if it meets the affordability and Minimum Value (MV) criteria as per the IRS Notice 2018-88. As per this notice, the employer’s contribution must be high enough for an employee to afford the lowest cost silver plan from the market and it cannot exceed more than 9.86% of the employee’s out-of-pocket income.
Since determining affordability for each employee is going to be a huge administrative exercise for the employer, Notice 2018-88 proposes three safe harbors to be used by the employers for determining whether the ICHRA can be afforded by the employee.
- Location: Employers can use the primary site of employment of the employee as the standard for affordability calculations.
- Affordability: The income of an employee can be estimated by the employers using the W-2 of the employee or the rate of pay.
- Calendar year: Employers instituting an ICHRA for the following calendar year can use the current year estimates to determine the affordability of the employee.
ICHRA, even though complex to understand, lessens the burden of managing employee healthcare for the employers. Businesses are always geared up to conserve their time and financial resources, and yet providing their employees the healthcare they deserve and controlling the cost of healthcare at the same time. It is widely expected that ICHRA will have a positive impact on the growth of businesses and improve the healthcare security net for the employees.