Can an employer pay for individual health policies and Medicare premiums rather than offering a group health plan to their employees?

An Individual Coverage Health Reimbursement Arrangement (ICHRA) is the only way an employer may reimburse an employee or directly pay the cost of an employee's individual health insurance policy or Medicare premium on a tax-advantaged basis. To do so outside of an ICHRA, an employer risks an excise penalty of up to $100 per day per employee for an impermissible employer payment plan.

ICHRA Basic Requirements

An employer must meet the following requirements to sponsor an ICHRA:

• No traditional group health plan (that is neither limited to excepted benefits nor account-based) can be offered to the class of employees who are offered the ICHRA.
• Permitted classifications include full-time, part-time, seasonal, hourly, salaried, collectively bargained, nonresident aliens with no US-based income, employees whose primary site of employment is in the same rating area, and employees who have not yet satisfied an ACA-compliant waiting period.
  Note: Classes are determined at the common-law employer level rather than on a controlled group basis (under Code Section 414).
• The minimum class size is 10 for an employer with fewer than 100 employees; a number (rounded down to a whole number) equal to 10% of the total number of employees for an employer with 100 to 200 employees; and 20 for an employer with more than 200 employees.
• The employee must be enrolled in individual health coverage or Medicare (Parts A and B or Part C) and requires annual substantiation generally no later than the first day of the plan year or before the date when the ICHRA coverage begins.
• The ICHRA must be offered on the same terms and conditions to all employees within a class.
• Employees must have the ability to waive coverage under the ICHRA. However, an employer cannot provide a cash incentive if employees opt out.
• An employer must distribute a notice to employees regarding the ICHRA’s benefits. A notice must be provided to eligible employees at least 90 days before the beginning of each plan year or no later than the date an employee is first eligible to participate in the ICHRA. A model notice is available here.
• An ICHRA is subject to ERISA, including the SPD, Form 5500, and plan fiduciary requirements.
• An ICHRA is also subject to COBRA, including the initial COBRA notice and COBRA election notice. Failure to maintain individual medical coverage is not a COBRA qualifying event.

ICHRAs and MSP Rules

Medicare Secondary Payer (MSP) rules generally prohibit employers from offering financial incentives to Medicare-eligible employees to waive or cancel coverage in an employer-sponsored group health plan. As a reminder, age–based MSP rules apply to employers with 20 or more employees, while disability-based MSP rules apply to employers with 100 or more employees.

However, employers subject to the MSP rules may offer ICHRAs to a class of employees without violating the MSP rules as long as all employees in the class are offered the ICHRA on the same terms.

The idea is that if an employer only provided the ICHRA to those employees who are not Medicare-eligible, it could be seen as discriminating against those employees. Second, allowing the ICHRA to reimburse Medicare expenses does not incentivize them to enroll in Medicare if the opportunity to enroll in the ICHRA is available to everyone in the class. Importantly, an employer who is subject to the MSP rules must allow employees in a class that is offered an ICHRA to enroll in either individual or Medicare coverage.

ICHRAs and ACA Employer Mandate

An ICHRA may be used to satisfy an employer’s obligation under the ACA’s employer mandate. An ICHRA is considered minimum essential coverage (MEC) for purposes of Penalty A. It will also satisfy Penalty B if the employee's required contribution after the employer's monthly ICHRA contribution is less than 9.12% (2023) or 8.39% (2024) of the employee's earnings. The employer may use the lowest-cost silver plan available in the worksite rating area based on the employee's age as a safe harbor (rather than each residential area). The difference between the employer's contribution and the premium cost is what would be reported on Line 15 of Forms 1095-C for purposes of affordability.

Additional information can be found in our prior Compliance Corner, July 21, 2022, article. Employers interested in implementing an ICHRA should contact their consultant for additional information.