What Is an ICHRA?

An ICHRA is an Individual Coverage Health Reimbursement Arrangement. It is the only way an employer may reimburse an employee or directly pay the cost of an employee’s individual health insurance policy 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.

An ICHRA can only be offered to a classification of employees who are not eligible for the employer's major medical plan. For example, an employer could offer a group health plan to employees in one location and an ICHRA to those in another. There are rules regarding minimum class size; however, they do not apply if the class is based on state. Thus, an employer could offer an ICHRA to those working in other states — even if that is only one employee in a state.

The following conditions must be met by an ICHRA.

• The employer cannot offer any group health plan to the same classification of employees being offered the ICHRA. However, an employer could also offer a dental-only or vision-only plan to those employees. Classifications include full-time, part-time, salaried, hourly, temporary staffing agency workers, seasonal, collectively bargained and different locations.
• 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.
• An ICHRA is subject to ERISA, which means it is subject to the summary plan description, Form 5500 and fiduciary requirements.
• An ICHRA is also subject to COBRA, including the Initial COBRA Notice, COBRA Election Notice and continued employer contributions.
• Expenses must be substantiated before each reimbursement. Thus, before each reimbursement or payment, the employer must confirm that the individual policy is still in effect and the premium amount.
• The same terms and reimbursements must apply within the same classification, though the employer may increase the maximum reimbursement based on family size and age.
• 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 example of an impermissible design would be an employer reimbursing the cost of an individual health insurance policy for an executive working at the employer headquarters. This would not meet the classification requirements.

An ICHRA may be used by an applicable large employer to satisfy the employer mandate obligation. An ICHRA is considered minimum essential coverage for Penalty A. It will also satisfy Penalty B if the employee’s required contribution after the employer’s monthly ICHRA contribution is less than 9.61% (2022) 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). That difference between the employer’s contribution and the premium cost is what would be reported on Line 15 of the Form 1095-C.