What Is an ICHRA and How Does It Work? A ICHRA Guide for Small Businesses

What Are the Benefits of an ICHRA?

There are many benefits to an ICHRA, which may make it an ideal fit for your business and your employees. Potential advantages include:

• Predictability and control: With an ICHRA, you set the exact coverage and allowance amount. That gives you a predictable budget throughout the plan year. Plus, plans aren’t impacted by annual rate hikes. Your employees know exactly what kind of reimbursement coverage to expect from you, too.
• Freedom of choice: With some employer group plans, employees may lose coverage for their healthcare provider of choice if they’re not covered under an employer plan. With an ICHRA, your employees get to choose the exact type of health insurance they want.
• Easy and simple: ICHRAs don’t have minimum participation requirements. They’re easy to set up. You don’t have to worry about claims liability. This is all while providing a benefit that can help you attract and retain top employees.

ICHRAs are fairly new, having only been available since 2020. Many professionals aren’t aware of them or know how they work. With some education, you may find your workforce prefers this kind of business healthcare coverage compared to other types of plans. 

What Qualifications Must a Business Meet to Offer an ICHRA?

Good news: if you have at least one W-2 employee, you can offer an ICHRA at your business. These include part-time, seasonal and foreign employees.

Employers can offer an ICHRA in addition to a group health insurance plan, but the same type of plan must be offered to the same employee class. For example, if you offer group health insurance to your full-time employees, you wouldn’t be able to offer an ICHRA as another option. You could, however, offer an ICHRA to your part-time employees. 

Are There Limits to an ICHRA?

No, there aren’t limits to what you set as your employer maximum contribution in an ICHRA. There are also no limits to how many employees you offer the ICHRA to, as long as the employees belong to the same employee class. 

What Are the ICHRA Rules of Notification?

Like other employer healthcare coverage, you must notify your employees about ICHRA eligibility so they understand what’s available to them. You must provide a notice in writing to:

• Each employee who becomes eligible during the plan year to the employee no later than the date they’re eligible
• Each ICHRA participant at least 90 days before the plan year starts

If you establish the ICHRA fewer than 120 days before the first plan year starts, you must provide the notice before or no later than on the ICHRA’s effective date.

What Are the Differences Between an ICHRA, HRA and QSEHRA?

As mentioned, an ICHRA is a type of HRA, or health reimbursement account. Another type of HRA is a QSEHRA. QSEHRA stands for Qualified Small Employer Health Reimbursement Arrangement. 

First, let’s look at the similarities between an ICHRA and a QSEHRA. 

• Both plans enable the employer to set the monthly allowance amount.
• With both plans, employees purchase the healthcare of their choice.
• Both plans may reimburse expenses listed in the IRS Publication 502.
• With both plans, employees submit their expense documentation, after which employers review and approve the eligible requests.
• Both plans provide tax-free reimbursement, both in terms of payroll tax and income tax for the participant. 

The main differences between an ICHRA and a QSEHRA are:

• With an ICHRA, there are no limits to how many employees may be eligible for this plan. With a QSEHRA, employers are only eligible if they have fewer than 50 full-time employees.
• With an ICHRA, employers may also offer a group insurance policy to a specific class of employees that’s separate from the employee class receiving ICHRA benefits. With a QSEHRA, employers aren’t allowed to offer a group insurance policy. 
• With an ICHRA, the employer structures employee eligibility. With a QSEHRA, all full-time employees and their families will be automatically eligible for the benefit. 
• With an ICHRA, there are no allowance caps for what an employer can reimburse an employee for. With a QSEHRA, the IRS updates annual allowance caps each year.

There are a few other differences between an ICHRA and a QSEHRA, including premium tax credit guidelines. Contact a business health insurance expert to walk you through what the differences may mean for your business. 

Are ICHRAs Tax-Deductible?

Yes. Any reimbursements an employer makes in an ICHRA are tax-deductible. Plus, ICHRA reimbursements are received tax-free by employees. 

How Do I Set Up an ICHRA?

To set up an ICHRA, you’ll need to take the following steps. 

1. Choose a start date.
2. Set a cancelation date for your group policy, if you plan to cancel it.
3. Determine eligibility, and designate employee class groups.
4. Set your budget and determine allowances.
5. Establish legal plan documents to ensure compliance with the IRS and U.S. Department of Labor. 
6. Educate your employees about your ICHRA offering. 

You can also provide resources to your employees so they can purchase their own individual health insurance or family health insurance, since they’ll need that in order to get reimbursed under an ICHRA.

To get help to set up an ICHRA, contact the health insurance experts at AZ Health Insurance Brokers online, at 602.617.4107 or by email at quotes@azhealthinsurancebrokers.com. We’ll help you understand whether or not an ICHRA is the best health insurance offering for your unique business, and we can help you set one up if you choose to do so. We can also recommend alternative business health insurance coverage options so you can compare what’s available.