If you’re exploring ways to offer health benefits without the one-size-fits-all approach of traditional group health insurance, Individual Coverage Health Reimbursement Arrangements (ICHRA) could be the perfect fit. ICHRA gives employers the flexibility to reimburse employees for individual health insurance plans and medical expenses, allowing employees to choose coverage that works best for them.
But offering an ICHRA also means navigating the requirements of the Affordable Care Act (ACA), especially for larger companies under the ACA’s employer mandate. Ensuring your ICHRA complies with ACA regulations isn’t just about avoiding penalties—it’s also key to providing quality, affordable health coverage to employees in a way that’s effective and compliant.
Understanding the Basics of ICHRA
The ICHRA offers tax-free reimbursement allowances that employees can use to purchase individual health coverage or cover medical expenses. This setup allows employers to allocate a monthly allowance, giving employees the choice to enroll in individual health insurance plans based on their own needs.
Compared to traditional group health plans, ICHRAs offer more control over costs for employers while allowing employees greater autonomy in choosing their insurance. Both employers and employees benefit from this arrangement, especially in situations where a traditional group health plan may be less flexible or cost-effective.
ACA Overview and Its Implications for ICHRA
The Affordable Care Act (ACA) includes several critical provisions affecting health insurance. Applicable large employers are required to offer minimum essential coverage, ensuring employees have access to basic health services. Another important provision is the ACA’s employer mandate, often referred to as the shared responsibility provision, which requires ALEs to provide affordable health insurance that meets minimum value standards to avoid penalties.
ICHRAs must be designed to align with these provisions, ensuring that employees have access to affordable health coverage that complies with the ACA’s affordability and MEC standards.
ICHRA Eligibility Criteria
ICHRA eligibility depends on several factors, including the employee’s status and geographic location. Employers can tailor ICHRA offerings for specific employee classes, such as full-time, part-time, and seasonal workers, or employees under a collective bargaining agreement.
Full-time employees and full-time equivalents generally fall under the ACA’s requirements, but employers can also use ICHRAs to cover part-time employees, as long as eligibility criteria are applied consistently. Geographic location can also impact eligibility, as healthcare costs and insurance markets vary, influencing the ICHRA allowance needed to ensure adequate coverage.
ICHRA and Affordability Standards under ACA
Under ACA regulations, an ICHRA is considered affordable if the employee’s required contribution for the lowest-cost silver plan within their geographic area does not exceed a set percentage of their household income. Employers must calculate affordability for different classes of employees to ensure compliance with ACA requirements.
By understanding affordability standards and adjusting ICHRA allowances, organizations can ensure their ICHRA plans meet ACA standards, avoiding penalties and providing accessible healthcare coverage.
ICHRA and Minimum Essential Coverage (MEC)
Minimum Essential Coverage (MEC) is a key component of ACA compliance and represents the minimum level of health insurance coverage that meets ACA requirements. MEC includes a range of health services, from emergency services to preventive care, ensuring that employees receive basic healthcare benefits.
For employers offering an ICHRA, ensuring that this coverage enables employees to meet MEC requirements is essential. When employees use ICHRA funds to purchase individual health insurance, they can meet these MEC standards by selecting qualifying health plans. However, it’s essential to verify that these individual health plans indeed offer MEC, as not all plans meet these standards automatically.
ICHRA and Minimum Value Standards
The ACA’s Minimum Value Standards ensure that health plans cover at least 60% of the average cost of essential health services. Minimum value is a critical consideration for employers, as it represents the benchmark for providing sufficient health coverage.
ICHRAs themselves don’t inherently meet minimum value standards because they function primarily as reimbursement arrangements rather than comprehensive health insurance plans. Instead, the coverage employees obtain with ICHRA funds needs to meet these standards for employers to avoid potential penalties.
For ICHRA-funded plans to meet minimum value requirements, employees should select health plans that offer substantial coverage beyond basic benefits. However, when an ICHRA falls short of minimum value, employees may have alternative options. In such cases, employees could seek additional coverage or explore ACA Marketplace plans that meet the necessary standards.
Employer Contributions and ACA Compliance
Employer contributions are a vital element of ICHRA design and directly impact ACA compliance. Setting contributions involves determining a monthly allowance that employees can use to purchase individual health coverage or cover medical expenses. Contributions must be structured to maintain affordability as defined by the ACA.
For ICHRA to be considered affordable, the cost of the lowest-cost silver plan in the employee’s geographic location should not exceed a specific percentage of their household income. Employers can adjust contributions based on employee classes, geographic location, and other variables to maintain ACA compliance.
Offering ICHRA Alongside ACA Marketplace Coverage
ICHRA offers employees the flexibility to use their allowances with ACA Marketplace plans, but it also impacts their eligibility for premium tax credits. Employees who receive an ICHRA allowance that makes individual coverage affordable under ACA standards become ineligible for ACA subsidies.
If an ICHRA falls below the affordability threshold, employees can opt out of the ICHRA and apply for premium tax credits instead, which helps make their Marketplace coverage more affordable.
Coordinating ICHRA benefits with ACA Marketplace options requires clear communication. Employees should understand how using an ICHRA impacts their eligibility for ACA subsidies and their overall coverage options.
ICHRA Notices and Reporting Requirements
For small businesses with fewer than 50 full-time equivalent employees, maintaining ICHRA compliance includes filing specific forms with the IRS. Under IRS guidelines, these businesses must submit the following:
- Form 1094-B and Form 1095-B to the IRS
- Form 1095-B to each employee who participated in the ICHRA for any part of the plan year
Form 1095-B outlines the coverage details, informing employees of their insurance status and allowing them to report it accurately for tax purposes. Each participating employee must receive a Form 1095-B, and a copy should be submitted to the IRS. Form 1094-B acts as a cover sheet, summarizing the total number of Form 1095-Bs submitted.
Compliance Pitfalls and How to Avoid Them
While ICHRA brings flexibility to employer-sponsored health benefits, ensuring full compliance with ACA regulations requires careful attention. Common pitfalls include misclassifying employee classes, which can lead to unintended gaps in coverage or non-compliance. Employers also sometimes neglect affordability calculations, failing to confirm that their ICHRA offerings meet ACA’s affordability standards, or they overlook timely reporting, risking penalties by missing IRS deadlines for forms like 1094-B and 1095-B.
TPAs help ensure accurate affordability calculations, keep track of reporting requirements, and streamline employee communication. By working with TPAs and conducting regular compliance audits, employers can maintain a smooth, compliant ICHRA program that avoids penalties and meets employee needs.
How ICHRA Affects Employee Choice and Flexibility
One of the most attractive features of ICHRA is the level of choice it offers employees, granting them control over their health coverage options. Instead of relying on a single, standardized group health plan, employees receive a set monthly allowance they can use to purchase individual health insurance.
This flexibility allows employees to tailor their coverage based on personal health needs, family considerations, and budget. ICHRA’s structure aligns well with the ACA framework, meeting requirements while enabling employees to shop around for plans that suit them best.
Employees often appreciate this level of independence, as it provides a way to secure a plan that feels more customized than typical employer-sponsored group coverage.
ICHRA Integration with Other Health Benefits
Employers can enhance the value of an ICHRA by integrating it with other benefits, such as Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). Pairing ICHRA with these accounts can help employees manage healthcare costs more effectively, especially when facing high out-of-pocket expenses.
- HSAs, which are tax-advantaged accounts, can complement an ICHRA by covering deductibles or copayments for high-deductible health plans
- FSAs allow employees to set aside pre-tax income for medical expenses, adding another layer of flexibility
By strategically combining these benefits, employers can create benefits packages that maximize the value of ICHRA while helping employees better manage healthcare expenses.
ICHRA for Large Employers and ACA Compliance
For companies with more than 50 full-time equivalent employees, offering an HRA instead of a traditional group health plan requires specific compliance steps. You must ensure that the HRA reimbursements you provide make individual health coverage affordable for employees. To meet ACA affordability standards in 2025, this means the reimbursement should cover the lowest-cost silver plan on the ACA marketplace or state exchange and not exceed 9.02% of the employee’s household income.
Here are the ICHRA reporting requirements for large businesses:
- File Form 1094-C and accompanying Forms 1095-C with the IRS
- Send Form 1095-C to each full-time employee who worked for at least one month during the calendar year
These forms include specific codes that detail the affordability calculations used, giving employees insight into how their coverage costs were determined. It’s essential to provide Form 1095-C to all full-time employees who meet the one-month employment threshold, ensuring they receive clear information about their health coverage.
ICHRA Plan Design and Customization
One of the valuable aspects of ICHRA is its flexibility in design, allowing employers to tailor health benefits to fit different employee classes. Employers can structure ICHRA offerings for full-time, part-time, and seasonal workers, adjusting the monthly allowances to meet the needs of each group.
Customization is essential, but it’s equally important to ensure that tailored plans remain ACA-compliant. Employers should be mindful of affordability standards and minimum essential coverage requirements for each employee group. Working with a TPA can help manage these variables, so employers can focus on creating a meaningful health benefits package that aligns with federal guidelines.
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Adapting ICHRA Plans for Future ACA Changes
The healthcare landscape is subject to shifts in policy, and potential ACA changes could impact ICHRA compliance requirements. If new regulations alter affordability thresholds or adjust requirements for minimum essential coverage, employers may need to make updates to their ICHRA plans.
For instance, setting contributions with some margin for adjustment can make it easier to respond to any changes in affordability standards. Regularly consulting with compliance specialists can also provide insights into anticipated changes, allowing employers to proactively manage adjustments and maintain compliance as regulations evolve.
ICHRA and ACA Compliance Audits
ACA compliance audits are a possibility for employers offering ICHRA, and preparing for them can safeguard against penalties. Documentation is key; employers should maintain thorough records of ICHRA plan details, employee eligibility classifications, and affordability calculations. Keeping up-to-date records not only helps in audits but also ensures consistency in how benefits are offered across different employee classes.
In case of an audit, employers should be ready to provide detailed information, including IRS filings like Form 1094-C and 1095-C, as well as records of any employee notices related to ICHRA benefits. If an employer is found non-compliant, corrective actions are essential to avoid recurring issues.
Making ICHRA Work for Your Team
Navigating ACA compliance while offering flexible, employee-focused health benefits is easier with ICHRA. By aligning your plan design with ACA standards, you provide your team with valuable, personalized coverage options. Whether you’re a small business or a large employer, ICHRA offers a unique blend of flexibility and compliance, empowering you to meet your team’s health coverage needs without the rigidity of traditional group plans. Staying informed, utilizing the support of TPAs, and regularly reviewing compliance standards will keep your ICHRA program running smoothly and effectively.
Ready to elevate your benefits strategy? With ICHRA, you can craft a compliant, flexible health plan that grows with your team and meets federal guidelines seamlessly.
