How to Set Up an Individual Coverage HRA (ICHRA)

An Individual Coverage Health Reimbursement Arrangement (ICHRA) offers employers a flexible approach to providing health benefits. This account-based health plan enables businesses to reimburse employees for individual health insurance premiums and other qualified medical expenses on a tax-free basis. An ICHRA functions as an alternative to traditional group health plans, allowing employers to define a monthly allowance while empowering employees to choose individual health coverage. This model simplifies benefit provision for organizations of any size.

Initial Decisions and Requirements

Before establishing an ICHRA, employers must make foundational decisions. A primary requirement is that an employer cannot offer a traditional group health plan to the same class of employees being offered the ICHRA. This means employers must strategically decide which employee groups will receive the ICHRA benefit, ensuring no overlap with group plan offerings for the same employee class.

Employers determine the allowance amounts they will provide for reimbursement, which can be a single amount for all eligible employees or vary based on defined employee classes. There are no maximum or minimum limits on these monthly reimbursement amounts. The allowance can cover individual health insurance premiums, qualified medical expenses as defined by IRS Publication 502, or a combination.

Defining employee classes is a crucial step, as it dictates how different groups of employees may receive varying allowance amounts. The IRS outlines eleven permitted employee classifications, including full-time, part-time, seasonal, salaried, hourly, employees in different geographic locations, and those covered by collective bargaining agreements. These classifications must be objective and job-related, adhering to non-discrimination rules under Internal Revenue Code Section 105(h). Benefits must be uniformly available within each class, and any variations, such as those based on age, must comply with rules to prevent disproportionate favoring of highly compensated individuals.

Employees must be enrolled in individual health coverage or Medicare Part A and B, or Part C, to receive reimbursements. This coverage must meet Minimum Essential Coverage (MEC) standards. Employers are responsible for ensuring that employees provide substantiation of this coverage, either through third-party proof or a signed attestation. This substantiation is required annually and each time an employee requests a reimbursement.

Creating the Required Plan Documents

Establishing an ICHRA necessitates the creation of formal documents that outline the plan’s structure and operational guidelines. These documents translate initial decisions regarding eligibility, allowances, and administration into legally binding terms. The Written Plan Document serves as the formal legal agreement for the ICHRA.

This document must detail named fiduciaries and plan administrators, along with their responsibilities. It defines eligibility requirements for participation, including employee classes and effective dates. The Written Plan Document describes benefits, eligible out-of-pocket expenses, funding, and payment methods. Procedures for claims, appeals, plan amendment, and termination are included, alongside information on Health Insurance Portability and Accountability Act (HIPAA) privacy officers and federal mandates.

The Offer Document, or Notice of Offer, formally communicates the ICHRA benefit to eligible employees. This notice must inform employees about the ICHRA allowance, the requirement to attest to individual health coverage, and how the ICHRA interacts with premium tax credits. This document provides transparent information, enabling informed decisions about health coverage.

The Summary Plan Description (SPD) is a mandatory document, providing a plain-language summary of the ICHRA for employees. While the Written Plan Document may contain complex legal language, the SPD is designed for easy understanding by the average participant. It outlines reimbursement rules, eligible expenses, annual limits, eligibility criteria, and procedures for claims and appeals. The SPD also informs employees of their rights under the Employee Retirement Income Security Act (ERISA). Employers can obtain templates from legal counsel or third-party administrators, and legal review is advisable for compliance.

Implementing the ICHRA

After gathering information and preparing plan documents, the next phase involves formally implementing the ICHRA and establishing its operational management. The first step is formal adoption, typically by an authorized company representative signing the Written Plan Document. Larger organizations may require a formal board resolution.

Providing timely notice to employees is crucial. Employers are generally required to deliver a written offer notice to each eligible employee at least 90 days before the ICHRA’s plan year begins. This notice must state the ICHRA allowance, effective date of coverage, and explain the interaction with premium tax credits. For newly eligible employees, such as new hires, the notice should be provided by the date their ICHRA coverage can begin.

Establishing the reimbursement process is central. Employers can choose to manage reimbursements internally or engage a third-party administrator (TPA). A TPA can streamline the process, as these entities often specialize in managing health reimbursement arrangements, including verifying substantiation documents and ensuring HIPAA compliance. If managed internally, the employer must establish clear procedures for receiving, reviewing, and processing reimbursement requests, ensuring that expenses meet the qualified medical expense criteria defined in IRS Publication 502.

Ongoing compliance and reporting obligations must be established. Employers are subject to various reporting requirements, including those under the Affordable Care Act (ACA). Applicable Large Employers (ALEs) must satisfy ACA reporting using Forms 1094-C and 1095-C. Smaller employers typically use Forms 1094-B and 1095-B. These forms provide information to the IRS about health coverage offered and, for ALEs, demonstrate affordability. ICHRA benefits are generally not reported as taxable income on an employee’s Form W-2.

ICHRAs, as ERISA plans, may be subject to Form 5500 reporting requirements, though plans with fewer than 100 participants are often exempt. This form provides information on the plan’s financial condition and operations. Employers should also maintain meticulous records of all plan documents, employee notices, and reimbursement transactions for at least seven years to facilitate audits and ensure regulatory adherence. Establishing these systems helps ensure smooth and compliant ICHRA operation.