What Business Owners Need to Know About ICHRA Benefits

October 4, 2023
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Are you thinking about providing your employees with a new individual coverage health reimbursement agreement (ICHRA) as part of your benefits package? There is some important information you will want to understand before implementing an ICHRA. Below are some of the key details to consider.

What is an ICHRA?

All types and sizes of businesses can offer an ICHRA program. It enables you to reimburse employees for their personally purchased health insurance expenses. It is an optional solution to providing healthcare coverage as an employer. It makes the most sense for smaller businesses with fewer than 50 employees. The Affordable Care Act (ACA) doesn’t require businesses of this size to provide health benefits. However, they are susceptible to a $100-per-day for each employee penalty when they do provide coverage that doesn’t meet certain ACA standards. The ICHRA avoids the risk of this penalty, while providing a manageable solution for both employers and employees.

ICHRA Employer Benefits

The ICHRA has several key benefits from an employer’s perspective:

  • Flexibility to choose reimbursement limits
  • Offering different plans to different employees based on defined classifications
  • Ability for employees to pay pre-tax for additional health insurance coverage beyond what is covered by the employer’s ICHRA plan.

ICHRA Qualifications & Requirements

To offer the ICHRA, there are certain qualifications and requirements that must be met:

Class Size Rule—You might face this issue if you offer a traditional group health plan to one class of employees and an ICHRA to another. This may incur extra costs or tax penalties unless you satisfy the “same terms” rule.

Minimum Class Size—If you do not offer a traditional group health plan, you can offer different ICHRA plans to different classes of employees (salaried, hourly, part-time, etc.).

Carryover Options—You are able to establish an ICHRA that allows employees to carry over unused reimbursement amounts to the following year.

Section 125—You can use a cafeteria plan like Section 125. This enables to employees who purchase health insurance outside of a public exchange to pay the uncovered part of the premium. This can save both the employer and employee to save on taxes.

Affordability Rules—Businesses with fewer than 50 employees are not subject to affordability rules under Section 4980H. This provides additional flexibility with an ICHRA.

Qualifying Insurance—Insurance that qualifies for the ICHRA includes individual healthcare coverage purchased through an exchange or on the open market, as well as Medicare.

Non-Qualifying Employees—S-Corporation shareholders with more than 2% ownership, their family members, and Form 1040 Schedule C taxpayers are not eligible to participate in an ICHRA.

90-Day Notice—If you are implementing an ICHRA plan, you must provide employees with at least a 90-day notice before the beginning of the plan year.

To learn more about the individual coverage health reimbursement arrangement (ICHRA) and other options to improve your employee benefits package, reduce tax liabilities and better your business structure as a whole, contact Illumination Wealth today.