The individual coverage health reimbursement arrangement (ICHRA) allows businesses of all sizes, from large corporations to small businesses like yours, to reimburse employees for their personally purchased health insurance expenses.
The ICHRA is particularly beneficial for businesses with fewer than 50 employees because they are not obligated to provide health benefits under the Affordable Care Act. But when they do provide coverage, they expose themselves to a $100-per-day penalty for each employee. The ICHRA avoids this penalty.
The ICHRA offers several benefits to the employer, including
- the flexibility to choose the reimbursement limits,
- the ability to offer different plans to different employees based on classifications, and
- the ability to offer a cafeteria plan that allows employees to pay pre-tax for additional insurance coverage above what the ICHRA reimburses.
There are restrictions on who can participate. Employees eligible for an ICHRA are those enrolled in individual exchange coverage, other individual insurance coverage, or Medicare. More-than-2-percent S corporation shareholders, their family members, and Form 1040, Schedule C taxpayers are not eligible to participate in an ICHRA.
If you plan to offer an ICHRA, you need to provide your employees with at least a 90-days’ notice before the beginning of the plan year. We encourage you to start planning now if you wish to offer an ICHRA on January 1, 2024, as this gives you a target date for the ICHRA notice of October 2, 2023.
Key Insights on the ICHRA for Small Businesses
If you are thinking about offering your employees the new ICHRA, take a moment to read the insights below.
Class size rule. You face the class size rule only if you offer a traditional group health plan to one class of employees and an ICHRA to another.
Minimum class size example. You cover four full-time employees with group health coverage and offer an ICHRA of $400 a month to your 12 part-time employees. Eight of the part-time employees accept. You satisfy the “same terms” rule and meet the class size requirement.
No minimum class size example. You face no minimum class size requirements when you don’t offer a traditional group health plan. Say you have seven employees. You can offer a $16,000 ICHRA to your two salaried employees and a $5,000 ICHRA to your five hourly employees.
Carryover rules. You can establish your ICHRA so employees can carry over unused amounts to next year.
Section 125 Plan strategy. You can use a cafeteria plan (a Section 125 plan) to let those employees who purchase individual health insurance coverage outside of a public exchange pay the uncovered part of the premium, which allows you and your employees to save on taxes.
Avoiding the $100-a-day-per-employee penalty. The ICHRA avoids the Affordable Care Act’s $100-a-day-per-employee penalty for reimbursing individually purchased health insurance.
Not subject to affordability rules. Businesses with fewer than 50 employees are not subject to affordability rules under Section 4980H, providing additional flexibility.
Qualifying insurance. Insurance that qualifies for the ICHRA includes individual coverage purchased through an exchange or on the open market, and Medicare.
As you can see, an ICHRA has several advantages for the small business.
