What is an ICHRA and
How Does It Work

This article further explores the following points:

  • What is ICHRA
  • How Does ICHRA Work
  • ACAwise take care of generating ICHRA codes to file Form 1095-c

ICHRA - An Overview

- Updated september 12, 2020 - 8.00 AM - Admin, ACAwise

The ICHRA was initially established through new rules from the Departments of the Treasury, Labor, and Health and Human Services on October 23, 2018. It was then finalized on June 13, 2019, and it is available for employers to begin using from
January 1, 2020.

The ICHRA is typically an upgraded version of another type of HRA called "QSEHRA" ( Qualified Small Employer HRA), introduced
in 2017.

An ICHRA enables businesses of any size to reimburse their employees a monthly allowance of tax-free money for their premiums and
healthcare costs.

This means employees can purchase the health care services they want, including individual health insurance, then their employer will reimburse them with an allowance of tax-free money.

How Does ICHRA Work

Here is a step-by-step process that explains how ICHRA works.

Step 1 - The Employer sets a Monthly Allowance:

With an ICHRA, the Employer sets an allowance of tax-free amounts for their employees to use monthly on individual healthcare insurance and other healthcare costs.

Here, the business doesn't want to offer all of its employees the same reimbursement amount.

It can be a different allowance amount for different classes of employees, including:

  • Full-Time employees
  • Part-time employees
  • Seasonal employees
  • Salaried employees
  • Non-salaried employees
  • Hourly employees
  • Temporary employees who are working for a staffing firm
  • Employees those covered by a collective bargaining agreement
  • Employees those in a waiting period
  • NRI employees those work in abroad
  • Employees from different locations, depending on rating areas
  • A blend of two or more of the above

Step 2 - Employees Purchase their own Health Insurance Plans:

Employees can purchase their own health insurance coverage plans and services to fit their needs and personal budget.

The IRS defines the full list of eligible and non-eligible healthcare expenses reimbursable through ICHRA in
publication 502.

Step 3 - Employees Need to Submit Proof of their Health Care Expense Documents
to Employer:

After incurring an expense, employees need to submit proof to the Employer through formal documents, such as a receipt or an explanation of their insurance company's benefits (EOB).

Step 4 - The Employer Reviews the Submitted Documentation and Reimburses
the Employees:

If the employee's submitted documentation is correct, and the expenses are eligible for reimbursement, the Employer will reimburse the employee up to their maximum allowance. These reimbursements amounts are tax-free for both the business and its employees.

Reminder: If the employee participated in the ICHRA, they are not eligible to purchase Premium Tax Credits (PTC) from the Marketplace.

For this reason, employees are free to opt-out of the ICHRA if their allowance amount by the Employer was considered "unaffordable" and wouldn't provide minimum value under the ACA.

Who Will Get Benefits From ICHRA

As we discussed above, the ICHRA is the alternative for employers looking to offer their employees health benefits. At the same time, it also benefits employees. Here's how,

  • ICHRA allows ALEs to "get out" of taking responsibility for employee health risks.
  • ICHRA is more personalized than employer-provided group plans. It allows employees to choose their own individual plans and doctors that fit their needs.
  • ICHRA allows employers to focus their time on best serving their clients and not managing employees' complicated group health plans.
  • ICHRA reimbursement amounts are tax-free for both the business and its employees.

ICHRA Design Rules

Here's an overview of ICHRA Design Rules:

  • Employers of any size are eligible to offer an ICHRA.
  • Stay compliant with our IRS approved ACA solution and meet your filing and postal mailing requirements from one place.Employees can participate in ICHRA and receive reimbursements only if they maintain a qualified individual health plan.
  • Employees of different classes (say geographic location, seasonal, part-time, full-time, abroad) can be offered different levels of benefits by the Employer.
  • With ICHRA, there are no maximum or minimum limits for monthly reimbursement amounts.
  • Employers have the flexibility to offer an ICHRA to the employee at any time throughout the year.
  • Employers can't offer an ICHRA to an employee covered under their group health plan. However, they can offer Excepted Benefit HRAs to employees.
  • If ICHRA is considered ‘unaffordable’, employees can choose between using Premium Tax Credits or the ICHRA. If it is considered ‘affordable’, then the employee cannot opt-out and receive a premium
    tax credit.
  • Once a year, the employees must be given a choice to ‘opt-out’ of receiving reimbursements through
    an ICHRA.
  • ICHRA will not reimburse medical care costs like Copay, deductible, short-term, limited-duration insurance (STLDI), and dental- or vision-specific costs.
  • If the employee is outside of open enrollment:
    Employees will have 60 days to purchase a health plan once the ICHRA becomes available, as it triggers a special enrollment period. This enables employees to find an individual health plan that meets MEC outside of open enrollment.

How to Calculate the Affordability of an ICHRA

Under the Affordable Care Act (ACA), every Applicable Large Employer (with more than 50 full-time equivalent employees) must provide health insurance coverage to their employees. This is known as the
"employer mandate."

ALEs, who fail to offer affordable health insurance coverage, are subject to potential IRS penalties.

So, how is ICHRA Affordability calculated?

ICHRA "affordability" can be calculated for each employee depending on the reference plan where an employee lives or works. In this case, the reference is the Lowest Cost Silver Plan (LCSP).

Affordable ICHRA Contribution > Lowest Cost Silver Plan - ( ACA affordability percentage * Employee Household Income).

Note:

The IRS adjusts the “ACA affordability percentage” annually based on the federal poverty line percentage.

  • 9.56% for Tax Year 2015
  • 9.66% for Tax Year 2016
  • 9.69% for Tax Year 2017
  • 9.56% for Tax Year 2018
  • 9.86% for Tax Year 2019
  • 9.78% for Tax Year 2020
  • 9.83% for Tax Year 2021

The two variables highlighted in the above ICHRA affordability equation are tough for the employers to remember. Therefore, the IRS has proposed different affordability safe harbors that employers can use to determine ICHRA affordability.

To determine the Lowest Cost Silver Plan, the IRS has proposed the following safe harbors:

  • Location
  • Age-Based Brands
  • Prior Year

To determine Employee Household Income, the IRS distinguishes the following safe harbors:

  • W-2 Wages
  • Ray of Pay
  • FPL (Federal Poverty Line)

Note: From the above calculation,

  • If an ICHRA is "affordable," employees are not eligible for Premium Tax credits (PTC)
  • If an ICHRA is "unaffordable," employees can choose either the ICHRA or opt-for Premium Tax
    Credits (PTC)

ACAwise also built an ICHRA Affordability Calculator that allows employers to calculate affordability for each employee at no time. So, if you don't know how much you want to offer your employee for the ICHRA to be affordable, click here.

Requirements to Use ICHRA

For Employees:

The employee and their family members are eligible to participate in ICHRA only if they have health coverage under an individual health insurance policy, including,

  • On-exchange or off-exchange coverage
  • Medicare Parts A and B
  • Medicare Part C

The employee can either be a primary policyholder or covered under a family member's individual policy.

In case the employee or their family member ever loses individual health coverage, they are no longer eligible to receive reimbursements through ICHRA.

For Employers:

Employers cannot offer an ICHRA to an employee covered under their group
health plan.

Employers can only offer a traditional group health plan to employees in one class (such as part-time) and an ICHRA to employees in another class (such as full-time).

However, if an employer offers a group health plan to a class of employees, they need to meet a specific class size requirement.

Minimum employee class sizes are:

  • 10 employees (employers with fewer than 100 employees)
  • 10% of your total employees (employers with 100-200 employees)
  • 20 employees (employers with more than 200 employees)

ICHRA Affordability codes to file Form 1095-C

One of the ALE's responsibilities is to complete Form 1095-C with codes (Employer-Provided Health Insurance Offer & Coverage) and submit to the IRS to avoid penalties.

On July 13, 2020, the IRS released a draft of Form 1095-C, which adds new codes (1L - 1S) for ALEs. It helps employees understand how their employer determined the affordability for their ICHRA plan. Here are the ICHRA affordability codes to file Form 1095-C:

  • 1L. Individual coverage health reimbursement arrangement (HRA) offered to employee-only with affordability was determined using the employee's primary residence location ZIP Code.
  • 1M. Individual coverage HRA offered to employee and dependent(s) (not spouse) with affordability was determined using the employee's primary residence location ZIP Code.
  • 1N. Individual coverage HRA offered to the employee, spouse, and dependent(s) with affordability was determined using the employee's primary residence location ZIP Code.
  • 1O. Individual coverage HRA offered to employee-only using the employee's primary work location ZIP Code affordability safe harbor.
  • 1P. Individual coverage HRA offered to employee and dependent(s) (not spouse) using the employee's primary work location ZIP Code affordability safe harbor.
  • 1Q. Individual coverage HRA offered to employee, spouse, and dependent(s) using the employee's primary work location ZIP Code affordability safe harbor.
  • 1R. Individual coverage HRA that is NOT affordable offered to employees; employee and spouse or dependent(s); or employee, spouse, and dependents.
  • 1S. Individual coverage HRA offered to an employee who was not a full-time worker.

ACAwise Takes Care of Generating ICHRA Codes and filing Form 1095-C

ACAwise is your complete ACA reporting solution that takes care of generating ICHRA codes.

So, whether you are a skilled filer looking for an electronic filing solution, or a new filer looking for complete ACA services and ICHRA code generation, ACAwise is here to assist you. ACAwise also offers state-filing solutions and past year filing options.

Talk to our experts today to learn more about how ACAwise will take care of generating ICHRA Codes to file your Form 1095-C to the IRS.

Let us take care of your ACA Reporting!

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