What is an ICHRA?
The Individual Coverage Health Reimbursement Arrangement (ICHRA) is an alternative to offering a traditional group health plan to your employees. It’s a specific account-based health plan that allows employers to provide defined non-taxable reimbursements to employees for qualified medical expenses, including monthly premiums and out-of-pocket costs, like copayments and deductibles. Employees must be enrolled in individual health insurance coverage to use the funds.
What counts as “individual health insurance coverage” for the ICHRA?
To participate in the ICHRA, employees must be covered by individual health insurance. This can be an individual health policy purchased off the Marketplace (referred to as Exchange or on-exchange) or a policy purchased directly from a carrier or using a private exchange (referred to as off-exchange), Medicare Parts A and B, or Medicare Part C.
Can an ICHRA be offered to distinctive employee classes?
Yes. ICHRA regulations generally allow businesses to determine ICHRA eligibility and to offer different allowance amounts to different employees based on 11 different employee classes. Minimum class sizes do apply in certain circumstances.
Depending on your business’s circumstances, you may need to abide by certain class size requirements put in place by ICHRA regulations.
Employee class size requirements apply to businesses that will offer both group health insurance and the ICHRA and will also use any of the following five employee classes (or any combination of these classes) to determine ICHRA eligibility: Full-time, Part-time, Salaried, Hourly and Geographic location.
Class Size Requirements:
| Minimum Count | Employer Size |
| 10 Employees | Total Employee Count < 100 Employees |
| Equal or Greater than 10% of all Employees | Total Employee Count 100 - 200 Employees |
| 20 Employees | Greater than 200 Employees |
Note: If an employer has fewer employees in a State than the numbers above, they may be excluded from this requirement.
The 11 employee classes are:
Can different amounts be established in each class?
Yes. Businesses can choose to offer different allowance amounts to different employees based on the class that they are aligned with. Employers can differentiate the allowance amount based on the size of the employee’s family and the employee’s age.
If an employer decides to offer older employees in the same class more money, you must offer the oldest employees no more than three times the allowance amount of the youngest employees in the class.
What are the minimum and maximum employer contribution requirements?
There are none, however, see How does the concept of affordability impact ICHRAs? which may impact your decision of how much to contribute.
How are employer & employee contributions to ICHRA premiums & expenses taxed?
Employer contributions to ICHRAs to cover employee premiums and out of pocket expenses are not subject to payroll taxes - just as employer contributions to group health premiums are not subject to payroll taxes.
Neither the employer nor the employee is taxed on the employer’s ICHRA contribution, regardless of whether it is used on or off exchange.
If an employee picks a plan with a premium that exceeds the employer’s contribution, the excess dollars may be contributed by the employee either post-tax, with their regular dollars, or pre-tax, via a POP (premium-only plan) or other Section 125 cafeteria plan. In order to use pre-tax employee dollars towards premiums, the employee must enroll off-exchange.
So if Joe is offered $600 towards his premiums by his employer, and he picks a plan that’s $800, he has 2 options:
When can an employee make premium payments pre-tax and when must they be after tax?
When should an enrollee enroll on-exchange vs off-exchange?
Do the affordability requirements of the Affordable Care Act apply to ICHRAs?
Affordability and related requirements (discussed in greater detail below) under the Affordable Care Act may apply to employers offering ICHRAs, depending on the employer’s size. “Affordability” is applicable for employers with 50 or more full-time or equivalent employees (ALE = Applicable Large Employer).
What are the minimum affordability requirements for eligible employers?
In order for employers to meet minimum affordability requirements and not be assessed two potential penalties (IRC §4980H(a)—The “A Penalty” and IRC §4980H(b)—The “B Penalty”), an employer must meet certain requirements. There are safe harbors that exist to help employers avoid penalty B.
Penalty A: This penalty applies where the ALE fails to offer minimum essential coverage to at least 95% of its full-time employees (and dependents) in any given calendar month.
Penalty B: This penalty applies where the ALE is not subject to the A Penalty (i.e., the ALE offers coverage to at least 95% of full-time employees and dependents). It applies for each full-time employee who was a) not offered minimum essential coverage, b) offered unaffordable coverage, or c) offered coverage that did not provide minimum value.
To be considered affordable, health insurance for employees should cost no more than 9.61%* of the employee’s household income, using the lowest cost self-only silver plan on the local exchange as a standard. This means that the amount an employee would pay towards the lowest cost self-only silver plan premium (after any employer contributions towards the cost) must be less than 8.5%* of the employee’s household income for the month. To learn about how the affordability requirement applies to ICHRAs, see How does the concept of affordability impact ICHRAs? below.
*The American Rescue Plan Act of 2021 has reduced this to 8.5% from 9.61% for the 2021 and 2022 calendar years.
The IRS recognizes that employers generally do not know the employee’s household income and provides three safe harbors for ALEs to determine whether an offer of coverage is affordable for purposes of avoiding B Penalty liability:
If an ALE’s offer meets any of these safe harbors, the offer of coverage is deemed affordable for B Penalty purposes—regardless of whether the employee may qualify for Exchange subsidies based on the employee’s actual income and number of household members.
The HealthSherpa ICHRA Affordability Calculator assists ALEs with the calculation of the Rate of Pay and W2 safe harbors, but not the Federal Poverty Line Affordability Safe Harbor. Please see the HealthSherpa website (www.healthsherpa.com) for more information.
How does the concept of affordability impact ICHRAs?
Generally an individual coverage HRA is considered affordable for an employee if the monthly premium the employee would pay, after the employer’s reimbursement, for the lowest cost self-only Silver plan available to them through the Marketplace in their area is less than 9.61%* of 1/12 of the employee’s household income. This means that the lowest cost silver plan premium, minus the employer’s ICHRA monthly allowance, must be less than 9.61% of the employee’s household income for the month. If this requirement is met, the ICHRA is considered affordable and may satisfy the employer mandate.
If your offer is affordable: The employee won’t be eligible for the premium tax credit for the employee’s Marketplace coverage or the coverage of other household members who would be covered by the individual coverage HRA.
If your offer isn’t affordable: The employee must decline (“opt out” of) the individual coverage HRA to claim the premium tax credit, if otherwise eligible, for the Marketplace coverage of the employee and household members with an individual coverage HRA offer. The employee can’t combine the individual coverage HRA with a premium tax credit.
HealthSherpa can help participants determine whether their ICHRA offer is affordable. Please see the HealthSherpa website for more information.
Can an employee take both a subsidy and an ICHRA?
No, an employee must either take a subsidy or elect ICHRA. Importantly, if the employee takes the subsidy, they must opt out of their ICHRA entirely and waive the employer contribution - it is not possible to “double dip” and use the ICHRA dollars for some other expense (e.g. dental/vision).
If an employee has already opted in to the ICHRA, they cannot qualify for a subsidy - so it is important that the employee checks their eligibility first before they enroll.
Can an employee use an ICHRA to enroll on a spouse's individual plan?
Yes. An employee who is offered an ICHRA may join a spouse’s existing individual policy, and use the ICHRA to pay for the employee’s portion of the premium. If the ICHRA plan documents allow it, they may use ICHRA dollars to pay for the spouse’s portion of the premium as well.
However, if the ICHRA isn’t extended to the spouse, they would need to enroll through separate enrollment groups so that the ICHRA amount does not pay for the spouse’s portion of the premium.
An ICHRA cannot be used to pay for a spouse’s group health insurance policy.
Can ICHRA dollars be used for other benefits such as dental, vision, accident, indemnity?
Generally, yes. The plan sponsor (employer) may design the ICHRA to cover 1) insurance premiums only or 2) both insurance premiums and qualified medical expenses.
Eligible premiums can include medical, dental, vision and other eligible plans. Those and other eligible expenses are outlined in IRS Publication 502 (IRC Section 213(d). Link: 2019 Publication 502 (irs.gov). Please see page 9 for eligible insurance plans. Many types of indemnity plans are excluded.
Does an ICHRA, itself, fall under ERISA?
Yes. ICHRAs, themselves, are considered a group health plan and would be subject to ERISA Guidelines such as, but not limited to:
ICHRAs require a participant to secure a qualified individual health plan (non-group health plan). Are the individual market health plans also subject to ERISA requirements?
No, they are not, provided certain provisions are met. The final HRA regulations provide that an “individual” market plan that is purchased through an individual market HRA arrangement will not be subject to ERISA’s requirements if the following requirements are met: (1) The purchase of the “individual” market plan is voluntary for employees, (2) The employer does not select or endorse any particular insurance company or individual market plan, (3) The reimbursement for premiums is limited solely to premiums for an “individual” market plan, (4) The employer does not receive any compensation in connection with the employee’s purchase of an “individual” market plan, and (5) The employee receives annual notice that the “individual” market plan is not subject to ERISA.
Can the ICHRA allowance amount be adjusted at any time?
No. The ICHRA plan design is established at the start of a plan year and will remain intact for a full 12 month period. The ICHRA benefit design—specifically the allowance amount—directly impacts employees' decisions to opt in or out of the benefit.
What is a special enrollment period (SEP)?
A special enrollment period is a timeframe when individuals can sign up for health insurance. Note that for 2021, a special enrollment period in the Marketplace health coverage is available February 15, 2021 through May 15, 2021 due to the .
Individuals may qualify for a Special Enrollment Period to enroll any time if you’ve had certain life events, including losing other health coverage, moving, getting married, having a baby, or adopting a child.
Depending on the Special Enrollment Period type, you may have 60 days before or 60 days following the event to enroll in a plan. You can enroll in Medicaid or the Children’s Health Insurance Program (CHIP) any time. Job-based plans must provide a Special Enrollment Period of at least 30 days.
Does being offered an ICHRA qualify for a SEP?
The SEP applies to people who are offered the ICHRA for the first time, but it also applies to employees who either had (or were offered) ICHRA coverage in the past, ceased that coverage (or turned it down), and are then offered it again – either during the employer’s annual enrollment period, or because the employee switches to a different class of employees, which changes the employee’s eligibility for coverage under the ICHRA.
Does losing an ICHRA qualify for a SEP?
Yes, see responses above.
Can I change my plan selection during the regular open enrollment period (OEP)?
Yes, generally you may change your individual health insurance coverage during the individual market’s annual open enrollment period from November 1 through December 15. Some state exchanges may provide additional time to enroll. See What is a special enrollment period (SEP)?, which references an additional enrollment period for 2021 that has been added in response to the COVID-19 national emergency.
What is COBRA continuation coverage?
The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) amended the Public Health Service Act, the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA) to require employers with 20 or more employees to provide temporary continuation of group health coverage in certain situations where it would otherwise be terminated. COBRA is available to qualified beneficiaries.
Who Is Entitled to Continuation Coverage? There are three basic requirements that must be met in order for you to be entitled to elect COBRA continuation coverage:
What is a qualified beneficiary?
A qualified beneficiary is an individual who is entitled to COBRA continuation coverage because he or she was covered by a group health plan on the day before a “qualifying event.” Depending on the circumstances, the following individuals may be qualified beneficiaries: a "covered employee" (a term that includes active employees, terminated employees and retirees); a covered employee's spouse and dependent children; any child born to or placed for adoption with a covered employee during the period of COBRA coverage; agents; self-employed individuals; independent contractors and their employees; directors of the employer; and, for public sector group health plans, political appointees and elected officials.
What is a qualifying event?
Qualifying events are certain events that would cause an individual to lose health coverage under a group health plan. The type of qualifying event will determine who the qualified beneficiaries are and how long they will be entitled to COBRA coverage.
What are some examples of qualifying events?
“Qualifying events” are events that cause an individual to lose his or her group health coverage. The type of qualifying event determines who the qualified beneficiaries are for that event and the period of time that a plan must offer continuation coverage. COBRA establishes only the minimum requirements for continuation coverage. A plan may always choose to provide longer periods of continuation coverage.
The following are qualifying events for a covered employee if they cause the covered employee to lose coverage:
Are ICHRAs COBRA-eligible?
If the employer satisfies the minimum requirements of having 20 employees, then the ICHRA plan offered would be subject to COBRA.
How long does COBRA last?
Assuming one pays all required premiums, COBRA coverage starts on the date of the qualifying event, and the length of the period of COBRA coverage will depend on the type of qualifying event which caused the qualified beneficiary to lose group health plan coverage.
For “covered employees,” the only qualifying event is termination of employment (whether the termination is voluntary or involuntary) including by retirement, or reduction of employment hours. In that case, COBRA lasts for eighteen months.
If the qualifying event is the death of the covered employee, divorce or legal separation of the covered employee from the covered employee’s spouse, or the covered employee becoming entitled to Medicare, COBRA for the spouse or dependent child lasts for 36 months.
How is COBRA coverage computed and how much will I pay?
Usually the beneficiary is required to pay the entire cost of COBRA coverage, although a few employers choose to subsidize COBRA. However, in the likely event that the employer chooses not to subsidize COBRA, the COBRA premium cannot exceed 100 percent of the cost of the group health plan for similarly situated individuals who have not incurred a qualifying event, including both the portion paid by employees and any portion paid by the employer prior to the qualifying event, plus an additional 2 percent for administrative costs. Please note the employer may charge up to 150 percent for an 11 month disability extension of COBRA coverage.
What alternative health plan coverage options exist if an individual or family doesn’t want to continue group coverage through COBRA?
An individual may compare their group coverage available through their employer via COBRA with private health plans available on the Marketplace or “Exchange” outside of the COBRA arrangement. This can be done by contacting a broker or agent that can assist you with those services.
If you become entitled to elect COBRA continuation coverage when you otherwise would lose group health coverage under a group health plan, you should consider all options you may have to get other health coverage before you make your decision. There may be more affordable or more generous coverage options for you and your family through other group health plan coverage (such as a spouse’s plan), the Health Insurance Marketplace, or Medicaid. Under the Health Insurance Portability and Accountability Act (HIPAA), if you or your dependents are losing eligibility for group health coverage, including eligibility for continuation coverage, you may have a right to special enroll (enroll without waiting until the next open season for enrollment) in other group health coverage. For example, an employee losing eligibility for group health coverage may be able to special enroll in a spouse’s plan. A dependent losing eligibility for group health coverage may be able to enroll in a different parent’s group health plan. To have a special enrollment opportunity, you or your dependent must have had other health coverage when you previously declined coverage in the plan in which you now want to enroll. You must request special enrollment within 30 days from the loss of your job-based coverage.
Losing your job-based health coverage is also a special enrollment event in the Health Insurance Marketplace (Marketplace or Exchange). The Marketplace offers “one-stop shopping” to find and compare private health insurance options. In the Marketplace, you could be eligible for a tax credit that lowers your monthly premiums and cost-sharing reductions (amounts that lower your out-of-pocket costs for deductibles, coinsurance, and copayments), and you can see what your premium, deductibles, and out-of-pocket costs will be before you make a decision to enroll. Eligibility for COBRA continuation coverage won’t limit your eligibility for Marketplace coverage or for a tax credit.
To qualify for special enrollment in a Marketplace plan, you must select a plan within 60 days before or 60 days after losing your job-based coverage. In addition, during an open enrollment period, anyone can enroll in Marketplace coverage. If you need health coverage in the time between losing your job-based coverage and beginning coverage through the Marketplace (for example, if you or a family member needs medical care), you may wish to elect COBRA coverage from your former employer’s plan.
COBRA continuation coverage will ensure you have health coverage until the coverage through your Marketplace plan begins. Through the Marketplace you can also learn if you qualify for free or low-cost coverage from Medicaid or the Children’s Health Insurance Program (CHIP). Keep in mind if you choose to terminate your COBRA continuation coverage early with no special enrollment opportunity at that time, you generally will have to wait to enroll in other coverage until the next open enrollment period for the new group health plan or the Marketplace.
More details about COBRA coverage, including COBRA notice and election requirements, and how long COBRA coverage must last, are included in the booklet An Employer's Guide to Group Health Continuation Coverage Under COBRA. To request a copy, contact EBSA at askebsa.dol.gov or call toll-free 1-866-444-3272.
Are ICHRAs subject to COBRA?
Yes, since ICHRA is considered a group health plan it is subject to both COBRA and ERISA unless an exception applies (certain small employers, churches or governments not subject to Code Section 4980B.)
COBRA requires an employer with 20 or more employees to offer continuation coverage to employees and their dependents where they lose coverage as a result of a qualifying event, such as an employee’s death, divorce, or job loss. See State rules for exceptions.
Note: Individual health plans are not employer-sponsored, therefore, employees can continue to participate in them even if they are no longer employed by that employer.
Can employees who lose their offer of an ICHRA due to a termination or reduction in hours claim a subsidy?
Yes, employees who lose access to coverage funded by an ICHRA will get access to a Special Enrollment Period for loss of Minimum Essential Coverage.
What is a Section 125 (cafeteria) plan?
Section 125 plans use pre-tax salary deductions to pay eligible medical expenses. A basic Section 125 premium-only plan (POP) covers premiums for medical insurance and supplemental coverage, such as dental or vision insurance, but a Section 125 cafeteria plan may also offer tax-advantaged benefits such as Health Flexible Spending Arrangements (FSA), which use pre-tax salary deductions to reimburse the cost of medical expenses like co-pays for doctor visits or prescription drugs.
Every dollar that passes through a Section 125 plan via pre-tax salary deductions brings tax savings to both the employee and the employer. The employee saves up to 40% from FICA and income taxes (federal and most state taxes) while to employer saves up to 10% in matching FICA tax, FUTA, and in some cases state unemployment and/or worker compensation tax.
In other words, for every $1,000 used to pay for benefits through a Section 125 plan, an employee could save up to $400 and the employer up to $100 in taxes. Savings can add up quickly when employees use a Section 125 plan to pay for premiums and other benefits.
How do the ICHRA and Section 125 cafeteria plan work together?
The Individual Coverage Health Reimbursement Arrangement (ICHRA) is the newest and most flexible HRA model available. It lets employers forego one-size-fits-all traditional group health plans in favor of reimbursing employees for an individual health insurance plan of their choice. Employers can enhance tax-saving benefits by pairing the ICHRA and a Section 125 cafeteria plan, so that employees choosing off-exchange plans may use pre-tax dollars to make up any portion of their health insurance premium not covered by the ICHRA.
Can an ICHRA participant deduct the unfunded balance of their individual health plan from their paycheck via a Section 125 POP plan?
Yes, the employee can deduct the remaining balance of their individual health plan pre-tax if the employer offers a Section 125 POP (Premium Only Plan). This will offer both the employer and employee tax savings. As described in additional detail in these FAQs, this only works for off-exchange individual health plans. An employer can also offer supplemental benefits, such as group dental insurance, that will be paid with pre-tax salary deductions through the Section 125 cafeteria plan.
Here’s how it works: Let’s say an employer provides $600 per month for individual coverage premiums in an ICHRA. An employee may have a monthly health insurance premium of $1,000 for a family of four. The employer allows the employee to set up a monthly $400 balance-of-premium payment to the insurance provider.
How can ICHRAs work together with other consumer-driven health accounts (i.e. FSAs and HSAs )
Health FSA contributions
An employer can offer employees both an ICHRA and a Health FSA through a Section 125 cafeteria plan. A Health FSA allows an employee to set aside an amount of pre-tax money per plan year for non-premium medical expenses, including deductibles, co-pays, co-insurance, prescription, dental and vision. Many non-prescription medical items may also be eligible for coverage through a Health FSA. The amount of money that an employee may set aside is indexed annually by the IRS. For 2021, the IRS will allow an employee to set aside $2,750 in a Health FSA.
With an employer-sponsored Health FSA, the sponsor determines whether the Health FSA:
*Note that because of the COVID-19 national emergency, the grace period and carryover rules may be temporarily increased by employers for the 2020 and 2021 plan years.
HSA contributions
In order for an ICHRA to be compatible with an HSA, the ICHRA must be limited to reimbursing only premiums or reimbursing other expenses in accordance with the HSA rules, meaning the ICHRA can only reimburse expenses such as dental, vision or post-deductible expenses without interfering with HSA eligibility. Employees in the same class can be offered a choice between an HSA-compatible ICHRA and a non-HSA-compatible ICHRA, so long as both types of ICHRAs are offered to all participants in the class on the same terms.
Employees with a qualifying high-deductible health plan (HDHP) and an HSA-compatible ICHRA can deposit an amount of pre-tax money in an HSA. As with Health FSAs, the amount that may be deposited in an HSA is indexed by the IRS annually. For 2021, an employee may contribute up to $3,600 for self-only coverage or up to $7,200 for family coverage into a new or existing HSA.
A Health FSA for employees with both an HSA-compatible ICHRA and HSA must be a limited-purpose design that generally pays only dental, vision, and post-deductible expenses.
Sources
This FAQ document was created and reviewed by legal counsel in April 2021. Please access the following sites for additional updates to this information.
For additional information on Section 125, Cafeteria plans and FSAs, please see the IRS site:
For additional information about COBRA:
An Employee's Guide to Health Benefits Under COBRA (dol.gov)
FAQs on COBRA Continuation Health Coverage for Employers and Advisers (dol.gov)
Section 125/Cafeteria/FSA Sources:
https://www.healthcare.gov/job-based-help/#/ichra
https://www.irs.gov/newsroom/health-reimbursement-arrangements-hras
https://www.cms.gov/files/document/overview-new-health-reimbursement-arrangements-part-two-slides.
https://marketplace.cms.gov/outreach-and-education/how-an-individual-coverage-hra-offer-works.pdf