What is an Individual Coverage HRA (ICHRA), and How Does it Work?

Established by federal ruling in 2019, individual coverage HRAs—otherwise known as ICHRAs—are important components of the employer-provided healthcare coverage landscape. Find out what HR and employers need to know when considering ICHRAs as part of a company’s health benefit offering.

What is an Individual Coverage HRA?

ICHRAs are account-based health plans that allow employers to better control healthcare costs by providing employees with defined, non-taxed reimbursements for qualified health insurance expenses. This can include monthly premiums for individual plans purchased through the Marketplace or through private insurance companies.

Employers of any size can offer ICHRAs as long as they employ at least one person who isn’t a self-employed owner (or spouse of a self-employed owner). This means that ICHRAs are only available for employees, not self-employed individuals. 

To offer ICHRA plans, employers are required to adhere to certain size requirements:

• Employers with fewer than 100 employees must have a class size minimum of 10
• Employers with 100 to 200 employees must have a class size minimum equivalent to 10% of the total number of workers
• Employers with 200 or more employees must have a class size minimum of 20 

It should also be noted that an ICHRA isn’t a traditional health plan. Likewise, enrolling in SHOP plans is generally the only way for smaller employers to earn the Small Business Health Care Tax Credit.

What Makes an ICHRA Affordable?

According to HealthCare.gov, an employer has the flexibility to determine how much it contributes towards its employees’ individual health insurance coverage. In other words, employees select the coverage that’s right for them and their families, then the employer reimburses the costs.

Employers must understand that the offered ICHRA will impact their employees’ eligibility to receive a premium tax credit through the Marketplace. This is contingent upon the affordability of the ICHRA. 

Remember: The premium tax credit (PTC) is a refundable credit that eligible people and their families can use to pay for health insurance premiums if they have coverage through the Health Insurance Marketplace. Certain criteria must be met for individuals to qualify for the PTC. 

ICHRAs must be affordable if employers wish to avoid possible penalties. According to HealthCare.gov, ICHRA affordability is based on three factors:

1. The employer contribution
2. The employee’s income
3. The plans available in the employee’s area

For plan years beginning in 2020, an ICHRA is classified as affordable if the lowest cost of self-only plan types does not exceed 9.78% of an employee’s household income.

• If an employer’s offer is affordable, the employee and their family won’t be eligible for a premium tax credit for their Marketplace coverage
• If an employer’s offer isn’t affordable, the employee must opt-out of the ICHRA to claim a premium tax credit for Marketplace coverage

What Else Should Small Businesses Know About ICHRAs?

Employers cannot offer the same type of employees a choice between traditional group health plan coverage and an ICHRA. For example, a small business can offer traditional group health plan options to all full-time employees and an ICHRA to part-time employees, but these full-time employees cannot be required to choose between a traditional plan and an ICHRA. 

Additionally, the IRS made updates to 2020 ACA compliance forms like 1095-C to incorporate ICHRA affordability of coverage calculations. These include codes 1L through 1S on Form 1095-C—and they’re required for employers that offer ICHRAs. 

To learn more, Employers should review full instructions for Forms 1094-C and 1095-C as well as instructions for Forms 1094-B and 1095-B.