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How to Set Up an ICHRA?

Published in ICHRA Setup 6 mins read

Setting up an Individual Coverage Health Reimbursement Arrangement (ICHRA) involves a structured, multi-step process designed to transition your employee health benefits to a more flexible, employee-centric model. An ICHRA allows employers to reimburse employees for individual health insurance premiums and qualified medical expenses tax-free, offering a modern alternative to traditional group health plans.

Here's a detailed guide on how to establish an ICHRA for your organization:

Understanding the ICHRA Advantage

An ICHRA provides employers with predictable budget control and eliminates the administrative burden of managing a traditional group health plan. For employees, it offers greater choice and portability in their health insurance, allowing them to select a plan that best fits their individual or family needs from the open market or a health insurance marketplace.

The Seven Key Steps to Setting Up an ICHRA

Establishing an ICHRA requires careful planning and execution. The process involves defining the scope, setting financial parameters, ensuring legal compliance, and effectively communicating with your employees.

1. Pick a Start Date

The first crucial step is to determine when your ICHRA will become effective. This start date dictates your planning timeline and helps ensure all necessary preparations, such as legal document creation and employee communication, are completed in advance. Common start dates include the beginning of a calendar year or a new fiscal quarter to align with budgeting and enrollment cycles.

2. Choose Who Will Be Eligible

You need to clearly define which employees will be eligible to participate in the ICHRA. Employers can offer an ICHRA to specific "classes" of employees, such as:

  • Full-time employees
  • Part-time employees
  • Salaried employees
  • Hourly employees
  • Seasonal employees
  • Employees in a specific geographic location
  • Employees in a collective bargaining agreement
  • New hires
  • Employees subject to a waiting period

Important: To prevent discrimination, all employees within the same class must be offered the ICHRA on the same terms. You cannot, for example, offer an ICHRA to some full-time employees and a traditional group plan to others within the same class. There are also minimum class sizes for certain groups (e.g., small employers must have at least 10 employees in a class for certain distinctions).

3. Determine Eligible Expenses

Next, decide which types of medical expenses your ICHRA will reimburse. By default, ICHRAs can reimburse individual health insurance premiums and a wide range of qualified medical expenses as defined by the IRS. These typically include:

  • Individual health insurance premiums: For plans purchased through a marketplace or directly from an insurer.
  • Deductibles, co-pays, and co-insurance: Out-of-pocket costs associated with health care.
  • Prescription drugs: Medications prescribed by a doctor.
  • Dental and vision care: Including exams, treatments, and corrective lenses.
  • Other qualified medical expenses: As outlined in IRS Publication 502, which covers a broad spectrum of medical services and products.

Employers have the flexibility to offer premium reimbursement only, or premium and qualified medical expense reimbursement.

4. Set Your Employee Allowance Amounts

An allowance is the maximum amount of money an employer makes available to each employee for reimbursement over a specific period (e.g., monthly or annually). When setting allowances, consider factors like:

  • Budget: What your company can afford.
  • Employee Needs: The average cost of individual health insurance plans in your area.
  • Fairness: Ensuring the allowance is adequate to help employees secure meaningful coverage.

Allowances can be set:

  • As a flat amount for all eligible employees.
  • Varying by employee class (e.g., full-time vs. part-time, or by family status).
  • Varying by employee age: To account for higher premiums for older employees, though specific rules apply to prevent discriminatory practices.

5. Provide Legal Plan Documents

Compliance is critical. You must establish legal plan documents for your ICHRA to ensure it adheres to federal regulations like ERISA, HIPAA, and the ACA. Key documents include:

  • ICHRA Plan Document: The foundational legal document outlining the terms and conditions of the ICHRA.
  • Summary Plan Description (SPD): A concise, easy-to-understand summary of the plan that must be provided to all eligible employees.
  • Other required notices: Such as COBRA notices (if applicable) and ERISA notices.

It's highly recommended to have these documents reviewed by legal counsel specializing in employee benefits to ensure full compliance.

6. Communicate the ICHRA to Employees

Effective communication is essential for a smooth transition. Employees need to understand how the ICHRA works, what it means for them, and how to utilize it. Your communication plan should include:

  • Educational materials: Explaining the ICHRA concept, its benefits, and the reimbursement process.
  • Launch announcements: Informing employees about the new benefit and its start date.
  • Detailed instructions: On how to submit expenses for reimbursement and what documentation is required.
  • Q&A sessions or webinars: To address employee questions directly.

This communication should occur well in advance of the ICHRA's effective date to give employees ample time to understand the changes and select their individual health plans.

7. Provide Resources to Help Employees Choose Individual Health Insurance

Since employees will be responsible for purchasing their own individual health insurance plans, providing resources is a crucial step. This support ensures employees can find and enroll in a qualifying health plan that meets their needs. Helpful resources include:

  • Information on health insurance marketplaces: Directing employees to Healthcare.gov or their state's marketplace.
  • Access to licensed health insurance brokers: Who can offer personalized guidance and help employees compare plans.
  • FAQs: Addressing common questions about individual health insurance.
  • Guidance on qualifying health plans: Reminding employees that their individual health plan must meet the Affordable Care Act's (ACA) minimum essential coverage (MEC) requirements to be eligible for ICHRA reimbursement.

By following these seven steps, employers can successfully implement an ICHRA, offering a flexible and cost-effective health benefit solution for their workforce.

Step Key Action Considerations
1. Pick a Start Date Define the effective date for your ICHRA. Align with budget cycles; allow ample time for setup and communication.
2. Choose Eligibility Identify specific employee classes for ICHRA participation. Must be offered on the same terms within a class; consider minimum class sizes.
3. Determine Eligible Expenses Decide which medical expenses (premiums, co-pays, etc.) are reimbursable. Premiums are mandatory; additional qualified medical expenses are optional.
4. Set Allowance Amounts Establish the maximum reimbursement amount per employee. Can vary by employee class or age; consider budget and local premium costs.
5. Provide Legal Documents Prepare and distribute formal plan documents (Plan Document, SPD). Essential for legal compliance (ERISA, HIPAA, ACA); seek legal review.
6. Communicate to Employees Inform employees clearly about the ICHRA and its operation. Use multiple channels (meetings, written guides); ensure timely announcements.
7. Provide Insurance Resources Offer guidance and tools to help employees find individual health plans. Direct to marketplaces, brokers; emphasize ACA-compliant plans.