An Individual Coverage Health Reimbursement Arrangement (ICHRA) is a tax-advantaged tool for businesses of any size. It allows employers to reimburse employees for eligible medical expenses, including premiums for individual health insurance plans and Medicare. ICHRAs offer an alternative to traditional group health insurance, giving employees the flexibility to choose their own coverage while enabling employers to control costs.
Key Features of an ICHRA
- Tax Benefits:
- Reimbursements are excluded from the employee's gross income, meaning they are free from federal income taxes and Social Security and Medicare (FICA) taxes.
- Employers can deduct ICHRA reimbursements as a business expense, reducing their taxable income.
- Flexibility & Cost Control:
- Employers set an annual reimbursement limit, determining how much they are willing to reimburse employees.
- Reimbursed expenses must qualify under Section 213(d), and employers decide which specific expenses (e.g., premiums, co-pays, or prescriptions) are eligible for reimbursement.
- Employers can offer different reimbursement amounts to specific employee classes, such as full-time, part-time, or seasonal workers.
- Employee Choice:
- Employees select individual health insurance plans, Medicare, or medical services that best meet their needs, offering flexibility compared to one-size-fits-all group plans.
- Employees can use the reimbursement to purchase coverage that fits their unique circumstances, including options available on the individual marketplace or directly through insurers.
- Administrative Simplicity:
- Employers do not need to manage a group health insurance plan, reducing the administrative burden.
- The ICHRA framework focuses on setting reimbursement amounts and verifying eligible expenses, making it more straightforward to implement than traditional group plans.
By offering an ICHRA, employers can provide meaningful, tax-efficient support for employees’ healthcare needs while keeping costs predictable and allowing employees greater freedom in selecting their coverage.
What Are the Mechanics of an ICHRA? Reimbursements Explained
Learn how an ICHRA plan year works, including reimbursements, benefit limits, and unused allowances.
Sean Grettum
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