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How to set up a new Individual Coverage HRA for employees
The new Individual Coverage Health Reimbursement Arrangement is an opportunity for employers to abandon one-size-fits-all traditional group health plans in favor of returning health coverage choice to employees. Here is how to set up a new Individual Coverage HRA.
How to set up a new Individual Coverage HRA for employees
No two people are exactly alike, and certainly no two have the same health coverage needs. Cookie-cutter employer-sponsored group health plans have become a costly and less effective solution for most of us.
With the new Individual Coverage HRA, businesses can now return health coverage choice to employees. Instead of the company trying to find the best health insurance fit for everyone — which is pretty much impossible to do — the ICHRA will reimburse employees for their purchase of an individual health coverage insurance policy that best fits them.
An important part of how to set up a new Individual Coverage HRA for employees is meeting the written plan document requirement. Basically, an employer describes the plan, sets up terms for each employee class, provides all necessary information about the company, its agents, plan administrators, plan obligations, employee responsibilities, and so forth, along with various legal disclosures.
Sound confusing? That’s why we’re here.
Core Documents simplifies the process for employers with the Core ICHRA Plan Document package. We even help you with free plan design consultations and a toll-free number to answer your questions (1-888-755-3373), or email for those who would rather type out a question and send it.
Plan design
Health Reimbursement Arrangements (HRA) are the most versatile of tax-saving benefit plans and the Individual Coverage HRA is the most versatile of all HRAs.
The versatility of the ICHRA owes to its many options. More options mean more opportunity for an employer to design a plan that best fits the health coverage needs of its employees while staying well within the company’s desired budget for group benefit expense, but it also means taking time to look at all the options so you don’t miss out on something you want in the plan.
Individual Coverage HRAs offer a lot of choices that employers should explore, but that doesn’t mean plan design has to be a burden. Remember, our free plan design consultants are available to answer your questions about How to set up a new Individual Coverage HRA for employees at any point in the planning process. Just give us a call or email at your convenience.
Elements of ICHRA plan design
Designate covered employees
The first thing an employer will probably want to do is to decide which employees will be offered the new Individual Coverage HRA.
Eligibility to participate in an employer-sponsored group health benefit is usually based on the number of hours worked in a week, month, or year. The employer designates one employee classification group (full-time) for employees working more than 30 hours per week (1,560 hours per year) that will be eligible for group health benefits and another employee classification group that is not eligible (part-time, seasonal, etc.).
The same terms rule means that the HRA must be offered on the same terms to all employees within an employee classification group.
The ICHRA allows ten status criteria that employers can use to set up as many employee classification groups as necessary to define ICHRA eligibility, coverage amount, reimbursement rules, and other terms of the plan. Plus, these groups can be designated by a combination of two or more of the status criteria.
One example of designating separate employee classes with a combination of the allowed criteria is when a company uses a waiting period. Two employee groups are set up for full-time employees. One is employees that have met the 30-day waiting period for benefits and the other is full-time employees that have not met the 30-day waiting period.
Exceptions for older workers and number of dependents
Higher benefit amounts are allowed within a class of employees for older workers and those with more covered dependents.
For example, a single employee class for full-time workers hired 1/1/2020 or later may provide within the same classification group that employees with self-only coverage are provided $3,600 annually while those with family coverage are provided $4,800, and those aged 55 and older receive $1,200 additional benefit.
List of employee classification group statuses
An ICHRA allows businesses to set classes of employees according to the following statuses:
- Full-time employees,
- Part-time employees,
- Employees working in the same geographic location (generally, the same insurance rating area, state, or multi-state region),
- Seasonal employees,
- Employees in a unit of employees covered by a particular collective bargaining agreement,
- Employees who have not satisfied a waiting period,
- Non-resident aliens with no U.S.-based income,
- Salaried workers,
- Non-salaried workers (such as hourly workers),
- Temporary employees of staffing firms, or
- Any group of employees formed by combining two or more of these classes.
Group Health Plan grandfathering option
The rules allow one other employee classification group outside of the standard statuses listed above: grandfathering an existing group health plan for employees hired before the ICHRA begins.
When this option is used, employees hired before December 31, 2019, would continue to be covered by the traditional employer-sponsored group health plan but those hired January 1, 2020 (the first day of the ICHRA plan year) and later will be covered by the HRA.
- However, ICHRA rules plainly state that an employee may not be offered a choice between a traditional group health plan and the HRA.
The employer must determine employee classification groups and offer either the grandfathered group health plan or the ICHRA to that group of employees. The employee cannot be permitted to choose.
Minimum class size rule
The minimum class size rule does not apply to employers offering an ICHRA to all employee classifications with no group grandfathered under a group health plan.
However, when an employer offers a group health plan to one or more class of employees and an ICHRA to one or more other classes, the minimum class size rule applies to classes being offered the ICHRA. Under the rule, minimum class size ranges from 10 to 20 employees, based on total number of employees.
HIPPA
HIPPA privacy rules apply to an ICHRA:
- A separate class may not be established which will discriminate based solely on specific health factors.
- Special enrollment periods (SEP) will be provided for certain life events occur, including the birth of a child, divorce, marriage, death of a spouse, and others (see list of qualifying life events at healthcare.gov).
Read the entire final rule, posted on the Federal Register:
Set terms and amounts
Once you have set up employee classification groups, be it one or two or a dozen, the next step is to set coverage terms and amounts for your new Individual Coverage HRA.
Keep in mind that the benefit must be offered on the same terms to all employees within a classification group.
How much?
Like all HRAs, the Individual Coverage model is funded entirely by the employer. No employee contributions are allowed.
Unlike the QSE-HRA, there is no maximum limit on how much an employer may provide in an ICHRA. There is no minimum amount required, either.
The employer determines the Individual Coverage HRA benefit amount, keeping in mind that the benefit must be offered on the same terms to all employees within a group, as explained earlier.
Annual prefunding or monthly?
The employer also decides if the ICHRA will be funded in a lump sum at the start of the year or if funds will be accounted to employees on a monthly basis.
Carryover of unused balance
What happens when an employee’s ICHRA has unused funds remaining at the end of the plan year? The employer may allow the balance to carry over into the new plan year (most common) or require that the amount be surrendered back to the employer.
HDHP compatibility
An employer may provide (within the same employee classification group) that the ICHRA will operate under HDHP-compatible rules for employees purchasing a high deductible health plan (HDHP) while maintaining traditional reimbursement rules for employees purchasing a traditional individual health plan.
Why would an employer want to do this?
HDHP individual coverage policies cost a lot less than traditional health insurance. Plus, an HDHP works alongside Health Savings Accounts.
HRA rules for HDHP-compatible coverage state that the ICHRA may not reimburse for medical expenses until the deductible on the policy is met. Also, when the HSA is offered through an employer-sponsored Section 125 Cafeteria Plan, the employer and employee gain an additional 8% FICA tax savings on employee pre-tax contributions to the HSA. This means more savings for everyone!
Section 125 option for HSA, FSA, balance of premium
A Section 125 Cafeteria Plan can work alongside an Individual Coverage HRA for more than Health Savings Accounts. Employers can also allow employees to fund a Health Flexible Spending Arrangement through the plan, with an HDHP/HSA-compatible option there, too.
And then, there’s the option to pay the balance of individual coverage premiums through the Section 125 plan. Most employees expect to pay for a portion of their health insurance beyond what the employer provides in the ICHRA. However, without the benefit of a Section 125 pre-tax plan, only the HRA-funded portion of the premium is tax-free to the employee.
When employees can pay the balance of premium via pre-tax salary deductions in a Section 125 plan, all of their individual coverage premium payment is deducted from their pay before taxes. This can amount to as much as 40% in tax savings (income and FICA tax).
Exchange premiums prohibited
According to Section 125 plan rules, only premiums for individual health insurance policies purchased on the open market are eligible for tax-advantaged balance of premium payments. Premiums for policies purchased through an ACA/marketplace health insurance exchange are not eligible for Section 125 pre-tax salary deductions.
If an employer chooses to provide a Section 125 Cafeteria Plan for employees to save taxes on health insurance premiums, it is important to let them know about the option before they purchase individual health coverage. This can be done when the ICHRA Required Notice to Employees is distributed (included in the Core ICHRA plan document package).
Why would an employer want to do this?
With a Section 125 plan, the employer saves 8% to 10% in payroll taxes (FICA, FUTA, and some state taxes) on pre-tax salary deductions employees elect for balance of premium payments and contributions to a Health FSA or HSA. That can add up to a lot of tax savings.
For more on the ICHRA, read:
Define the Plan Year
Like all HRAs, individual coverage models run on a 12-month plan year. Just when that plan year begins and ends is up to the employer.
Calendar plan year
Most employer-sponsored benefit plans have a calendar plan year that begins on January 1 and ends on December 31 of each year. A calendar plan year fits especially well with the Individual Coverage HRA since employees can only change from one individual health coverage policy to another during the standard open enrollment period, which usually runs November 1 to December 15.
Short first year
Maybe you want to start an ICHRA with a calendar-year plan but today is June 14. That’s not a problem.
In this case, a short plan year is available for the first year. Using the June 14 example, an employer ordering a Core ICHRA Plan Document package in June could have all required written notices distributed to employees for a first short plan year starting October 1 and ending December 31. The next plan year (and all following) would run with the calendar year (January 1 through December 31).
Non-calendar plan year
While a calendar plan year works well with the Individual Coverage HRA, it is not required. Employers may choose to run their benefit plan in line with their fiscal or tax year. A short first plan year is available for this adjustment as well.
Order your Core ICHRA package
Core Documents provides employers with everything they need to establish an IRS- and DOL-compliant tax-saving benefit plan.
The Core ICHRA plan document package will be only $199. And, since the Individual Coverage HRA is a brand-new model, this already low price includes one free plan document update within the first plan year.
No annual fee
All of our Core plan document packages come to you for a one-time fee. There’s no required renewal or subscription fee. You only pay for an update when one is needed, and then at a reduced price (1 free update comes with the new Core ICHRA package).
Launch your plan document
A Core ICHRA plan document package includes:
- Signature-ready plan document;
- Corporate resolution to adopt an Individual Coverage HRA;
- Summary Plan Description (SPD);
- Individual Coverage HRA Notice to Employees;
- Employee election form;
- Annual substantiation of coverage form;
- Ongoing substantiation of coverage (for reimbursement requests); and,
- Administrative handbook.
When your Core ICHRA Plan Document package arrives, you will:
1. Sign the plan document in the two places indicated
Keep it on file and available in case of an IRS audit, the DOL requesting a copy, an employee asking to view the document, and for administrative guidance. The plan document is not filed with the IRS, DOL, or any other entity.
2. Distribute to every eligible employee, at least 90 days before the start of each plan year:
- Individual Coverage HRA Notice;
- Summary Plan Description;
- Employee election form; and,
- Annual substantiation of coverage form.
Election and substantiation forms must be signed by employees, returned to the employer, and kept on file.
Don’t miss out on important ICHRA news:
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Topic: How to set up a new Individual Coverage HRA for employees, 2019