Is ICHRA considered minimum essential coverage (MEC)?

The individual coverage health reimbursement arrangement (ICHRA) is a flexible, cost-effective alternative to traditional group coverage for applicable large employers (ALEs). But those looking to offer a compliant health benefit might wonder: Is an ICHRA considered minimum essential coverage (MEC) under the Affordable Care Act (ACA)?

Brokers, business owners, and HR leaders who are looking into the ICHRA as a long-term benefit must understand whether it can satisfy their ACA compliance obligations. Even a small misstep can result in costly tax penalties for your organization.

This article breaks down how ICHRAs work, whether they meet MEC standards on their own, and what coverage employees need to be eligible for the benefit.

In this blog post, you’ll learn:

• Whether an ICHRA is minimum essential coverage (MEC) under the ACA, and what that means for employer compliance.
• How an ICHRA works and why employees must pair it with qualifying individual health insurance coverage.
• Which types of individual health insurance plans meet MEC requirements and are eligible to coordinate with an ICHRA.

What is the individual coverage health reimbursement arrangement (ICHRA)?

An ICHRA is a tax-advantaged health benefit available to employers in any industry and of all sizes, as long as they have at least one W-2 employee. Rather than working with an insurer and choosing a traditional group health plan, employers provide a fixed, tax-free monthly contribution amount that employees use to buy their own health plan on the individual market.

This defined-contribution approach to health benefits shifts plan choice to employees while helping employers better predict and control their budgets. As a result, ICHRAs have become an increasingly popular alternative to group coverage in recent years, especially for larger organizations looking to comply with federal ACA regulations and avoid rising premium costs.

How does the ICHRA work?

If you’re used to how a group health plan operates, the ICHRA will likely feel like a complete shift at first. However, its structure and the way it works are pretty straightforward.

First, the employer decides how much to contribute each month toward their employees’ medical expenses. The ICHRA has no employer contribution limits, and you can vary amounts based on employee classes (e.g., full-time or part-time workers), age, or family status.

Next, all W-2 employees whom you offer the benefit must enroll in an individual health insurance plan that provides MEC to participate.

An individual health insurance plan that provides MEC must:

• Meet the ACA’s individual insurance mandate.
• Provide substantial coverage for physician and hospital medical services.
• Cover the ten essential health benefits under the ACA without any annual or lifetime limits.
• Offer coverage to dependent adult children up to age 26.
• Meet the ACA’s preventive services standards.

After they get proper coverage, employees generally pay their monthly insurance premiums upfront, and their employer reimburses them for the cost up to their set contribution amount. If you want to eliminate the reimbursement step, partnering with Remodel Health makes it easy to do so. Employers simply deposit their monthly contributions into FDIC-insured accounts, and we’ll automatically make your employees’ premium payments to their insurance carriers.

Once your employees reach their set monthly limit, they can’t exceed it. ICHRA funds also stay with you if an employee leaves your company or the plan year ends. Lastly, ICHRA payments are income tax-free for employees and exempt from payroll taxes for the business owner.

Is the ICHRA considered minimum essential coverage (MEC)?

No, the federal government doesn’t consider the ICHRA by itself to be MEC. This is because the ICHRA isn’t a health insurance policy. It’s simply a way for employers to provide their employees with a tax-free monthly contribution so that they can purchase their own individual health plans. However, MEC still plays a vital role in how the ICHRA benefit works.

To take advantage of the ICHRA, your W-2 employees and their qualified dependents must have a qualified individual health insurance plan that provides MEC. If an employee doesn’t enroll in a health plan that meets MEC requirements, or they’re uninsured, they can’t participate in the benefit.

Which health plans provide MEC that are also eligible for the ICHRA?

As mentioned above, employees must enroll in an individual health plan that meets MEC requirements. While many individual plans qualify, not all plan options on the market meet this standard. Therefore, educating and communicating with your employees about acceptable plans before you implement the benefit is essential.

Individual health insurance coverage that provides MEC that is also ICHRA-eligible includes:

• Medicare Parts A and B combined
  
  
• Medicare Part C (also known as Medicare Advantage)
  
  
• ACA-compliant individual health plans sold on private or public exchanges
  
  
• ACA-qualified student health insurance policies
  
  
• Catastrophic health insurance policies for individuals who qualify according to federal guidelines

Coverage that doesn’t qualify for the ICHRA includes a spouse’s or parent’s group health plan, COBRA, and Medicaid. Association health plans, TRICARE, short-term plans, fixed indemnity policies, and healthcare sharing ministries are also ineligible. While plans like COBRA do provide MEC, they don’t qualify as individual plans for the ICHRA.

Suppose an employee currently has an ineligible plan. In that case, offering an ICHRA triggers a special enrollment period (SEP) and gives them 60 days to switch to qualifying health insurance coverage. Employees can also switch plans during the annual Open Enrollment Period to use the ICHRA benefit.

Conclusion

While an ICHRA is a powerful tool, rising in the health benefits industry, it doesn’t provide MEC on its own. Instead, employees enroll in an individual plan that meets MEC standards to use the benefit and receive tax-free reimbursements for their premiums. This distinction is key to staying ACA-compliant. So, you must clearly communicate MEC requirements to your employees and explain their plan options so your ICHRA complies with federal guidelines.

If you’re considering an ICHRA for your company, Remodel Health is ready to guide you every step of the way. We’re the trusted leader in ICHRA administration, serving more than 100,000 members. With a dedicated team of more than 200 employees and licensed benefits advisors standing by to help your staff navigate the individual market, we’ll ensure your ICHRA is compliant and designed just the way you want it. Book a call with us today to learn more!