Who is eligible for ICHRA?

Creating a competitive benefits package is a top priority for business owners looking to attract and retain talented workers. As an alternative to traditional group health plans, many employers. brokers, and HR leaders are looking toward the individual coverage health reimbursement arrangement (ICHRA) as a way to offer greater flexibility, budget stabilization, and employee choice.

But before implementing an ICHRA, it’s crucial to understand who can participate in the benefit and how you can use eligibility customization options to personalize your plan design and enhance the employee experience. 

This article will help brokers and employers determine ICHRA eligibility so they can build a benefit that meets their financial goals and their employees’ unique needs.

In this blog post, you’ll learn:

• How individual coverage health reimbursement arrangement eligibility works, including the types of health insurance coverage that qualify.
• Which types of employees, business owners, and health insurance plans are incompatible with the ICHRA.
• How employers can use IRS-approved employee classes to customize ICHRA eligibility.

How does the ICHRA work?

An ICHRA is a customizable, tax-advantaged health benefit that allows employers to contribute a set amount of money that employees can use to pay for their individual health insurance premiums. Depending on how the employer structures their ICHRA benefit, certain out-of-pocket medical expenses may also be eligible costs.

Here’s a brief overview of how the ICHRA works:

1. The employer determines the contribution limit and eligible expenses. You decide how much tax-free money your participating employees will receive each month for individual health insurance premiums and, if your plan allows, qualified medical expenses. The ICHRA has no annual limits, and you can adjust contribution amounts based on employee age, family size, or employee class.
2. Employees choose their own health coverage. To participate in the benefit, employees must have a qualified individual plan that provides minimum essential coverage (MEC). 
3. Employees pay for medical care and get reimbursed. Through the plan year, employees pay their health insurance premiums and eligible medical costs out of pocket. In your employee benefit plan details, you can restrict ICHRA payments to premiums only or include other qualified healthcare expenses outlined in IRS Publication 502. Then, they request reimbursement.
   1. If you administer your ICHRA through Remodel Health, employers can set aside funds in a secure account, allowing them to send their employees’ premium payments directly to the carrier. This eliminates the need for employees to cover the cost up front.

Who is eligible for the ICHRA?

Unlike a group health plan, any company with at least one W-2 employee can offer an ICHRA — regardless of its location, budget, or industry. However, only W-2 workers, whether full-time or part-time, and their qualified dependents are eligible for the benefit.

Qualified dependents include:

• Legally married spouses
• Biological, adopted, or stepchildren up to age 26
• Relatives for whom the employee provides at least half of their financial support (and can be legally claimed as a dependent on the employee’s tax return)

Employees must enroll in an individual health insurance plan that meets MEC requirements to use the ICHRA. Under the ICHRA final rules, they must also confirm at the start of the plan year and on an ongoing basis that they are still enrolled in their qualifying health coverage to receive ICHRA reimbursements for premiums and medical expenses throughout the plan year¹.

Remodel Health streamlines the employee attestation of coverage requirements. When employees shop for plans through the Remodel Health platform, we automatically verify their enrollment status each month and pay the premiums directly to the carriers.

Eligible forms of health insurance coverage include:

• Individual health plans that employees purchased through public or private health insurance marketplaces. These plans must comply with the Affordable Care Act (ACA) and provide minimum essential coverage and minimum value. 
• Medicare Parts A and B together
• Medicare Part C (also known as Medicare Advantage)
• Most student health insurance plans, except self-insured student health policies
• Catastrophic health plans (for those who apply and meet the qualifications) 

If the employer allows spouses and dependents to take advantage of the benefit, they must specify so in the employee benefit plan documents. Then, just like W-2 employees, qualified household members must get eligible health coverage to receive ICHRA reimbursements. This doesn’t necessarily need to be a separate policy, however. 

For example, if an employee enrolls in a qualified family plan on the individual market that covers their spouse and dependents, they meet the individual coverage requirement.

Are business owners eligible to participate in the ICHRA?

Business owners may be eligible for ICHRA participation depending on how the IRS classifies them. If the federal government considers the owner a common law employee, then they can take part in the benefit.

For example, the IRS considers C corporations to be a separate legal entity, where the owner is a W-2 employee. Therefore, C corp owners, including spouses and qualified dependents of C corp owners, may use the benefit legally. 

Certain business owners may still be eligible to receive ICHRA reimbursements, even if they aren’t legally able to use the benefit themselves. For instance, the federal government categorizes partners in a partnership as self-employed. This means they can’t directly participate in the ICHRA. 

However, they can still take advantage of the benefit if: 

• Their spouse is a W-2 employee of the organization, and
• The spouse enrolls in qualifying coverage that meets MEC requirements

In this case, the spouse can participate in the ICHRA as an employee, and the partner may receive reimbursements as an eligible dependent.

Who is ineligible for the ICHRA?

Although the ICHRA is one of the most flexible health benefit options available, there are some restrictions on eligibility. Sole proprietors, S corp owners, uninsured workers, and 1099 contractors aren’t eligible to participate in the benefit. Additionally, certain health plan types aren’t compatible with the ICHRA.

According to IRS rules, ineligible healthcare coverage includes:

• COBRA
• TRICARE
• Healthcare sharing ministries
• Association health plans
• Short-term medical policies
• Fixed indemnity plans
• Medicaid
• Traditional group health plans, including coverage through a spouse or parent

Employees enrolled in these types of coverage must switch to a qualifying individual plan if they want to use the ICHRA. Luckily, offering an ICHRA for the first time triggers a 60-day special enrollment period, which gives employees the chance to shop for qualified coverage on the individual market. 

Outside of this time, employees can enroll in or change their health plan during the annual Open Enrollment Period.

Can employers vary employee eligibility requirements for the ICHRA?

Yes, employers can customize eligibility rules using 11 employee classes defined by the IRS. While you don’t have to use all the class categories available, you must comply with nondiscrimination rules. This means you must offer all employees within the same class the ICHRA on the same terms and conditions. 

The ICHRA employee classes are:

1. Full-time employees
   • Business owners may define full-time employment as an average of 30 hours per week (this is the only option for applicable large employers) or 40 hours or more per week.
2. Part-time employees
   • Employers may define part-time employment as averaging fewer than 30 hours or 40 hours per week.
3. Seasonal employees
4. Temporary employees who work for a third-party staffing company but perform services for your company.
5. Salaried employees who earn fixed W-2 wages
6. Non-salaried employees who receive payment for actual time worked
7. Employees covered by a collective bargaining agreement that outlines their employment terms, pay, and working conditions.
8. Employees in a waiting period
   • By law, waiting periods for enrollment in this type of reimbursement arrangement may not exceed 90 days.
9. Foreign employees working outside the U.S.
10. Employees located in different geographic regions
    • You can group employees in this class based on insurance rating areas, states, or multi-state regions. If you’re a fully remote organization, you can use the rating area where most of your enrolled employees reside at the start of your ICHRA’s plan year.
11. A combination of two or more of the above classes

Using employee classes can help you tailor your retention strategy. For instance, if you want to attract more skilled workers to your organization, you can choose to only offer the ICHRA to full-time employees. Or, you could place newly hired workers in a waiting period class for their first month of employment before fully enrolling them in the benefit. Whatever you choose, employee classifications can help you craft an ICHRA benefit that works best for you.

Conclusion

The basics of ICHRA eligibility are relatively simple. But the secret to building a benefit that works for your company’s specific needs and goals lies in leveraging employee classes and outlining clear plan details. By carefully tailoring your benefit strategy, you can maximize your ICHRA’s value, attract the employees you want to retain long term, and ensure that your staff and their families have affordable healthcare. 

If you’re interested in learning more about how an ICHRA can work for your organization, contact the team at Remodel Health to get started!

References

1. Health Reimbursement Arrangements and Other Account-Based Group Health Plans: “ICHRA Final Rules”