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Understanding the IRS Large Employer Mandate and the Rising Importance of ICHRAs

In today’s complex healthcare landscape, understanding the intricacies of health benefits, especially for Applicable Large Employers (ALEs), is crucial. This article delves into the technical details surrounding the Large Employer Mandate, providing clarity on the emerging mechanisms for fulfilling this mandate, particularly the role of Individual Coverage Health Reimbursement Arrangements (ICHRAs).

1. Defining Applicable Large Employers

An ALE is an employer with more than 50 full-time equivalents (FTEs). But what is an FTE?

• Full-Time Employees: An individual working more than 30 hours weekly.

• Part-Time Employees: To determine FTEs from part-time work, combine all part-time hours weekly and divide by 30. This calculation gives the number of full-time equivalences.

2. The Large Employer Mandate

Central to the ALE classification is the Large Employer Mandate. Its core principle: ALEs must actively participate in providing health benefits to their employees. Fulfilling this mandate typically involves:

• Traditional Group Health Plan: The most prevalent method. A plan is deemed ‘IRS affordable’ if an employee pays no more than 9.83% (a percentage that can change based on IRS guidelines) of their total income towards their coverage.

3. Alternative Avenues to Fulfillment

While the traditional method is widespread, there are alternative mechanisms:

• Employer Shared Responsibility Payment: A misunderstood concept. Contrary to popular belief, this isn’t a penalty but an actual IRS bill. It offers two payment avenues: Part A and Part B. This mechanism is frequently assessed during company acquisitions when newly-formed entities surpass the ALE threshold, leading to unexpected health benefits expenses. Crucially, this payment is billed in arrears, offering cash flow benefits during crucial company growth phases.

4. The Rise of Individual Coverage Health Reimbursement Arrangements (ICHRAs)

From the ashes of the 2017-introduced Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) rose ICHRAs. While QSEHRAs catered to small employers with less than 50 employees, ICHRAs have expanded the horizon to include ALEs, presenting them with a new mechanism to fulfill the mandate.

Advantages of ICHRAs:

• Cost-Effectiveness: Often more affordable than traditional group plans, ICHRAs provide a compelling financial case for employers.

• Employee Autonomy: ICHRAs empower employees, allowing them to make decisions about their health benefit spending. This shift aligns with the modern trend of personalized, user-centric benefit structures.

A New Era of Employee Health Benefits

The healthcare landscape is witnessing a transformation. As the costs associated with traditional group health plans continue to escalate, ALEs are exploring alternative avenues to fulfill their mandates without compromising on the quality of health benefits provided to their employees. The rise of ICHRAs showcases this shift, emphasizing a move towards cost-effective, flexible, and employee-centric solutions.

In this new era, employers and employees together navigate the intricacies of health benefits, with tools like ICHRAs leading the way. As regulations evolve and the demands of the modern workforce change, it’s essential for companies to stay informed, agile, and ready to adapt.

Connect with us to see how switching to ICHRAs can benefit your team!