ICHRA Tax Benefits for 2023
It’s the start of a new year. Many employers are looking for new ways to break out of the old health insurance model and into something new that works for more people and the modern workforce landscape. Enter ICHRA, which stands for Individual Coverage Health Reimbursement Arrangement. ICHRA is a game-changer for employers looking to provide health benefits to their employees and get tax benefits.
ICHRA Tax Benefits
So what exactly is ICHRA?
ICHRA is a highly effective way to reimburse employees for eligible health expenses from a tax perspective. There are many reasons why your business may choose to use a health reimbursement arrangement like ICHRA, namely the sizable ICHRA tax benefits.
The great thing about ICHRA is that reimbursements are tax-deductible for employers. And employees are not taxed on the reimbursements, either. Which means they don’t have to recognize reimbursements as income tax. Now that’s what we call a huge tax benefit for both parties.
Instead of paying payroll taxes on employee reimbursements, employers can provide health benefits to employees because ICHRA reimbursements qualify as tax deductions.
ICHRA administrators, like Take Command, we’ll help you design and launch your ICHRA in minutes. It’s a simple and efficient process.
So if you own a large business, is ICHRA good or bad for large employers? We’re happy to report that ICHRA for large employers is simple, affordable, and an intelligent move. In addition, you can choose to work with an ICHRA administrator to make the process even more streamlined.
ICHRA uses a reimbursement model that is much simpler than traditional group benefits.
ICHRA Reporting Requirements
The IRS defines an applicable large employer (ALE) as a business with 50 or more employees. If that’s you, and you had an ICHRA in 2022, here’s what you need to do for your upcoming tax preparation to fulfill the ICHRA reporting requirements.
A common ICHRA FAQ among business owners is, “what forms do I need to report if I offered an ICHRA last year?
Current ICHRA regulations require that you:
File a Form 1094-C and accompanying Forms 1095-C with the IRS, and
Provide a Form 1095-C to any employee who meets ICHRA eligibility, meaning they were full-time for at least one month during the calendar year.
Another ICHRA FAQ we often hear is, “how and when do I need to file these forms to comply with ICHRA regulations?”
For the 2022 reporting period, you will need to file your 2022 Form 1094-C and accompanying Forms 1095-C by:
February 28, 2023, if filing on paper (not recommended), or
March 31, 2023, if filing electronically.
Check out this post for more information about ICHRA reporting requirements and filing instructions.
ICHRA vs QSEHRA
The main difference between an ICHRA and a QSEHRA is that employers of all sizes can offer an ICHRA, but there are different qualifications an employer must meet to offer a QSEHRA.
Both allow businesses to reimburse employees for qualified medical expenses such as individual health coverage premiums and out-of-pocket medical expenses. Employers set an allowance amount, then employees make a qualified health purchase and file a claim through the HRA administrator, then employees are reimbursed. So the reimbursement method structure is the same.
Both provide a tax benefit for both employer and employee. HRAs have a substantial tax advantage for employees and employers. All employer HRA contributions are tax deductible and payroll tax-free. That means ICHRA and QSEHRA plans both have tax benefits. In addition, employees with an individual health insurance policy that meets the minimum essential coverage (MEC) as determined by the ACA don’t pay income taxes on the reimbursements received either. Your HRA administrator, like Take Command, will ensure your employees understand their HRA plan and how to find the best individual plan for them that meets their needs and ICHRA requirements.
Wondering which HRA is best for your business? Check out this quick guide to get started.
Quick ICHRA vs QSEHRA Comparison
Want to know how QSEHRA and ICHRA compare to each other? Let’s look at them side-by-side to get a quick glimpse. You can also download our comparison chart and save it for later.
ICHRA for Dummies
ICHRA is a complex issue, and there’s a lot to understand. So if it’s confusing, this is a super simple ICHRA explainer. We’ll call it ICHRA for dummies (though you are most certainly NOT dumb!)
How it started
January 1, 2020, a new and more efficient way to offer benefits brought a streamlined and budget-friendly approach to health benefits for companies, allowing for more personalization and portability for employees. This tax-friendly option is Individual Coverage Health Reimbursement Arrangement (ICHRA).
How it’s going
ICHRA is a superior model to traditional employer-sponsored group plans, which are often too expensive, unpredictable, and one-size-fits-all. The White House predicts that 800,000 businesses will benefit from this new model of employer-sponsored health insurance over the next five years.
An estimated 11 million workers will use this HRA to purchase a plan in the individual marketplace—a key factor for creating a stronger market and controlling skyrocketing healthcare costs by encouraging healthy individuals back into the insurance pool.
ICHRA at a Glance
ICHRA is available to companies of all sizes; employees need individual health insurance coverage to qualify.
ICHRA is a tax benefit. That means employers can reimburse without paying payroll taxes, and employees don’t have to pay income tax.
There are no contribution limits on monthly reimbursement rates. There are minimum contribution limits.
The employer decides how much money to contribute each month, designs the HRA plan according to different employee classes, provides employees with helpful information about how the HRA works, and outsources administrative functions like insurance coverage verification, onboarding, compliance, and reporting.
ICHRA Classes
Customizing ICHRA classes allows employers to design a benefit within budget and prioritize their health benefits budget. Employee classes identified groups by legitimate job-based criteria like hours worked or location. If you have various employee classes, you can offer each group a different health benefit if you choose to. For example, offer one a group health plan and another an ICHRA. You still get the same ICHRA tax benefit for employees on the ICHRA plan.
Here’s the complete list of ICHRA classes.
Full-Time Employees
Part-Time Employees
Seasonal Employees
Employees covered by a collective bargaining agreement
Employees who have not satisfied a waiting period for coverage
Salaried Employees
Non-Salaried Employees
Temporary employees of staffing firms
Non-Resident aliens with no US-based income
Employees in the same geographic rating area
Any combination of two or more classes from above
In addition to scaling benefits by class, employers can also choose to vary reimbursement rates by family size, employee age, or both
ICHRA Eligible Expenses
If you’re familiar with Health Savings Accounts (HSAs) and what “Qualified medical expenses” are defined by the IRS in publication 502, then you’ll already know what ICHRA eligible expenses are because it’s the same list. It includes things like doctor visits, co-pays, prescriptions, medical equipment, dental procedures, etc.
Employers can choose what they want their ICHRA to reimburse.
The best ICHRA administrators have a handy search tool available so you and your team can easily find what qualifies as ICHRA eligible expenses. Please read our blog to see a complete list of all ICHRA eligible expenses. You can also search for eligible expenses in IRS Publication 502.
Make sure you check your ICHRA plan document to identify what is available for reimbursement under your ICHRA eligible expenses benefit or ask your Take Command ICHRA administrators for more information.
What’s great about both options is that both types of reimbursement, whether reimbursing for medical premiums or reimbursing for medical expenses, are tax-free. No employer tax, no income tax, no payroll tax.
Employees of ICHRA providers must have one of the following eligible plans:
Setting up an ICHRA Plan
Now that you understand the ICHRA tax benefits and the value of a health reimbursement arrangement, what’s your next step? Develop your ICHRA plan. Your HRA administrator, like Take Command, will help you set up your QSEHRA or ICHRA plan and understand the health reimbursement arrangement rules as it applies to your business.
If you’re wondering if ICHRA plans are right for you, talk to our team of experts. And let’s look at some of the statistics. The numbers speak for themselves.
HHS projects that in the next 5-10 years, roughly 800,000 employers will offer Individual Coverage HRAs to pay for insurance for more than 11 million employees. If market conditions break the right way, it could be much higher. Take Command estimates that as many as 50 million employees and family members could participate in an ICHRA plan in the coming years.
As always, our ICHRA experts are on hand to help at any time. Chat with us on our website!
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