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Individual Coverage HRA (ICHRA)
A New Employer Health Benefits Option


Recent federal rule changes present employers with a new opportunity to offer true, defined-contribution, health benefits to employees (in place of traditional group coverage).

The new “Individual Coverage HRA” (ICHRA) rules modify prior, existing Health Reimbursement Account (HRA) regulations to permit the use of HRA pre-tax funds for reimbursement of individual health insurance premiums (as an IRS-qualified medical expense).

As a condition for using HRA funds for individual coverage premiums, an employee must couple the ICHRA with qualified health insurance purchased by the employee – coverage purchased either through an ACA health insurance marketplace or a commercial insurance broker. Medicare-eligible employees couple the ICHRA with Medicare coverage (part A & B or C).

Employers may offer ICHRAs starting in 2020.

What is an ICHRA?

An ICHRA is another type of health reimbursement account (HRA) that is coupled with qualified individual health insurance purchased by the employee. The employee must maintain qualified individual coverage to remain ICHRA eligible.

Health Reimbursement Accounts (HRA) are IRS-recognized, notional, employer-funded accounts used by employees on a pre-tax basis to pay for qualified health expenses. An ICHRA is a group health plan HRA that an employer may offer to employees instead of offering traditional group health coverage. The combination of the new HRA (the ICHRA) with qualified individual coverage allows employers to comply with the employer mandate to offer minimum value (MV) coverage (if applicable).

While the ICHRA is considered a group health plan, the actual insurance an employee purchases (to couple with the ICHRA) is separate and distinct from the ICHRA. This means the individual or Medicare coverage purchased with the ICHRA, is not subject to ERISA requirements provided the employer maintains an “arm’s length” distance from the employee’s purchase decision.

Eligible employees may use ICHRA money to pay for qualified health insurance premiums and other qualified medical expenses (QMEs) depending on employer rules. Funds used from an ICHRA are excluded from an employee's income (and FICA). ICHRA eligibility requires the employee enroll in and maintain "qualified" ICHRA health insurance coverage such as ACA individual plans and Medicare.

As a group health plan, employers define the ICHRA rules that apply to employees eligible for the plan. This includes defining who is eligible for the ICHRA (a class of employees), how much (contributions) employees will receive, the timing of contributions and eligible plan reimbursements. Additional decisions include defining the ICHRA plan start and plan end as well as how unused ICHRA funds will be treated if ICHRA funds remain after payment of premiums. In addition to premiums, employers may allow reimbursement of non-premium QMEs or allow unused funds be used for expenses incurred in future years (if the employee is still ICHRA eligible).

The employer contributes a pre-determined amount to the ICHRA (the defined-contribution opportunity). Funds contributed to the account are notional meaning that the employer will not incur an expense until payment for an eligible reimbursement is made.

How does an ICHRA work?

For the employer:

  • Introduce the ICHRA benefit to employees.
  • Create an ICHRA plan document to specify eligibility, amounts, and reimbursement rules.
  • Issue ICHRA required notices.
  • Enroll employees in ICHRA (employers must allow annual opt-outs).
  • Allocate pre-tax funds to the employee ICHRA account (employers may vary contributions by age, family and employee class).
  • Reimburse employees for eligible expenses.
  • Incur costs only for submitted expenses.
  • Adhere to ERISA/ICHRA employer obligations (when applicable).

For the employee:

  • Shop and price health insurance options (through an exchange or with a broker).
  • Choose either the ICHRA or federal subsidies (if eligible) to defray premium costs (employees eligible for federal subsidies would opt out of the ICHRA).
  • Select and purchase qualified coverage (or couple with Medicare).
  • Report qualified coverage to the employer.
  • Submit reimbursement requests.
  • Use leftover ICHRA funds for plan deductibles, copays or coinsurance (if permitted by the ICHRA plan).
  • Access unused ICHRA funds in future years (if permitted by the ICHRA plan).
  • Maintain qualified individual health coverage (a key ICHRA eligibility requirement).

Why should I consider an ICHRA?

For the employer:

  • Predictability/Control: Employers establish an annual ICHRA budget for each employee based on business conditions independent of group coverage premium rate changes.
  • Trend Savings: Consider the current uncontrolled, annual group premium trend and compare this to a fixed annual ICHRA budget controlled and set by the employer, then project how the difference in the two trends may drive savings.
  • Financial Benefits: ICHRA reimbursements are excluded from employee wages and FICA. An employer only incurs actual ICHRA expenses when a reimbursement occurs. Funds are notional (available for use) and unused funds remain with the employer if an employee leaves the company or declines the ICHRA.
  • Independence: The employer’s healthcare role will diminish over time – the employer won’t need to annually choose or communicate insurance options or product changes.
  • Choice: Most markets will offer greater carrier and plan choice to employees versus the one to three options that may be offered today. Medicare-eligible employees are able to enroll in Medicare plans with an employer's financial help.
  • Stability: Eliminate the need to rebid group plans annually due to cost increases or employee dissatisfaction. Individual employees decide whether to change plans each year.
  • Simplicity: Employer decisions are limited to who is eligible, the contribution amount and whether QMEs are eligible. It’s possible that annual ICHRA changes will be limited to contribution amounts – whether to increase and by how much.
  • Focus: Employers may refocus on business concerns – no need to communicate annual premium increases, carrier swaps, or provider network changes.
  • Loyalty: Accumulated ICHRA balances remain with employer upon termination. Access to accumulated balances (that offset deductibles and copays) may inform employment choices.

For the employee:

  • Choice: Choose the right plan that works best for the family based on individual evaluation of the premium costs vs. the plan benefits/network. Employees also have financial choices whether to buy up or down in coverage each year.
  • Leverage: Employees will use employer ICHRA funds first – if ICHRA funds cover the entire premium, some employees could pocket employee premium costs previously withheld from the paycheck (that paid for group coverage). In addition to no-cost preventive services, leftover ICHRA funds provide first dollar coverage toward other plan expenses.
  • Savings: The ability to preserve ICHRA funds for medical expenses or for future years creates incentives to reduce premiums and consider expenses over multiple years.
  • Flexibility: If the employer allows unused ICHRA funds to be used in future years, employees have flexibility to buy up or down in coverage each year relative to fund balances and needs.
  • Consistency: Employees may use the same method of coverage acquisition annually. There are no forced plan changes due to an employer coverage decision. The employee decides whether to change plans independent from the employer.
  • Persistency: Employees don't automatically lose coverage if employment changes. The employee simply loses the employer’s financial support (which may be regained if a new employer also offers an ICHRA).
  • Simplicity: Budget, purchase plan, use insurance, seek ICHRA reimbursement.
  • Focus: If plans/carriers aren't changing every year, there will be less work disruption and questions related to carrier, provider and plan design changes.

Additional ICHRA Details

When →
Coverage →
Who →
Employee Classes →
Special Enrollment Period→
Contributions →
Rollovers →
Attestations →
Qualified Reimbursements →
Other ICHRA Rules →
Key ICHRA Documents →
Glossary →
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When

Employers define the ICHRA plan year start and plan year end. The new federal rules permit an ICHRA plan start date of January, 1, 2020 or later (however, there is a 90-day, ICHRA notice requirement to employees so employers will need to factor this notice timing into their plan start decision).

Each year employees must be given the option to opt out of the ICHRA (the opt-out option is required to support employees who are eligible and want to receive federal tax subsidies).

Employees must maintain active, qualified insurance coverage for each month the employee is enrolled in the ICHRA. If an employee seeks a reimbursement for services or premiums associated with a particular month – for example March 2020, the employee must be enrolled in active coverage for March 2020. Eligible ICHRA dependents are subject to the same active, qualified coverage requirement.

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Coverage

The ICHRA approach has two components: the HRA (which is a group health plan subject to group health plan rules) and the qualified individual insurance coverage (that employees must have and maintain to use the ICHRA funds).

The ICHRA includes the actual notional account and the accompanying employer plan rules that define eligibility plus how funds are allocated and used.

ICHRA-qualified insurance coverage includes:

  • Coverage that requires no member cost sharing for preventive services, includes comprehensive essential health benefits (EHB), a plan that pays for at least 60% of the plan’s projected costs (for substantial in-patient and physician services), applies no annual benefit limits, while limiting annual out-of-pocket, cost-sharing to the employee, in other words an ACA-qualified health plan (QHP).
  • Such ACA individual market coverage is purchased by the employee:

Through an ACA marketplace (www.healthcare.gov [external site] points to on-exchange options). The term “exchange” is sometimes used in place of “marketplace”. Individual market health coverage is regulated by each state, or

Via a commercial broker or directly from the insurance carrier (provided the coverage is considered QHP coverage, often referred to as “Off-Exchange” coverage.

  • Medicare Part A and B, or C coverage. Employees who are Medicare eligible may not purchase individual market coverage and therefore must couple the ICHRA with a Medicare plan to maintain ICHRA eligibility.
  • Certain university-sponsored, insured student coverage is also considered ICHRA-qualified coverage (but only if the coverage is insured group coverage. Self-insured university plans offered to students are not considered ICHRA-qualified plans).

Some insurance coverages are not considered qualified individual health insurance coverage for ICHRA purposes. Examples include other group coverage (for example through a spouse), short-term limited duration (STLD) plans; Christian ministry plans and Medicaid plans are not considered qualified individual insurance plans and therefore may not be coupled with an ICHRA. An employee enrolled in Tricare may enroll in the ICHRA plan, but only if qualifying insurance coverage is obtained and maintained (in addition to the Tricare coverage).

The new rules require the distribution of an ICHRA notice to employees to provide additional information on the ICHRA offer terms, the availability of tax credits, and the need to purchase coverage as well as other detailed requirements. The annual ICHRA notice must be distributed to employees no later than 90 days prior to the plan year start.

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Who

Employer Considerations

  • An ICHRA may be offered by any employer with two or more employees (there is no employer size limitation).
  • An employer must offer the ICHRA on the “same terms” to all employees in the same class of employees (see contributions for information).
  • Applicable Large Employers (ALE) may use the ICHRA to comply with the ACA employer mandate to offer “affordable”, “minimum value” coverage to full-time employees.
  • Individual market health insurance coupled with the ICHRA qualifies as “minimum value” coverage for the purposes of the ALE employer mandate. Consumers must purchase and maintain comprehensive insurance coverage to use the ICHRA.
  • The ICHRA qualifies as an “affordable” offer if the employer’s ICHRA contribution amount is sufficiently generous (subject to the employer mandate affordability calculation). The ICHRA adds a variable to the mandate’s affordability calculation.
  • Affordability calculation: If the net annual premium cost (for individual coverage) that an employee must pay is less than 9.86% of the employee’s self-only income then the ICHRA is deemed as an affordable employer offer of coverage. The net annual premium cost is calculated as follows: [(the monthly cost of the lowest priced silver plan) minus (the monthly self-only, employer ICHRA contribution)] multiplied by 12 months.

Employee considerations

An employee is ICHRA eligible if he/she purchases qualified coverage, meets the employer’s requirements (for example, a member of the employee class offered an ICHRA by the employer) and complies with the other ICHRA rules. Applicable ICHRA rules include:

1. The employee must purchase qualified “individual” health insurance coverage.

2. The employee may not couple the ICHRA with other group coverage (such as coverage through a spouse’s employer).

3. The employee may not enroll in the ICHRA if using federal tax credits.

4. The employee must attest to the employer the enrollment in qualified health insurance coverage.

5. The employee may only use funds in the ICHRA for qualified medical expenses (premiums or 213d) approved by the employer that occurred during a month when qualified health insurance coverage is active.

6. The employee must attest and substantiate expenses to the employer – an attestation that qualified coverage is in place when the service occurred along with proof of the service.

Dependents who are ICHRA eligible per the employer’s rules are subject to the same requirements. If an employee opts out of ICHRA coverage, this decision will effectively opt out all dependents as well.

Former employees may participate in the ICHRA plan, but only if the former employee is offered the ICHRA on the “same terms” as any employee who is still employed and a member of the same class (class that applied prior to the former employee’s termination). For example, if the former employee was a member of the full-time, Texas class of employees prior to termination; the former employee’s ICHRA will be subject to the terms defined for active, full-time, Texas employees. An employer is not required to offer the ICHRA to former employees.

Employees (or dependents) enrolled in an ICHRA are not eligible for federal tax credits (such as a PTC). Employees (or dependents) offered an ICHRA that fulfills the ACA employer-mandated, ACA “affordability” requirement would also be ineligible for premium tax credits.

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Employee Classes

The new ICHRA rules provide flexibility to employers who may want to vary the ICHRA “terms” for different sets of employees – for example, if the employer wants to offer the ICHRA to some employees, but not all employees. Or, perhaps the employer would like more ICHRA contribution flexibility due to geographic differences. This flexibility is supported by the employer’s ability to define permissible classes of employees.

Permissible ICHRA employee classes include employees who are:

  • Full-time
  • Part-time
  • Salaried
  • Non-salaried
  • Seasonal
  • Collective bargained
  • New hires (special rules apply in the context of traditional health coverage)
  • Geographic (based on a worksite using state or rating area designations)
  • Subject to a coverage waiting period
  • Non-resident aliens with no U.S.-based income
  • Temporary employees (who are employees of an entity that hired the employees for temporary placement at an unrelated entity)
  • A class may also combine two or more of the other classes

Class definitions – an employer may choose from two sets of federal rules when defining classes. Employers may use section 105(h) or section 4980H as long as the choice is made prospectively (prior to the plan year) and applied consistently during the entire plan year.

Employers may offer different ICHRA options to different employee classes or may offer traditional health coverage to one class and an ICHRA to another. For employees in a specific, designated class, the ICHRA must be offered on the “same terms” to all employees within the class.

For employers concerned about transitioning its entire workforce from traditional coverage to an ICHRA, the rules allow for the special “new hire” class whereby an employer could prospectively offer new employees an ICHRA while continuing traditional health coverage for current employees.

An employer may not offer employees within a class a choice between traditional group coverage and an ICHRA.

Class Minimums
If an employer continues to offer traditional group health coverage to at least one class of employees, then a minimum size requirements may apply to the employee classes offered an ICHRA (certain classes are exempt). The minimum size will range from 10 to 20 employees depending on the company’s total number of employees.

Certain classes are exempt from the minimum even if traditional health coverage is offered to a different group. For example, an employer that offers an ICHRA to Texas-based employees, but group coverage to Oregon-based employees would not be subject to an ICHRA minimum because an employee class based on “worksite by state” is not considered an applicable class for the minimum purposes. The minimum ICHRA class size is determined based on the number of employees offered the ICHRA – not the number of employees that enroll.

While the “same terms” requirement applies to employees within a class, some limited variability within a class is still permitted. See the section on contributions for additional details on what may vary.

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Special Enrollment Period

Employers may offer ICHRA plans based on a 12-month calendar year or non-calendar year period. Enrollment in individual market health insurance is generally limited to an annual enrollment period that generally takes place between November 15th and December 15th (some states extend this window). To reconcile rules – rules for off-year plans and marketplace open enrollment – and to also account for new employees who may need a mid-year insurance enrollment option (upon enrollment in an ICHRA), a new “Special Enrollment Period” will be created for ACA plans sold on- and off-exchange. Special Enrollment Periods (SEP) previously existed to allow for certain life changes. This new SEP allows employees newly eligible for ICHRA to purchase qualifying individual coverage mid-year.

The ICHRA plan, as a group health plan, will also be subject to qualifying life events which may impact an employee’s ICHRA eligibility outside the annual ICHRA enrollment period – for example marriage or a new child.

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Contributions

Funds contributed to the ICHRA are technically “allocated” as notional amounts. The employer does not incur any actual ICHRA expense until the employee receives an actual reimbursement. Provided the employer and the employee comply with ICHRA requirements, funds reimbursed from the ICHRA are excluded from income (and FICA).

Contributions could occur up front or on a monthly basis. If the entire contribution is allocated on the plan start date, contributions for mid-year enrollees may be prorated.

There is no limit on the amount of funds an employer may contribute annually to the employee’s ICHRA, however the “same terms” requirement means every employee in an employee class must receive the same amount on the same terms with a couple of permissible exceptions.

Employers may vary contributions by employee class – for example, the employer could create two full-time employee classes based on a work site using state as the designation. For the two classes, the employer could have different terms – including contribution structure. An employer might take this approach if individual premiums are meaningfully more expensive in one of the states and the employer would like to account for this through an increase in ICHRA contributions for employees in the more expensive state.

Applicable large employers will need to consider its contribution strategy through the lens of “the cost of the cheapest silver plan”. The ACA employer-mandated “affordability” calculation takes into account this cost when determining the potential net premium cost to the employee (the silver plan cost minus the ICHRA funds) tied to employee’s self-only income. The employer may face ACA penalties if the ICHRA contribution is not sufficient relative to the cost of the cheapest silver plan and if the employee receives tax credits.

Variations Within A Class
There are some unique individual insurance market dynamics so the new ICHRA rules provide certain exceptions to the “same terms requirement” within a class. While the “same terms” requirement applies to employees within a class, the employer may vary the ICHRA terms to employees within the class in three scenarios:

The employer may vary terms based on:

Age — the oldest may receive three times as large an ICHRA contribution as the youngest employee (lowest ICHRA contribution). The cost of individual market premiums increase with age so the new ICHRA rules allow employer contributions to vary based on age as well. Premiums are constrained by the same 3-1 maximum permitted ratio which is why this ratio is used for the ICHRA. Employers have latitude in determining age, but must use the same approach prospectively and consistently for all employees – for example, employee age is determined as of the 1st of the year.

Family Size — if the employer allows dependents to participate in the ICHRA (subject to the same insurance coverage requirement), the employer may modify the employer contribution based on an increase in family size.

Health Savings Accounts (HSA) — an employer may offer different ICHRA options to employees within a class to address HSA concerns. A conflict is avoided if the employer only allows premium reimbursements from the ICHRA. Alternatively, if the employer wants to allow ICHRA reimbursement of QMEs (for example to reimburse deductible expenses), the employer may want to offer two options within an employee class: an HSA-eligible ICHRA and an HSA-ineligible ICHRA. The HSA-eligible ICHRA could only reimburse plan expenses after the employee’s HDHP deductible is met and demonstrated (in accordance with HSA rules).

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Rollovers

ICHRA accounts are notionally funded – employer money is not actually used until an ICHRA reimbursement occurs. If the employee leaves the company, unused ICHRA funds remain with the employer. HRA rules also allow unused ICHRA funds to be available in future years – for example toward next year’s premiums or towards future QME expenses.

An example:

  • Year One: Acme Widgets provides John Williams a monthly $500 ICHRA contribution. John's monthly insurance premium is $300. John has no expenses (other than preventive) in year one and an ICHRA balance of $2400 ($200 times 12) at year end. Acme Widgets allows a rollover of this balance to year two.
  • Year Two: ICHRA contribution and premium amounts remain constant. John has no expenses until December (year 2). John's ICHRA December balance is $4,800, but a December medical procedure will cost him $3,600 based on his own plan's required cost sharing. Because his ICHRA allows rollovers and reimbursement of plan expenses, John uses $3,600 from his ICHRA as reimbursement and uses none of his own money.
  • Year Three: In January, John has no further plan expenses (other than his January premium) and leaves the company at the end of the month. His remaining $1,400 ICHRA balance is forfeited (Acme Widgets keeps these funds).

The employer may limit or cap rollover amounts provided the rules are uniformly applied to all employees within the class and defined in the plan document.

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Attestations

In addition to the purchase of individual market health insurance, employees must attest to the existence of insurance coverage for two purposes – 1) an annual attestation to demonstrate general ICHRA eligibility and 2) an attestation of coverage as part of an expense reimbursement/substantiation request. If the employer makes a direct payment to the insurance carrier for premiums, a per reimbursement attestation for the premium payment is not required.

Substantiation requires the employee to demonstrate that the expense – for example, a copay – is an eligible expense, unreimbursed by another party and incurred while enrolled in qualified individual market coverage.

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Qualified Reimbursements

ICHRA eligible expenses are the same as IRS-qualified medical expenses (QME) defined in section 213d with the addition of individual market insurance premiums. Within the boundaries of 213d, an employer may define which expenses will be reimbursed by the employer’s ICHRA plan.

An employer could limit reimbursements to premiums alone, to premiums + member cost-sharing for covered services, premiums + 213d expenses or some other combination. Employees are not required to use the ICHRA for premium reimbursements, however employees must be enrolled in qualified coverage even if not using funds for premiums.

The employer may want to consider tradeoffs related to restricting eligible reimbursements. Allowing employees to use ICHRA funds for any 213d expense may reduce the amount of funds available to cover cost-sharing associated with the insurance coverage. However, allowing employees to apply unused ICHRA funds toward the plan’s cost-sharing may be viewed as a positive attribute of the ICHRA offering – providing budget flexibility to employees. It may also encourage employees to consider overall health costs in the context of a multi-year budget.

Reimbursements from an ICHRA are subject to the attestation and substantiation requirements outlined in the attestation section. In addition to the attestation requirement, the new ICHRA rules call for plan administrators to use “reasonable,” substantiation procedures for qualified expenses.

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Other ICHRA Rules

  • The Individual Coverage HRA is a group health plan and a type of Health Reimbursement Account (HRA) which subject the ICHRA to applicable regulations.
  • The ICHRA plan is subject to ERISA provisions such as documentation and communication requirements
  • The individual health insurance coverage purchased by the employee is not subject to ERISA provided the employer maintains an “arm’s length” relationship with the employee’s insurance. The employer may not choose, recommend or endorse the employee’s selection of coverage. An employer may provide general information about insurance including information about using healthcare.gov to find coverage. Specific conditions for maintaining the arm’s length requirement include:

♦ Purchase of individual health insurance coverage is completely voluntary.

♦ The employer, employee organization, or other plan sponsor does not select or endorse any particular issuer or insurance coverage.

♦ Reimbursement for non-group health insurance premiums is limited solely to individual health insurance coverage.

♦ The employer, employee organization, or other plan sponsor receives no consideration in the form of cash or otherwise in connection with the employee’s selection or renewal of any individual health insurance coverage.

♦ Each plan participant is notified annually that the individual health insurance coverage is not subject to ERISA (included in the annual 90-day notice).

  • Employers offering ICHRA may also offer a section 125 plan to employees to use pre-tax, employee funds (excludable from income) to pay for monthly premium expenses that exceed the monthly ICHRA contribution. For example, if the employee purchases an ACA plan with a $250 monthly premium, but the monthly ICHRA contribution is only $200, the employee could elect to withhold $50/month using the section 125 plan to pay for the excess cost. Important Note: Due to an ACA provision, section 125 participants may not purchase coverage through an ACA marketplace (exchange). This means the section 125 participants must purchase coverage off-exchange (through a commercial broker or directly from the insurer). Employers are not required to offer a section 125 plan for employee premiums.
  • Note, a Retiree-Only HRA is separate and distinct from an Individual Coverage HRA (ICHRA) offered to a former employee.
  • Upon termination, an employee must be given the option to waive access to any remaining ICHRA balances (so as to preserve the employee’s tax credit eligibility after termination).

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Key ICHRA Documents

  • ICHRA employee notices (specific details must be included)
  • Employee annual insurance coverage attestation
  • Employee expense reimbursement attestation

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ICHRA Glossary

  • HRA: Health Reimbursement Account or Health Reimbursement Arrangement — employer-funded, notional, pre-tax account provided to employees
  • ICHRA: Individual Coverage HRA
  • ICHRA-Qualified Coverage: State-regulated, individual market coverage including ACA marketplace plans, Medicare or qualified student coverage
  • QME: Internal Revenue Service list (213d) of qualified expenses eligible for reimbursement from an HRA (if allowed by employer)
  • ERISA: Employer Retirement Income Security Act, federal law defines how ICHRA is offered, communicated and administered
  • Attestation: Employee statement confirming enrollment and maintenance of ICHRA qualified coverage
  • Substantiation: Employee proof of a qualified expense including date and type of service.
  • Employee Class: Employer-defined set of employees. Permissible ICHRA classes are defined in the text. Employees within a class must be offered an ICHRA on the “same terms”.
  • PTC (APTC): Premium Tax Credit (or Advanced PTC). Federal premium subsidies qualified households with between 100 and 400 percent of the federal poverty level. Enrollment in an ICHRA disqualifies an individual from receiving PTC.

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