Reduce Taxes for Everyone with an Individual Coverage Health Reimbursement Arrangement (ICHRA)

We all want to make sure the people that care for our children and loved ones have access to health insurance so they can perform at their best, and COVID sure has emphasized how we’re all connected. HRAs (Health Reimbursement Arrangements) are a great way to ensure your employee is covered and feels valued, and can be a worthwhile perk that strengthens the compensation package.

Individual Coverage HRAs enable you to transfer tax free income to your employees by reimbursing their medical care expenses (and sometimes their family members’ medical care expenses), up to a maximum dollar amount that you determine and make available each year. The reimbursements are tax-free to both you and your employee, so you don’t pay your typical 10% employer tax and your employee doesn’t pay their typical 15%+ employee taxes.

This type of arrangement allows workers to shop for plans in the individual market and select coverage that best meets their needs. Best of all, this arrangement increases your employee’s take home pay, can reduce your employer expenses, and it’s straight-forward to do! All you need is to follow the steps below.

Good to Know

• You, the employer, can contribute as little or as much as you want to an Individual Coverage HRA.

• HRAs can include reimbursements for monthly premiums and out-of-pocket costs, such as copayments and deductibles. All expenses listed in IRS Publication 502 (IRC Section 213(d)) are eligible for reimbursement. 

• Proof of health insurance enrollment for the period your employee will be covered is required.

• If your employee already has individual health insurance coverage, no change is required to meet the HRA’s health coverage requirement.

• At least once a year, employees must be allowed to opt out of your HRA to claim the premium tax credit offered through the Exchange if they can’t afford an individual plan with your HRA.

• If your employee doesn’t already have individual health insurance coverage, enrollment in coverage can be through the Exchange or outside of the Exchange – for example, directly from an insurance company.

  • Note: People in most states use HealthCare.gov to enroll in coverage through the Exchange, but some states have their own Exchange. To learn more about the Exchange in your state, visit HealthCare.gov | The Marketplace in your state.

    If your employee is enrolled in Medicare Part A and B or Medicare Part C, enrollment in Medicare will meet the HRA’s health coverage requirement. For information on how to enroll in Medicare, visit Medicare.gov | Sign up/change plans.

• Here is a thorough HRA explanation from the IRS, and a good overview from the Healthcare.gov website.

Three Simple Employer Steps

Step One: Provide a written notice

Written Notice Form (edit and give to your employee)

In most cases, you must provide this written notice (provided by the IRS) at least 90 days before the start of the HRA plan year. Your employee will need this notice to determine if the offered HRA is affordable and enroll in individual coverage. If your HRA starts January 1, your employee can enroll in the insurance exchange or directly with a health insurance company during the annual open enrollment period each November 1 through January 31. For coverage to start on January 1, enrollment in a health plan is required by December 15. 

If you are offering your HRA at another time of year, your employee may qualify for a special enrollment period to enroll in or change health insurance coverage outside of open enrollment.

Step Two: Give your employee two required “Proof of coverage” forms to fill out

Proof of Coverage (Annual and Ongoing)

Your employee must fill out the first section, the Annual Proof of Coverage, at the beginning of the HRA. The second “Ongoing” proof of coverage is found below and must be filled out every time they request a reimbursement during a monthly period. Keep these forms in case of an audit.

Step Three: In the Nest Payroll app, create the reimbursement whenever needed.

Open the app, click on your employee “to Pay”. Towards the bottom you will see “Non-Taxable Reimbursement”. Click on the green + sign and enter the amount into the Health Care box. You can do this at the same time you create a paycheck or separately.

Please note, the information contained in this post is general in nature, and while we do our best, it may be out of date, may not be applicable to your specific circumstances, and is not intended to be a substitute for or relied upon as personalized tax or legal advice. Please consult a professional tax advisor for your particular situation.