ICHRA Notice Requirements: A Complete Guide for Employers

Table of Contents#

1. What is an ICHRA?
2. ICHRA Notice Requirements: Key Rules
   • 2.1 Timing of the Notice
   • 2.2 Required Content of the Notice
   • 2.3 Delivery Methods for the Notice
3. Employer Obligations Beyond Notices
   • 3.1 Plan Documentation
   • 3.2 Reimbursement Rules
   • 3.3 ACA Compliance
   • 3.4 Reporting and Tax Documentation
4. Common Mistakes to Avoid
5. Conclusion
6. References

What is an ICHRA?#

An Individual Coverage Health Reimbursement Arrangement (ICHRA) is a type of employer-sponsored health benefit introduced by the IRS in 2020. Unlike traditional group health plans, ICHRAs allow employers to set a fixed monthly allowance (tax-free for employees) that employees can use to purchase individual health insurance (through the Marketplace or off-exchange) or pay for qualified medical expenses (e.g., deductibles, copays).

Key features of ICHRA:

• Flexibility: Employers can offer different allowance amounts based on employee classes (e.g., full-time vs. part-time, geographic location, family size).
• Tax Advantages: Reimbursements are tax-deductible for employers and tax-free for employees (if the employee has minimum essential coverage, or MEC).
• No Minimum Contribution: Employers are not required to contribute a set amount, though allowances must be reasonable and non-discriminatory.

ICHRA is available to employers of all sizes, making it a popular option for small businesses, startups, and organizations seeking to reduce administrative burdens associated with group plans.

ICHRA Notice Requirements: Key Rules#

The IRS and Department of Labor (DOL) mandate that employers offering an ICHRA must provide a written notice to all eligible employees. This notice ensures employees understand their options, eligibility, and how the ICHRA works. Below are the critical requirements:

2.1 Timing of the Notice#

Employers must distribute the ICHRA notice at least 90 days before the start of the plan year for existing employees. For new hires, the notice must be provided within 14 days of their start date.

• Example: If your ICHRA plan year starts on January 1, 2024, existing employees must receive the notice by October 1, 2023. A new employee hired on March 1, 2024, must receive the notice by March 15, 2024.
• Special Cases: If an employer changes the ICHRA design (e.g., adjusts allowance amounts or eligibility criteria), a new notice must be provided at least 90 days before the change takes effect.

2.2 Required Content of the Notice#

The ICHRA notice must be clear, written in plain language, and include the following information:

a. Eligibility Details#

• Which employees are eligible for the ICHRA (e.g., full-time employees, part-time employees working 30+ hours/week).
• Any waiting periods (e.g., 60 days after hire) or conditions for eligibility.

b. ICHRA Allowance Information#

• The total monthly or annual allowance amount the employee is eligible to receive.
• Whether the allowance varies by family size (e.g., higher allowances for employees with dependents).

c. Reimbursement Rules#

• A statement that employees must have minimum essential coverage (MEC) to receive tax-free reimbursements. MEC includes Marketplace plans, employer-sponsored group plans, Medicare, Medicaid, or CHIP.
• A list of expenses eligible for reimbursement (e.g., individual insurance premiums, copays, deductibles).
• How reimbursements are processed (e.g., submitting receipts, online portal).

d. Marketplace Information#

• A reminder that employees can shop for individual health insurance on the Health Insurance Marketplace (e.g., Healthcare.gov) and may qualify for premium tax credits (PTCs).
• A warning that if an employee receives an ICHRA allowance, they may not be eligible for PTCs unless the ICHRA is deemed “unaffordable” under ACA rules (see Section 3.3).

e. Opt-Out Option#

• If employees can decline the ICHRA (e.g., to enroll in a spouse’s group plan), the notice must explain how to opt out and the consequences (e.g., losing access to the allowance).

2.3 Delivery Methods for the Notice#

The notice must be provided in a way that ensures employees can easily access and retain it. Acceptable delivery methods include:

• Paper Copies: Hand-delivered or mailed to the employee’s home address.
• Electronic Delivery: Emailed to the employee’s work or personal email, or posted on a secure company portal (if the employee regularly uses the portal for work-related communications).
• In-Person Meetings: Distributing the notice during a staff meeting (with a written copy provided afterward).

Employers should retain proof of delivery (e.g., email receipts, signed acknowledgment forms) to demonstrate compliance in case of an audit.

Employer Obligations Beyond Notices#

While ICHRA notices are critical, employers must also fulfill other obligations to maintain compliance. These include:

3.1 Plan Documentation#

Employers must maintain a written ICHRA plan document that outlines the program’s rules, including:

• Eligibility criteria (e.g., employee classes, waiting periods).
• Allowance amounts and how they are calculated.
• Reimbursement procedures (e.g., submission deadlines, substantiation requirements).
• Termination rules (e.g., what happens to unused allowances if an employee leaves).

The plan document must be updated whenever changes are made to the ICHRA (e.g., allowance adjustments) and kept on file for at least 6 years.

3.2 Reimbursement Rules#

To avoid tax penalties, employers must:

• Verify MEC: Before reimbursing expenses, confirm the employee has MEC. This can be done by collecting a copy of the employee’s insurance card or a Marketplace enrollment confirmation.
• Limit Reimbursements to Eligible Expenses: Only reimburse expenses defined by IRS Publication 502 (e.g., premiums, doctor visits, prescription drugs). Excluded expenses include cosmetic procedures, gym memberships, or over-the-counter drugs without a prescription.
• Process Reimbursements Promptly: Reimbursements should be made within a reasonable time frame (e.g., 30 days of receiving a valid claim).

3.3 ACA Compliance#

ICHRA is subject to the ACA’s employer shared responsibility provisions (also known as the “employer mandate”) for applicable large employers (ALEs—those with 50+ full-time equivalent employees). Key ACA obligations include:

• Affordability: The ICHRA allowance must be “affordable” for employees. Affordability is determined by the percentage of the employee’s household income spent on the lowest-cost self-only Marketplace plan in their area. For 2024, the affordability threshold is 8.39% of household income. If the ICHRA allowance is less than this amount, the employee may qualify for PTCs.
• Non-Discrimination: ICHRA allowances cannot favor highly compensated employees (HCEs) or key employees. For example, employers cannot offer HCEs a higher allowance than non-HCEs in the same employee class.

3.4 Reporting and Tax Documentation#

• Form 1095-C: ALEs must report ICHRA coverage on Form 1095-C, which is provided to employees and the IRS. This form indicates whether the employer offered affordable coverage.
• Tax Treatment: Reimbursements are not taxable to employees if they have MEC. Employers must report reimbursements as tax-free on employees’ W-2 forms (Box 12, Code FF).

Common Mistakes to Avoid#

To ensure compliance, employers should watch for these common pitfalls:

1. Missing the 90-day notice deadline: Failing to send the notice 90 days before the plan year can lead to penalties from the IRS or DOL.
2. Incomplete notice content: Omitting critical details (e.g., MEC requirement, Marketplace information) can confuse employees and risk non-compliance.
3. Not verifying MEC: Reimbursing employees without confirming MEC makes the reimbursement taxable and may trigger IRS penalties.
4. Discriminatory allowances: Offering higher allowances to HCEs violates ACA non-discrimination rules.
5. Poor record-keeping: Failing to maintain plan documents or proof of notice delivery can make audits difficult.

Conclusion#

ICHRA is a powerful tool for employers to offer flexible, cost-effective health benefits, but compliance with notice requirements and other obligations is non-negotiable. By understanding the timing, content, and delivery of ICHRA notices, maintaining detailed plan documentation, and adhering to ACA and IRS rules, employers can avoid penalties and ensure employees fully understand their benefits.

For complex cases (e.g., determining affordability or employee classes), consulting a benefits attorney or tax professional is strongly recommended.

References#

• IRS Notice 2019-45: Guidance on ICHRA
• Department of Labor: ICHRA Compliance Resources
• Affordable Care Act: Employer Shared Responsibility Provisions
• IRS Publication 502: Medical and Dental Expenses