Common Mistakes Employers Make When Setting Up an ICHRA

The Individual Coverage Health Reimbursement Arrangement (ICHRA) is a powerful tool for employers looking to provide flexible health benefits to their employees. It allows businesses to reimburse employees for individual health insurance premiums, offering both cost control and employee choice. However, as with any new system, setting up an ICHRA can come with challenges. Employers who are new to ICHRAs may make mistakes that can complicate the setup process or lead to legal issues down the line.

In this article, we will explore some of the most common mistakes employers make when setting up an ICHRA and provide best practices to help businesses navigate this flexible and valuable healthcare benefit.

1. Failing to Properly Classify Employees

One of the most common mistakes employers make when setting up an ICHRA is failing to properly classify their employees. ICHRA allows employers to divide employees into various classes, such as full-time, part-time, seasonal, or employees working in different locations or departments. Each class may be offered a different level of reimbursement for health insurance premiums.

However, if employees are not correctly classified, it could lead to issues with compliance, including potential violations of the Internal Revenue Service’s (IRS) non-discrimination rules. If an employer offers more generous reimbursement to one group of employees over another without a valid classification, this could be seen as discriminatory and result in penalties.

Best Practice: Employers should carefully define employee classes based on clear criteria, such as hours worked, job role, or location, and ensure that the reimbursement amounts are consistent with the employee's classification. Regularly review classifications to ensure accuracy and compliance with ICHRA regulations.

2. Not Adhering to Non-Discrimination Rules

Non-discrimination rules are a key component of ICHRA. The IRS mandates that ICHRA benefits must not disproportionately favor highly compensated employees (HCEs), shareholders owning more than 2% of an S corporation, or other select groups of employees. Failing to comply with these rules can lead to significant penalties, and employers might be required to make adjustments to their ICHRA structure to ensure that all employee classes are treated fairly.

Employers often overlook the fact that ICHRA benefits cannot be designed to favor higher-paid employees, even though they are allowed to offer different reimbursement amounts based on employee classes. The key is ensuring that these classes are structured in a way that reflects business needs and is not used to give preferential treatment to certain employees based on compensation alone.

Best Practice: Ensure that the ICHRA structure is designed with fairness in mind. For example, if offering higher reimbursements to full-time employees, verify that this does not unfairly exclude part-time employees who may still be eligible for ICHRA benefits. Additionally, maintain records to show that decisions regarding reimbursements are based on employee class, not compensation level.

3. Offering Inadequate Reimbursement Amounts

Another common mistake is offering reimbursement amounts that are not aligned with the needs of employees. While ICHRA provides employers with the flexibility to set their own reimbursement limits, these amounts should reflect the actual cost of insurance premiums and the healthcare needs of the workforce.

For instance, if an employer sets reimbursement amounts that are too low for employees to purchase meaningful health insurance coverage, the ICHRA benefit will likely fail to meet the needs of the employees. On the other hand, offering overly generous reimbursements could strain the company’s budget.

Best Practice: Employers should research the average cost of individual health insurance premiums in their area and for the type of coverage employees typically seek. Reimbursement amounts should be reasonable and help employees afford quality health insurance plans that meet their needs. Regularly review and adjust reimbursement levels based on market changes and employee feedback.

4. Lack of Clear Communication to Employees

Another mistake employers often make when implementing ICHRA is failing to communicate the plan clearly to employees. ICHRA is different from traditional group health insurance, so employees may be unfamiliar with how it works and how they can use it to purchase their own health insurance. Without clear communication, employees may feel confused, frustrated, or unsure about how to take full advantage of their ICHRA benefits.

Best Practice: Employers should create easy-to-understand communications that clearly explain how ICHRA works, how employees can select their own insurance plans, and how reimbursement works. This could include guides, FAQs, or even one-on-one consultations with HR personnel to walk employees through the process. Clear communication will help employees feel confident in their ability to navigate the ICHRA system and maximize their benefits.

5. Ignoring Compliance with Minimum Essential Coverage (MEC) and Affordable Care Act (ACA) Requirements

While ICHRA gives employees the flexibility to choose their health insurance plans, employers must ensure that the plans employees purchase meet certain requirements. To be eligible for ICHRA reimbursement, employees must have a health plan that provides Minimum Essential Coverage (MEC), which satisfies the Affordable Care Act (ACA) mandate.

Some employers mistakenly assume that any health plan qualifies for ICHRA reimbursement, leading to issues if employees purchase plans that do not meet MEC requirements. If the plan does not qualify, employees will not be able to receive reimbursement for their premiums.

Best Practice: Ensure that employees are only reimbursed for premiums on plans that meet the MEC requirement. It is helpful to provide employees with a list of insurance carriers or plans that meet these requirements, or to partner with a benefits consultant to ensure compliance with ACA regulations.

6. Failure to Track and Report Contributions Properly

ICHRA requires employers to track and report the reimbursement amounts given to employees. Failure to properly document and report these contributions can create complications during tax season or during an audit. Additionally, mistakes in documentation can lead to non-compliance with IRS reporting requirements.

Best Practice: Implement a reliable system for tracking and reporting ICHRA reimbursements. This could involve using software specifically designed for ICHRA administration or working with a benefits administrator to ensure that contributions are documented accurately. Keep detailed records of all reimbursements and any communication with employees about their benefits.

7. Not Reviewing the ICHRA Plan Annually

Finally, many employers make the mistake of setting up their ICHRA plan and then failing to review or update it. The healthcare landscape and insurance premiums change regularly, and so do employee needs. Failing to periodically review the ICHRA structure can lead to outdated benefits that no longer meet the needs of employees or the employer.

Best Practice: Review your ICHRA plan annually to ensure it remains competitive, compliant, and effective. This review should include evaluating reimbursement amounts, employee feedback, and any regulatory changes that may affect the ICHRA structure. An annual review will help keep the plan aligned with both employee needs and business goals.

Setting up an ICHRA can be a highly beneficial way for employers to offer health benefits while keeping costs manageable. However, to ensure success and avoid costly mistakes, employers must pay attention to key factors such as proper employee classification, adherence to non-discrimination rules, adequate reimbursement amounts, clear communication, and compliance with regulations. By following these best practices and avoiding common pitfalls, employers can create an effective and compliant ICHRA program that benefits both the company and its employees. Learn more about ICHRAs and how Ameriflex can help keep your world quiet.