ICHRA Contribution Strategies

Did you know that employers have multiple reimbursement strategies? Questions to ask when comparing ICHRA solutions.

By offering an ICHRA, the employer determines how much it will reimburse employees monthly. The defined amount represents the maximum amount the employee can be reimbursed through the ICHRA.

When providing an ICHRA, the employer sets the monthly reimbursement amount for employees. This defined sum indicates an employee's maximum reimbursement through the ICHRA.

This allows for better budgeting, flexibility in plan design, and freedom for employees to choose from multiple coverage options.

With an ICHRA, employers:

? Establish the pre-tax contribution allowance per person, stabilizing the maximum out-of-pocket expenses for which the employer will be responsible.

? Provide employees the opportunity to shop and compare all individual coverage options.

The ICHRA Solution allows employers to define the monthly contribution amount and addresses the following:

? Employer contribution is monthly with no carryover from month to month or year to year.

? Contribution amounts do not accumulate for the employee to use in a later month

Note: Contribution amounts not used by the employee are forfeited and may be available to the employer to pay plan expenses.

? Payment to Establish the pre-tax contribution allowance per person, stabilizing the maximum out-of-pocket expenses for which the employer will be responsible.

? Provide employees the opportunity to shop and compare all individual coverage options.

Note: Contribution amounts not used by the employee are forfeited and may be available to the employer to pay plan expenses.

? Payment facilitation for insurance premiums only, including: - Individual Insurance that is MEC (Minimum Essential Coverage) - Medicare Part C - Medicare Part D - Medicare Supplement Note:

Individual employees must pay for Medicare Part A and Part B. Premium payments for this coverage and be reimbursed for insurance premiums only, including: - Individual Insurance that is MEC (Minimum Essential Coverage) - Medicare Part C - Medicare Part D - Medicare Supplement Note:

Designing Employee Eligibility Classes

Flexibility in designing the program to fit the needs of employees better is one of the most valuable features of an ICHRA. Employers may structure the eligibility and contribution based on 11 classes defined by ICHRA regulations.

Defining the Contribution Amount

The employer defines the contribution amount it will provide tax-free to the ICHRA. The amount can be as little or as much as the employer wants (no minimum or maximum contribution amounts are required). The contribution amount must be a fixed dollar amount. Most industry ICHRA solutions support these employer-defined contribution strategies: Employee Only, Tier, and Relationship. Please ask your ICHRA provider if they can administer your reimbursement schedule before signing an agreement.

Defined Contribution by Employee Only

This option allows an employer to contribute the same amount to all employees or set different amounts based on age.

? Contribution amounts may be equal

? Contribution amounts may vary by age

? Contribution amounts may vary by employee classes (a class may be excluded from coverage under the ICHRA)

Individual market policies for older people typically cost more, so employers may offer higher contribution allowances to older employees. Contribution allowances must be structured using a 1:3 ratio from the youngest to the oldest employee to be considered ICHRA compliant. For example, the employer may contribute $200 for a 24-year-old and $600 for a 64-year-old employee.

In either example, if the total monthly premium is less than the defined monthly contribution in an employee's age band, the contribution does not carry over to the following month. The employee will pay the remainder if the total monthly premium exceeds the defined contribution.

Defined Contribution by Tier

Contribution by tier is used when an employer wants to contribute to the overall total premium, including dependent premium cost. The contribution amounts for each tier are shared among all members of that tier and do not reflect contributions for each individual.

The employer determines their health benefits budget and sets a fixed contribution amount, giving equal amounts to all employees regardless of age.

? Contribution amounts may be equal by tier

? Contribution amounts may vary by tier

? Contribution amounts may vary by employee classes (a class may be excluded from coverage under the ICHRA)

In either example, if the total monthly premium is less than the defined tier contribution, the contribution does not carry over to the following month. If the total monthly premium exceeds the defined tier contribution, the employee is responsible for paying the remainder.

Defined Contribution by Relationship

Contribution by relationship is used when an employer wants to contribute based on each household member.

An employer may specify fixed contribution amounts for the employee, the employee's spouse, or the employee's child(ren).

? Contribution amounts may vary by relationship

? Contribution amounts may vary by age and relationship

? Contribution amounts may vary by employee class relationship (a class may be excluded from coverage under the ICHRA)

Individual market policies for older people typically cost more, so employers may elect to offer higher contribution allowances to older employees. Contribution allowances must be structured using a 1:3 ratio from the youngest to the oldest employee to be considered ICHRA compliant.

For example, the employer may contribute $100 for a 24-year-old and $300 for a 64-year-old employee. In either example, if the total premium is less than the defined monthly contribution, the contribution does not carry over to the following month.

Affordability Calculation of the ICHRA

The Affordable Care Act (ACA) generally requires Applicable Large Employers (ALEs) employers with 50 or more full-time equivalent employees to offer comprehensive health coverage to their full-time employees (30 hours per week) and dependent children, known as the “employer mandate.”

Employers may be subject to steep penalties (i.e., shared responsibility payments) for failing to offer health coverage to substantially all of their full-time employees or for not offering full-time employees coverage that is affordable and provides a certain minimum level of coverage.

An ICHRA can help ALEs satisfy the employer mandate.

? First, by offering an ICHRA to substantially all (generally 95%) of its full-time employees, the employer can avoid the larger of the two employer mandate penalties.

? Furthermore, if the ICHRA offered by an employer to substantially all full-time employees is “affordable,” then the employer can also avoid the second type of employer mandate penalty.

If the ICHRA is deemed unaffordable, the employer may be subject to the second type of employer mandate penalty. A formula is used to determine whether an employer-sponsored group health plan, including an ICHRA, provides coverage on an affordable basis.

The formula is different from the way the marketplace determines affordability for subsidies. An ICHRA is considered “affordable” for an employee if the monthly premium for the lowest-cost silver plan for self-coverage only (available through the marketplace in the employee’s area of residence), minus the monthly amount made available to the employee under the ICHRA (not including any increased amount made available under the ICHRA based on the number of covered dependents), is less than 8.39% of 1 /12 of the employee’s annual household income.

The percentage rate applies in 2024 and is indexed yearly. For purposes of the calculation described above, an employer chooses one of three safe harbors to determine annual household income (e.g., the W-2 safe harbor, the rate of pay safe harbor, or the federal poverty line safe harbor) for purposes of affordability under the employer shared responsibility provisions.

The employer can use certain safe harbors to determine annual household income:

• W-2 WAGES: The reported income from Box 1 of W-2 form of the employee.
• RATE OF PAY: The hourly rate of an employee multiplied by 130 hours per month to estimate a monthly wage.
• W-2 Wages The lowest allowance that can be considered affordable for Mary is $250.

The employer contribution allowance must be ≥$250/mo. to be considered affordable.

• The employer’s contribution is set at $375/mo., which is above the affordability limit. Mary must pay any difference for the coverage she selects. The lowest allowance that can be considered affordable for Jack is $405. The company’s contribution allowance of $375/mo. is below the affordability limit. Jack can opt out of the ICHRA, go to the marketplace to see if he qualifies for a subsidy. If he qualifies, he can choose not to participate in the ICHRA and instead get subsidized coverage through the marketplace. Because the employer did not provide affordable coverage, the employer will have to pay a penalty. Lowest Cost Silver Plan Lowest Cost Silver Plan Affordability Calculation Affordability Calculation Mary Jack $50,000 $35,000 $600 $650 ($50,000 / 12) X .0839 = $350 ($35,000 / 12) X .0839 = $245 $600 - $350 = $250 $650 - $245 = $405 Monthly cost of the lowest-priced silver plan on the market Monthly contribution from company 8.39% of monthly household income – < FEDERAL POVERTY LEVEL: Assume the employee's income level to be equal to the federal poverty level.

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