Step-by-Step Guide to Implementing ICHRA in Your Small Business

Setting up health benefits for your small business can feel like navigating a maze, but it doesn’t have to be. The Individual Coverage Health Reimbursement Arrangement (ICHRA) offers a flexible, cost-effective alternative to traditional group health plans. With ICHRA, you set a budget, your employees pick the health plan that works best for them, and everyone walks away happy.

But how do you actually go about implementing ICHRA in your small business? In this guide, we’ll break down the process step by step, so you can get your plan up and running with ease. Whether you’re new to the concept or just need a refresher, this guide will help you understand exactly how to implement ICHRA without the headache.

What is ICHRA and Why Should Small Businesses Consider It?

ICHRA, or Individual Coverage Health Reimbursement Arrangement, is a game-changer for small businesses looking to offer flexible, affordable health benefits. An ICHRA is an employer-funded health reimbursement arrangement that can be integrated with an employee’s individual health insurance coverage (or Medicare). To participate and receive tax-free reimbursements, an employee must be enrolled in qualifying individual health insurance coverage (or Medicare), and the employer must follow specific federal requirements for notices, plan documents, and verification.

Key Benefits of ICHRA for Small Businesses

• Cost Control: You decide the reimbursement amount, preventing unexpected premium hikes.
• Flexibility for Employees: Employees can choose from a wide range of health insurance plans.
• Tax Advantages: Reimbursements are generally tax-free to employees and tax-deductible to employers when the ICHRA is properly designed and administered — including verifying that participants are enrolled in qualifying individual health insurance coverage (or Medicare) and substantiating eligible expenses.
• Compliance Made Easy: SimplyHRA handles compliance paperwork, ensuring you stay on the right side of the law without the hassle.

If you’re looking to offer health benefits without the complexity of group plans, ICHRA is worth considering.

Step 1: Determine Your Budget and Eligible Employees

Before diving into the setup process, you need to decide how much you want to contribute per employee and who will be eligible for the benefit.

Setting a Budget

One of the biggest perks of ICHRA is cost control. You set a fixed reimbursement amount, ensuring there are no surprises down the road. Consider:

• Your overall budget for employee health benefits.
• How much you want to reimburse per employee per month.
• You can vary the ICHRA allowance by permitted employee classes (for example, full-time vs. part-time) — but the federal rules define how classes work. If you offer a traditional group health plan to one class and an ICHRA to another, minimum class size and other class rules may apply.

Defining Employee Classes

ICHRA allows you to segment employees into different classes, giving you more control over how benefits are distributed. Common classes include:

• Full-time vs. Part-time
• Seasonal workers
• Employees in different geographic locations
• Salaried vs. hourly employees

Decide which classes make sense for your business and how much you’re willing to contribute to each.

Step 2: Design Your ICHRA Plan

Once you’ve settled on a budget and eligible classes, it’s time to design the actual plan.

Structuring Reimbursements

• Monthly Allowance: Set a fixed dollar amount per employee per month.
• Expense Types: Decide whether the ICHRA will reimburse premiums only or premiums plus other qualified medical expenses (generally those allowed under federal tax rules, such as Code §213(d)). If employees want to contribute to an HSA with an HDHP, consider an HSA-compatible design (often premium-only).

Establish Plan Rules

To stay compliant with IRS rules, you must:

• Offer ICHRA on the same terms to all employees within a class.
• Verify eligibility: Before you reimburse anything, you must have a process to confirm that each participating employee (and any covered dependents, if applicable) is enrolled in qualifying individual health insurance coverage or Medicare, and you must keep documentation/attestations as part of your administration records.
• Communicate plan details clearly in writing to all eligible employees.

This is where SimplyHRA can help—our platform streamlines the process, ensuring compliance without the administrative headache.

Step 3: Notify Employees and Provide Support

Transparency and communication are key when introducing a new benefits plan. Make sure employees understand:

• How ICHRA works
• How to shop for individual health insurance
• How to submit claims for reimbursement

Crafting a Clear Communication Strategy

• Provide the required ICHRA written notice: Employers must give eligible employees an ICHRA notice with specific required information — generally at least 90 days before the start of the plan year (or no later than the date coverage can begin for employees who become eligible later).
• Hold a meeting or webinar to walk employees through the process.
• Provide resources or access to a benefits advisor for plan selection assistance.

With SimplyHRA, your employees get access to in-house enrollment support, making the transition smooth and straightforward.

Step 4: Administering the Plan and Staying Compliant

After setting up and communicating the plan, the next step is ongoing administration and compliance.

Claim Reimbursements

Before reimbursing, you must

1. Verify the employee’s qualifying individual coverage (or Medicare) for the month being reimbursed and,
2. Substantiate the expense (for example, premium documentation or other eligible expense documentation) and retain records as part of your plan administration.

Compliance Requirements

ICHRA administration can trigger multiple federal requirements depending on your situation, including:

• ERISA plan documentation/disclosures
• HIPAA privacy protections for health information
• ACA-related affordability/Marketplace coordination rules
• COBRA continuation requirements (for employers subject to COBRA)

SimplyHRA’s platform automates compliance tasks, keeping you on track without manual paperwork.

Step 5: Monitor and Adjust as Needed

Once your ICHRA is up and running, keep an eye on its effectiveness and adjust as needed.

Evaluate Plan Performance

• Are employees satisfied with the plan?
• Is the budget in line with expectations?
• Are there any compliance issues or claim disputes?

Make Adjustments

Based on your evaluation, you might decide to:

• Adjust reimbursement amounts.
• Expand or change eligible classes.
• Modify plan rules for better flexibility.

SimplyHRA makes it easy to tweak your plan as your business needs change, ensuring a seamless experience for both you and your employees. Material changes may require a summary of material modifications.

Common Pitfalls to Avoid When Implementing ICHRA

While ICHRA is straightforward, some common mistakes can cause headaches down the road.

Not Communicating Clearly

Employees need to understand how the plan works and what they need to do. Confusion leads to dissatisfaction.

Skipping Compliance Steps

Missing compliance requirements can result in hefty penalties. Use a platform like SimplyHRA to stay compliant.

Setting Unrealistic Budgets

Make sure your budget is both sustainable and competitive to retain talent.

Why Choose SimplyHRA for Implementing ICHRA?

At SimplyHRA, we simplify the process of setting up and managing ICHRA. Our platform is designed to make it easy for small businesses to:

• Set up ICHRA in minutes without complicated paperwork.
• Control costs with predictable budgets and no surprise premium hikes.
• Ensure hassle-free compliance with all federal regulations.
• Provide employees with flexible, personalized health plan options.

Whether you’re just getting started or looking to optimize your existing ICHRA, SimplyHRA has you covered.

Ready to Offer Flexible, Affordable Health Benefits?

Implementing ICHRA in your small business doesn’t have to be a daunting task. By following these step-by-step guidelines and leveraging SimplyHRA’s powerful platform, you can provide flexible, cost-effective health benefits that keep both you and your employees happy.

Take the first step today! Schedule a demo or Sign up for an employer account and see how easy it is to implement ICHRA with SimplyHRA.

Frequently Asked Questions (FAQs) about Implementing ICHRA

Q: Can I adjust the reimbursement amounts for ICHRA mid-year?

A: Employers typically set allowances for the plan year, but plan terms can be amended prospectively if the employer follows the plan’s amendment process and provides any required participant communications. Employees’ qualifying life events (e.g., marriage, birth of a child) mainly affect their ability to enroll/change individual coverage — not whether the employer can change the ICHRA allowance. However, you can adjust the amounts during the annual renewal period.

Q: Do I need to offer the same reimbursement amount to all employees under ICHRA?

A: You don’t have to offer the same amount to everyone, but you must follow the ICHRA rules: you can vary allowances by permitted employee classes, and you may vary by age and family size within a class only within the limits allowed by the regulations (and the ICHRA must be offered on the same terms to all employees within a class). The flexibility to customize contributions helps you align benefits with your budget and employee needs.

Q: Are employers required to provide proof of employees' insurance coverage under ICHRA?

A: Yes, employers must verify that employees have qualifying individual health insurance before reimbursing them through ICHRA. This ensures compliance with federal regulations.

Q: What happens if an employee leaves the company mid-year?

A: If an employee leaves the company, they are no longer eligible for ICHRA reimbursements. The employer is not obligated to continue payments, ensuring cost control and budget predictability.

Q: Can employees use ICHRA funds to pay for dental and vision insurance premiums?

A: Depending on how the plan document is written, an ICHRA can reimburse certain qualified medical expenses, which may include dental and vision premiums. However, to participate in an ICHRA and receive tax-free reimbursements, employees generally must be enrolled in qualifying individual health insurance coverage (major medical) or Medicare — dental/vision-only coverage does not satisfy that requirement by itself.

Q: How does ICHRA impact COBRA requirements?

A: If your business is subject to COBRA, an ICHRA is generally a group health plan benefit that may need to be offered under COBRA continuation rules to qualified beneficiaries. In that case, the individual can elect COBRA to continue access to the ICHRA benefit (subject to the plan’s terms) and will generally pay the applicable COBRA premium for that continued benefit.

Q: Can employees participate in a Health Savings Account (HSA) while enrolled in ICHRA?

A: An employee can generally contribute to an HSA only if they’re HSA-eligible (including being covered by an HDHP and having no disqualifying other coverage). An ICHRA that reimburses medical expenses before the HDHP deductible would generally make someone ineligible to contribute to an HSA. HSA-compatible designs often limit the ICHRA to premium-only reimbursements (or use other HSA-compatible structures such as limited-purpose or post-deductible designs).

Q: Is it mandatory to renew the ICHRA plan every year?

A: Most employers operate an ICHRA on a 12-month plan year and review plan design annually. While you don’t ‘renew’ in the same way as a group insurance policy, you should confirm each plan year’s allowance amounts, eligibility/class design, notices, and plan documents remain accurate and compliant. This allows you to adjust reimbursement amounts, eligibility classes, and other plan details to match your evolving business needs.

Q: How does ICHRA affect employee recruitment and retention?

A: Offering ICHRA can significantly enhance employee recruitment and retention by giving employees the flexibility to choose their preferred health insurance plans, increasing job satisfaction and loyalty.

Q: Can employers use ICHRA to offer different health benefits in different states?

A: Yes, ICHRA’s flexibility allows you to provide customized health benefits based on geographic location, making it an excellent option for multi-state employers.