IRS Changes Rules for Health Insurance Premiums, Employers Could Benefit

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A monumental change regarding health insurance premiums has been announced by the IRS recently – and both large and small employers stand to benefit.

Beginning January 1, 2020, large and small employers may reimburse employees for the cost of individual health insurance policies using an individual coverage health reimbursement arrangement (ICHRA).

Previously, the IRS took the position that employer premium reimbursement arrangements outside of employer-sponsored group health insurance policies were an ACA-noncompliant group health plan, subject to an excise tax of $100 per day, per employee. The change in rules from this position is significant.

There are some policy details to consider regarding applicability, as it doesn’t stand to benefit all employers across the board.

5 Requirements for Qualifying Employers

What employers can utilize an ICHRA? All employers, including applicable large employers, can utilize an ICHRA, if certain conditions are met.

An ICHRA counts as an “offer of coverage” for applicable large employers, and the IRS is expected to issue guidance about when an ICHRA constitutes “affordable” coverage.

What are the conditions for reimbursing employees through an ICHRA? There are 5 requirements:

  1. The employee must have health coverage, and provide proof.
  2. The employer cannot offer group health insurance to any class of employees who are also offered an ICHRA.
  3. The employer must offer reimbursements on the same terms to all employees in each class.
  4. Written notice is required 90 days before the start of the plan year, every year.
  5. A written plan document is required.

Other notable guidelines surrounding these reimbursements include:

No Reimbursement Limitations

An employer can choose any reimbursement amount as there are currently no IRS limitations.

Pre-tax Dollars Allowed for Employee Insurance Premiums

Employees can pay their share of premiums using pre-tax dollars. An employee can use a cafeteria plan to pay the difference between the total cost of their coverage and the employer’s reimbursement, but only if their coverage was not purchased on the Exchange.

Any Individual Health Insurance Qualifies

An employee can have any kind of individual health insurance: individual policy, student health coverage, or Medicare Parts A, B, or C.

Nonqualified Coverage

Coverage under a spouse’s employer-sponsored group plan, short-term limited duration policies, and health care sharing ministries do not count as reimbursable coverage under an ICHRA.

Carryover is Acceptable

Unused funds can be carried over.


For questions or guidance surrounding IRS rules and applicability, please contact a K·Coe Isom tax advisor.

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