2020 has brought some exciting news for farm and ranch employers. On January 1, 2020, a new type of medical expense reimbursement plan — the Individual Coverage Health Reimbursement Arrangement (ICHRA) — became effective.
How is it different from other plans? An ICHRA is funded entirely with employer contributions. It is a reimbursement arrangement. Instead of paying healthcare costs directly, the employer periodically reimburses participating employees.
And there’s good news for both employers and employees. Allowable reimbursements are fully tax deductible by employers and not subject to payroll taxes, and they are not taxable compensation to the employees, either.
Of course, there are stipulations to be aware of:
- Employees must be enrolled in individual health insurance coverage obtained on their own and not through a subsidized marketplace plan. Medicare and Medigap coverage both qualify.
- Generally, employers cannot offer employees a choice between an employer-provided group health insurance plan and an ICHRA.
- Employees must substantiate their insurance coverage with every request for reimbursement they submit to their employer.
- The ICHRA can reimburse both medical insurance premiums and qualified medical expenses.
- Employers can establish annual limits on the maximum amount of reimbursement, as well as the type of expenses allowed to be reimbursed.
- An ICHRA’s benefits can increase as a participant’s age or family dependents increase.
- All eligible employees must be allowed to “opt out” of the ICHRA if they so choose.
- Employers must provide written notice to participants at least 90 days prior to the beginning of each plan year.
Also of note is how employers must offer the ICHRA on the same terms to all employees within “a class of employees.” This means that participation or the amount of reimbursements can be varied so long as all employees within “a class of employees” are treated the same.
Some of the allowable classes of employees are:
- Full-time employees
- Part-time employees
- Salaried employees
- Hourly employees
- Seasonal employees
- Employees who have not satisfied a stated waiting period to participate
An ICHRA in action
To explore the full potential of an ICHRA and how employers can set one up, let’s look at a farm corporation with the following employee census:
- Four shareholder family members who all work full time on the farm and are paid on a salaried basis.
- Two full-time hired farm workers who are paid on an hourly basis.
- Five seasonal workers, paid on an hourly basis, who only work during seeding and harvest.
This employer could establish an ICHRA that provides for the following benefits:
- Four salaried employees: Reimbursement in full for all health insurance premiums and any out-of-pocket medical costs paid by the employee.
- Two full-time hourly employees: Reimbursement in full for all health insurance premiums paid by the employee.
- Five seasonal workers: No participation in the plan.
ICHRAs: Are you excited by this new plan option?
As ICHRAs are new, we’ll most likely see additional rulings to clear up questions. But this is a great option that employers can use to provide farm and ranch employees with a fully deductible fringe benefit. Administrating the plans will also be easier because of sample notification and plan summary forms. However, careful analysis and planning will be the key to maximizing benefits for both the employer and the employees. If you have any questions about ICHRAs, please contact us.
Learn more about other tax related topics:
We explain land improvements depreciation and write-offs for ag producers
7 tax changes to keep in mind this tax season
Income tax ramifications of easements