By: HUB’s EB Compliance Team
The Individual Coverage Health Reimbursement Arrangement (ICHRA) has become one of the most significant alternatives to traditional group health plan coverage since its introduction in 2020. As employers evaluate ICHRAs for their workforce, one of the most frequently misunderstood areas involves the intersection of ICHRA benefits and Medicare eligibility. Employers offering or considering an ICHRA must understand how these arrangements interact with Medicare — both to structure the benefit properly and to avoid exposing their organizations to compliance risk.
This article provides a practical overview of how ICHRAs work alongside Medicare, the key regulatory requirements and the compliance pitfalls employers should watch for.
ICHRA fundamentals and the Medicare connection
An ICHRA allows employers of any size to reimburse employees for individual health insurance premiums and qualified medical expenses on a tax-favored basis. Unlike the qualified small employer HRA (QSEHRA), there is no cap on the reimbursement amount, and the ICHRA may be offered alongside a traditional group health plan — provided the employer does not offer employees a choice between the two and uses permissible employee classes to separate who receives each benefit.
A critical design feature of the ICHRA is that the employee must be enrolled in individual health insurance coverage to receive reimbursements for premiums and, depending on plan design, out-of-pocket medical expenses. Employees cannot simply use the ICHRA funds towards out-of-pocket medical expenses without also having individual health insurance coverage. Medicare enters the picture because Medicare Parts A, B and C all qualify as individual health insurance coverage for ICHRA purposes.
Medicare as qualifying coverage under an ICHRA
In order to meet the ICHRA requirements for individual coverage, an employee must have either Medicare Part A (hospital insurance) and Medicare Part B (medical insurance) or Medicare Part C (Medicare Advantage). Medicare Part D (prescription drug coverage), standing alone, does not satisfy this requirement, though it may be reimbursable as a qualified medical expense if the plan document permits.
This means a Medicare-enrolled employee (or Medicare-eligible dependent) can participate in the employer's ICHRA and receive reimbursements for Medicare premiums — including Part B premiums, Part D premiums, Medicare Advantage premiums and Medigap (Medicare Supplement) premiums — as well as other eligible out-of-pocket medical expenses, depending on plan design.
Class-based offering rules and Medicare-specific considerations
The ICHRA regulations allow employers to offer the ICHRA to specific classes of employees, provided the classification system follows the rules in 29 CFR § 2590.702-2(d). Importantly, Medicare enrollment or eligibility status is not itself a standalone permissible employee class. Employers cannot create an ICHRA class defined solely by whether employees are or are not enrolled in Medicare. Instead, employers must use the job-based classifications identified in the regulation to determine which employees are offered an ICHRA versus a traditional group health plan.
When Medicare eligible employees are in a class of employees that is offered an ICHRA, they are included in the class like all other employees. For example, assume an employer were to offer a traditional group health plan to their hourly employees and an ICHRA to their salaried employees. All salaried employees would be eligible for the ICHRA, whether or not they are eligible for Medicare.
Practical considerations
Since Medicare eligibility is not an allowable ICHRA class by itself, this may limit the effectiveness of using an ICHRA to address an employer’s Medicare eligible population. Other, non-Medicare eligible employees are likely to be included in any allowable class that also includes Medicare eligible employees. Thus, when seeking to offer ICHRA to a select class of employees, employers need to understand eligibility for the entire class, not just those who are eligible for Medicare.
Conclusion
The ICHRA offers employers a powerful mechanism to provide health benefits to Medicare-enrolled employees in a tax-efficient structure. Employers should work closely with their benefits advisors to ensure their ICHRA design achieves its intended objectives while avoiding the potential pitfalls when offering an ICHRA.
If you have any questions, please contact your HUB advisor. View more compliance articles in our Compliance Directory.
NOTICE OF DISCLAIMER
Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on HUB International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect, and HUB International does not have an obligation to update this information. You should consult an attorney, accountant or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.