Powering ICHRA Administration with Payroll Integrations

Introduced in 2020, the Individual Coverage Health Reimbursement Arrangement, or ICHRA, has gained popularity as an affordable employer-sponsored health benefit. ICHRAs deliver employees access to more personalized health insurance plans and can make it easier for employers to manage their costs. 

The nature of ICHRA administration requires providers to manage dynamic payroll contributions and deductions that can change from month to month and employee to employee. As a result, ICHRA providers are increasingly relying on payroll integrations to access their customers’ payroll systems and manage reimbursements and deductions on their behalf. Bidirectional payroll integrations give providers two-way access to employers’ payroll systems, meaning they can work faster—and with fewer resources.

What is an ICHRA?

An Individual Coverage Health Reimbursement Arrangement (ICHRA) is an employer-sponsored health benefit that reimburses employees for individual health insurance premiums and medical expenses. Employers set aside a monthly allowance for each employee, which they can use to cover the cost of their plan, eligible medical expenses, or both.

Unlike traditional group plans, ICHRAs offer flexibility, allowing employees to select any health plan that suits their needs and get reimbursed up to a limit defined by their employer. This provides tailored coverage options while effectively controlling costs.

Under an ICHRA, employees are reimbursed for qualified healthcare expenses through their paycheck up to the employer limit. In some cases, the employee may be able to pay for costs that exceed their reimbursement limit through payroll deductions. That means ICHRA providers need to be able to reimburse employees for their expenses and make deductions from their paychecks. 

Key components of ICHRA administration

Administering an Individual Coverage Health Reimbursement Arrangement (ICHRA) involves three key steps. 

Step 1: Set up reimbursement plans

To implement an ICHRA, the employer has to set reimbursement limits for each class of employee. The classes are defined by employment status (full-time, part-time, or temporary), geographic location, whether the employee is salaried or hourly, and whether the employee is part of a collective bargaining agreement. 

Step 2: Manage employee eligibility and enrollment

Once the reimbursement limit has been set, employees need to be enrolled in the plan based on eligibility criteria. ICHRA providers need to be able to pull employee data like hire date, employment status (full-time or part-time), and salary and wage information to determine eligibility and the right class for each employee. They’ll also need to track employees’ proof of coverage once submitted to ensure the plan meets regulatory requirements.

Step 3: Manage reimbursements and deductions

When an employee submits a reimbursement request, the provider needs to be able to track and approve requests and reimburse the employee for the correct amount through their paycheck. If the employee exceeds their reimbursement limit, they may be able to pay the balance through their paycheck as well—so providers also need to be able to manage payroll deductions within each pay cycle.

How payroll integrations power ICHRA administration

As the provider, the first step to successful ICHRA administration is ensuring you have accurate and timely access to an employer’s payroll data. Because health expenses can fluctuate month to month and employee to employee, the reimbursements and payroll deductions that ICHRAs require are complex and always changing. 

Without the ability to pull data directly from the payroll system and write changes back to that system, the responsibility of updating employees’ paychecks would fall on the employer. That’s a ton of work for any HR department, but especially taxing for small employers without the resources of enterprise businesses. Creating a best-in-class customer experience means reducing the administrative workload on your customers by managing this work on their behalf. 

But with multiple employers, all of which could have tens, hundreds, or thousands of employees, this is no small feat. Automating this work can help—and that’s where payroll integrations come in.

360° payroll integrations allow ICHRA providers to fetch data directly from the employers’ payroll systems and update reimbursements and deductions automatically—making it the most efficient and secure way to access mission-critical payroll data for ICHRA administrators. 

Let’s take a closer look at how payroll integrations can power ICHRA administration. 

1) Comprehensive, reliable data access

Payroll integrations create a seamless connection between the payroll system and your own software, syncing information between the two on a daily basis or on-demand. When an employee is hired, terminated, or sees a salary adjustment, that information is automatically shared with you—along with all the details you need to determine eligibility. And when the data is standardized—as it is through unified API providers like Finch—you can receive data from any payroll provider in the same format. (In other words, data is mapped across different providers’ various field names to a single, consistent field name.)

Removing manual processes from the workflow—like asking employers to manually send files with payroll information—can increase the overall accuracy of the data and create a better experience for your customers. HR admins spend an average nine hours per week manually updating benefits-related data between systems. 

2) Automated payroll contributions 

After each statement period, you likely deliver a report with the total reimbursements due to each employee. The employer will then take that information and either upload it to their payroll systems themselves or work with their payroll provider to distribute the reimbursements to each employee. 

Now imagine how much better the employer experience would be if that were done automatically. Bidirectional payroll integrations enable just that: you can write the employer’s contributions to each individual employee’s paycheck, through the payroll system, without ever having to involve the employer.

Each employee’s total reimbursement can vary each period, so using automated workflows to calculate what they’re owed and write the amount back to the payroll system guarantees the employer makes accurate contributions each period. This ensures that each employee is reimbursed in full for all of their qualified medical expenses in a given period, and unused funds are retained by the employer.

3) Automated payroll deductions

Under some plans, employees whose premiums exceed their reimbursement limit can use pre-tax deductions from their paycheck to pay the balance. In that case, you as the provider need to be able to make payroll deductions equal to the amount the employee owes each month.

Like with employer contributions, deductions can be automatically managed through 360° payroll integrations. Based on their class and reimbursement limit, you can calculate how much needs to be deducted from an employee’s paycheck before taxes to cover their health plan expenses, then send that information to the payroll system on the employer’s behalf. 

4) Improved efficiency

Directly connecting to an employer’s source of truth through a payroll integration eliminates bottlenecks in ICHRA administration. For example: you can pull all the data pertaining to employee eligibility to quickly identify eligible employees and their reimbursement class during enrollment. Plus, when employee data is refreshed daily or on-demand, you don’t need to wait for employers to send their payroll data through manual channels or SFTP to begin processing contributions or deductions.

5) Improved compliance and better reporting

As in any regulated industry, maintaining compliance with state and federal ICHRA requirements is paramount. With on-demand access to standardized data from each employer, you can easily verify that each employee is eligible to participate and that the plan complies with requirements defined by the ACA, ERISA, and other government regulations. For example, payroll integrations make it easier for you as an ICHRA provider or for a third-party administrator to automatically verify that ICHRA plans do not favor highly compensated employees and adhere to IRS non-discrimination rules. 

Plus, evergreen access to employers’ organization and payroll data means you can more easily offer additional administrative benefits, like year-to-date summaries and insights from census data that could help employers to understand how they can best serve their workforce. For example, you might highlight that the employer has enough hourly employees to add an additional ICHRA class.

Unlock access to hundreds of HR and payroll systems with Finch

Payroll integrations have immense value in ICHRA administration, but building and maintaining multiple API integrations is costly, resource-intensive, and often not scalable. With Finch’s Unified Employment API, you only need to build one integration—to Finch—to access hundreds of payroll and HR systems at once.

Finch offers the widest and deepest available coverage of HR and payroll systems—4x more than any other unified API. Schedule a call with our sales team to learn more, or try it yourself for free.