On June 13, 2019, the final Health Reimbursement Arrangement rules were released by the Departments of Labor, Health and Human Services, and the Treasury (collectively, the Departments) permitting employers to offer a new “Individual Coverage HRA” (ICHRA) as an alternative to traditional group health plan coverage, subject to certain conditions.
Starting in January 1, 2020, employers will have two additional alternative options to help provide health insurance coverage to their employees.
Individual Coverage HRA
Employers may provide tax-preferred funds to purchase individual health insurance coverage on or off a Health Insurance Marketplace Exchange – subject to certain conditions.
Excepted Benefit HRA
Funded at up to $1,800 a year, the Excepted-Benefit HRA (EBHRA) allows reimbursement of expenses other than premiums (e.g., copays, deductibles, or other expenses not covered by the primary plan) and COBRA, dental and vision premiums. This is allowed even if the employee declines enrollment in the traditional group health plan – creating a type of individual coverage HRA.
ICHRA Basic Requirements and Rules – Executive Summary
- Employer may distinguish between permitted classes of employees
- Employer may not offer to a class of employees traditional group health coverage if an ICHRA is offered to that class.
- Employer must offer an ICHRA on the same terms to all employees within the permitted classes but may distinguish between number of dependents or age within a 3:1 ratio.
Contributions & Uses
- Individuals are only allowed to claim reimbursement from an individual coverage HRA when they are actually/currently enrolled in individual market / Medicare coverage.
- Employer may provide annual ICHRA contribution amount of no more than integrated individual plan premium cost, if ICHRA is used for premium reduction.
- ICHRA may be used to pay individual premiums or Medicare Part D and Medicare supplemental coverage and cost-sharing or benefits not covered by the primary plan.
- Can be designed to reimburse all IRC 213(d) qualified medical expenses or may limit to some expenses, such as premiums.
- Employers may offer an ICHRA that is compatible with an HDHP/HSA if only reimbursing premiums or limiting reimbursements per HSA rules.
- May not reimburse expenses not covered by Medicare if subject to Medicare Secondary Payer rules – additional rules expected.
Affordable Care Act (ACA)
- Premium tax credit available if ICHRA contribution is deemed is unaffordable coverage.
- Affordability rules yet to be released -will be released in the coming months. Be sure to sign up for the Leavitt Compliance Alerts!
- Opt-out must be available at least annually to preserve eligibility for Exchange coverage and premium tax credit.
- Notice, attestation and substantiation requirements.
Prior to these latest final HRA rules and pursuant to IRS Notice 2013-54, employers were prevented from offering stand-alone HRAs that allow employees to purchase coverage on the individual market. These final rule are in response to the Trump administration’s Executive Order in October 2017 promoting health care choice and competition, which also resulted in:
- An earlier final rule on association health plans recently challenged in the courts.
- A Final Rule allowing Short-Term Insurance that provides less than a typical ACA-compliant plan.
The final rule mostly mirrors the Proposed Rules issued October 2018 with a few notable changes reflected below.
Notable Features of the Final Rule
Age Limitations in HRA Contributions
- HRA Contributions can vary no more than 3:1 older versus younger employees, like the premium variation permitted in the individual market.
Nondiscrimination – Limit Ability to Offer ICHRA to Only Some
- Contributions differential between older and younger employees cannot be more than 3:1 – additional guidance expected.
- May offer different contributions for family size so long as consistent and pre-determined before plan year.
- May determine which employees qualify for ICHRA for terminated employees so long as treat the same as their active class former co-workers.
- Combination of classes may create subclass (e.g., CBA full-time employees).
- Nondiscrimination test IRC 105(h) does not apply to HRAs that reimburse only premiums.
- Additional guidance to come!
|Employees who have not satisfied a waiting period
|Non-resident aliens with no U.S.-based income
|Employees working in the same geographic location (generally, the same insurance rating area, state, or multi-state region)
|Non-salaried workers (such as hourly workers)
|Employees in a unit of employees covered by a particular Collective Bargaining Agreement CBA
|Temporary employees of staffing firms
|Any group of employees formed by combining two or more of these classes
See page 428-438 of the final HRA rules for examples related to nondiscrimination.
If implementing a new hire rule, employers can offer new employees an ICHRA and grandfather existing employees in a traditional group health plan.
Minimum Class Size Requirement
To prevent adverse selection in the individual market, a minimum class size rule applies if offering a traditional group health plan to some employees and an ICHRA to other employees based on the following class variations:
- Full-time versus part-time status
- Salaried versus non-salaried status
- Geographic location, if the location is smaller than a state
- Combination of any of the classes
The minimum class size is:
- 10 employees < 100 employees
- 10% of the total number of employees, for an employer with 100 to 200 employees
- 20 employees > 200 employees
Substantiation / Attestation / Notice
Attestation. Employers may enforce the requirement to be actually enrolled in individual coverage through an attestation from the covered individual that they have qualified coverage – but there is no requirement to investigate.
Notice to employees. Employers must provide an ICHRA notice about its availability, it’s exclusion from the ERISA definition and interaction the premium tax credit.
Notice to Exchange. Employee eligible for ICHRA or QSEHRA are required to notify the Exchange so that the amount of the tax credit/subsidy is reduced by the QSEHRA amount and eliminates eligibility for any premium tax credit where eligible for an ICHRA that is affordable.
SUBSTANTIATION. Must require substantiation of the HRA claim amounts at the time of reimbursement. May do so on the form of submission of the claim attesting to the accuracy of the claim.
Qualified Small Employer HRA (QSEHRA) Interaction with ICHRA
Prior to these final rules on ICHRA, Qualified Small Employer HRAs (QSEHRA) allowed small business with fewer than 50 full-time employees to use pretax dollars to reimburse employees who bought nongroup health coverage – like these new rules. However, these new ICHRA rules go further in the following ways:
- Allows employers of any size to pay premiums for individual policies through an ICHRA that allows premium reimbursement.
- Creates a Special Enrollment Period in the Exchange’s individual market for those who gain access to an ICHRA or a QSEHRA to purchase individual market health insurance coverage.
- Clarifies that individual coverage will not be an ERISA plan if certain conditions are met just because it is funded by employer funds to an ICHRA or a QSEHRA.
- QSEHRA contribution limits in 2019 are capped at $5,150 for a single employee and $10,450 for an employee with a family while there is no limit on ICHRA contributions other than for EBHRA.
Excepted Benefit HRA (EBHRA)
EBHRAs can be offered in addition to a traditional group health plan to cover the cost of copays, deductibles, or noncovered expenses while allowing rollover of unused amounts from year to year.
Excepted Benefits Qualifications. Offered in conjunction with a traditional group health plan (although enrollment is not required), an EBHRA cannot be used to reimburse individual health insurance premiums, group health plan premiums (other than COBRA), or Medicare premiums. Reimbursement for premiums for excepted benefits, such as dental and vision coverage, as well as for STLDI, is permitted. Additionally:
- Annual HRA contribution must be limited to $1,800 per year (indexed for inflation)
- Must be uniformly available to all similarly situated individuals
- Must not be integral part of the plan
Multiple HRAs Permitted. Employers can continue to offer HRAs that reimburse only excepted benefits, and those HRAs need not meet the requirements for Excepted Benefit HRAs.
Affordable Care Act Interaction
ACA EMPLOYER MANDATE. The offer of an ICHRA may be ACA-compliant if the employer contribution to the ICHRA is high enough to be deemed affordable. In general, whether an applicable large employer that offers an ICHRA to its full-time employees (and their dependents) owes a penalty payment under the employer mandate will depend on whether the HRA is affordable. This is determined under the premium tax credit rule being issued as part of the this HRA rule at a later date. Affordability will be based, in part, on the employer contribution amount. The Internal Revenue Service will provide more information on how the employer mandate applies to ICHRA in the coming months.
AFFORDABLE. The rules that outlines what is to be deemed affordable have yet to be released. Be sure to sign up for the Leavitt Group Compliance Alerts! What we do know now is that employers must still satisfy the ACA’s affordability and minimum value requirements and minimum value is presumed if the ICHRA contributions are high enough to be deemed affordable. The IRS has signaled a safe harbor rule will be coming soon as well as additional rules related to affordability. (See examples on page 353-355 of the final rules.) IRS issued Notice 2018-88 which outlined proposed safe harbor methods for determining whether individual coverage HRAs meet ACA affordability thresholds for employees, and which stated that ICHRAs that meet the affordability standard will be deemed to offer at least minimum value.
Pretax Premiums, ERISA & Other Rules
Special Enrollment Rights (SEP). Permit midyear election changes within the same metal tier or plan category / add or delete dependents when becoming eligible for/losing eligibility.
Cafeteria Plan for Individual Coverage Premiums. Allow payment of individual premiums not covered by ICHRA to be paid using pre-tax funds under an IRC section 125 cafeteria plan for coverage purchased off the Exchange only.
Individual Coverage Not an ERISA Plan. DOL proposed a clarification to provide ICHRA and QSEHRA plan sponsors with assurance that the individual health insurance coverage the premiums of which are reimbursed by the ICHRA or QSEHRA does not become part of an ERISA plan.
GRACE PERIOD. ICHRA will reimburse permitted expenses until the integrated individual coverage terminates even if due to nonpayment. The employee must notify the HRA of individual coverage termination date after which any expenses incurred shall not be reimbursed.
Action Required Only for Interested Plan Sponsors
Action may be required for some plan sponsors seeking alternative plan designs. Employers can start offering Individual Coverage HRAs and Excepted Benefit HRAs on January 1, 2020. Employees who want to take advantage of an ICHRA with a start date of January 1, 2020, will need to enroll in individual health insurance during the open enrollment period at the end of 2019 (lasting from November 1, 2019 to December 15, 2019), unless already on or about to enroll in Medicare. If choosing to offer an ICHRA for 2020, certain steps must be taken relatively soon. In short, the compliance requirements include:
- ICHRA notice about its availability and interaction the premium tax credit.
- Reasonable substantiation/attestation procedures to ensure that participating employees and their families are enrolled in individual health insurance or Medicare, while covered by the ICHRA.
- Permit annual opt-out of ICHRA to allow claiming of premium tax credit if otherwise eligible and if the HRA is unaffordable.
- Affordable ICHRA contributions required for ACA compliance.
- Nondiscriminatory contribution strategies and plan design.
- Employers will have no responsibilities related to the integrated individual coverage itself that is purchased by the employee because that coverage is not part of the employer-sponsored plan provided:
- Employees purchase was voluntary
- Employer does not select or endorse any particular individual coverage
- Employer does not receive any cash, gifts or other consideration in connection with employee’s selection or renewal of individual coverage
- Each employee notified annually that the individual health insurance is not subject to the Employee Retirement Income Security Act (ERISA), which is the federal law governing employer-provided health coverage
With a short amount of time until the 2020 renewal session, there is little time to modify plan designs and there is concern the Exchanges are not ready to make accurate eligibility determinations for individuals who will be offered ICHRA. It is important to know this could result in inaccurate IRS notices of penalty assessment for ACA Employer Shared Responsibility obligations. Any such missteps should be easily corrected by responding with proof of offering sufficient, affordable coverage. Consult with your own legal or tax professional if you are uncertain about your obligations.