On June 13, 2019, the U.S. Departments of Health and Human Services, Labor and the Treasury issued a final rule allowing employers of all sizes to offer two new kinds of health reimbursement arrangements (HRAs) beginning in January 2020. The two new HRAs include:
- individual-coverage HRAs (ICHRA) and
- excepted-benefit HRAs (EBHRA).
Further, proposed regulations were released last week specific to how the Employer Shared Responsibility under the Affordable Care Act (ACA) and nondiscrimination testing will apply to ICHRAs.
The following summaries will highlight key details from the proposed regulations:
Employer Shared Responsibility Provisions
One of the provisions of ACA is the Employer Shared Responsibility Provision. This is commonly referred to as “Pay or Play” or the “Employer Mandate”. Applicable Large Employers (ALEs) are required to offer health insurance to 95% of their full-time employees that meets both adequate coverage and affordable coverage standards. ALEs who do not meet these requirements may be subject to financial penalties.
- Applicable Large Employers (ALE), in general, are employers who had an average of 50 or more full-time employees (including full-time equivalent employees) in the prior calendar year.
- Adequate coverage is coverage that provides for an average of 60% coverage of health care expenses.
- Affordable coverage is coverage in which the employee’s contribution to self-only coverage is no more than 9.78% (2020 and indexed annually) of the employee’s household income. The regulations provide a safe harbor where the employer may use the hourly rate of pay, W-2 wages or federal poverty line in the calculation to determine affordability.
With the introduction of the Individual Coverage HRA (ICHRA), employers will have the opportunity to provide a tax-free benefit to employees in which to purchase individual health insurance coverage either on or off the exchange. This can be offered in lieu of employer sponsored group health insurance.
Proposed regulations would allow the ICHRA to meet the Employer Shared Responsibility Provision in some cases. An affordable ICHRA is treated as providing minimum value under Code § 4980H. The preamble of the proposed regulations confirms that the ALE by offering an ICHRA, an ALE offers an eligible employer-sponsored plan that is taken into account in determining whether the ALE offered coverage to enough full-time employees and their dependents to avoid a Code § 4980H(a) penalty. Affordability of the ICHRA would be based upon:
- The amount of the premium for the lowest cost silver plan for self-only coverage of the employee offered in the Exchange for the rating area in which they reside
- LESS the maximum monthly reimbursement provided by the employer through the ICHRA.
In simple terms, you look at what the employee must pay out of their pocket for the lowest-cost silver self-only plan on the Exchange, after they receive their ICHRA amount for the month.
If the employee out of pocket responsibility after ICHRA is less than the annual indexed percentage of household income (9.78%), the ICHRA would be classified as affordable coverage.
A safe harbor would allow ALEs to reference a look back month before the plan year as the applicable lowest cost premium. In addition, another safe harbor would allow ALE’s to utilize the employee’s place of work rather than place of residence for the basis of the premium. CMS has released a tool to assist employers in identifying the lowest-cost silver plan in the required area. Employers must apply all safe harbors (both the two above as well as existing safe harbors for determining affordability) similarly for all similarly situated employees.
Employers will need to be careful with their calculations to avoid any potential “Pay or Play” penalties for failure to offer affordable coverage.
An annual requirement of all Health Reimbursement Arrangements (HRA) is nondiscrimination testing. This ensures that highly compensated employees are not receiving more favorable treatment than other employees. Two new nondiscrimination safe harbors were included in the proposed regulations in regard to ICHRAs.
- The maximum reimbursement amount can vary between classes as established in the ICHRA regulations. In addition, the maximum reimbursement amount can vary between age, but only as provided in the regulations (benefit amount for older employees cannot exceed three times that of the youngest tier). Within these definitions, the safe harbor provides that the maximum reimbursement amount cannot vary further. (Employees within the same class and same age parameters must receive the same benefit.)
- ICHRAs must not be nondiscriminatory in the operation of the plan. You cannot have a disproportionate number of highly compensated individuals qualifying for and the ICHRA and utilizing the maximum benefit compared to non-highly compensated employees.
In addition, proposed regulations include that ICHRAs which only reimburse insurance premiums will be treated similarly to a fully-insured group insurance plan for nondiscrimination testing. Currently, nondiscrimination testing for fully-insured plans are not being enforced.
The IRS will take comments on these proposed rules through December 29, 2019. Further, the IRS has indicated that you can rely on the proposed regulations for plan years beginning before the date that is six months after final regulations are published.
We will continue to monitor these regulations and will provide updates as they become available.