Individual Coverage HRA (ICHRA)

 

Background

On June 13, 2019, the U.S Departments of Health and Human Services, Labor, and the Treasury pre-released final regulations (and accompanying FAQs) that will expand the use of health reimbursement arrangement (HRAs). For plan years beginning on or after January 1, 2020, employers will be able to offer two new types of HRAs created by these final regulations – individual coverage HRAs (ICHRAs) and Excepted Benefit HRAs. Under prior regulations, an HRA provided by an employer to purchase individual coverage would have created a health plan that violated the ACA.

The new final regulations will permit employers of all sizes to offer ICHRAs as an alternative to traditional group health plan coverage, subject to certain conditions. ICHRAs are employer-funded accounts for employees to purchase individual-market insurance. Through an ICHRA, employers will reimburse employees for their medical expenses, up to an amount determined by the employer, and not count toward the employees’ taxable wages. ICHRAs will also allow employees to pay insurance premiums for individual coverage, whereas existing HRAs do not.

ICHRA Integration Requirements

ICHRAs must be integrated with health insurance purchased on the individual market. The integration rules are somewhat more complicated than the rules for integration with other group coverage.This is due to concerns by the government that employers would provide ICHRAs only to older or sicker employees, thus violating HIPAA nondiscrimination rules and destabilizing the individual health insurance market.

An ICHRA must meet the following requirements in order to be considered integrated.

Individual Coverage

The participant and any dependent(s) must be enrolled in individual ACA compliant health insurance, Employers may assume that any policy sold in the individual market that covers non-excepted benefits is compliant with the ACA for each month that they are covered by the HRA.

• This includes nonexcepted benefit coverage that complies with health care reform’s prohibition on lifetime and annual dollar limits and its preventive services mandate.By comparison, it does not include Short-Term Limited-Duration Insurance or coverage that consists solely of excepted benefits
• It also includes Medicare coverage (Parts A and B or Part C).See the Medicare section for information on ICHRAs and Medicare Secondary Payer (MSP) rules.
  
• ICHRAs may NOT be integrated with TRICARE.
• Note that an individual market special enrollment period is available for employees and their dependents who gain access to an ICHRA.

If any individual covered by the HRA ceases to be covered by individual health insurance, the HRA may not reimburse medical care expenses that are incurred by that individual or any dependents after the individual health insurance coverage ceases. In addition, the participant must forfeit the HRA subject to any continuation coverage requirements.

• The ICHRA must reimburse expenses incurred prior to the individual losing individual coverage and a reasonable time may be established for submitting these expenses.

Proof of Coverage

Every person covered by the ICHRA must provide proof that they are also covered by individual health insurance. It must be provided:

• No later than the first day of the plan year.
  • For participants who enroll mid-year, proof must be provided by the date when ICHRA coverage begins.
• Each time a participant requests reimbursement of medical expenses from the ICHRA.

There are two ways a participant can provide proof of coverage:

1. A statement from a third party (such as a health insurance issuer).
2. A statement (attestation) from the participant.
   • The DOL has included a sample form in their FAQs that can be used for annual and on-going participant statement requirements.

Reimbursements

Eligible expenses that can be reimbursed from an ICHRA include all Section 213(d) medical care expenses. These can be limited to any one expense or set of expenses and plan documents should reflect what expenses are reimbursable.

• For example, the employer can limit reimbursement to Individual Coverage premiums only, which makes the ICHRA HSA-compatible and exempt from Section 105(h) nondiscrimination testing.

Employees Covered

An employer may limit its offer of an ICHRA to a permitted class of employees (see box to the right), but must offer it to everybody in that class and may not offer coverage under the employer’s group health plan to any person in that class.However, the employer may offer these employees excepted benefits (other than an excepted benefit HRA), such as vision and dental coverage or a health FSA. After the classes have been established for a plan year, they may not be changed until the next plan year.

The ICHRA must be available on the same basis to all employees within a class;Carryovers from previous years are not considered when determining whether the ICHRA is being provided on the same basis for the current year however, the employer may vary the amount available under the ICHRA as follows:

• An employer may increase the maximum dollar amount as the number of covered dependents increases.
  • If the number of dependents changes during the year, the amount can remain the same for the remainder of the year or pro-rated.
• An employer may increase the maximum dollar amount as the age of the participant increases, provided that the amount does not exceed three times the amount available to the youngest participant.
• If variations in the maximum dollar amounts are applied based on number of dependents or age, the variance must be the same for all participants in the same class with the same number of dependents or the same age.

A special rule allows employers to offer an ICHRA to only new hires (employees hired after an established date) within a class, but offer its own group health plan to members of the class hired prior to the established date.

Under no circumstances may an employer offer an employee a choice between it’s own group health plan and an ICHRA.

Opt-Out Option

A participant must be permitted to opt out of and waive future reimbursements from an ICHRA at least once (but only once) per plan year, prior to the start of the plan year.Participants may want to opt-out because ICHRA eligibility/participation can affect a person’s eligibility for a premium tax credit, which in some cases may be more advantageous than the ICHRA.

• Participants that become eligible mid-year must be given the opportunity to opt-out at the next ICHRA open enrollment period.
• Upon termination of employment, ICHRA participants must forfeit the remaining balance (subject to any continuation coverage requirements) or be permitted to permanently opt-out of and waive future reimbursements for themselves and their dependents (if covered).

Notice Requirement

The ICHRA must provide a written notice to each participant at least 90 days before the start of the plan year.

• If an ICHRA is established less than 120 days before the start of the first plan year, the notice must be provided on or before the ICHRA’s effective date.
• If a person becomes eligible during the plan year, the notice must be provided no later than the date the person becomes eligible.

The DOL has provided a model notice.

• The model notice need not be used, but whatever notice is used must contain all the information set forth in the model notice.

ICHRA Health Plan Requirements

An ICHRA, as with HRAs generally, is considered a group health plan and subject to the same laws and mandates as other group health plans (such as a major medical plan). The ICHRA final regulation provides guidance on how some of these laws apply to ICHRAs specifically. Employers should be aware of this specific guidance and also understand how the laws impact ICHRAs generally given their group health plan status.

ERISA Considerations and Safe Harbor

An ICHRA is a group health plan and will be subject to ERISA to the extent the sponsoring employer is not exempt from ERISA. Accordingly, all the rules generally applicable to ERISA plans will apply to an ICHRA, such as the Summary Plan Description (SPD) and Form 5500 requirements.

That said, coverage purchased on the individual market will not be ERISA-compliant and employers that sponsor ICHRAs will want to be sure that individual coverage purchased by an employee using funds from an ICHRA will not become part of an ERISA plan. To this end, the Department of Labor has established a safe harbor which will guarantee that an employer has not inadvertently created a group health plan from a bunch of unrelated insurance policies.

In order to take advantage of this safe harbor, an employer must:

• Ensure that the purchase of any individual health insurance coverage is completely voluntary.
• Ensure that it does not select or endorse any particular issuer or insurance coverage.
• Ensure that reimbursement for non-group health insurance premiums is limited solely to individual health insurance coverage that does not consist solely of excepted benefits.
• Ensure that it does not receive any commission or incentive in the form of cash or otherwise in connection with the employee’s selection or renewal of any individual health insurance coverage.
• Provide each plan participant with an annual notice that the individual coverage is not subject to ERISA.

COBRA

ICHRAs are subject to COBRA and COBRA eligibility could arise in the case of qualifying events such as termination of employment or reduction of hours.

• Please note that loss of eligibility to participate in an ICHRA due to the individual’s failure to maintain individual medical coverage (such as not paying premiums) does not create a COBRA qualifying event.
• When an ICHRA is offered to former employees, they are considered to be in the class they were in when they were active employees.

HIPAA

HRAs are generally subject to HIPAA’s portability, privacy and security, special enrollment and non-discrimination rules.

• These requirements apply regardless of whether a plan is subject to ERISA.

Medicare

Under the ICHRA final regulations, Medicare is considered qualifying individual medical coverage and reimbursement of Medicare or Medicare supplemental premiums does not violate Medicare Secondary Payer (MSP) rules.Without this provision, the ICHRA may be seen as violating Medicare’s prohibition on offering incentives to active employees who elect Medicare rather than the employer’s own health insurance.

Employers subject to the MSP rules who offer an ICHRA to a class of employees must:

• Allow all employees in the class to enroll in either individual, nonexcepted benefit health coverage or Medicare.
• Not limit ICHRA reimbursements to only medical expenses not covered by Medicare.

IRS Regulations

If a participant’s individual medical coverage is purchased outside of an exchange, employers can allow employees to pay the portion of premium not covered by the ICHRA through a pre-tax cafeteria plan.

• This arrangement must be offered under the same terms and conditions for all employees within a class.

In addition, an ICHRA can be compatible with an HSA if it only reimburses premiums or is designed to only reimburse expenses that comply with HSA rules.

• Employers can offer both HSA compatible and non-HSA compatible ICHRA options, as long as they are offered on the same terms to employees in a class.

ICHRAs are subject to Section 105(h) nondiscrimination rules, unless it only reimburses individual coverage insurance premiums. One problem that arises relates to the ability of employers to base HRA contributions on age. Normally this would violate section 105(h). Proposed final rules (on which employers may rely pending the issuance of a final rule), provide that an employer that varies its ICHRA contribution in accordance with the age-related rules (see above under Employees Covered), will not be considered out of compliance with Section 105(h) solely on account of that plan design feature.

• The IRS notes however that if a disproportionate number of highly compensated individuals (HCIs) qualify for and utilize the maximum HRA amount allowed under the same terms requirement based on age in comparison to the number of non-HCIs who qualify for and use lower HRA amounts based on age, the individual coverage HRA may be found to be discriminatory in practice (operation).

ACA

Notably, the ICHRA final regulations exempt it from the ACA’s prohibition on annual and lifetime dollar limits and coverage of certain preventive services, as long as the ICHRA is integrated with individual coverage that complies with these ACA provisions.

• Other health plan requirements, such as the Summary of Benefits and Coverage (SBC), generally still apply.

Special Considerations for ALEs

Applicable Large Employers (ALEs) may owe a shared responsibility payment to the IRS for any month in which it either:

1. fails to offer coverage to at least 95% of its full-time employees (and their dependents); or
2. offers coverage to that is not affordable or does not provide minimum value.

The payment is due depending on whether any full-time employee is allowed a premium tax credit (PTC) for purchasing individual coverage from an exchange.

Coverage Requirement

According to the final regulations, an ICHRA is counted in determining whether an employer has met the 95% coverage threshold. If the employer meets the threshold, then it would not be exposed to a shared responsibility payment under the circumstances set out in (1) above.

Affordability

Coverage is considered affordable for every month the employee’s required HRA contribution for the month does not exceed 1/12 of the product of the employee’s household income for the taxable year and the required contribution percentage.

Because employees don’t contribute to an HRA, the term “required HRA contribution” is defined in this context to be the amount that an employee must pay for self-only coverage under the lowest cost silver plan (LCSP) in the rating area of the “applicable location” minus the amount available to the employee under the HRA to pay for that coverage.

The applicable location is normally the rating area in which the employee resides. However, many large employers will have employees in multiple rating areas and, concerned about the administrative burden of determining affordability, the IRS has instituted some safe harbors that employers may use. Naturally, there are rules.

Location Safe Harbor

An employer may use the lowest cost silver plan for the employee for self-only coverage offered through the Exchange where the employee’s primary site of employment is located for determining whether an offer of an individual coverage HRA to a full-time employee is affordable.

• An employee’s primary site of employment is the place at which the employer reasonably expects the employee to perform services on the first day of the plan year (or, if later, on the first day the employee is eligible for ICHRA coverage. If the employee’s primary site of employment changes, the employer must begin using the LCSP for the new location to determine affordability no later than the first day of the second calendar month after the change. For example, if an employer transfers an employee from City A to City B effective on September 25, the LCSP for City B will apply November 1.
• In the case of an employee who regularly works from home or at another worksite that is not on the employer’s premises but who may be required by his or her employer to work at, or report to, a particular worksite, such as a teleworker with an assigned office space, the worksite to which the employee would report to provide services if requested is the applicable primary site of employment. However, if the employee does not have an assigned office or location to which to report, the primary site of employment is the employee’s residence.
• The IRS has acknowledged that it is difficult to craft a single rule that addresses every possible working arrangement. If you have a situation that does not fit neatly into scenarios anticipated by the rules, consult with counsel on how to proceed.

Employers also need to be alert to the fact that insurers do not always offer coverage throughout an entire rating area. The ICHRA regulations do not permit an employer to vary HRA contributions by a geographic area smaller than a rating area. The location safe harbor is based on where the employee works. However, the premium tax credit regulations for affordability are based on the cost of coverage where the employee resides. The collision of these three rules can create a situation where coverage for one employee at a given location is affordable but is not affordable for another similarly situated employee at the dame location. This is best explained through an example.

• An employer has worksites in County A and County B. County A and County B are part of a single rating area. Insurer A only offers coverage in County A and Insurer B only offers coverage in County B. The LCSP for Insurer A is more expensive than the LSCP for Insurer B. Employee A lives in County A but works in County B. Employee A therefore must buy insurance from Insurer A. The employer must make the same HRA contribution for all employees in County A and County B. If the employer bases its LCSP for employees working in County B on the coverage provided by Insurer B (as permitted using the location safe harbor), coverage that is affordable for an employee living and working in County B may not be affordable for an employee working in County B but living in County A.
• In order to ensure that it will not incur a shared responsibility payment for employees living in County A but working in County B, the employer would want to calculate its HRA contribution based on the more expensive LCSP for County A.

Look-Back Month Safe Harbor

The affordability of employer sponsored coverage is determined monthly for purposes of the premium tax credit. This can create issues for employers who normally will not have information about the premium for the LCSP when they are designing employee benefits for the coming year. To address this concern, the IRS rules permit an employer to base its affordability calculations based on a look-back month.

• In the case of a calendar year plan, an employer offering an individual coverage HRA may use the monthly premium for the lowest cost silver plan for January of the prior calendar year.
• In the case of a non-calendar year plan, an employer offering an individual coverage HRA may use the monthly premium for the lowest cost silver plan for January of the current calendar year.

General Requirements

An employer may choose to use either, neither or both of the safe harbors but must do so uniformly and consistent with respect to a class of employees as described above under the heading Permitted Classes of Employees. However, the minimum size requirements do not apply.

Note that the affordability safe-harbors for determining household income apply to the use of the ICHRA safe harbors. These include the W-2, rate of pay, and federal poverty line safe harbors.

Existing rules on premium adjustments due to tobacco use and wellness incentive apply to the affordability of an ICHRA.