The HRA Final Rule Is Here (Part 3)—How ICHRAs Can Satisfy the Employer Mandate and Nondiscrimination Rules

On June 13, 2019, the Departments of Labor, the Treasury, and Health and Human Services jointly issued a final rule to expand the flexibility and use of health reimbursement arrangements (HRAs). The final rule, applicable for plan years beginning on or after January 1, 2020, created two new types of HRAs—the individual coverage HRA (ICHRA) and the excepted benefit HRA. Get up to speed on these by reading Part 1 and Part 2 of this blog post.

Now fast forward to September 30, 2019. The Department of the Treasury and the Internal Revenue Service (IRS) issued proposed regulations to clarify how ICHRAs can satisfy the employer mandate under the Patient Protection and Affordable Care Act (ACA) as well as nondiscrimination rules under Section 105(h) of the Internal Revenue Code (IRC).

How an ICHRA Can Satisfy the Employer Mandate and Nondiscrimination Rules

Employer Mandate Refresher

Under IRC Section 4980H, an applicable large employer (ALE), which is an employer that has an average of 50 or more full-time or full-time equivalent employees in the previous calendar year, must adhere to the following.

  1. Offer minimum essential coverage to at least 95% of its full-time employees (and their dependents)
  2. The coverage must be affordable and provide minimum value. Coverage is affordable if the cost of single coverage is less than a certain percentage of the employee’s household income (9.78% in 2020). Coverage provides minimum value if it covers at least 60% of total allowed costs and provides substantial coverage of inpatient hospital and physician services.

If the ALE does not meet both of these requirements and at least one full-time employee receives a health premium tax credit for purchasing coverage through the ACA Marketplace, then the ALE must pay an employer shared responsibility penalty.

Proposed Regulations to Satisfy the Employer Mandate for an ICHRA

First, to the extent an employer is not an ALE, or is an ALE but offers ICHRAs only to its non-full-time employees, the ICHRA does not need to satisfy the requirements of the employer mandate.

Additionally, the ALE is in the clear if it offers an ICHRA, which is considered minimum essential coverage, to at least 95% of full-time employees and their dependents, and if its contribution to the ICHRA is enough to make the lowest cost silver-level ACA Marketplace policy for single coverage in the employee’s rating area affordable. (ICHRAs that are affordable are treated as providing minimum value.)

But this raises issues for the ALE about determining affordability for each employee. What if the ALE has employees in multiple rating areas? How does the ALE determine a valid contribution amount when ACA Marketplace premiums in a given rating area vary based on an individual’s age?

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Enter the following proposed guidelines and safe harbors:

Location safe harbor:

An ALE may calculate affordability for each individual employee based on his or her residence or, to avoid this administrative burden, it may use the lowest cost silver plan for single coverage based where the employee’s primary site of employment is located. The primary employment site is generally the location where the employee works on the first day of the plan year, though there are some additional safe harbor determinations available, including one for telecommuting employees.

If an ALE wants to set a single contribution amount for an ICHRA, it can determine affordability based on the lowest cost silver plan in the most expensive Marketplace rating area of any of its full-time employees. The ALE may end up contributing more than is necessary to pass the affordability test, but this greatly eases administration

Employee age:

Even though the premium for the lowest cost silver plan in a rating area will vary for each employee based on his or her age, the proposed regulations do not include an age-based safe harbor to ease the burden of calculating affordability on a per-employee basis. However, to determine the affordability of the ICHRA, the proposed regulations do allow an employer to use the lowest cost silver plan for the lowest age band in the ACA Marketplace for the employee’s applicable location. The employee’s age is determined on the first day of the plan year (or first day of eligibility if mid-plan year).

If an ALE wants to set the same ICHRA contribution amount for a class of employees, the ALE can use the age of the oldest employee in the class to determine the contribution amount. (Though the ALE still needs to consider geographic variability across a class of employees if applicable.)

Look-back month safe harbor:

Because insurers in the ACA Marketplace announce their premiums late in the calendar year, after an ALE would need these amounts to determine ICHRA contribution amounts for the upcoming year, the proposed regulations provide a look-back month safe harbor. If an ALE offers an ICHRA with a calendar-year plan year, it may use the monthly premium for the lowest-cost silver plan on January 1 of the prior calendar year. For ICHRAs with non-calendar-year plan years, the ALE may use the monthly premium for the lowest-cost silver plan on January 1 of the current calendar year.

Household income safe harbor:

The safe harbors that ALEs currently used to determine an employee’s household income for calculating the affordability of an employer-sponsored group health plan will also apply for ICHRAs.

All of these safe harbors are optional, and an ALE may apply more than one or use different safe harbors for various classes of employees.

IRC Section 105(h) Nondiscrimination Requirements Refresher

IRC Section 105(h) contains nondiscrimination rules for self-funded health plans. Specifically, a self-funded health plan cannot discriminate in favor of highly compensated individuals (HCIs) with respect to eligibility or benefits.

If a plan fails to satisfy the nondiscriminatory benefits requirement, then any excess reimbursements paid under the plan to an HCI are includible in his or her gross income.

Proposed Regulation to Satisfy Nondiscrimination Requirements for an ICHRA

Employers may make larger ICHRA contributions for older participants or those with dependents because the coverage they need to purchase will likely be more expensive than for single individuals or younger people. However, it is common for HCIs to be older, more tenured employees. So how can an ICHRA, which is a self-funded health plan, meet the Section 105(h) nondiscrimination requirements if these increased contributions end up favoring HCIs?

The proposed rule is vague but seems to clarify that the ICHRA is not automatically discriminatory if an HCI receives a larger contribution due to age or family size. However, this safe harbor does not automatically guarantee nondiscrimination if a disproportionate number of HCIs qualify for and utilize the maximum ICHRA amount allowed compared to the number of non-HCIs that qualify for and use lower amounts based on age.

Important Dates

The comment period for these proposed rules is open through December 30, 2019.

According to the Treasury Department and IRS, employers may rely on these proposed regulations for any ICHRA plan year beginning between January 1, 2020 and six months following the publication date of a final rule.

Enroll today in the International Foundation e-learning course: Health Reimbursement Arrangements (HRAs). The online course is up to date with the latest regulations and covers everything plan sponsors need to know about HRAs.

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Developed by International Foundation of Employee Benefit Plans staff. This does not constitute legal advice. Consult your plan professionals for legal advice. 


Rose Plewa, CEBS
Senior Instructional Designer, Online Learning Department at the International Foundation

HBCE

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