On September 30, 2019, the IRS proposed regulations regarding the application of the ACA’s employer shared responsibility provisions (also known as the employer mandate) to HRAs integrated with individual health insurance coverage or Medicare, known as individual coverage HRAs (ICHRAs). The guidance also addressed the application of the self-insured plan (Section 105(h)) non-discrimination rules to ICHRAs. The proposed rules supplement the June 2019 final regulations, which permitted the use of ICHRAs effective January 1, 2020, and subsequent related guidance under IRS Notice 2018-88.
As background, an HRA is an employer-funded, account-based group health plan that allows for payment of employee medical expenses on a tax-advantaged basis (the HRA reimbursements are not included in the employee’s gross income). In order to comply with the ACA mandates applicable to group health plans, such as the prohibition against annual or lifetime limits for essential health benefits and the provision of preventive care without cost sharing, HRAs previously needed to be integrated with an ACA compliant group health plan. This meant that stand-alone HRAs were generally prohibited. However, the June 2019 final rules introduced the ICHRA, which allowed for the integration of HRAs with individual health insurance coverage, provided certain conditions are satisfied.
Applicable large employers (those with 50 or more full-time employees, including full time equivalents) during the preceding calendar year) that sponsor ICHRAs must still satisfy the ACA employer shared responsibility mandates to avoid tax penalties. The penalties can arise if an employee receives a premium tax credit through the ACA marketplace because he or she was not offered employer-sponsored MEC that is of MV and is affordable. To avoid penalties, the employers must offer such coverage to at least 95% of full-time employees and their children until age 26. The IRS has indicated that an employer’s offer of an ICHRA is an offer of MEC. Satisfying the affordability condition is more challenging.
Prior IRS guidance provided that an ICHRA is deemed affordable if the benefit makes the lowest cost individual silver policy in an ACA exchange rating area affordable to an employee who resides there. By definition, the silver plan would cover at least 70% of required costs and thus also meet the minimum value standard. ICHRA coverage is considered affordable if the employee's required monthly contribution (that is, premium cost-HRA benefit) does not exceed 9.78% (for 2020) of the employee's household income. When determining affordability for employer mandate purposes, an employer can use any of the previously established safe harbors (specifically, Form W-2 wages, rate of pay, and federal poverty line), provided that the application is uniform and consistent for any acceptable classification of employees.
However, the previous guidance failed to adequately address the inherent complexities of applying the affordability requirement to a diverse employee group, whose members would be purchasing individual coverage. For example, employees could reside in different rating areas, so premiums for the lowest cost silver plan could vary dramatically. Costs could also differ based upon ages of the employees themselves. Additionally, the premiums for the lowest cost silver plan on the exchange are typically not known until October, which makes it difficult for employers to plan and fund for ICHRAs prior to the start of the plan year.
In an effort to address these concerns, the new proposed regulations provide optional safe harbors and clarification regarding the affordability determination. First, the guidance provides a location safe harbor for ascertaining the lowest cost silver plan. This safe harbor allows an employer to use the ACA rating area for an employee’s primary site of employment instead of the employee’s residence. The primary site of employment is the location where the employer reasonably expects the employee to perform services as of the first day of the ICHRA plan year (or coverage date, if later). For remote workers, the location would be the site from which they actually work, unless they are required to periodically report to the employer’s work site, which would then be considered the employee’s primary site. A permanent change in employee work sites must be taken into account for affordability purposes by the first day of the second month following the employee’s relocation.
Second, the IRS declined to provide an age-based safe harbor. The IRS was concerned that employees older than a set safe harbor age may not find their cost of coverage affordable and receive tax credits on the exchange, although the employer would be deemed to have satisfied the affordability mandate. However, for a particular rating area, an employer is permitted to use the lowest cost silver plan for employees in the lowest age bracket as the base plan for determining affordability. For older employees, the employer could then use the price of that plan for the applicable age bracket to determine affordability (regardless of whether a less expensive silver plan was available for the age group). The guidance also clarifies that for affordability purposes, an employer should use the employee’s age on the first day of the plan year (or his or her date of coverage, if later).
Third, the proposed rules introduce a look-back month safe harbor that allow employers with calendar year ICHRAs to base the monthly cost of the cheapest silver policy for a year on the cost of that policy as of the first day of the previous year. So, an employer offering an ICHRA with a plan year beginning January 1, 2020, could use the exchange rates as of January 1, 2019. Non-calendar year plans could use the rates as of January 1 of the current year.
Fourth, the IRS emphasizes that an employer electing to use any of the optional safe harbors must apply the chosen method uniformly and consistently for all employees in a class. The permitted classes are as specified in the June 2019 final ICHRA rules, which include salaried vs. hourly; full time vs. part time; bargaining unit vs. non-bargaining unit; seasonal vs. regular; and employees in one rating area, state, or region vs. another. The guidance also confirms that employers can report employee required contributions (for Forms 1094-C and 1095-C) based upon the safe harbors and that premiums for affordability purposes do not need to reflect tobacco surcharges or wellness incentives, unless the wellness program incentive relates exclusively to tobacco use, in which case the incentive is treated as earned. Additionally, the proposed rules allow employers to rely upon the accuracy of the premium information made available by the government marketplace.
Finally, the IRS provides clarification regarding the application of the Section 105(h) nondiscrimination rules to ICHRAs. These rules generally apply to self-insured health plans and prohibit discrimination in favor of highly compensated individuals (HCIs), which include the five highest paid officers, more-than-10% shareholders/owners and the highest-paid 25% of all employees. However, if an ICHRA only reimburses insurance premiums (and not other medical expenses), it is treated as an insured plan and not subject to the Section 105(h) rules. The rules propose two nondiscrimination safe harbors. First, the maximum ICHRA contribution can vary within a class of employees if the variation applies under the same terms to all within the class, and between classes if each class is a permitted class under the ICHRA rules. Second, ICHRA designs can vary contributions based upon family size and age (provided the maximum contribution for the oldest participant does not exceed three times the amount for the youngest participant), without the plan automatically being deemed as discriminatory. However, the guidance notes that an ICHRA that is not discriminatory in design could still fail the Section 105(h) test, if HCIs actually benefit disproportionately to non-HCIs.
Employers who are considering adopting ICHRAs should review the new guidance and speak with their benefit consultants. Organizations planning to offer ICHRAs effective January 1, 2020, can use the 2019 exchange rates – as outlined above – for purposes of setting contribution and funding levels.
Some large employers may find the new safe harbors helpful in satisfying the ACA shared responsibility provisions. In particular, the rules provide some simplifications for determining affordability for employees that reside in diverse geographic locations. However, it is unclear if the proposed regulations adequately address the administrative concerns of potential ICHRA plan sponsors.
The IRS has requested comments on the proposed rules by late December. However, employers can generally rely on the guidance in designing ICHRA options for 2020. The proposed rules will remain effective for any plan year that begins at least six months prior to the publication of final rules. Please stay tuned to Compliance Corner for further updates on this topic.
ICHRA Proposed Rules »