Updated 5/21/20 with IRS Notice 2020-33, which clarifies when ICHRAs can reimburse healthcare premium payments.
A final rule was recently released that creates two new types of health reimbursement arrangements (HRAs) that may be useful for certain employers: Individual Coverage HRAs (ICHRAs) and Excepted Benefits HRAs. Employers will be able to offer the new HRAs starting January 1, 2020.
Individual Coverage HRAs
Employers can now offer ICHRAs that reimburse employees for individual market health insurance and Medicare premiums, up to a maximum determined by the employer. Prior to the final rule, employers could only offer HRAs if they were “integrated” with a qualifying group health plan. The final rule allows ICHRAs to be “integrated” with individual plans or Medicare.
Update 5/21/20: IRS Notice 2020-33 clarified when ICHRAs can reimburse healthcare premium payments. Generally, ICHRAs cannot reimburse medical expenses incurred before the beginning of the plan year. This restriction caused administrative issues to the extent that individuals must pay part or all of the premiums for coverage prior to the first day of the plan year. The IRS addressed this administrative issue in Notice 2020-33, which provides that ICHRAs are allowed to treat premium payments as “incurred” on the (1) first day of each month, (2) the first day of the period of coverage, or (3) the date the premium is paid. In short, IRS Notice 2020-33 allows ICHRAs to reimburse employees for premium payments when they are paid (even if the payment is due before the beginning of the plan year).
Employees must enroll in individual insurance coverage (on or off the Marketplace Exchange) or Medicare in order to be eligible for an ICHRA. Employees will be required to substantiate their enrollment to be eligible for the ICHRA.
ICHRAs must be fully funded by employer contributions. The amount of contributions is determined by the employer but may impact their compliance with the ACA employer mandate, as discussed below.
Employers cannot offer an ICHRA to employees who are also offered a group health plan. This means that if an employee is eligible for an employer-sponsored group health plan, they cannot be eligible for an ICHRA.
Employers also have the option to offer the ICHRA to certain “classes” of employees, while also offering a group health plan (or no coverage) to other classes of employees. The classes of employees must be based on certain distinctions, such as full-time versus part-time status, salaried versus non-salaried, or geographic location. In addition, employee classifications must meet the minimum class size rule, which generally means employee classes cannot be less than 10% of the total employee population.
Employers may want to offer ICHRAs to employees who are not eligible for the group health plan (such as part-time employees). Employers would most likely not want to offer ICHRAs to their full-time employees because they would need to eliminate their group health plan, which may impact ACA compliance, as discussed below.
ICHRA and the ACA Employer Mandate
Under the ACA employer mandate, applicable large employers or “ALEs” (those with 50 or more full-time and full-time equivalent employees in the prior year) must offer affordable, minimum value coverage to their full-time employees and their dependents or pay a potential penalty.
ALEs will be deemed to satisfy the employer mandate by offering an ICHRA to their full-time employees and their dependents if the ICHRA is deemed “affordable” (meaning employers must fund the ICHRA up to a certain dollar amount). Generally, an ICHRA is considered “affordable” if the cost of purchasing self-only coverage on the lowest cost Marketplace Exchange silver plan (minus employer ICHRA contributions) is less than a certain percentage of an employee’s household income. The IRS released additional guidance on how employers can calculate how much they must contribute to ICHRAs so they are considered “affordable,” which we review in this blog post.
It is important to note that employees covered by an affordable ICHRA would not be eligible for a premium tax credit through the Marketplace Exchange.
Excepted Benefit HRA
Employers can also offer a new Excepted Benefit HRA that does not need to be integrated with a group health plan. Excepted Benefit HRAs can be used to reimburse employees for certain qualified medical expenses such as copays, deductibles, non-covered qualifying medical expenses, and premiums for vision, dental, short-term limited-duration insurance, and COBRA. Excepted Benefit HRAs cannot be used to reimburse premiums for individual health coverage, group health plan coverage (other than COBRA premiums), or Medicare.
Excepted Benefit HRA Eligibility
Employers must offer a traditional group health plan in order to offer an Excepted Benefit HRA. However, employees do not need to enroll in the employer’s group health plan (or any other coverage) in order to qualify for the Excepted Benefit HRA.
Prior to the Final Rule, traditional HRAs could only be offered to employees who enrolled in the group health plan.
Offering Excepted Benefit HRA
Employers can choose to offer the Excepted Benefit HRA to certain classes of employees, as long as the classes are based on a bona fide employment-based distinction.
In 2020, employers can contribute up to $1,800 annually (adjusted annually for inflation) to Excepted Benefit HRAs. Employees’ unused funds will carry over year to year.
Excepted Benefit HRAs provide an option for employers who want to offer another health care benefit alongside their group health plans that assist employees with covering the cost of certain premiums and medical expenses.
Additional Employer Obligations and Considerations
HRAs are subject to ERISA, COBRA continuation rights, and HIPAA. Both types of HRAs must have a Summary Plan Description (SPD) (ICHRAs must also have a Summary of Benefits and Coverage).
In addition, if an employer offers an ICHRA, the employer must do the following:
- Provide notice to eligible employees 90 days before the beginning of the plan year. For employees eligible after the beginning of the plan year, the notice must be provided by the first date of eligibility. For ICHRAs that are established less than 120 days before the beginning of the plan year, the notice must be provided no later than the effective date of the ICHRA (See Model Notice);
- Implement reasonable procedures for verifying that participating employees and their dependents are enrolled in individual health insurance or Medicare (See sample Model Substantiation Form);
- Allow employees to opt out of the ICHRA at least annually;
- Ensure any classes are valid and meet the minimum class size rule; and
- For ALEs, ensure the ICHRA meets affordability standards if offered to full-time employees.
If an employer offers an Excepted Benefit HRA, the employer must do the following:
- Ensure the annual employer contribution does not exceed $1,800 in 2020;
- Ensure the Excepted Benefit HRA is being offered in conjunction with a group health plan; and
- Ensure that the Excepted Benefit HRA is uniformly available to similarly situated individuals.
Employers that plan to offer ICHRAs and Excepted Benefit HRAs starting January 1, 2020 must comply with the employer requirements outlined above. Employees must enroll in individual health insurance at the end of 2019 (unless they have Medicare) in order to be eligible for the ICHRA in 2020.
ICHRAs are likely most practicable for small non-ALE employers who do not offer group health coverage or ALEs who want to offer a health care benefit to classes of employees who are ineligible for their group health plan. For ALE employers, ICHRAs may not be a feasible replacement for group health plans until more regulations are released regarding ACA affordability requirements. ICHRAs also come with additional administrative considerations for employers.
Employers may want to consider offering an Excepted Benefit HRA alongside their group health plan as an additional health benefit for employees.
- Final Rule FAQ
- Final Rule press release
- IRS Notice 2020-33: Clarification of ICHRA Reimbursement of Premium Payments
- Department of Labor: (866)444-3272 or www.askebsa.dol.gov
- IRS Office of Chief Counsel: (202)317-5500
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