by Matt Gerard
on July 19, 2019
New Individual Coverage HRA Expands Options and Promotes Flexibility for Employers and Employees
It is almost never too early to begin thinking about open enrollment, and beginning January 1, 2020, employers will be able to offer two new Health Reimbursement Arrangement (HRA) options. The DOL, HHS, and IRS recently announced final regulations expanding the use of HRAs. Among other changes, the final regulations settle requirements for two new HRAs: the “Individual Coverage HRA” and the “Excepted Benefit HRA.” This article will discuss the Individual Coverage HRA (ICHRA) which reverses the Affordable Care Act policy that prohibited HRAs or premium payment plans from reimbursing premiums paid for individual insurance coverage and which allows employers to offer HRAs that allow some or all of their employees to purchase insurance on the individual market. A later article will discuss the Excepted Benefit HRA.
The Affordable Care Act introduced market reforms that were incompatible with stand-alone HRA designs. To allow HRAs to be of benefit under the Affordable Care Act (ACA), the IRS issued regulations stating that HRAs must integrate with insurance coverage that was compliant with the ACA. Currently, HRAs can only integrate with ACA-compliant group health plans and, in limited situations, Medicare. However, the Individual Coverage HRA can integrate with a variety of insurance coverages including:
ICHRAs are limited in the type of coverage with which they integrate. ICHRAs may not integrate with either short-term, limited-duration insurance or coverage consisting solely of dental, vision, or similar “excepted benefits.” Such coverage is the domain of the Excepted Benefit HRA. Additionally, an ICHRA cannot integrate with other group health coverage, such as spousal coverage.
Employers can contribute as much as they want to an Individual Coverage HRA; however, employers who offer an ICHRA must do so on the same terms to all individuals within a class of employees. Permissible employee classes include:
Amounts offered to a class may be increased for employees within that class who have more dependents or who are older, but the maximum amount available to the oldest participants may not be more than three times the amount available to the youngest participant. Like other HRAs, ICHRAs may permit rollover of unused amounts to subsequent plan years.
Further, an employer can offer an ICHRA to some classes of employees and a traditional group health plan to other classes. Through a new hire rule, employers can also offer new employees an Individual Coverage HRA and grandfather existing employees in a traditional group health plan. In order to prevent adverse selection in the individual market, the final regulations subject a minimum class size requirement to employers who offer an ICHRA to some employees and a traditional group health plan to other employees. The minimum class size varies with the size of the sponsoring employer as follows:
Adherence to the minimum class size requirement is vital. If an employer violates this requirement, then the classes chosen by the employer will be deemed as one class of employees with varying terms within the class; consequently, the ICHRA would fail to satisfy ACA requirements and violate Internal Revenue Code section 105(h) nondiscrimination rules.
Although the DOL, HHS and IRS anticipate that ICHRAs will primarily benefit small and mid-size employers, employers of any size can offer an ICHRA. Employers who offer an ICHRA must provide written notice to eligible employees regarding the Individual Coverage HRA and its interaction with the premium tax credit (PTC). This notice requirement is discussed in its own section later in this article.
In order to be eligible for the ICHRA, employees must be enrolled in individual health insurance coverage for the plan year. Participants must substantiate that they, and each dependent covered by the ICHRA are enrolled in such individual coverage, Medicare Parts A and B, or Medicare Part C annually as well as with every request for reimbursement under the ICHRA. This substantiation can be accomplished through the participant’s attestation, and the IRS has provided an Individual Coverage HRA Model Attestation. If an individual covered by the ICHRA also fails to have individual health insurance coverage for any month, the ICHRA would not comply with the Affordable Care Act for such month; thus, the participant could not seek reimbursement under the ICHRA for claims occurring after the loss of such individual coverage. If an entire family covered by the ICHRA loses individual coverage, the family will forfeit the ICHRA coverage; however, such a forfeiture would not be a “loss of coverage” qualifying event under COBRA.
Additionally, employees who are eligible for the ICHRA cannot also be eligible for a traditional group health plan sponsored by their employer. For these purposes, a “traditional” group health plan is one that is neither account-based nor limited to excepted benefits. Employees must be given an opportunity to opt out of the ICHRA and waive future reimbursements under the ICHRA on at least an annual basis.
Notice of Availability
As previously mentioned above, employers who offer an ICHRA must provide written notice to eligible employees. The employer must provide this written notice at least 90 days before the beginning of each plan year. The employer must provide this written notice to newly eligible participants no later the date on which the employee is first eligible to participate in the ICHRA. This written notice must contain the following information:
To assist employers in complying with the notice requirement, the IRS has issued an Individual Coverage HRA Model Notice. This model notice contains appropriate language that addresses elements the required notice. Note that the model notice is not designed to be used “as is” in its entirety. Sponsoring employers must tailor the model notice to the specific, applicable terms of the ICHRA which they sponsor. Nevertheless, if employers tailor the model notice and timely provide the tailored notice to their employees, the DOL, HHS, and IRS will consider such employers as being in “good faith” compliance with the notice requirement.
Generally, Individual Coverage HRAs may reimburse expenses for medical care, as defined by Internal Revenue Code section 213(d), of an employee, and certain members of the employees’ family. The IRS annually issues Publication 502, which provides several examples of medical expenses that may be reimbursed under an ICHRA; however, employers are not required to allow reimbursement for all medical expenses. Thus, employers can specify the maximum annual ICHRA benefit and may design an ICHRA that limits reimbursements to insurance premiums or point-of-sale, out-of-pocket expenses (e.g., copayments, deductibles, or coinsurance).
Comparison to QSEHRAs
ICHRAs are similar to Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) in some respects. Both ICHRAs and QSEHRAs can reimburse individual coverage premiums and out-of-pocket medical expenses, require advanced notice to eligible employees, and are potentially compatible with a Health Saving Account (HSA), depending on the design of the ICHRA or QSEHRA. However, unlike QSEHRAs, employers of any size can offer an ICHR; whereas, only employers who have fewer than 50 employees may offer QSEHRAs. Additionally, employers can offer ICHRAs to some employees and a traditional group health plan to other employees, and ICHRAs are compatible with health flexible spending arrangements (health FSAs). Additionally, employers can offer an ICHRA and excepted benefits (e.g., dental and vision insurance) to their employees. Conversely, employers who offer QSEHRAs cannot offer any other group health plan, including a health FSA. While COBRA does not apply to QSEHRAs, ICHRAs will be subject to COBRA. ICHRAs are likely to have broader appeal than QSEHRAs with employers and employees because of the increased flexibility of ICHRAs.
One item of note: Some states effectively prohibit employer funding or involvement in the purchase of individual major medical insurance coverage by treating such coverage as group health insurance when there is employer funding. Some of these states began revisiting such laws and regulations with the passing of the 21 Century Cures Act, which created QSEHRAs. Nevertheless, employers will want to carefully review applicable state law with their advisors before establishing an ICHRA.
Act Now to Sponsor an ICHRA for 2020
Employers who wish to offer an Individual Coverage HRA at the start of 2020 need to take quick action. Employers will need to plan what the amount of Individual Coverage HRA benefit, what expenses will be reimbursable, who will be eligible for the Individual Coverage HRA, provide the required notice for eligible employees, and provide sufficient time to allow employees who want to take advantage of the Individual Coverage HRA to enroll in individual health insurance (or Medicare) during the open enrollment period near the end of 2019. Additionally, for more information, the IRS has posted Frequently Asked Questions about the Individual Coverage HRA and Excepted Benefit HRA available here.
Interested employers should contact National Benefit Services, LLC today to discuss ICHRAs and how they can complement and expand an employer’s current benefit plans. As always, NBS is readily available to assist employers with employee benefit plan design and fringe benefit design and administration, amending plan documents, creating required notices and summary plan descriptions.