Final Regulations Permit Employers to Reimburse an Employee’s Costs for the Purchase of an Individual Health Insurance Policy
Effective January 1, 2020, employers may put aside pre-tax funds into a health reimbursement arrangement (“HRA”) that can be used by an employee to pay for premiums and other out-of-pocket costs related to the purchase of an individual health insurance policy (known as “individual coverage HRAs” or “ICHRAs”), if certain conditions are met. Recently released final regulations (found here) reverse previous Affordable Care Act (“ACA”) guidance that prohibited an employer from reimbursing individual health insurance premiums (except in limited circumstances).
As we discussed when the proposed regulations were released (find our articles here and here), these final regulations could indicate a shift in the employer-provided health coverage market from traditional group health plans to a 401(k)-like defined contribution approach. The final regulations give an employer the option to not offer a traditional group health plan and instead contribute a defined amount into an ICHRA on an annual basis; the employee could then use the ICHRA funds to purchase any individual health insurance policy the employee desires using the government Marketplace or through the private individual insurance market.
Arguably, this could provide employers with a new cost-containment method to help combat the rising cost of major medical coverage for employees and permit employers to offload the significant administrative responsibilities associated with administering a traditional group health plan. While it seems that the main target audience for these regulations is smaller employers, this could be something that larger employers might want to explore in the future, especially since the final regulations anticipate that an offer of ICHRA coverage may be able to fully satisfy ACA’s employer mandate (as discussed further below).
An HRA is an account-based health plan funded solely by employer contributions used to reimburse certain medical expenses incurred by eligible employees and their dependents. Other than certain HRAs maintained by small employers that meet specific qualifications (known as “qualified small employer HRAs” or “QSEHRAs”), ACA guidance did not allow employers to maintain an HRA to reimburse the cost of individual insurance policies. As noted, these final regulations remove this prohibition and expressly permit ICHRAs, provided that the employer satisfies the conditions set forth below.
The final regulations are very detailed and contain several conditions that an employer must satisfy in order to maintain an ICHRA. Below is a summary of the most significant conditions.
An ICHRA Must Be Offered on the Same Terms Within Each Class of Employees. The regulations permit employers to establish certain specified “classes” within their work force for ICHRA purposes. If an employer will offer an ICHRA to a specific class of employees, the ICHRA must be made available to each employee within that class on the same terms and conditions (subject to certain exceptions for age and family size, as discussed below). Classes specifically permitted by the ICHRA regulations are:
Classes are determined at the common law employer level, so IRS-defined controlled groups can be disregarded for purposes of determining class population.
Generally speaking, the amount an employer contributes to an ICHRA must be the same for all employees within a class. However, certain exceptions may be made due to an employee’s age and/or family size. An employer can choose to uniformly increase the amount it contributes to an ICHRA based on increases in employee age and/or number of dependents. However, for increases in contributions based on age, the maximum dollar amount available to the oldest participating employee cannot be greater than three times the amount available to the youngest participating employee.
Non-salaried (i.e., hourly) status
Employees covered by a collective bargaining agreement
Nonresident aliens with no U.S. income
Employees who have not satisfied the group health plan’s waiting period
Temporary employees of staffing firms
Primary worksite location (based on same insurance rating area, as defined by the ACA)
An Employee Cannot Be Eligible for Both a Group Health Plan and an ICHRA. The employer cannot offer both a group health plan and an ICHRA to the same class of employees. Employers who choose to offer group health plan coverage to one class of employees and ICHRA coverage to another class must ensure that the class of employees being offered the ICHRA satisfies the following minimum class size requirements:
These class size requirements only apply to classes based on full-time versus part-time status, salaried versus non-salaried (i.e., hourly) status, or geographic location (if the location is smaller than a state). Further, the size of the employer for purposes of the minimum class size requirements is based on common law employment rather than on a controlled group basis. And there is a special rule for new hires that allows an employer who has already been offering a group health plan to a class of employees to grandfather those employees and offer an ICHRA to all new employees hired into that class on or after January 1, 2020.
For employers with fewer than 100 employees, the minimum class size is 10 employees;
For employers with 100 to 200 employees, the minimum class size is 10% of the employer’s employees;
For employers with more than 200 employees, the minimum class size is 20 employees.
Employees Must Be Enrolled in Individual Health Coverage or Medicare, and the Employer Must Substantiate Enrollment and Medical Expenses. ICHRA coverage can only be offered to employees who are actually enrolled in individual health coverage that provides major medical benefits or Medicare, and an employee must generally enroll in such coverage within the 60-day period before the first day of the ICHRA plan year. In addition, the employer must have reasonable procedures in place to substantiate employees’ enrollment in individual health coverage and their medical expenses. The employer must obtain verification of an employee’s enrollment in individual health coverage annually (an employee attestation will suffice). Also, the employer must require substantiation each time an employee seeks medical care expense reimbursement from the ICHRA. The departments of the Treasury, Labor, and Health and Human Services have collectively issued model annual and ongoing attestation forms to use for these purposes (found here).
An Employer Must Maintain and Distribute an Annual Notice. An employer must provide an annual notice to employees at least 90 days before the start of the plan year (and for new hires during the plan year, no later than the date on which ICHRA coverage first takes effect for the new hire). The notice must satisfy certain content requirements, and must be distributed using the distribution rules set forth by the U.S. Department of Labor (DOL). DOL has issued a model notice that can be customized and used by employers (found here).
The ICHRA Must Give Employees the Right to Opt Out on an Annual Basis. Employees must be provided with an opportunity to opt out of ICHRA coverage at least once each year and upon termination of employment.
ACA’s Employer Mandate (Section 4980H)
As noted in a previous Foley article (found here), the IRS issued a notice in 2018 (found here) that discussed the development of guidance that would make it possible for employers to fully satisfy ACA’s employer mandate while offering ICHRAs.
Background Note: On a high level, the ACA’s employer mandate imposes two requirements in order to avoid potential tax penalties: (1) offer health coverage to at least 95 percent of full-time employees (and dependents); and (2) offer “affordable” health coverage that provides “minimum value” to each full-time employee (the terms are defined by the ACA and are discussed further in these previous updates).
The final regulations have already confirmed that an employer’s offer of ICHRA coverage satisfies the requirement to offer health coverage for employer mandate purposes, so as to satisfy the first requirement described above. The final regulations did not issue final rules on how an employer can offer “affordable” health coverage that provides “minimum value” via an ICHRA, but the IRS intends to do so soon, after it considers the comments made in response to its 2018 notice on this topic. We expect the end result will be that employers will be able to fully satisfy the employer mandate without sponsoring a traditional group health plan.
An ICHRA Plan is Still an ERISA Welfare Plan
The final regulations provide that the individual health insurance policies purchased by employees would not be subject to ERISA if the employer satisfies certain requirements. However, it is important to note that an ICHRA plan is still an ERISA welfare plan much like any other ERISA welfare plan. Employers must satisfy their general ERISA responsibilities with respect to an ICHRA plan, such as maintaining and distributing a summary plan description, as well as filing an annual DOL Form 5500 (if the plan does not qualify for the small-plan exception).
There is no special carve-out from COBRA, so COBRA applies as it would to any other group health plan. Applying the already-existing COBRA rules, the final regulations note that an individual’s failure to maintain individual health coverage would not trigger an offer of COBRA continuation coverage (since this is not a qualifying event); however, termination of employment or a reduction of hours (for example) would trigger an offer of COBRA continuation coverage if it would otherwise result in the loss of ICHRA coverage.
If an employee chooses to enroll in individual health coverage that is a high-deductible health plan, ICHRA coverage will not disqualify the employee from maintaining a health savings account (“HSA”), provided the ICHRA can only be used to reimburse employees for premiums (and not also to reimburse employees for other eligible medical expenses). The regulations permit an employer to offer both an HSA-compatible (i.e., “premium only”) ICHRA and an ICHRA that is not HSA-compatible to employees within the same class.
Employers who are interested in adopting an ICHRA plan effective January 1, 2020, should begin preparing soon, so that they have sufficient time to put in place all necessary documents, including a plan notice, summary plan description, substantiation attestations, and other materials, before the start of the plan year.
Some large employers may want to wait until final rules are issued regarding compliance with ACA’s employer mandate. The rules could be critical to the success of ICHRAs for large employers. If the final rules provide administratively practical options for large employers to fully satisfy the employer mandate, ICHRAs may make a big splash in the large employer space in the future. We will issue another Foley article once we have final rules concerning compliance with ACA’s employer mandate.