July 14, 2020

Volume X, Number 196

July 14, 2020

Subscribe to Latest Legal News and Analysis

July 13, 2020

Subscribe to Latest Legal News and Analysis

IRS Issues Proposed Regulations Regarding Individual Coverage HRAs

On Sept. 30, 2019, the IRS issued proposed regulations regarding how the employer-shared-responsibility provisions of the Affordable Care Act (ACA) and certain nondiscrimination rules under the Internal Revenue Code (Code) will apply to individual coverage health reimbursement accounts (HRAs).

The proposed regulations aim to facilitate the adoption of individual coverage HRAs by employers on or after Jan. 1, 2020.  


On Oct. 12, 2017, President Donald Trump issued Executive Order 13813, “Promoting Healthcare Choice and Competition Across the United States,” which directed the Department of the Treasury, the Department of Labor, and the Department of Health and Human Services to allow HRAs to be used in conjunction with non-group coverage. In response, the departments issued final regulations on June 14, 2019, which allow for the integration of HRAs with individual health insurance coverage, subject to certain conditions (Integration Regulations). The Integration Regulations are effective for plan years beginning on and after Jan. 1, 2020. 

Concurrent with the issuance of the final Integration Regulations, the IRS issued final regulations regarding the premium tax credit under Code Section 36B (PTC Regulations). The premium tax credit is a keystone feature of the ACA designed to help certain individuals pay for individual health insurance coverage obtained through a State-marketplace exchange. To be eligible for a premium tax credit, an individual must (1) not be enrolled in an employer-sponsored plan and (2) not be eligible for coverage under an employer-sponsored plan that is “affordable”[1] and provides “minimum value.”[2]

Under the PTC Regulations, an individual coverage HRA is considered to be affordable for a month if the employee’s “required HRA contribution” does not exceed 1/12 of the product of (1) the employee’s household income and (2) the required contribution percentage (originally 9.5 percent and subject to adjustments after 2014).[3] 

Importantly, the PTC Regulations define “required HRA contribution” as the excess of (1) the monthly premium for the lowest-cost exchange-offered silver plan for self-only coverage in the rating area in which the employee resides over (2) the monthly self-only amount available to the employee under the HRA.[4] 

The PTC Regulations also provide that an individual coverage HRA that is affordable is treated as providing minimum value. Thus, unlike other group health plans, no separate analysis to determine whether a plan provides minimum value coverage is required for individual coverage HRAs.

Determining affordability and minimum value is an integral part of the employer shared responsibility provisions, under which an applicable large employer (ALE)[5] may be liable for a payment for a month if at least one full-time employee is allowed a premium tax credit for purchasing individual coverage through an exchange (the so-called “B” penalty).[6] Again, whether an employee may claim a premium tax credit depends on whether an offer of coverage by the employer is affordable and provides minimum value.

Earlier IRS guidance confirmed an individual coverage HRA is an eligible employer-sponsored plan for purposes of the employer shared responsibility rules.[7] Building on this guidance, the proposed regulations provide safe harbors for an employer to identify an appropriate affordability plan so they can determine before the start of a plan year the amount of contributions required to avoid “B” penalties under the employer shared responsibility provisions.

Proposed Regulations

  1. Employer Shared Responsibility – Safe Harbors for Identifying Appropriate Affordability Plans

a. Location-Related Issues

The proposed regulations provide that to determine whether an offer of an individual coverage HRA is affordable under the employer shared responsibility provisions, an employer may use the lowest-cost silver plan for the employee for self-only coverage offered through an exchange where the employee’s primary site of employment is located. Some commenters noted that large employers with multiple work locations would be discouraged from offering individual coverage HRAs because they would have to track and align HRAs on a rating-area basis. Indeed, for traditional employer-sponsored plans, employers only need to look at the cost of a single plan to determine affordability. These commenters suggested alternatives, such as allowing employers to use, for all work locations nationwide, one lowest-cost silver plan in the rating area in which the employer’s headquarters is located. However, the IRS noted these and other similar suggestions would result in a significant number of cases in which full-time employees are allowed premium tax credits while the employer is treated as offering them affordable coverage.

For employees who regularly work at home or at a worksite that is not on the employer’s premises, the proposed regulations provide that the primary site of employment is the worksite to which the employees would provide services if requested. Or, if an employee has no particular assigned office or worksite to which to report, the employee’s residence is the primary site of employment.

In some industries, it is common for an employee’s primary site of employment to change frequently. In this regard, the proposed regulations attempt to strike a balance between (1) requiring employee-specific, up-to-date information be used to determine affordability and (2) giving employers sufficient time to feasibly account for their employees’ movements. Accordingly, the proposed regulations provide that an employee’s primary site of employment generally is the location at which the employer reasonably expects the employee to perform services on the first day of the plan year. However, if an employee relocates to another worksite, then the employee’s primary worksite is deemed to have changed no later than the first day of the second calendar month after work begins at the new location.

Because there is not necessarily one lowest-cost silver plan per rating area, the proposed regulations further clarify the lowest-cost silver plan for an employee for a month is the lowest-cost silver plan in the part of the rating area that includes the employee’s applicable location.

b. Age-Related Issues

Under the PTC Regulations, affordability is in part based on each employee’s age.  Thus, even for employees with the same primary worksite, the cost of the applicable affordability plan is determined on an employee-by-employee basis. The proposed regulations do not provide a safe harbor for the age used to determine the premium of an employee’s affordability plan.

The proposed regulations clarify that an employee’s applicable age is the employee’s age as of the first day of the plan year.

Because it is possible within the same rating area for one plan to be the lowest-cost silver plan for one age and another plan to be the lowest-cost plan for another age, the proposed regulations clarify that the lowest-cost silver plan for an employee for a month is the lowest-cost silver plan for the lowest age band in the individual market for the employee’s applicable location.

c. Look-Back Month

Under the PTC Regulations, the affordability of an individual coverage HRA for a month is determined, in part, based on the cost of the affordability plan for that month. Exchange plan premium information for a calendar year is usually not available until shortly before the beginning of open enrollment for that year (e.g., Nov. 1). However, many employers determine the health benefits they will offer for the next year much earlier than open enrollment. Accordingly, the proposed regulations provide that calendar year plans may look back to the monthly premium for the lowest-cost silver plan for January of the prior calendar year. Special rules apply to non-calendar year plans.

Notwithstanding short-term volatility of marketplace premiums, the proposed regulations do not require adjustments to look-back month premium amounts.  

d. Consistency Requirement

Under the proposed regulations, use of any of the safe harbors is optional. An ALE may choose to apply the safe harbors for any class of employees, provided it does so on a uniform and consistent basis for all employees within such class. The proposed regulations define “class of employees” as a class of employees set forth in the Integration Regulations (e.g., salaried employees, non-salaried employees, employees whose primary site of employment is in the same rating area, collectively bargained employees, seasonal employees, etc.).[8]

2. Information Reporting

To enable the IRS to track and enforce compliance with the employer shared responsibility provisions, ALEs are required to file with the IRS (and furnish to full-time employees) information about whether the employer offers coverage to full-time employees and, if so, information about the coverage offered.[9] This information is reported and furnished on Forms 1094-C and 1095-C. Of particular concern for employers considering an individual coverage HRA is the requirement to report each full-time employee’s required contribution on Form 1095-C. While the proposed regulations do not amend the Form 1094-C/1095-C reporting rules, it is unclear how employers sponsoring individual coverage HRAs should complete the forms. The IRS has previously suggested that employers would not be required to report an employee’s required contribution calculated under the PTC Regulations; instead, employers would be required to report an employee’s required contribution determined under the applicable safe harbors used to calculate the employee’s required contribution under the employer shared responsibility provisions.

To enable the IRS to track and enforce compliance with the ACA’s individual mandate, any entity that offers minimum essential coverage (MEC) must report certain information to the IRS that identifies covered individuals and their period of coverage (and must furnish the same information to the individuals).[10] This information is reported and furnished on Forms 1094-B and 1095-B; however, ALEs sponsoring self-insured plans report and furnish this information on Part III of Form 1095-C. Individual coverage HRAs constitute MEC and are thus subject to this reporting requirement. In general, the employer is responsible for reporting, but there is an exception if the individual’s eligibility for the MEC is conditioned on participation in other employer-sponsored MEC (for which reporting is required). Although eligibility for an individual coverage HRA is conditioned on enrollment in an individual marketplace health insurance plan or Medicare, the aforementioned exception is not available because it is not the employer that provides marketplace health insurance or Medicare coverage. The proposed regulations do not amend the Form 1094-B/1095-B reporting rules. However, it is important to note the future of information reporting related to the individual mandate is uncertain because the Tax Cuts and Jobs Act of 2017 reduced the individual shared responsibility payment to zero (effective for months beginning after Dec. 31, 2018). 

3. Nondiscrimination

Under the Integration Regulations, employers may limit the offer of an individual coverage HRA to certain classes of employees (and may vary the amounts, terms, and conditions of individual coverage HRAs between different classes of employees).[11] However, within each class of employees offered an individual coverage HRA, the HRA must be offered on the same terms and conditions to all employees within the class, subject to certain exceptions.[12] One of the exceptions to the “same terms” requirement is an increase of the maximum dollar amounts made available under the HRA as the age of the participant increases.[13]

Individual coverage HRAs are generally subject to the nondiscrimination provisions under Code Section 105(h). The regulations under Section 105(h) provide, “(A)ny maximum limit attributable to employer contributions must be uniform for all participants … and may not be modified by reason of a participant’s age or years of service.”[14] Accordingly, varying the maximum amounts made available under an individual coverage HRA for (1) different classes of employees and (2) age-based increases within a class of employees, would appear to fail the requirements under the Section 105(h) regulations.  To address this conflict, the proposed regulations provide that if the maximum dollar amount made available varies between classes, or varies for participants within a class, then with respect to that variance, an individual coverage HRA does not violate the uniformity requirement under the Section 105(h) regulations, provided that (1) variations within a class comply with the “same terms” requirement under the Integration Regulations and (2) for variations between classes, the classes are among those set forth in the Integration Regulations. 

Key Takeaways

The Integration Regulations will allow employers to offer individual coverage HRAs to some or all of their employees for plan years beginning on and after Jan. 1, 2020. 

Depending on how broadly individual coverage HRAs are used, they could have a significant impact on group and individual markets. 

The proposed regulations aim to facilitate the adoption of individual coverage HRAs by addressing and clarifying how certain aspects of health care reform and the Code will apply to them.

Employers not ALEs (i.e., employers that generally have less than 50 full-time employees) do not need to consider the safe harbors described in the proposed regulations for identifying an affordability plan.

Employers are generally permitted to rely on the proposed regulations before final regulations are adopted.

The proposed regulations do not modify the information-reporting requirements related to the employer shared responsibility provisions and individual mandate to accommodate individual coverage HRAs. However, future administrative guidance will likely be available to help employers fulfill their reporting obligations (e.g., updates to the Instructions for Forms 1094-B/1095-B and Forms 1094-C/1095-C), sufficiently in advance of applicable reporting deadlines.

[1] See I.R.C. § 36B(c)(2)(C)(i).

[2] See I.R.C. § 36B(c)(2)(C)(ii).

[3] Treas. Reg. § 1.36B-2(c)(5)(i).

[4] Treas. Reg. § 1.36B-2(c)(5)(ii).

[5] In general, an employer is an applicable large employer for a calendar year if it had more than 50 full-time employees during the preceding calendar year.

[6] I.R.C. § 4980H(b).  An employer can incur a “B” penalty even if it avoids an “A” penalty by offering coverage to at least 95% of its full-time employees (and their dependents). 

[7] See IRS Notice 2018-88. Thus, if an ALE offers an individual coverage HRA to at least 95% of its full-time employees (and their dependents), the ALE will not be liable for an “A” penalty for any month. 

[8] See Prop. Treas. Reg. § 54.4980H-5(f)(7)(iv) and Treas. Reg. § 54.9802-4(d)(2).

[9] See generally IRC § 6056.

[10] See generally IRC § 6055 and Treas. Reg. § 1.6055-1(a) et seq.

[11] See Treas. Reg. § 54-9802-4(d).

[12] See Treas. Reg. § 54-9802-4(c)(3).

[13] Provided that (1) the same maximum dollar amount attributable to the increase in age is made available to all participants in a class of employees who are the same age, and (2) the maximum dollar amount made available to the oldest participant(s) is not more than three times the maximum dollar amount made available to the youngest participant(s).  Treas. Reg. § 54.9802-4(c)(3)(iii)(B).

[14] Treas. Reg. § 1.105-11(c)(3)(i).

© 2020 Dinsmore & Shohl LLP. All rights reserved.National Law Review, Volume IX, Number 289


About this Author

Chase A. Tweel Associate Dinsmore Cincinnati DC

Chase’s practice focuses on the design, implementation, and administration of qualified retirement plans, health and welfare plans, and nonqualified deferred compensation plans. He also advises on equity- and cash-based incentive compensation arrangements, severance policies, and employment and separation agreements for individual executives.

He regularly reviews and drafts plan documents, amendments, SPDs, notices, forms, and administrative procedures, as well as board resolutions, committee charters, and other governance-related documents. His clients have included publicly-traded...

513- 977-8690
Ben F. Wells, Dinsmore Shohl, Wealth Planning Lawyer


Ben Wells is a Partner in the Corporate Department and is Chair of the firm's Tax, Benefits and Wealth Planning Practice Group. He leads the firm's Fringe Benefits Committee and is a member of its Practice Management Council. Over a period of more than 25 years, Ben has advised and counseled clients on a full range of issues relating to employee benefits and executive compensation.

Ben works with Fortune 500 companies, privately held employers, not-for-profit employers, state and local governmental entities, health care providers, private equity investors, ERISA plan fiduciaries, financial institutions, board of directors, compensation committees and executives. He helps his clients design, offer and terminate both qualified and non-qualified retirement plans, including stock option, deferred compensation and incentive plans. Ben advises boards of directors and compensation committees on senior executive compensation, including the requirements of Sections 162(m), 280G and 409A of the Internal Revenue Code, and compliance with the requirements of the Sarbanes-Oxley and Dodd-Frank Acts. Ben also represents senior executives in the negotiation of employment, incentive, change in control and severance agreements.

James Tweatt, Dinsmore Law Firm, Employment Law Attorney

Jay’s practice is concentrated in the areas of employee benefits and executive compensation for both profit and tax-exempt entities. He advises companies on the design, formation and operation of tax-qualified retirement plans (including cash balance and hybrid plans), nonqualified deferred compensation plans (including Code §§ 409A and 457 compliance), and welfare benefit plans (including compliance with the Affordable Care Act, COBRA, FMLA, and USERRA).

He also has experience with ERISA fiduciary issues, including issues related to plan...