Update To Individual Coverage HRAs: IRS Issues Proposed Regulations
In a previous newsletter article published on July 22, 2019, we discussed the final regulations issued in June 2019 which authorize employers to provide employees with tax-preferred funds to pay for the cost of health insurance coverage purchased in the individual market, via an individual coverage health reimbursement arrangement (“ICHRA”). These final regulations apply for plan years beginning on or after January 1, 2020.
The final regulations left several issues open and unsettled, especially with respect to the employer mandate under the Affordable Care Act (“ACA”). To address some of these concerns, the IRS issued a set of proposed regulations on September 30, 2019.
Employer Mandate. As background, the ACA’s employer mandate imposes penalties on applicable large employers if: (1) the employer fails to offer at least 95% of its full-time employees and their dependents an opportunity to enroll in “minimum essential coverage” under an employer-sponsored plan (the “pay-or-play” provision); or (2) the employer offers an employer-sponsored plan, but such plan does not provide “minimum value” or is not “affordable” for any particular employee (the “affordability” provision).
(1) The “Pay-or-Play” Provision. Under the proposed regulations, an employer that offers an ICHRA to at least 95% of its full-time employees and their dependents satisfies its obligations under the “pay-or-play” provision. This is true even if a full-time employee declines to enroll in the ICHRA and receives a premium tax credit for marketplace coverage.
(2) The “Affordability” Provision. The proposed regulations address how ICHRAs affect an individual’s eligibility for premium tax credits to purchase ACA health exchange coverage. As background, an individual is eligible for premium tax credits (and the employer plan is considered unaffordable) if the individual (a) is not eligible for coverage under an “eligible employer-sponsored plan” (including an HRA) that is both affordable and provides minimum value, and (b) is not enrolled in an eligible employer-sponsored plan (if the coverage is not affordable or does not provide minimum value). As a result, an individual is generally ineligible for premium tax credits in months under which the individual is eligible to participate in or covered by an employer-sponsored HRA (including an ICHRA). Therefore, the employer mandate would, in effect, eliminate the possibility for applicable large employers to offer ICHRAs.
Accordingly, the proposed regulations provide a number of safe harbors for meeting the affordability mandate. Generally, affordability for purposes of an ICHRA would be determined based on an employee’s income, his or her required ICHRA contribution, and the lowest-cost available silver marketplace plan based on the employee’s residence. Therefore, affordability is generally determined separately for each employee, based on his or her residence. But under the proposed regulations, employers may use a “location safe harbor” that would allow a large employer to use the lowest cost silver plan in the rating area in which the employee’s primary site of employment is located. This safe harbor would relieve the administrative burden of determining affordability on an individual employee basis and would instead permit a determination based on only one location.
Further, under the proposed regulations, an ICHRA that is affordable pursuant to these rules will be deemed as providing minimum value for purposes of the employer mandate.
The proposed regulations clarify that ICHRAs are subject to the nondiscrimination requirements applicable to group health plans. In particular, if a disproportionate number of highly compensated individuals qualify for and utilize the ICHRA as compared to non-highly compensated individuals, the ICHRA may be found to be discriminatory. As a result, any excess reimbursements to highly compensated individuals would be included in their federal incomes as taxable compensation.
Under federal law, an employer generally cannot provide an ACA marketplace plan as a benefit under its cafeteria plan. Because of this, employers cannot permit employees to make salary reduction contributions to a cafeteria plan to purchase a health plan offered through the ACA marketplace. However, this restriction does not apply to coverage offered outside of the marketplace.
The proposed regulations clarify that this general rule applies to ICHRAs. In other words, if an employer offers an ICHRA in connection with its cafeteria plan, only employees who purchase individual health coverage outside of the ACA marketplace may pay for such health coverage through salary reductions made via the employer’s cafeteria plan.
While the proposed regulations would add clarification to the some of the rules governing ICHRAs for applicable large employers, the overall workability of the proposed regulations remains to be seen. Certainly, the proposed regulations would add complexity to the administration of ICHRAs by applicable large employers.