IRS offers new options for stand-alone HRAs, including one that can be used to purchase individual health insurance
Following enactment of the Affordable Care Act (ACA) of 2010, the IRS issued a series of rulings generally preventing employers from offering stand-alone HRAs (Health Reimbursement Arrangements) that active employees could use to purchase health insurance in the individual market, or pay other out-of-pocket medical expenses. But new regulations that will become applicable in 2020 will offer employers two new alternatives—the Individual Coverage HRA (ICHRA) and the Excepted Benefits HRA—that employers can use to provide stand-alone HRAs to active employees if certain conditions are met.
The advantage of the ICHRA is that employers can use it to subsidize individual health insurance coverage for groups of employees that are not otherwise offered group health coverage. For some employers, especially smaller ones, it may even be a way to offer tax-favored health benefits to all employees without sponsoring a group health plan. However, employers should remain mindful of how offering an ICHRA interacts with its Shared Responsibility obligations under the ACA, as well as the impact on employees’ potential eligibility for premium tax credits.
The ICHRA should not be confused with the Qualifying Small Employer HRA (QSEHRA), which Congress created by statute to give employers with less than 50 full-time employees the option to offer their employees an HRA to buy individual market coverage instead of offering a more comprehensive group plan. Among other differences, the ICHRA (1) is available to employers of all sizes, and (2) does not have a dollar limit on the amount that can be offered for the purchase of individual health insurance.
For employers that want to offer an ICHRA to any
employees in 2020, they will need to issue the required
notice in 2019 in time for employees to obtain individual coverage during the open enrollment period running from
November 1, 2019 to December 15, 2019.
Employers that offer ICHRAs can make them available to all employees, or only to certain classes of employees as defined in the regulation (e.g., full-time employees, part-time employees, seasonal employees, new hires that have not met a permitted waiting period, salaried workers, employees in the same geographic location, etc.). The ICHRA must be offered on the same terms to all employees within a class, except that the employer can make more funds available to older employees and to employees with more dependents. For employers that offer ICHRAs only to certain classes of employees, and a more traditional group health plan to others, there must be at least 20 employees in each class that is offered the ICHRA (assuming the employer has more than 200 employees).
Employees who receive ICHRAs can use the money to purchase individual coverage on the private market, or through one of the ACA’s marketplace exchanges. And if the ICHRA does not cover the full cost of coverage, employers can permit employees to pay the balance with pre-tax salary reduction contributions through their IRC § 125 cafeteria plans—but only with respect to coverage purchased on the private market.
Also of note, employers can use ICHRAs to satisfy the ACA’s Shared Responsibility requirement to offer “minimum essential coverage.” Thus, an employer could avoid the $2,000 per full-time employee Shared Responsibility penalty by offering an ICHRA to at least 95 percent of full-time employees (as defined by the ACA). However, the $3,000 shared responsibility penalty could apply if the employer does not put enough money into the HRAs to ensure the ACA&’s affordability threshold is satisfied.
There are a few more things employers should know about ICHRAs if they are thinking about offering them:
- The employer must allow eligible employees to opt-out of the ICHRA at least annually.
- The employer must provide a notice to eligible employees about how accepting the ICHRA might affect their eligibility for a premium tax credit under the ACA. A model notice is available here.
- The employer must have reasonable substantiation procedures in place to ensure that employees and their families are covered by individual health insurance or Medicare while covered by the ICHRA. A model attestation is available here.
Another question is what, if any, responsibility the employer will have for the individual health insurance policies employees purchase with their ICHRAs. The answer is “none,” so long as:
- The employee’s purchase of any individual health insurance is completely voluntary.
- The employer does not select or endorse any particular insurance carrier or coverage.
- The employer does not receive any cash, gift, or other consideration in connection with the employee’s purchase or renewal of individual insurance coverage.
- The employer notifies employees annually that the individual insurance coverage they purchase is not governed by ERISA.
What Are Excepted Benefit HRAs?
Prior to the ACA, many employers used HRAs to help employees cover out-of-pocket medical expenses regardless of whether they were enrolled in the employer’s group health plan. Since the ACA, employers generally have been required to limit the availability of these HRAs only to employees enrolled in their group health plans. The regulations create a new Excepted Benefit HRA that employers can offer to all employees, regardless of whether they are enrolled in the employer’s group health plan.
Only HRAs meeting the following requirements will be considered Excepted Benefit HRAs:
- The annual HRA contribution must be no more than $1,800 (adjusted for inflation beginning in 2021).
- The HRA must be offered in conjunction with a group health plan, even though employees can participate in the HRA without enrolling in the group health plan.
- The HRA cannot be used to reimburse individual health insurance premiums, group health insurance premiums (other than COBRA), or Medicare premiums, although it can be used to reimburse premiums for excepted benefits such as dental or vision benefits.
- The HRA must be uniformly available to all similarly situated individuals.
For additional information, the IRS has published a series of FAQs, which are available at: https://www.irs.gov/pub/irs-utl/health_reimbursement_arrangements_faqs.pdf. Additionally, the full text of the final regulations is available at: https://www.govinfo.gov/content/pkg/FR-2019-06-20/pdf/2019-12571.pdf.
Christine Drager is a specialist leader in the Human Capital practice of Deloitte Consulting LLP focusing on pension actuarial consulting and assisting employers with the design, valuation, and financial management of pension and other postretirement benefit plans.
Maria Moliterno is a manager in the Human Capital practice of Deloitte Consulting LLP and specializes in actuarial consulting for pensions and other employee benefits.