Regulatory Agencies Issues Final Regulations Authorizing Individual Coverage HRAs

Last week the Departments of Treasury, Labor, and Health and Human Services (the “Agencies”) published final regulations regarding individual coverage health reimbursement arrangements (ICHRAs).  In general, ICHRAs are health reimbursement arrangements (HRAs) or other account-based group health plans that are integrated with a health insurance policy issued in the individual insurance market (or Medicare) for purposes of complying with certain requirements under the Patient Protection and Affordable Care Act (ACA).  During the Obama administration, the Agencies had taken the position that an HRA could be integrated only with group health plan coverage for purposes of satisfying the ACA’s requirements and specifically could not be integrated with individual health insurance policies.  The new regulations reflect a significant change in course at the Agencies and expand an employer’s ability to use an HRA as a method of providing health benefits to its employees by allowing integration with individual health insurance policies.[1]

ICHRA Requirements.  The final regulations impose a number of different requirements an ICHRA must satisfy.  An HRA that does not satisfy these requirements and is not otherwise exempt from or compliant with the ACA[2] will violate the ACA and may trigger penalties for the employer under the Internal Revenue Code or the Public Health Services Act.

No Offer of Traditional Group Health Coverage.  The final regulations do not allow an employer to offer both the ICHRA and a traditional group health plan to the same employees. A traditional group health plan generally includes any group health plan other than plans consisting solely of excepted benefits (e.g., dental plans, visions plans, most health FSAs, etc.).

Important:  Employees cannot be offered a choice between coverage under the ICHRA and traditional group health coverage.

An employer may, however, offer an ICHRA and a traditional group health plan to different groups of employees in accordance with certain requirements contained in the final regulations.

• An employer may grandfather employees eligible for its traditional group health plan and offer an ICHRA only to employees hired after a certain date.
• An employer may divide its employees into classes and offer an ICHRA to one or more classes and a traditional group health plan to one or more different classes.
• The regulations authorize the use of the following ten (10) specific classes: full-time employee; part-time employees; employees whose primary site of employment is in the same rating area; seasonal employees; employees subject to a particular collective bargaining agreement; employees who have not satisfied a waiting period under a group health plan; non-resident aliens with no U.S.-based income; salaried employees; hourly employees; and temporary employees of staffing firms.
  • The list is exclusive. Other classes (e.g., based on age or earnings) are not allowed.
  • An employer may create additional classes by combining two or more of the 10 approved classes.
• In some cases, an employer may designate a class for purpose of offering an ICHRA only if the class satisfies a minimum size requirement.
  • The minimum class size requirement applies only if the employer offers traditional group health plan coverage to at least one other class.
  • The minimum class size requirement generally applies only to the following classes: (1) salaried employees; (2) non-salaried employees; (3) full-time employees; (4) part-time employees; and (5) in some cases, employees whose primary site of employment is in the same rating area.
  • Compliance with the minimum size requirement is determined prior to the beginning of each plan year and is satisfied if:
    • The class includes at least 10 employees if the employer has fewer than 100 employees.
    • The class includes at least 10% of the employer’s total employees if the employer has between 100 and 200 employees.
    • The class includes at least 20 employees if the employer has more than 200 employees.

Other Coverage Requirement.  In order to participate in the ICHRA, covered individuals (employees and their dependents) must be enrolled either in individual health insurance or Medicare Parts A and B or C.

Note:  Enrollment in Medicare Part A by itself is insufficient.  The individual must have both Medicare Parts A and B or Medicare Part C.

• Individual health insurance includes all health insurance sold through the individual insurance market (including Exchange issued coverage, catastrophic coverage, and student health insurance) other than coverage consisting of solely HIPAA excepted benefits (e.g., dental or vision coverage) or short-term limited duration insurance (STLDI).
• The employer must implement reasonable procedures to substantiate the fact that covered individuals have satisfied the other coverage requirement. Substantiation is required annually and prior to each reimbursement.  Obtaining an attestation from the participant constitutes a reasonable substantiation procedure.
• The HRA must not reimburse any expenses incurred after the other coverage is canceled or terminated. In other words, participants have no ability to spend down the balance of their ICHRA if they lose the required individual health insurance or Medicare coverage.  Note, however, that the ICHRA must reimburse eligible expenses incurred prior to the cancellation or termination of the individual health insurance or Medicare coverage, provided that the plan may establish a reasonable deadline for submitting such expenses.  Also note that the rules authorize transfers from ICHRAs to other HRAs.
• Participants and their dependents are not required to have the same underlying coverage.
• The regulations make adjustments to the special enrollment rules applicable in the individual market to coordinate with ICHRAs.
• An ICHRA cannot be integrated with group coverage (i.e., an employee or dependent cannot satisfy the other coverage requirement via enrollment in a group health plan sponsored by another employer).
• Employers may permit employees to pay premiums for individual health insurance, to the extent they are not reimbursed through the ICHRA, through the employer’s Section 125 cafeteria plan provided the other coverage is not purchased through an exchange. This opportunity must be offered to all employees within a class of employees in accordance with the “same terms” requirement described below.

Note:  It appears the opportunity to pay individual health insurance premiums through the cafeteria plan might be available only if a portion of the premiums are reimbursed through the ICHRA (i.e., only if the cafeteria plan supplements the ICHRA).

Opt Out Requirement.  Like with HRAs integrated with a group health plan, participants must be given an opportunity to opt out of the ICHRA for themselves and all dependents.

• In general, the opportunity to opt out must be provided annually prior to the beginning of the plan year.
• If an employee or dependent becomes eligible mid-year, the opt out opportunity must be provided during the HRA enrollment period for the employee or dependent.
• If coverage under the ICHRA would continue after the termination of employment, the opt out opportunity must also be provided upon termination of employment.

ICHRA Must Be Offered on Same Terms.  If an employer offers an ICHRA to a class of employees (see above), then the ICHRA must be offered to all employees in that class on the same terms.

• The same terms include the maximum benefit available during the plan year (i.e., the amount of the employer contribution).
  • Variations in the maximum benefit are allowed based on the number of dependents covered by the ICHRA and the participant’s age (capped at a 3:1 ratio).
  • The maximum annual benefit may be prorated for participants who become covered under the ICHRA after the plan year has begun.
  • Carryovers and amounts transferred from another HRA are disregarded for purposes of this requirement so long as they are available on a uniform basis to all participants within a class of employees.
• An employer may offer the ICHRA to some, but not all, former employees within a class of employees (although the former employees participating in the ICHRA must be treated the same active employees in the same class).

Eligible Expenses.  As with HRAs in general, an ICHRA can reimburse all 213(d) medical expenses.

• The employer may also limit the type or types of eligible expenses (e.g., solely premiums, solely cost-sharing amounts, etc.).
• The employer may also design the ICHRA to be HSA compatible (e.g., limit eligible expenses to HDHP premiums and excepted benefits and/or post-deductible expenses). Such a plan design does not violate the “same terms” requirement described above provided all participants within a class have the same coverage options available to them.
• ICHRAs can reimburse Medicare and Medicare supplement premiums despite potential concerns under the Medicare secondary payer rules.

Notice Requirements.  Employers must distribute a notice to each employee who is eligible for the ICHRA annually at least ninety (90) calendar days before the start of each plan year.

Note:  Employers intending to adopt an ICHRA effective January 1, 2020, must distribute the first notice no later than October 2, 2019.

• The deadline is no later than the date coverage begins for employees who become eligible after the annual notice is provided or for new employers established less than 120 days before the effective date of the HRA.
• The Agencies have made available a model notice that will satisfy the content requirements. It is available here (https://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Market-Reforms/Downloads/HRA-Model-Notice-PDF.pdf).

Impact of ICHRAs on Premium Tax Credits and Employer Mandate. 

• Because an ICHRA constitutes minimum essential coverage, any employee enrolled in an ICHRA will be ineligible for premium tax credits (PTCs) for coverage purchased through an exchange.
• An employee who is offered an ICHRA, but opts out of the ICHRA, will generally not be disqualified for PTCs unless the ICHRA offered by the employer is affordable. An ICHRA is affordable for a given month if employee’s required contribution for the month does not exceed 1/12^th of the employee’s annual household income multiplied by the required contribution percentage.  The employee’s required contribution is the difference between the monthly premium for self-only coverage under the lowest cost silver plan offered by the exchange for the rating area in which the employee resides minus the monthly contribution to the ICHRA made by the employer for self-only coverage.
  • If an ICHRA is affordable under the forgoing test, it is deemed to provide minimum value for purposes of PTC eligibility.
• The final regulations do not specifically address the impact of offering an ICHRA on the ACA’s employer mandate. Rather, the Agencies cross referenced IRS Notice 2018-88 and indicated that the IRS would be proposing rules under Section 4980H regarding the issues addressed in that notice.  Notice 2018-88 suggests that the PTC rules described above will generally be used to determine whether an applicable large employer offering a ICHRA has offered affordable, minimum value coverage for purposes of Section 4980H.

ERISA Concerns.  Like HRAs in general, an ICHRA is an ERISA employee benefit plan unless it qualifies as a governmental or church plan.  The DOL clarified in the final regulations that individual health insurance policies, the cost of which is paid or reimbursed through an HRA (including an ICHRA) or through a Section 125 plan, will not become ERISA benefit plans due to the fact the premiums have been paid or reimbursed through that plan.  However, the arrangement must satisfy the following conditions:

• The purchase of the individual health insurance is completely voluntary. The fact that such coverage must be purchased to participate in the HRA does not make the purchase involuntary.
• The employer does not select or endorse any particular issuer or policy. For example, offering individual health insurance through a private exchange that does not include all individual health insurance offerings available in the particular market will not satisfy this requirement.
• Reimbursements for premiums are limited to premiums for policies that do not consist solely of excepted benefits.
• The employer receives no consideration in connection with the participant’s purchase of the insurance policy.
• The employer complies with an annual notice requirement informing participants that the individual health insurance coverage is not subject to ERISA. This requirement is incorporated into the notice requirement for ICHRAs described above.

Effective Date.  The final regulations become applicable on January 1, 2020.  Employers may establish ICHRAs effective as of that date.  In order to determine whether an ICHRA is appropriate for an employer and to implement the ICHRA in a timely manner, an employer considering an ICHRA for January 1^st needs to begin evaluating and planning now.

Please contact us if you have any questions about ICHRAs.

[1] The final regulations also address another type of HRA, referred to as an excepted benefit HRA.  We will be addressing excepted benefit HRAs in a subsequent client alert to be issued in the near future.

[2] Such HRAs include HRAs integrated with a group health plan pursuant to prior guidance from the Agencies, HRAs providing only excepted benefits (e.g., dental and vision care reimbursements), HRAs covering fewer than two current employees (e.g., retiree HRAs), and the new excepted benefit HRAs.