IRS Issues Guidance to Clarify Health Reimbursement Arrangement Rules
The IRS has issued proposed regulations to clarify the application of the ACA's employer shared responsibility provisions under Section 4980H of the Internal Revenue Code (the "Code") and certain nondiscrimination rules for self-funded plans under Code Section 105(h) to Individual Coverage Health Reimbursement Arrangements ("ICHRAs").
Background. The ACA's employer shared responsibility provisions apply to an employer that is an Applicable Large Employer ("ALE"). In general, an employer is an ALE for a calendar year if it had an average of 50 or more full-time employees (including full-time equivalent employees) during the preceding calendar year.
A health reimbursement arrangement ("HRA") is a form of employee benefit plan provided by an employer to its eligible employees to reimburse them for specified medical expenses incurred by themselves (or their dependents). Under an HRA, benefits received by an employee are: (i) paid up to a specific dollar amount from funds provided solely by the employer ; and (ii) entitled to tax-free treatment as amounts received under an accident and health plan.
An ICHRA is an HRA integrated with individual health insurance coverage or Medicare. Beginning on January 1, 2020, employers can provide ICHRAs that employees can use to purchase individual health insurance coverage.
Proposed Regulations. The proposed regulations clarify that an offer made by an ALE to a full-time employee to participate in an ICHRA will be treated as an offer of minimum essential coverage ("MEC") for purposes of avoiding the penalty under Code Section 4980H(a).
NOTE: An ALE may be liable for the Code Section 4980H(a) penalty if it fails to offer at least 95% of its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan and at least one full-time employee receives a premium tax credit.
The proposed regulations also explain that an employer can avoid the employer shared responsibility penalty under Code Section 4980H(b) by using ICHRAs that are considered "affordable" and provide minimum value.
NOTE: This penalty applies if a full-time employee receives a premium tax credit and that employee was not offered MEC, or was offered MEC that is not affordable or does not provide minimum value.
Current IRS regulations governing the ACA's employer shared responsibility mandate establish three safe harbors that ALEs can use to determine if the coverage they offer is affordable. The proposed regulations provide two new safe harbors for determining affordability in the context of ICHRAs: the "Location Based Safe Harbor" and the "Look-Back Month Safe Harbor." In general, ICHRA affordability is determined under the two new safe harbors based on the lowest- cost silver plan for self-only coverage offered through an Exchange in the rating area in which the employee resides.
Location-Based Safe Harbor. To determine if the ICHRA is affordable, an ALE uses the lowest- cost silver plan in the rating area in which the employee's primary site of employment is located (i.e., the location at which the employer reasonably expects the employee to perform services on the first day of the plan year).
- For an employee who regularly works from home, the worksite is the location where the employee would report to provide services, if requested.
- If an employee's site of employment permanently changes during the plan year, the new site of employment generally must be used by the first day of the second month after the employee begins to perform services at the new worksite.
- If there is more than one lowest-cost silver plan in the rating area, the plan used is the lowest-cost silver plan in the part of the rating area that includes the employee's primary location of employment.
Look-Back Month Safe Harbor. Under the Look-Back Month Safe Harbor, an employer generally can use the monthly premium for the lowest-cost silver plan for January of the prior calendar year (or January of the current calendar year if the ICHRA has a non-calendar year plan year).
Code Section 105(h) Nondiscrimination. Existing regulations allow an ALE to vary the amounts available under an ICHRA based on age. The proposed regulations provide that: (i) ICHRA contributions will not be treated as violating the Code Section 105(h) nondiscrimination rules solely due to variations based on age or family size; and (ii) other existing requirements under Code Section 105(h) remain in force (i.e., that a plan not discriminate in practice in favor of highly compensated employees).
Additional Guidance. The proposed regulations provide the following additional guidance:
- An ICHRA that is affordable is deemed to provide "minimum value."
- An ALE can continue to use the W-2 wages, rate of pay and federal poverty line affordability safe harbors from the existing Code Section 4980H regulations.
- An ALE can apply the safe harbors for any class of employees, provided it does so on a uniform and consistent basis.
- HHS will make available the lowest cost plan data in all states with federally-run Exchanges.