Final regulations permit expanded use of health reimbursement accounts

The Regulations are the result of President Trump’s October 2017 executive order mandating new health care rules to increase consumer choice in the health insurance market. The Regulations significantly expand the existing Qualified Small Employer Health Reimbursement Accounts (QSEHRA) opportunity (for employers with less than 50 full-time employees and no group health insurance plan), such that employers of any size will be able to offer a new type of HRA to help pay for their employees’ individual coverage on a tax-favored basis.

An HRA is a tax-favored account to which an employer can contribute on a tax-deductible basis (there is no minimum or maximum contribution amount) for use by the employee for tax-free reimbursement of qualified medical expenses, including employer group health plan deductibles and copay amounts. Under the law currently in effect since the Obama administration (except for QSEHRAs as discussed above), the use of employer contributions to HRAs by employees to purchase individual health care coverage has been precluded. The Regulations establish Individual Coverage Health Reimbursement Accounts (ICHRAs), which will be permitted to reimburse employee individual coverage premiums, and Excepted Benefit Health Reimbursement Accounts (EBHRAs), which will be available to provide additional tax-favored employee medical expense reimbursement opportunities for employee out-of-pocket costs, such as copays, deductibles, and medical expenses not covered under the employer’s group health plan. Employers will be able to offer ICHRAs and EBHRAs as of Jan. 1, 2020.

• Employees not permitted to choose between group health plan or ICHRA – An employer will be permitted to maintain both a group health plan and an ICHRA simultaneously; however, it will not be permissible for an employer to maintain both and to permit an employee to choose between them.
• No minimum or maximum contribution amounts – Subject to specified class requirements, the employer will be free to determine the amounts of its contributions (no employee contributions will be permitted).
• Differing treatment permissible for different classes of employees – An employer will be permitted to offer an ICHRA on a class-by-class basis (based on certain employment variations, such as salaried/hourly, full-time/part-time, seasonal, temporary, collectively bargained, and employees located in certain geographic areas – generally, the same insurance rating area, state, or multistate region)

o If, on the basis of full-time/part-time, salaried/nonsalaried, or geographic location (if the location is smaller than a state), an employer provides a group health plan to certain classes of its employees and an ICHRA to others, each class must be comprised of not less than: 10 employees if the employer has fewer than 100 employees, 10% of all employees if the employer has 100-200 employees, or 20 employees if the employer has more than 200 employees.

• Additional flexibility – Employers that offer an ICHRA will be required to do so on the same terms for all employees in a particular class, but it will be permissible for them to increase the ICHRA amount for older workers and for workers with a greater number of dependents.
• Employee individual or Medicare coverage required – To be eligible, an employee will be required to have individual coverage (whether or not purchased on an exchange) or be enrolled under Medicare for each month the employee or a family member is to be covered by the ICHRA. Employees will be required to substantiate their individual or Medicare coverage annually and each time they seek reimbursement; model attestation forms have been provided for this purpose. The individual coverage cannot be short-term, limited-duration insurance, or coverage consisting solely of dental and/or vision benefits.
• Grandfathering available – If desired, an employer will be able to continue its existing group health plan, but implement an ICHRA solely for new employees.
• No use-it-or-lose-it requirement – An ICHRA will be able (not required) to provide for unused amounts from one year to continue to be available for future-year reimbursements.
• Coverage satisfies Affordable Care Act (ACA) employer mandate – An employer’s offer of ICHRA coverage will count as an offer of coverage for purposes of the ACA’s employer mandate for “Applicable Large Employers” (generally, those having 50 or more full-time employees).
• No premium tax credit – No premium tax credit will be available for an individual for any coverage purchased on an exchange for any month for which the individual is covered by an ICHRA.
• Annual employee opt-out opportunity – Employees will be required to have at least an annual opportunity to opt out (i.e., to obtain a premium tax credit for the purchase of individual coverage on an exchange if the ICHRA is considered “unaffordable” under the ACA).
• Employee notice – A detailed written employee notice will be mandated, to explain the operation of the ICHRA, including how the availability of the ICHRA offer may preclude an employee’s eligibility for a premium tax credit in connection with their purchase of individual health care coverage on an exchange. A model notice has been provided as part of the Regulations package and may be used by employers to satisfy the notice requirement.

• Annual contribution limitation – Contributions (employer only; no employee contributions permitted) will be limited to $1,800 per year (to be indexed for inflation annually, beginning in 2021).
• Must be offered in conjunction with a group health plan – An EBHRA must be required to be offered in conjunction with a group health plan; however, an employee will not be required to enroll in the employer’s group health plan as a requirement to have an EBHRA.
• Available for copays, etc. – An EBHRA would be used to cover employee costs for copays, deductibles, and/or noncovered medical expenses.
• Cannot be used for certain premium payments – EBHRA reimbursements will not be available for individual or group health insurance premiums or contributions, group health plan premiums (other than COBRA), or Medicare premiums; however, premiums for dental and/or vision coverage will qualify.

Per the questions and answers issued by the Agencies in conjunction with the Regulations, ICHRAs are intended to increase the use of HRAs, especially for smaller employers, to assist them in avoiding the costs and administrative efforts involved in maintaining a traditional group health plan. However, in addition to the use of ICHRAs by small employers, consider a larger employer with a group health plan and one employee in a particular state where individual coverage is available at a low cost; the employer and the employee could each enjoy cost savings by the employee obtaining that individual coverage at the employer’s expense through the use of an ICHRA. It is also significant that the offer of an ICHRA to an employee will satisfy the employer mandate under the ACA for “Applicable Large Employers.”  An ICHRA does not eliminate all administrative requirements, due to the employee notice and attestation requirements; however, the model employee notices and attestation forms provided by the Agencies for these purposes are very helpful. The Agencies anticipate that approximately 800,000 employers will  offer ICHRAs to pay for health insurance covering more than 11 million individuals.

Dana Fried, Managing Director, National Tax Services 

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