Proposed regulations address individual coverage HRA affordability and nondiscrimination requirements

    The U.S. Treasury has issued proposed regulations that apply the Affordable Care Act (ACA) affordability requirement to individual coverage health reimbursement accounts (ICHRAs). The proposed rules also cover ICHRA nondiscrimination requirements. 

    According to final regulations issued in June by the U.S. Treasury Department, the Labor Department, and the Department of Health and Human Services (the agencies), employers of any size can for the first time contribute to health reimbursement accounts (HRAs) that their employees can use to purchase ICHRAs, effective as of 2020. To avoid shared responsibility payment penalties under the ACA, an employer that is an “Applicable Large Employer” (generally, having had 50 or more full-time equivalent employees for the immediately preceding year) must provide its employees with medical coverage that offers minimum value and is affordable.  

    It is noteworthy that under the proposed regulations, effective for 2020, if an ICHRA satisfies the affordability requirement, it will automatically be treated as satisfying the minimum value requirement.

    Understanding ICHRAs

    The proposed regulations offer employers the following guidance:

    - Employees not permitted to choose between group health plan or ICHRA – Employers will be permitted to offer a group health plan or an ICHRA, but are not allowed to maintain both and let employees choose between them.

    No minimum or maximum contribution amounts – Subject to specified class requirements, employers will be free to determine the amount of their contributions. No employee contributions will be permitted.

    Differing treatment permissible for different classes of employees – Employers will be permitted to offer an ICHRA on a class-by-class basis (based on certain employment variations, such as salaried or hourly, full-time or part-time, seasonal, temporary, and collectively bargained, as well as employee location in certain geographic areas (generally, the same insurance rating area, state, or multistate region).

    o If, on the basis of full-time or part-time, salaried or 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 comprise not less than 10 employees if the employer has fewer than 100 employees, 10% of all employees if the employer has 100 to 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 they may increase the ICHRA amount for older workers and 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 in 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, employers can continue their existing group health plan but implement an ICHRA solely for new employees.

    No use-it-or-lose-it requirement – An ICHRA will be able, but is not required, to provide for unused amounts from one year to continue to be available for future year reimbursements.

    Coverage satisfies 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 must 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 mandatory 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. Employers can use the model notice provided by the U.S. Treasury to satisfy the notice requirement.

    Defining affordability for ICHRAs

    An ICHRA is considered affordable for full-time employees (the affordability requirement does not apply to an ICHRA for part-time employees only) if the amount an employee must pay for self-only monthly coverage under the lowest-cost Silver plan offered on the Exchange in the employee’s rating area (where the employee resides), less the self-only monthly amount the employer provides under the ICHRA, does not exceed 9.78% (for 2020) of the employee’s household income. Thus, the affordability requirements depend in part on an employee’s household income and rating area, which may not be readily available to the employer. The proposed regulations provide safe harbors to ease this administrative burden for employers.

    Look-back month safe harbor – The Exchanges may not establish their premium costs until just before open enrollment, making it difficult for employers to determine the amount of their required ICHRA contribution in advance. This safe harbor will permit a calendar year HRA to use the cost of the lowest-cost Silver plan offered on the Exchange in the employee’s rating area during January of the immediately preceding calendar year. A noncalendar year HRA would use January of the current year.

    Form W-2 safe harbor – Because an employer may not have its employees’ household income information, this safe harbor will permit the affordability requirement to be treated as met if the amount the employee must pay on the Exchange – after taking into account the employer’s ICHRA contribution amount – does not exceed 9.78% (for 2020) of the employee’s current calendar year Form W-2 Box 1 wages. This will require the employer to project the employee’s W-2 wages at the beginning of the calendar year.

    Rate-of-pay safe harbor – To avoid the projection of W-2 wages for the year, this safe harbor will treat the ICHRA as affordable if the amount the employee must pay on the Exchange for the calendar month – after taking into account the employer’s ICHRA contribution amount – does not exceed 9.78% (for 2020) of the employee’s monthly salary. A different and more complex analysis is used for hourly paid employees.

    Federal poverty-line safe harbor – This safe harbor will treat the ICHRA as affordable if the amount the employee must pay on the Exchange for the calendar month – after taking into account the employer’s ICHRA contribution amount – does not exceed 9.78% (for 2020) of one-twelfth of the federal poverty line for a single individual for the applicable calendar year.

    Location safe harbor – Because the employer must use the lowest-cost silver plan in the employee’s rating area, in lieu of the employee’s area of residence, this safe harbor will permit the employer to use the primary site of the employee’s employment to determine the employee’s rating area. Special rules are provided for changes of the employee’s primary employment site and for employees who work from home.

    What to consider in ICHRA nondiscrimination testing

    In general, the nondiscrimination requirements for self-insured medical plans preclude discriminatory benefits for highly compensated employees. These rules generally do not permit differing contribution levels based on an employee’s age or length of service. The proposed regulations, however, allow different ICHRA contribution levels based on the number of dependents covered or the employee’s age (provided that the oldest participants do not receive an amount that exceeds 300% of the amount the youngest participants receive). In this regard, however, the preamble to the proposed regulations reminds taxpayers that the use of the special rule allowing the number of dependents and the employee’s age to be considered must still pass muster under the nondiscrimination in operation requirements.

    What does CohnReznick think?

    The government has estimated that approximately 800,000 employers will offer ICHRAs to pay for health insurance covering more than 11 million individuals. The fact that the proposed regulations address requirements specific to ACA-covered Applicable Large Employers demonstrates the IRS’ expectation that both large and small employers will use ICHRAs. The guidance provided, specifically the various safe harbors, should assist Applicable Large Employers in meeting their obligations under the ACA to provide ICHRAs that meet the affordability standard.


    Dana Fried, Managing Director, National Tax Services



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    Dana Fried

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    Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.