Employers May Offer Individual Coverage HRAs in 2020
On September 30, 2019, IRS released proposed regulations clarifying the application of the employer shared responsibility provisions and nondiscrimination rules to individual coverage HRAs, authorized by final regulations issued June 20, 2019 (effective August 19, 2019). The new proposed rules provide safe harbors for applicable large employer (ALEs) who choose to provide individual coverage HRAs to their employees in 2020. These individual coverage HRAs may provide new savings to some employees without employer-provided group health care coverage. They do, however, come at the cost of rendering employees ineligible for a premium tax credit (PTC).
The June regulations sought to implement President Trump’s October 12, 2017, Executive Order 13813, which directed the agencies to propose guidance to expand employers’ ability to offer HRAs to their employees. The rules sought to restore some employer health plan options that existed before the Affordable Care Act.
Before the ACA, many small businesses, including farming businesses, reimbursed their employees for the cost of coverage they purchased on their own. This reimbursement was tax free to the employee and deductible by the employer. The ACA imposed a number of new “market reforms” that had to be included in all group health insurance policies.
IRS Notices 2013-54 and 2015-17 established that employer reimbursement plans and standalone HRAs are “group health plans.” Consequently, if an employer reimburses its employees for the cost of acquiring health insurance on the individual market, the employer has established a “group health plan” subject to ACA market reforms. Because such a plan imposes an annual dollar limit up to the cost of the individual market coverage purchased, it violates the “no annual dollar limits” requirement of the ACA. Similarly, because standalone employer payment plans do not provide preventive services without cost-sharing in all instances, they violate the preventive services requirements of the ACA. As such, the agencies made clear that such arrangements did not comply with the ACA and that their sponsors were subject to an excise penalty in an amount up to $100 per day per employee per violation. Several plans were exempt from the requirements:
- Plans with fewer than two participants who are current employees were allowed to continue without penalty (known as the retiree-only exception, this exception allows employers with only one employee to continue to reimburse the cost of their health coverage or to provide an HRA to that sole employee.)
- HRAs established to reimburse employees for excepted benefits such as limited dental and vision benefits and some long-term care coverage were also allowed to continue without penalty.
In December of 2016, Congress passed a law (as part of the 21st Century Cures Act) that allowed small employers to again offer some HRAs to their employees. Called Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs), these plans are helpful for some small employers (fewer than 50 employees). If the plan complies with the law, the QSEHRA is deemed not to be a “group plan” subject to ACA market reforms. Significant restrictions, however, have limited their usefulness for many small employers. In particular, if employees must buy coverage on the Marketplace, the QSEHRA will make them ineligible for a premium tax credit (PTC) or, if the coverage is “unaffordable,” the PTC is still reduced by the amount offered by the QSEHRA. The fact that the employer offers the plan (even if the employee does not receive a benefit) triggers the PTC reduction. There is no opt-out. If an employee has insurance coverage through a spouse’s employer, the QSEHRA may reimburse for those premiums. If the spouse can pay those premiums on a tax-free basis, however, the QSEHRA reimbursement is taxable. In other words, the employer could provide the same economic benefit to the employee by raising wages. QSEHRA plans are also limited to a contribution amount of $5,150 for a self-only employee and $10,450 for a family plan
June 20, 2019, Regulations
The final regulations effective August 19, 2019, allow employers to establish new forms of account based plans, including individual coverage HRAs and excepted benefits HRAs, to help their employees purchase health care insurance or pay medical expenses on a tax-advantaged basis for plan years beginning in 2020.
Individual Coverage HRAs
Under the regulations, employers may provide individual coverage HRAs to their employees who purchase individual health insurance on their own. Prior regulations allowed HRAs to be “integrated” or provided only in conjunction with employer-provided group health insurance. The new regulations allow integration of an HRA with individual health insurance coverage, including the following types of plans:
- Plans purchased on the ACA healthcare exchange (the Marketplace)
- ACA-compliant plans purchased through the individual health insurance market
- “Grandfathered” and “Grandmothered” plans (plans not compliant with ACA, but allowed to remain)
To receive reimbursements under the HRA, the employee (and any dependents covered by the plan) must prove actual enrollment in individual health insurance coverage or Medicare Part A (Hospital Insurance) and B (Medical Insurance) or Medicare Part C (Medicare Advantage) for each month covered by the HRA. Health sharing ministries and the new Farm Bureau Health Plans do not constitute eligible coverage.
To prevent employers from using these new regulations to encourage high risk employees to purchase insurance on the individual market rather than enroll in a current group health plan, the regulations include anti-discrimination provisions designed to protect against abuse. Under the rules, employers may offer group coverage or an individual coverage HRA to each class of employees, but they may not offer both. The plan offered would have to be the same for everyone in the same class of employment. Employers may, however, make distinctions, using classes based on the following status:
- Full-time employees,
- Part-time employees,
- Employees working in the same geographic location (generally, the same insurance rating area, state, or multi-state region),
- Seasonal employees,
- Employees in a unit of employees covered by a particular collective bargaining agreement,
- Employees who have not satisfied a waiting period,
- Non-resident aliens with no U.S.-based income,
- Salaried workers,
- Non-salaried workers (such as hourly workers),
- Temporary employees of staffing firms, or
- Any group of employees formed by combining two or more of these classes.
Minimum class size rules apply to these categories. Employers are also allowed to offer new employees an individual coverage HRA, while grandfathering current employees in a traditional group health plan. Employers are allowed to contribute as little or as much as they want to the individual coverage HRA. They just must offer the same HRA on the same to terms to all employees within a class. Amounts, however, may be higher for older employees or for employees with more dependents.
Interaction with the Premium Tax Credit
Individual coverage HRAs could provide substantial tax-advantaged savings for some employees purchasing health care insurance or services. For other employees, however, the individual coverage HRA may increase the cost of their coverage. This is because individuals covered by an individual coverage HRA are ineligible for the premium tax credit. The premium tax credit (usually paid in advance) is available to offset the cost of plans purchased on the Marketplace for taxpayers with incomes at or below 400 percent of the federal poverty limit. The credits can be substantial, often reducing the sticker price of the policy by many thousands of dollars a year. Individual insurance purchase on the Marketplace is often unaffordable (even for those above 400 percent of the FPL) if the taxpayer does not qualify for the PTC.
Although employees are allowed to opt out and waive any reimbursements under the HRA, they will remain ineligible for the PTC, unless the HRA is either unaffordable (according to the formula provided in the regulation) or does not provide minimum value (the regulations provide that affordable coverage will always provide minimum value). If the employee opts out because the plan is unaffordable, the “offered” HRA reimbursements will not reduce the employee’s allowable PTC.
Affordability is established if the employee’s required HRA contribution does not exceed 1⁄12 of the employee’s household income multiplied by a “required contribution percentage,” which is 9.86 percent in 2019. The employee required HRA contribution amount is calculated by subtracting the monthly HRA contribution for self-only coverage by the lowest cost silver plan for self-only coverage available to the employee through the Exchange for the rating area in which the employee resides. This affordability calculation applies even where the employee is purchasing insurance for the family.
Although affordability is determined on a monthly basis, the HRA will be considered unaffordable for the entire year if it is unaffordable at the time the determination is made. Employers are required to give notice to employees to ensure that they are aware of the impact of the HRA on their PTC eligibility. Sample notice and attestation forms are available on the IRS website.
Excepted Benefits HRAs
The HRA regulations alternatively allow employers to establish an excepted benefits HRA to its employees. This benefit can be in an amount up to $1,800, regardless of family size or age. Excepted benefits plans cannot reimburse for health insurance premiums or Medicare coverage. They are restricted to reimburse:
- Limited dental and vision coverage
- COBRA expenses
- Short-term health plan expenses
- Expenses not covered by the associated group health plan
Additionally, an excepted benefits HRA must meet these requirements:
- The employer must offer a group health plan, but the excepted benefits HRA must not be an integral part of that plan,
- the HRA must provide benefits that are limited in amount,
- the HRA cannot provide insurance premium reimbursement, and
- the HRA must be made available on the same terms to all similarly situated individuals.
The employer may not offer both an excepted benefits HRAs and an individual coverage HRA. Offering an excepted benefits HRA does not make employees ineligible for the PTC because this type of HRA is not minimum essential coverage.
September 30, 2019, Proposed Regulations
The proposed regulations under IRC § 4980H that were issued on September 30, 2019, provide several safe harbors for applicable large employers (ALEs) to determine whether an offer of an individual coverage HRA constitutes an offer of affordable coverage for purposes of the employer shared responsibility provisions. Employers with an average of 50 or more full- time employees (including full-time equivalent employees) during the preceding calendar year remain subject to the employer mandate. This mandate triggers a penalty for any month an ALE fails to offer coverage under an eligible employer-sponsored plan to at least 95 percent of its full-time employees (and their dependents). Less costly penalties apply if individual employees receive a PTC because the coverage offered was not affordable.
Health care remains a costly problem for many employers and their employees. It remains to be seen how these new regulations will impact the individual healthcare market. Employers should work with an advisor to determine the risks and rewards of the new options available.
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