Proposed Regulations Provide Additional Guidance on Individual Coverage HRAs

The U.S. Department of the Treasury has issued proposed regulations addressing how individual coverage health reimbursement arrangements (ICHRAs) can comply with the Employer Shared Responsibility Payments (ESRP) requirements under the Affordable Care Act (ACA) and the nondiscrimination rules for self-funded medical plans under section 105(h) of the Internal Revenue Code.

The proposed regulations follow a set of final regulations issued in June that establish rules for ICHRAs. ICHRAs present an alternative to traditional group health coverage by allowing employers to establish an account-based group health plan that pays or reimburses some or all of the premium for an employee’s individual health insurance coverage. The new proposal also follows guidance issued last year on the interplay between the ESRP and nondiscrimination rules and ICHRAs.

Employer Shared Responsibility Payment Requirements

The ESRP rules require applicable large employers (ALEs)—employers with 50 or more full-time (or full-time equivalent) employees—to offer group health coverage to full-time employees and their dependents that meets certain standards, or pay an assessment under the Internal Revenue Code. There are two basic standards that apply:

• An ALE must offer minimum essential coverage to at least 95 percent of its workforce, and their dependents.
• The coverage offered by an ALE must be affordable (with employee contributions not exceeding a specified percentage of the employee’s household income) and provide minimum value, covering at least 60 percent of expected medical expenses. 

Affordability Safe Harbors

The new guidance focuses primarily on affordability.

Under traditional group health plans, affordability can be measured by testing the amount that employees are required to contribute toward employer-provided group health coverage. With an ICHRA, coverage is purchased on the individual market, where premiums vary with each insurance carrier and policy. The final ICHRA regulations tie the cost of coverage for affordability testing to the lowest-cost silver plan available through the applicable ACA Exchange. The new proposed regulation introduce two basic safe harbors for applying the test. 

Location Safe Harbor

In general, the monthly premium of the lowest-cost silver plan available on an Exchange is determined by the rating area in which an individual resides. The proposed regulations offer employers a simplifying safe harbor that bases the rating area on the “employee’s primary site of employment,” which is determined in accordance with specified rules, including:

• The primary site of employment is generally the location where an employee is expected to perform services on the first day of the plan year. 
• If an employee’s worksite changes permanently or indefinitely during the plan year, the primary site of employment must be changed to the new location no later than the first day of the second month after the employee begins performing services at the new location.
• If the employee regularly works at home, but reports to a particular office or worksite, that location is the primary site of employment. 
• If the employee works at home, but does not report to a particular location, the employee’s residence is the primary site of employment.

Look-Back Month Safe Harbor

Employers generally determine the health benefits they will offer and the amount to make available in an ICHRA for an upcoming plan year well in advance. For employers with calendar plan years, this determination will often precede the date on which the monthly premium for the lowest-cost silver plan for the upcoming plan year is announced. The proposed regulations introduce a safe harbor that allows these employers to look back at the monthly premium for the lowest-cost silver plan in January of the prior calendar year to determine affordability. Employers with non-calendar plan years may look back at the premium for January of the current year.

Use of these affordability safe harbors is optional, and an employer may use them for any class of employees permitted under the ICHRA rules as long as it does so in a consistent manner for that class.

The proposed regulations and accompanying comments address a number of additional issues, including:

• If an ALE’s ICHRA is deemed affordable, it will be deemed to meet the standards for providing minimum value. The proposed regulations are able to avoid the complexity of the minimum value rules because ACA regulation of the individual health insurance market provides assurance that the individual insurance purchased by the employee will provide minimum value.
• Because the final ICHRA regulations allow for integration of an ICHRA with Medicare, the offer of an ICHRA to full-time employees who are enrolled in Medicare will be deemed an offer of coverage for purposes of the ESRP rules.
• The final ICHRA regulations generally allow employees to pay for the cost of individual health insurance beyond what is covered by an ICHRA with pre-tax dollars through a cafeteria plan. This opportunity does not extend to insurance provided through an ACA Exchange, which is specifically prohibited by cafeteria plan rules.

105(h) Nondiscrimination

Section 105(h) of the Code prohibits group health plans from discriminating in favor of highly compensated employees. These rules generally prohibit plans from providing increased limits on benefits for individuals on account of their age. By contrast, the final ICHRA regulations specifically permit employers to increase the amounts available under an ICHRA based on age, provided they meet specified criteria. The proposed regulations provide that ICHRAs that meet these criteria will not be treated as violating the section 105(h) nondiscrimination rules. 

Unlike the rules on ESRP requirements, the latest guidance does not offer a safe harbor on nondiscrimination. If increased contributions to older ICHRA participants disproportionately favor highly compensated employees, those employees may be taxed on what is considered the discriminatory amount.

Ballard Spahr Employee Benefits and Executive Compensation attorneys can advise health plan sponsors on how to navigate the new ICHRA rules to comply with applicable requirements.

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