Any time the government proposes changes, there are almost inevitably a series of related rules that need to be tweaked or addressed. The new proposed rules allowing employers to reimburse for individual insurance policies are no exception.
In our prior piece, we noted that the agencies did not fully address how the proposed rules would work with the Affordable Care Act (“ACA”) employer mandate. Additionally, the proposal included some options that could, or would, violate existing nondiscrimination rules that apply to health reimbursement arrangements (“HRAs”) and other self-insured health plans. The IRS is now starting to address those concerns with the release of Notice 2018-88 (the “Notice”).
The purpose of the Notice is to suggest some ways the IRS might address these issues and ask for comments. Employers should not start implementing the rules described in the Notice. However, employers who have relevant opinions or ideas, should consider submitting comments as described in Section V of the Notice.
The Employer Mandate
By way of background, the ACA employer mandate applies to applicable large employers (“ALEs”). ALEs are generally employers that employed 50 full-time and full-time equivalent employees in the prior calendar year. To avoid any employer mandate penalty, an ALE must offer affordable, minimum value, minimum essential coverage to its full-time employee and must offer minimum value, minimum essential coverage (which does not have to be affordable) to the full-time employee’s dependents. The penalties are as follows:
- $2,320 per year (for 2018, adjusted annually) multiplied by the number of all the employer’s full-time employees, minus the first 30 full-time employees. This applies if the ALE does not offer any coverage or offers minimum essential coverage to less than 95% of its full-time employees (and their dependents), and at least one full-time employee receives a premium tax credit to help pay for coverage through an ACA Marketplace (The “A” penalty, see IRC 4980H(a)); or
- $3,480 per year (for 2018, adjusted annually) multiplied only by the number of the employer’s full-time employees who actually received a premium tax credit. This applies if the ALE offers coverage to at least 95% of its full-time employees (and their dependents), but at least one full-time employee receives a premium tax credit to help pay for coverage through a Marketplace. (The “B” penalty, see 4980H(b)). This could happen if the full-time employee was in the less than 5% who were not offered coverage. It could also happen if the employer’s plan was not affordable for the employee or did not provide minimum value.
Anticipated Guidance on the Employer Mandate
The Notice confirms that an employer would satisfy the A penalty by offering its full-time employees an HRA that reimburses premiums for individual coverage (an “individual insurance HRA”). Just like with other employer-based coverage, this is true whether or not the individual insurance HRA is affordable or provides minimum value.
Avoiding the B penalty is a bit more complicated because the individual insurance HRA has to be affordable and provide minimum value. Coverage is generally “affordable” if the employee’s cost of self-only coverage is less than a certain percentage (9.56% in 2018; 9.86% in 2019) of the employee’s household income (or one of the IRS-approved safe harbors that are proxies for the employee’s household income).
When an employer offers a traditional health plan to its employees, the employee’s cost is easy to determine because the employer sets it. However, offering an individual insurance HRA inverts that calculation: the employer is providing its contribution, but may not know what the employee is actually paying for his or her individual market coverage.
To address this, the IRS is proposing a series of options to determine the cost of coverage. They are:
- The employee’s actual contribution toward the cost of individual coverage.
- HUB Point: This requires the employer knowing what the employee is paying for the individual coverage. This will vary by employee and may not be information the employer has.
- The worksite safe harbor (what the IRS calls the “location safe harbor”).
- Under this safe harbor, the employer uses the premium for the lowest cost sliver-level individual plan (minus the HRA amount) for the employee’s worksite location, rather than the employee’s residence.
- Because individual premium cost can vary by geographic rating area, employees who all work at one worksite can have varying premium costs based on where they live. This safe harbor would let the employer focus on the cost of coverage that would apply in the area of its worksite rather than for all employees at the worksite.
- HUB Point: This presents a question for remote employees. Would their premium be determined by where they work (which is likely the same as where they live) or by the worksite into which they report? If it’s where they live, this would not be any different than using the employee’s actual contribution.
- The prior calendar year safe harbor.
- This would allow employers to use the amount the employee paid for his or her coverage in the prior calendar year, minus the current year HRA contribution. For example, to determine whether an HRA provided affordable coverage in 2021, the employer would use the cost of the employee’s premium in 2020 minus the amount available under the HRA in 2021.
- As of now, this would only be allowed for HRAs with a plan year that is the same as the calendar year.
- The IRS is proposing this because they know plan design decisions are often made before new premium amounts are available for individual plans. Those premium amounts typically aren’t available until November.
- HUB Point: Employers would still need to collect this premium information from employees, presenting a practical difficulty. However, the IRS is proposing that the employer could combine this safe harbor with the worksite safe harbor, which would allow the employer to use the prior year premium for the employer’s worksite, minus the current HRA amount.
- HUB Point: Some HRAs with non-calendar plan years (such as those that begin in February, March, etc.) might have similar difficulties in setting HRA amounts based on the current year’s cost of coverage. If this safe harbor is finalized, hopefully it will be expanded to include those HRAs as well.
- The first day of the HRA year safe harbor
- The IRS is also proposing a rule under which the HRA would be treated as affordable for the entire HRA plan year if it was affordable for the first month of the HRA plan year.
- This is designed to prevent HRAs that don’t line up with an employee’s tax year (usually, the calendar year) from having to change their contribution amounts during the plan year.
The above cost safe harbors primarily focus on how to determine the cost of coverage. However, as noted above, affordability is based both on the cost of coverage and the employee’s household income.
For traditional employer coverage, the IRS has proposed three affordability safe harbors that are designed to either approximate the employee’s household income or, alternatively, insure the coverage is very likely to be affordable. Under these safe harbors, the cost of self-only coverage cannot be more than the specified percentage (9.56% in 2018; 9.86% in 2019) of:
- The federal poverty level applicable to the employee;
- The employee’s W-2 wages; or
- The employee’s rate of pay.
The IRS is proposing that these existing affordability safe harbors could also be applied based on the cost of individual coverage. In other words, an employer could take the individual cost (either the actual cost or the cost determined using the above-described cost safe harbors) and use it as the employee’s cost for purposes of the affordability safe harbor.
The IRS is also proposing that employers would be required to apply these cost and affordability safe harbors consistently within groups of employees. Similar rules exist for applying the current affordability safe harbors to employer-based coverage.
Of course, coverage also has to provide minimum value, in addition to being affordable. However, the IRS proposes that an HRA that’s affordable would be treated as providing minimum value. That simplification, if finalized, would be welcome news.
Under existing nondiscrimination rules, HRAs generally cannot provide greater benefits to highly compensated individuals (generally, the top 25% of an employer’s workforce). Additionally, the maximum amount available for reimbursement under an HRA cannot vary based on an employee’s age, among other factors. Violating these rules would make the HRA reimbursement amounts taxable to the highly compensated employees, which is undesirable.
By contrast, the proposed individual insurance HRA rules would allow amounts to vary based on classes of employees (e.g., full-time versus part-time) and increase based on an employee’s age. The ability to increase reimbursement based on age is trying to recognize that premiums for individual market coverage increase based on age as well.
Varying maximum reimbursement by classes of employees could mean that highly compensated individuals receive greater reimbursement. However, the IRS expects to issue future guidance that says an individual insurance HRA would not violate the nondiscrimination rules as long as the maximum reimbursement was consistent within each class of employees. The IRS also expects the guidance would allow individual insurance HRAs to increase reimbursement based on the employee’s age.
If the IRS issues this guidance, it would mean that individual coverage HRAs would not be discriminatory as long as employees in the same class, who are the same age, could receive the same maximum reimbursement.
However, the Notice also reiterates that an individual insurance HRA that only reimburses for insurance premiums is not subject to the nondiscrimination rules. This is based on existing regulations and is unlikely to change. Therefore, if an employer wanted to avoid any nondiscrimination concern, it could limit reimbursement under the individual insurance HRA only to premiums for the cost of individual coverage.
As with the proposed HRA rules, the Notice is just an expression of where the IRS expects to go. While it is a helpful breadcrumb in that process, employers cannot start implementing this now. However, employers interested in providing thoughts on the proposals in the Notice should consider submitting comments as described in Section V of the Notice. HUB International will continue to monitor these developments and provide updates, as appropriate.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.