By: HUB’s EB Compliance Team
Under final rules jointly released last week, the Departments of Treasury, Labor, and Health and Human Services (the “Departments”) completed their controversial U-turn (see our prior article) on employers reimbursing for individual coverage through a health reimbursement arrangement (“HRA”). The new rules take effect January 1, 2020. Until then, employers are still prohibited from reimbursing premiums for individual coverage.
The Final Rules
However, starting in 2020, reimbursing premiums for individual coverage through an individual coverage HRA (“ICHRA”) is permissible. The concept of ICHRA is intended to deliver a new avenue for employers to more flexibly fund employee health coverage. Although the pitch sounds appealing, there are many uncertainties about meaningful marketplace coverage opportunities for workers. Moreover, the new guidance imposes key restrictions and limitations:
- Authorized Classes: Although the rules allow employers to offer the ICHRA to select employee classes (or a combination of classes), the ICHRA must be made available to all employees within that class (or combination of classes). The new regulations only allow the following classes:
- Unionized employees (which can be as narrow as those covered by a particular bargaining agreement)
- Employees who have not satisfied the group health plan’s waiting period
- Non-resident aliens with no U.S.-source income
- Temporary employees who are part of a temp agency (if the temp agency is offering the individual coverage HRA)
- Employees whose primary employment site(s) is (are) in the same insurance rating area (as defined by the ACA)
- HUB Point: Last year’s proposed HRA rules omitted salaried, non-salaried, and the temp employees from the class definition. The Departments were initially concerned that allowing distinctions based on salaried versus non-salaried would be subject to manipulation, but were persuaded by comments to the proposed rules that such manipulation was unlikely.
- Minimum Class Size: The class of employees offered the ICHRA generally must satisfy the following minimum size requirements:
- For employers with fewer than 100 employees, the class must be at least 10 employees
- For employers with 100 to 200 employees, the class must be at least 10% of the employees
- For employers with more than 200 employees, the class must be at least 20 employees
- Integration of HRA and Individual Coverage: The ICHRA can only be available to employees (and their dependents) who are actually enrolled in individual market coverage.
- For this purpose, “individual coverage” includes not only individual market coverage (whether offered through the ACA exchange/marketplace or not), but also student health insurance coverage (applicable to certain educational institutions) and Medicare Parts A and B or Medicare Part C.
- Individual coverage excludes all of the following: coverage under the plan of a spouse, short-term limited duration policies, health care sharing ministries, and TRICARE.
- Substantiation Requirements: The employer must have reasonable procedures to verify that the employee and dependents are actually enrolled in individual coverage. Employers can have the employee attest that they are covered or provide documentation (like an EOB or insurance card). The employer must ask for this verification at enrollment and every time a reimbursement is requested.
- Notice from Employees: The ICHRA must require employees to provide a notice if their coverage is cancelled. If individual coverage is cancelled, the employer must cease to make reimbursements and employees forfeit the right to the HRA and to COBRA continuation rights for the ICHRA. Some employers may find mandating incoming notification about cancellations challenging.
- ICHRA or Group Plan, but Not Both: Employees cannot be offered both ICHRA and a group health plan. It has to be one or the other.
- Uniform Offering: The ICHRA must be offered on the same terms to all employees who are enrolled. However, the maximum reimbursement can increase as the age of the employee increases (but no more than by a multiple of three) and as the number of dependents enrolled increases. Employers can also give employees a choice between an HRA that is compatible with a health savings account (“HSA") and one that is not. “Compatible” here means the HRA reimbursement generally only kicks in after the HSA minimum deductible is satisfied.
- Opt-Out Rights: Participants must be given the right to opt-out of future reimbursements at least once a year and upon termination of employment. This annual opt-out appears to correspond with ACA requirements intended to facilitate ACA exchange/marketplace access.
- Notice to Employees: A notice must be given to all employees at least 90 days before the beginning of the plan year. The notice has specific content requirements. Among other items, the notice must let the employee know that they cannot receive a premium tax credit/subsidy for individual coverage if they take the HRA and they may still not be able to get the subsidy even if they opt-out of the HRA.
Non-ERISA Plans: Like the proposed rules, the final rules would not make the individual insurance policies part of the ERISA plan, if certain requirements are met. In other words, only the HRA would need to comply with ERISA’s requirements (like issuing a summary plan description or filing Forms 5500). As a result, an employer will not be left having to summarize each separate individual policy or obtain information from each carrier to complete a Form 5500.
However, this comes with some challenges. To get the benefit of this ERISA exemption, the employer has to basically be 100% “hands off” on the individual insurance policies. Specifically:
- Employee participation must be voluntary;
- The employer cannot select or endorse any particular issuer or insurance coverage;
- No premiums, other than individual health insurance premiums, can be reimbursed from the HRA (however, non-premium out-of-pocket expenses, like co-payments and deductibles, can be reimbursed);
- The employer receives no consideration (money or other benefit) in connection with the employee selecting or renewing a policy; and
- Each participant is notified annually that the individual policies are not subject to ERISA. This would normally be included in the 90-day notice described above.
Employers with voluntary benefits will likely recognize these conditions for keeping those benefits “out of” ERISA. However, this final rule lets employees pay for the balance of the individual insurance premiums through a cafeteria plan. In the voluntary benefits space, allowing those kinds of payments would raise questions about whether the employer was endorsing the carrier or insurance company.
Excepted HRAs: Although ICHRAs have (understandably) received the lion’s share of attention, the new regulations also allow excepted benefit HRAs. This type of HRA allows an employer to reimburse up to $1,800 per year for premiums for excepted benefits paid by employees and their dependents. The premiums must be for coverage under a dental or vision plan, short term limited duration plans, or plans offered by another employer. An employee cannot be offered an excepted benefit HRA and an ICHRA simultaneously. An employee’s eligibility for an excepted benefit HRA, will not disqualify the employee from accessing Premium Tax Credits from an ACA exchange/marketplace.
Unresolved Issues and Additional Considerations
Although some employers may believe this type of arrangement is attractive, they should consider the following:
- From a practical point of view, an ICHRA could have an impact on recruiting and retention. Health insurance is a highly-valued benefit and group plan offerings are frequently more generous, and easier for employees to navigate, than individual health insurance offerings.
- Although the regulations mention the ACA employer mandate, the new rules still do not comprehensively address how these individual coverage HRAs work with mandate obligations. The Departments said that would be addressed in future guidance. They previously suggested ways they may address it, as we wrote about here.
- Similarly, the existing nondiscrimination requirements that apply to HRAs were not addressed by the final rules. As we’ve noted previously, increasing reimbursement due to age is prohibited by those rules, so it’s not clear how the permitted age variation described above works. There was no promise that they would be guidance forthcoming on this, although the IRS has suggested approaches before.
- Most of the potential pitfalls we identified with the proposed rules here still apply. In short:
- Keeping the individual policies out of ERISA is not easy and the penalties can be steep if an employer messes this up.
- Choosing from among various individual options is likely to be confusing and stressful to employees.
- Employers may have to send premium payments they collect through payroll to multiple carriers.
- The HRA is a type of self-funded medical plan and is therefore fully subject to HIPAA privacy and security rules. Consequently, the employer will need to address HIPAA duties including training and developing applicable policies and procedures.
- However, if the individual policies are not ERISA plans, then the carriers cannot share information with the employer, unless the employee authorizes it. This means employees will generally have to be their own claims advocates.
- COBRA still needs to be offered on the HRA.
- This arrangement may cause employee confusion and lead to more employees claiming premium tax credits for coverage through the ACA exchanges/marketplaces. This means the employer will likely receive more letters from the IRS saying they owe an ACA employer mandate penalty.
- The rules say that reimbursements can only be made while the employee (and, if applicable, dependents) are covered under the individual coverage. However, if the coverage is cancelled retroactively for failure to pay premiums, or if the employee fails to notify the employer of cancellation of coverage for several months, does this mean the employer needs to seek repayment of the prior reimbursements? The rules do not specify.
Additional information is available in these FAQs released by the Departments.
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.