This past summer in 2019, the Departments of Labor, Treasury, and Health and Human Services (the Departments) issued final rules creating two new types of health reimbursement arrangements (HRAs) – the individual coverage HRA (ICHRA) and excepted benefit HRA (EBHRA) – that are available as of Jan.1, 2020.

Similar to traditional HRAs, these benefits are funded solely by employer contributions and can be used to pay for medical expenses and insurance premiums. Unlike traditional HRAs, which generally require that they are elected alongside a group medical plan in order to satisfy several requirements under health care reform, these two new benefits may offer additional flexibility for employers in benefit design. They may also allow employees greater choice of healthcare options by allowing integration with individual medical coverage and, in the case of the EBHRA, act as a standalone HRA benefit.

While these new benefits have some similarities with traditional HRAs, they each contain a few distinct features that are important for employers to keep in mind when determining whether they are the right fit for their employees. Let’s break down several of the highlights and requirements unique to these new benefits.

Individual Coverage HRA.

The first is the individual coverage HRA, so-called because the benefit integrates with individual medical coverage or Medicare, rather than a group health plan. Unlike a traditional HRA, the ICHRA allows employees to enroll in individual health plans (either through the health care Exchange or private insurance market) and be reimbursed for those health insurance premiums, as well as other medical expenses, with pre-tax employer dollars.

What employers may offer an ICHRA?

Employers of any size may offer an ICHRA including applicable large employers (ALEs) who are subject to the employer mandate. This is different than qualified small employer HRAs (QSEHRAs), which may also reimburse individual medical premiums, and are limited to non-ALEs who do not offer any other form of group health plans (including dental, vision, and health flexible spending accounts). In fact, a large employer can satisfy both sections of the employer mandate (i.e., the offer of coverage and affordable/minimum value requirements, subject to special rules and calculations discussed further below) by offering a standalone ICHRA to their full-time employees or offering an ICHRA alongside a traditional group health plan (to different classes of employees).

What employees may be offered an ICHRA?

The ICHRA may only be offered to employees of the company. Therefore, owners and self-employed individuals (including sole proprietors and more than 2% shareholders of an S-Corporation) are ineligible to participate on a pre-tax basis.

Additionally, in order to be eligible to participate in an ICHRA, employees (and any eligible dependents) must be enrolled in either individual medical coverage (on or off the Exchange) or Medicare (Parts A and B or C) as of the first day of their enrollment in the ICHRA. Enrollment in other types of health coverage, including group health plans (such as COBRA or coverage through a spouse’s employer), Medicaid, and TRICARE, are not sufficient for ICHRA eligibility.

Furthermore, the class of employees offered the ICHRA may not be offered the choice between a traditional group medical plan and the HRA. An employer may only offer an ICHRA to employees who are offered no other form of group medical coverage.

Designing the ICHRA Benefit

There are many important considerations for an employer when designing an ICHRA, including: 1) what employees will be eligible for the benefit, 2) how much to offer, and 3) what expenses will be reimbursed.

First, the employer must determine their eligibility for the ICHRA. The regulations define a comprehensive list of classes that can be used for this purpose and additional classes are not permissible. The permitted list of classes includes:

  • full-time/part-time;
  • salaried/hourly;
  • seasonal;
  • temporary workers in a staffing firm;
  • geographic location;
  • employees of a Collective Bargaining Agreement (CBA);
  • employees who have not satisfied the group health plan waiting period;
  • non-resident aliens with no U.S. sourced income; and
  • combination of the above.

When considering what employees to offer the ICHRA, employers should keep in mind minimum class size rules which apply to some of the classes listed above if the employer also offers a traditional group health plan to another class of employees. The affected classes include: 1) full-time/part-time, 2) salaried/hourly, and 3) geographic location (if the insurance rating area is smaller than a state). The minimum class sizes determine how many employees must be in the eligible class (not those who enroll) and are based on the size of the common law employer (rather than including any commonly controlled entities). The minimum class sizes are:

  • 10 employees for an employer with < 100 employees  
  • 10% total number of employees for an employer with 100 to 200 employees
  • 20 employees for an employer with 200 or more employees

For example, an employer that offers a traditional group health plan to most employees but an ICHRA to employees located in Philadelphia will be subject to the minimum class size rules. However, if the same employer offered the ICHRA to all Pennsylvania employees, the minimum class size rule would not apply.

Second, employers will need to consider the amount they want to make available under the ICHRA and how they want those funds to be made available (i.e., full annual limit available as of the beginning of the plan year or amounts made available ratably throughout the year).

While there is no statutory maximum annual dollar limit for the benefit, ICHRAs must be provided on the same terms and conditions to all eligible employees within a designated class, with the exception of variations based on either family size or age. Age variances, however, may not result in a more than 3:1 ratio for the oldest eligible participant compared to that of the youngest participant.

In determining their annual benefit amount, employers should also consider whether the ICHRA would be considered affordable for employees, both for the purposes of satisfying the employer mandate (if applicable) and determining whether the ICHRA will preclude employees from remaining eligible for a premium tax credit (PTC) on the Exchange. In general, an employee is ineligible for a PTC if their ICHRA is considered affordable, even if the employee opts out of receiving the benefit.

Calculating affordability can be complicated. In general, an ICHRA is considered affordable for a month if the required employee monthly contribution towards their insurance premium (calculated using the self-only premium for the lowest cost-silver level plan in the employee’s rating area) in excess of the dollar amount provided monthly by the ICHRA (calculated by dividing the annual self-only ICHRA benefit by 12) does not exceed 1/12th of 9.78% of their income (in 2020). An ICHRA will be deemed to provide minimum value if it is considered affordable. Proposed guidance allows an employer to use the employee’s work location as their rating area for determining if a benefit is considered affordable, making it easier to calculate when employees live in different rating areas.

For example, suppose the lowest cost-silver level plan in the rating area is $449. The ICHRA provides monthly reimbursement of up to $300. To calculate affordability, the employer would need to determine if $149 (the employee’s share of the premium) exceeds 1/12th of 9.78% of their 2020 income.

Last, the employer will need to consider what types of expenses they would like the ICHRA to reimburse. ICHRAs can reimburse a wide range of expenses, including:

  • general medical expenses (as defined under Internal Revenue Code Section 213(d));
  • deductibles, coinsurance, and copayments;
  • dental and vision expenses and premiums;
  • preventative care expenses;
  • Medicare premiums (A, B, C, D, and supplemental policies); and
  • individual medical premiums (either on or off the Exchange).

ICHRAs may not reimburse group health care premiums (including COBRA), Medicaid, TRICARE or short-term limited-duration insurance (STLDI) premiums.

What must an employer do to offer an ICHRA?

Once an employer has determined their benefit design, they must provide notice of the ICHRA to all eligible employees no later than 90 days before the beginning of the plan year. There are only two exceptions to this notice requirement. First, new employers created within 120 days before the beginning of the first ICHRA plan year may provide the notice by the first day of the first plan year. In addition, for employees hired after the notice is provided or mid-plan year, employers must provide notice by the first day that the employee is eligible for the ICHRA.

Moreover, ICHRAs are subject to several federal laws and regulations including the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) and the Employee Retirement Income Security Act of 1974 (ERISA). Employers who may be subject to these laws should review their current policies to ensure they are compliant. ICHRAs are also subject to nondiscrimination testing (NDT) under Internal Revenue Code Section 105(h) unless they are limited to reimbursing only medical premiums.

Excepted Benefit HRA.

The second new HRA is the excepted benefit HRA, which provides a sizeable employer-funded account while allowing employees to enroll in their choice of primary health coverage, if any. In fact, employees eligible for the EBHRA may choose not to enroll in any other form of coverage, and to participate in the EBHRA as a completely standalone benefit.

What employers may offer an EBHRA?

Employers of any size may offer an EBHRA, including applicable large employers (ALEs) who are subject to the employer mandate. Unlike ICHRAs, the employer must also offer all EBHRA-eligible employees a traditional group health plan in addition to the EBHRA; therefore, an ALE would not be able to satisfy the employer mandate solely by offering an EBHRA.

What employees may be offered an EBHRA?

Similar to ICHRAs, the EBHRA may only be offered to employees of the company.  Therefore, owners and self-employed individuals (including sole proprietors and more than 2% shareholders of an S-Corporation) are ineligible to participate on a pre-tax basis.

In addition, employers must offer employees eligible for the EBHRA participation in a traditional group health plan.  However, those employees need not actually enroll in the group health plan (or any coverage for that matter), in order to participate. This means that an employee could decline the group health plan, enroll in the EBHRA and choose not to enroll in any other health coverage (essentially taking the EBHRA as their sole health insurance as a standalone HRA).

Designing the EBHRA Benefit

When designing their EBHRA, an employer will need to determine: 1) what employees will be eligible for the benefit, 2) how much to offer, and 3) what expenses will be reimbursed.

First, the regulations do not list specific classes that employers can utilize to design their EBHRA benefit (unlike the ICHRA).  Rather, employers may use objective business criteria to create benefit classes similar to other health benefits. Examples of permissible business criteria include full-time/part-time, salaried/hourly, and geographic location. Apart from these employment-based classifications, the benefit must be provided on the same terms to all similarly situated active employees.

Second, employers will need to consider the amount they want to make available under the EBHRA and how they want those funds to be made available (i.e., full annual limit available as of the beginning of the plan year or amounts made available ratably throughout the year). Unlike the ICHRA, the annual maximum limit for EBHRAs in 2020 is $1,800. This amount is indexed annually for inflation starting in 2021. If the employer allows unused amounts to roll over into the following plan year, this amount is not included in the next year’s annual limit.

Last, the employer will need to consider what types of expenses they would like the EBHRA to reimburse. EBHRAs can reimburse a wide range of expenses, including:

  • general medical expenses (as defined under Internal Revenue Code Section 213(d));
  • deductibles, coinsurance, and copayments;
  • dental and vision expenses and premiums;
  • preventative care expenses;
  • COBRA premiums; and
  • STLDI premiums.

EBHRAs may not reimburse any group health premiums other than COBRA, nor may they reimburse premiums for individual medical coverage or Medicare.

What must an employer do to offer an EBHRA?

There is no annual notice requirement for EBHRAs, however, EBHRAs are subject to the continuation rules under COBRA, ERISA’s documentation and reporting requirements and NDT.  Employers should review whether they may be subject to these laws and ensure their plan’s compliance.

How PrimePay can help.

PrimePay can administer pre-tax benefits for your company, including HRAs, HSAs, and FSAs. When you choose PrimePay’s pre-tax benefit plan administration, you receive a dedicated service team, access to our support portal, automated claims processing, and a PrimePay debit card and mobile app. Click here to learn more or fill out the form below:

 

Disclaimer: Please note that this is not all-inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding the specific application of the information to your own plan.