As an alternative to traditional group health plan coverage, employers may offer a type of health reimbursement arrangement(HRA) – an individual coverage HRA (ICHRA) – to reimburse eligible employees for insurance policies purchased in the individual market or Medicare premiums. ICHRAs are available to employers of all sizes and there are no minimum or maximum contribution requirements.
However, there are some strict design requirements for ICHRAs. For example, employees and dependents who are covered by an ICHRA must be enrolled in individual insurance coverage or Medicare coverage. Also, an employer can offer certain types of employees a traditional group health plan and other types of employees an ICHRA, but it cannot offer the same type of employees a choice between a traditional group health plan and an ICHRA. For example, an employer can offer full-time employees a traditional group health plan and offer part-time employees an ICHRA. Employers with ICHRAs must also provide an annual notice to covered employees.
In addition, employers may allow employees to pay for off-Exchange health insurance on a tax-favored basis, using a Section125 cafeteria plan, to make up any portion of the premium that is not covered by the employer’s ICHRA.
An HRA is a type of account-based group health plan that is funded solely by employer contributions and reimburses eligible employees for medical care expenses, up to a maximum dollar amount for a coverage period. HRAs are an attractive option for employers and employees due to their tax-favored status. Employers may take a federal income tax deduction for HRA contributions. Any reimbursements that employees receive from their HRAs for medical care are excludable from the employees’ income and wages for federal income and employment tax purposes.
Most HRAs cannot satisfy certain Affordable Care Act (ACA) market reforms on their own, such as the ACA’s coverage requirement for preventive health services and its prohibition on annual limits. To avoid violating the ACA, HRAs must be integrated with other health plan coverage that complies with these mandates. Prior to the rules for ICHRAs, HRAs were only permitted to integrate with other group health plan coverage and Medicare (in limited situations).
Before ICHRAS became available in 2020, employers could not use HRAs to reimburse employees for individual health insurance premiums without violating the ACA and risking exposure to excise taxes of $100 per day for each applicable employee. This restriction does not apply to HRAs that are exempt from the ACA’s reforms, such as QSEHRAs, retiree-only and HRAs that only reimburse excepted benefits (such as limited scope dental and vision coverage).
On June 13, 2019, the Departments issued final rules that expand the usability of HRAs. Effective for plan years beginning on orafter Jan. 1, 2020, the final rules allow HRAs to be integrated with individual insurance policies (or Medicare) for purposes ofsatisfying the ACA’s reforms.
This means that, effective for 2020, ICHRAs may be used to reimburse employees for the cost of individual health coverage (orMedicare coverage) on a tax-free basis, subject to certain conditions.
Employers may use ICHRAs to reimburse employees for their individual health insurance premiums (or Medicare premiums),subject to the conditions outlined below.
A key restriction for ICHRAs is that employers cannot offer any employee a choice between an ICHRA and a traditional group health plan . However, as explained below, employers with ICHRAs may continue to offer a traditional group health plan provided these benefits are offered to different classes of employees.
An ICHRA may provide for reimbursement of expenses for medical care, as defined under Internal Revenue Code (Code)section 213(d). An employer has discretion to specify which medical care expenses are eligible for reimbursement from its ICHRA.
An employer may allow an ICHRA to reimburse all medical care expenses, may limit an ICHRA to allow reimbursements only for premiums, may limit an ICHRA to allow reimbursements only for non-premium medical care expenses (such as cost-sharing) or may designate specific medical care expenses that will be reimbursable.
Although not required, employers most often use ICHRAs to reimburse premiums for individual health insurance coverage orMedicare (including Medicare Part A, B, C or D, as well as premiums for Medigap policies).
An employee who is covered by an ICHRA must be enrolled in individual health insurance coverage (or Medicare coverage) foreach month that he or she is covered by the ICHRA. This coverage requirement also applies to any family members (such as spouses and children) who are covered by the ICHRA.
All individual health insurance policies, except for individual health insurance coverage that consists solely of excepted benefits or short-term, limited-duration insurance (STLDI), will satisfy this enrollment requirement. For example, individual insurance coverage includes:
Medicare coverage includes Medicare Parts A and B or Part C.
If any individual ceases to be covered by individual health insurance coverage (or Medicare coverage), the ICHRA cannot reimburse medical care expenses incurred by that individual after the coverage ceases.
The ICHRA must implement (and comply with) reasonable procedures to substantiate that participants and each dependent covered by the ICHRA are (or will be) enrolled in individual health insurance coverage or Medicare coverage for the plan year. Reasonable substantiation procedures may consist of documentation by a third party (for example, an insurance card or explanation of benefits document) or a participant’s attestation.
In general, the deadline for providing this substantiation cannot be later than the first day of the plan year. After this initial substantiation, the ICHRA must require participants to substantiate this individual insurance coverage prior to each expense reimbursement.
The Departments have provided a model substantiation form for employers to use.
If an employer offers an ICHRA to a class of employees, the employer cannot also offer a traditional group health plan to the same class of employees. A traditional group health plan refers to a group health plan other than an account-based group health plan or a group health plan that consists solely of excepted benefits. This means that an employer cannot offer a choice between an ICHRA and a traditional group health plan to any employee or dependent.
Employers can contribute as little or much as they want to an ICHRA. However, an employer must offer the ICHRA on the same terms to all employees within a class of employees, subject to a few specific exceptions, described below. Unused amounts may be carried forward from year to year, as long as the carryovers are provided on the same terms to all employees within a class.
Employers cannot vary their ICHRA contributions based on a percentage (for example 80%) of employees’ individual health insurance premiums. Also, employers cannot offer a more generous ICHRA benefit based on an employee’s adverse health factor, such as diabetes, chronic illnesses or cancer.
Employee Classes
Employers with ICHRAs may make distinctions between different groups of employees, using the following employee classes:
The classes of employees are determined based on the employees of a common law employer, rather than the employees of a controlled group of employers.
Also, if an employer offers an ICHRA to former employees, a former employee is considered to be a member of the same class of employees that he or she was in immediately before separation from service. Keep in mind that employers may continue tooffer retiree-only HRAs, which are not subject to the ACA’s market reforms or the rules for ICHRAs.
Minimum Class Size
A minimum class size requirement applies if an employer offers a traditional group health plan to some employees and anICHRA to other employees based on the following classes: full-time versus part-time status; salaried versus non-salaried status; or geographic location if the location is smaller than a state. The minimum class size requirement also applies if an employer combines any of these classes with other classes, except this requirement does not apply to a group of employees that is a combination of one of these classes and a class of employees who have not satisfied the waiting period.
The minimum class size is determined prior to the start of the ICHRA plan year and depends on the employer’s size, as follows:
Whether a class of employees satisfies the minimum class size requirement for a plan year is based on the number of employees in that class who are offered the ICHRA as of the first day of the plan year.
Exceptions to Same Terms Requirement
Employers that offer an ICHRA to a class of employees must offer the ICHRA on the same terms and conditions to all of the employees within the class, subject to the following exceptions:
Age - An ICHRA’s maximum dollar amount may increase as the participant’s age increases, if:
Number of Dependents - An ICHRA’s maximum dollar amount may increase as the number of a participant’s dependents who are covered under the ICHRA also increases, so long as the same maximum dollar amount attributable to the increase in family size is available to all participants in that class of employees with the same number of dependents covered by the HRA.
New Participants - For employees whose coverage under the ICHRA becomes effective after the start of the plan year, the maximum dollar amount may be the same as the amount available to employees whose coverage starts on the first day of the plan year, or the maximum dollar amount can be pro-rated for the portion of the year that the employee is covered by the ICHRA.
To help employers transition from offering a traditional group health plan to an ICHRA, the final rules include a special rule that permits employers to offer new employees an ICHRA, while grandfathering existing employees in a traditional group health plan. An employer may set the new hire date prospectively for a class of employees as any date on or after Jan. 1, 2020.The ICHRA must be offered on the same terms to all participants in the new hire subclass.
Example: An employer offers all employees hired on or after Jan. 1, 2024, an ICHRA on the same terms and continues to offer the traditional group health plan to employees hired before that date.
Employees must be permitted to opt out of an ICHRA so they may claim the premium tax credit under the ACA, if they are otherwise eligible for the premium tax credit and the ICHRA is considered unaffordable. An employer may establish timeframes for enrollment in (and opting out of) the ICHRA but, in general, the opportunity to opt out must be provided in advance of the first day of the plan year. Annual Notice Requirement Employers with ICHRAs must provide a notice to eligible participants regarding the ICHRA and its interaction with the ACA’s premium tax credit. In general, this notice must be provided at least 90 days before the beginning of each plan year. For participants who are not eligible at the beginning of the plan year (such as new hires), the notice must be provided by the time the participant is first eligible to participate in the ICHRA.
The Departments provided a model notice for employers to use to satisfy this notice requirement.
An individual who is eligible for an ICHRA is not eligible for an ACA premium tax credit (PTC) for any month when the individual is enrolled in the ICHRA or the individual opts out of the ICHRA but the ICHRA is considered “affordable” under theACA’s rules. Affordability for purposes of the premium tax credit is based on the dollar amount of the employer’s contribution, the employee’s annual household income, and the monthly premium of the self-only, lowest cost silver plan available to the employee through the Exchange in their area.
If the ICHRA does not cover employees’ full premiums for individual insurance coverage, the employer may permit employees to pay the balance of the premiums on a pre-tax basis through its Section 125 cafeteria plan. However, federal tax law prohibits employers from allowing employees to pay for Exchange coverage on a pre-tax basis. This prohibition does not apply to coverage that is purchased outside of an ACA Exchange.
Employees who have individual insurance coverage under a high deductible health plan (HDHP) may want to make contributions to a health savings account (HSA). Employers may offer a choice between an ICHRA that is compatible with anHSA and an ICHRA that is not HSA-compatible to a class of employees. An HSA-compatible ICHRA may reimburse individual insurance premiums and other medical expenses after the HDHP deductible has been satisfied, but cannot reimburse first-dollar cost-sharing under the HDHP. ERISA Compliance In general, an ICHRA is a group health plan that is subject to ERISA. This means that the ICHRA is subject to ERISA’s reporting and disclosure rules (for example, the SPD requirement and Form 5500) and its fiduciary requirements. The final rules provide that the individual insurance policies are not considered part of the employer’s ERISA plan if the following safe harbor criteria are met:
The ACA’s employer shared responsibility rules, also known as the employer mandate or “pay or play” rules, require applicable large employers (ALEs) to offer minimum essential coverage that is affordable and provides minimum value to their full-time employees, or pay a penalty.
According to the Departments, an offer of coverage under an ICHRA counts as an offer of coverage under the ACA’s employer mandate rules. In general, whether an ALE that offers an ICHRA to its full-time employees (and their dependents) owes a penalty under the employer mandate rules will depend on whether the ICHCRA is considered affordable. This means that, to avoid a penalty, ALEs with ICHRAs will need to contribute a sufficient amount for the ICHRA offer of coverage to be considered affordable to their full-time employees.
On Sept. 30, 2019, the IRS issued proposed rules on the application of the employer shared responsibility rules to ICHRAs.These rules would establish affordability safe harbors related to ICHRAs, including a safe harbor based on the cost of the affordability plan at employees’ primary site of employment, rather than their residence. Although these rules are only in proposed form, taxpayers are generally permitted to rely on them.
This Compliance Overview is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. Used with permission ©2019-2020, 2023 Zywave, Inc. All rights reserved.