Agencies Issue Final Regulations Expanding Use of HRAs

The IRS, DOL, and HHS have jointly issued final regulations that expand the availability and permitted uses of HRAs, finalizing with modifications proposed regulations that were issued in 2018 (see our Checkpoint article). Here are highlights of the regulations, which are generally applicable for plan years beginning on or after January 1, 2020:

• Individual Coverage HRAs (ICHRAs). HRAs can be integrated with, and reimburse premiums for, individual health insurance coverage if certain conditions are met.

  • Enrollment in Individual Coverage. Employees and dependents covered by ICHRAs must be enrolled in individual health insurance coverage (which does not include short-term limited-duration insurance (STLDI) or coverage consisting solely of excepted benefits) or Medicare (see below). ICHRAs must substantiate enrollment annually on or before the first day of the plan year (or when coverage begins, if later) and before each reimbursement. Optional attestation language is included in the Fact Sheet.
  • Same Terms and Conditions. An ICHRA must be offered on the same terms and conditions to all employees within a class, except that the benefit amount may increase based on age (by up to three times the maximum dollar amount available to the youngest participant) or family size. Employees who become covered under an ICHRA midyear may receive the full annual benefit or a prorated amount; the method must be determined before the plan year and must be the same for all employees within a class. The preamble notes that while HRAs are generally subject to the Code § 105(h) nondiscrimination rules, those rules do not apply to HRAs that reimburse only insurance premiums. The IRS intends to propose regulations to address contribution variations based on age (see our Checkpoint article).
  • Traditional Health Plan Not Offered. The ICHRA sponsor cannot offer a “traditional” group health plan (one that is neither account-based nor limited to excepted benefits) to the same class of employees that is offered an ICHRA. (A special rule for new hires allows employers to offer a traditional plan to current employees within a class while offering an ICHRA to new hires in the class.) Several permitted classifications are offered, with a few changes from the proposed regulations (e.g., salaried and non-salaried classes have been added), as well as a new minimum class size requirement that applies in certain circumstances. The regulations also clarify that classes are determined at the common-law employer level (rather than on a controlled group basis).
  • Opt-Outs, Waivers, and Notices. ICHRA participants must be able to opt out and waive future reimbursements annually before each plan year. Upon termination of employment, participants must either forfeit the remaining balance (subject to COBRA) or be able to permanently opt out of and waive future reimbursements. Eligible employees must receive timely written notices with specified information (the Fact Sheet includes model language).
  • Eligible Expenses; HSA Compatibility. ICHRAs can be designed to reimburse all Code § 213(d) medical care expenses or to limit reimbursements to particular expenses (e.g., premiums). Thus, ICHRAs can be designed to be HSA-compatible by only reimbursing premiums or limiting reimbursements in accordance with the HSA rules. Employees in the same class can be offered a choice between an HSA-compatible ICHRA and one that is not HSA-compatible.
  • Medicare. ICHRAs can also be integrated with Medicare Parts A and B or Part C and can reimburse premiums for Medicare (all parts) and Medicare supplemental insurance. However, an ICHRA that is subject to the Medicare secondary payer (MSP) requirements may not limit reimbursement to expenses not covered by Medicare. HHS plans to issue further guidance on Medicare requirements and ICHRAs.

• Excepted Benefit HRAs (EBHRAs). Employers can also offer non-integrated HRAs that qualify as excepted benefits (EBHRAs) and thus are not subject to the PHSA mandates, if the following requirements are met:

  • Other Coverage. The employer must offer a traditional group health plan to the EBHRA participants (enrollment is not required) for the plan year.
  • Limited Benefits. No more than $1,800 (indexed after 2020) can be newly available to each participant for each plan year. Carryovers permitted under the EBHRA are disregarded, but amounts available under other HRAs or account-based group health plans are counted, unless those arrangements reimburse only excepted benefits.
  • Reimbursement. An EBHRA may reimburse Code § 213(d) medical expenses but not premiums for individual health coverage, Medicare, or non-COBRA group coverage (premiums for coverage consisting solely of excepted benefits can be reimbursed). STLDI premiums can also be reimbursed, although the agencies may restrict small employers’ EBHRAs from allowing such reimbursement under certain circumstances.
  • Uniform Availability. The EBHRA must be available under the same terms and conditions to all similarly situated individuals (as defined under HIPAA’s health status nondiscrimination rules). An EBHRA cannot be offered to employees who are also offered an ICHRA.
• Cafeteria Plan Salary Reductions. Employers with ICHRAs can allow employees to use pre-tax cafeteria plan salary reductions to pay any portion of their individual insurance premiums not covered by the ICHRA, so long as the coverage is purchased outside of an Exchange and subject to applicable cafeteria plan guidance. If offered, salary reductions must be available on the same terms and conditions to all employees within a class.
• Premium Tax Credit/Employer Shared Responsibility. Employees and dependents covered by an ICHRA—or offered an affordable ICHRA—are ineligible for premium tax credits. Affordability is based on the premium for the lowest-cost silver plan available in the rating area where the employee resides, amounts available under the ICHRA, and the employee’s household income. The IRS notes that applicable large employers can avoid employer shared responsibility penalties by offering an affordable ICHRA to full-time employees and indicates that more information, including proposed regulations, will be provided.
• ERISA Plan Status of Individual Health Coverage. A DOL regulation amends the definitions of “employee welfare benefit plan” and “welfare plan” as used in ERISA to provide a safe harbor excluding individual health insurance funded by an ICHRA if certain requirements are met. Among other things, the purchase of the insurance must be completely voluntary for employees; the ICHRA sponsor must not select or endorse any particular insurer or coverage (including a menu of coverage such as a private exchange); and participants must be notified annually that the individual coverage is not subject to ERISA. The exclusion applies only to the individual coverage; the HRA’s ERISA status is unaffected.
• Special Enrollment. An HHS regulation establishes an individual market special enrollment period for employees and their dependents who gain access to an ICHRA or are provided with a QSEHRA, allowing them to enroll in individual insurance coverage or change from one individual coverage plan to another.

EBIA Comment: The regulations will bring significant changes for account-based plans by establishing two new types of HRAs that—unlike QSEHRAs—will be available to employers of any size. (We note that portions of the regulations also apply to other account-based plans; employers and advisors interested in other designs should pay close attention to the applicable definitions.) According to the preamble and fact sheet, the regulations are expected to increase the number of low-to-moderate-wage workers (and family members) with health insurance coverage, help small employers offer coverage, and promote flexibility for employers and employees; the agencies predict that roughly 800,000 employers will ultimately offer ICHRAs. While the take-up rate remains to be seen and will likely depend on how robust the individual market becomes, those who work with health benefits will want to quickly familiarize themselves with the regulations, to allow time to evaluate and, if appropriate, implement the new HRAs before open enrollment for the 2020 plan year. For more information, see EBIA’s Consumer-Driven Health Care manual at Section XXVIII (“Individual Coverage and Excepted Benefit HRAs Under Proposed Regulations”), which will be updated for this development. See also EBIA’s Cafeteria Plans manual at Section X.F (“Should Participants Be Permitted to Pay for Individual Insurance Policies Under a Cafeteria Plan?”), EBIA’s ERISA Compliance manual at Section VI (“What Workplace Fringe Benefits Are Subject to ERISA?”), and EBIA’s Health Care Reform manual at Sections V.K (“Health Reimbursement Arrangements (HRAs)”), XXI.A.3 (“Annual and Special Enrollment Periods Required for Exchanges”), and XXIX.F (“Premium Tax Credits for Lower-Income Individuals”).

Contributing Editors: Thanks to attorney John R. Hickman for his contributions to this article, with final editing by EBIA staff. Mr. Hickman is a partner in the Employee Benefits Practice Group with Alston & Bird in Atlanta, www.alston.com, and is a Contributing Author of EBIA’s Consumer-Driven Health Care, Cafeteria Plans, and Health Care Reform manuals and a Contributor to EBIA’s HIPAA Portability, Privacy & Security manual.

More to come! For more coverage of the final HRA regulations (along with many other advanced topics), join us in Seattle, July 16–18, for EBIA’s Advanced Cafeteria Plans and Benefits Conference. If you can’t make it to Seattle, don’t miss our just-announced webinar “HRAs in 2020: A Brave New World for Defined Contribution Health Care” (live on 8/21/19). Mr. Hickman will cover the regulations at both events.