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Affordability and Nondiscrimination Rules for Individual Coverage HRAs

Some employers may be considering an offer of Individual Coverage Health Reimbursement Arrangements (ICHRAs) beginning January 1, 2020, that will allow employees to shop for and select a plan during this year’s upcoming Health Insurance Exchange Open Enrollment Period, which starts on November 1, and ends on December 15, 2019. If employers aren’t quite ready for January 1, they can instead offer an ICHRA that starts in the middle of the calendar year, and their employees can enroll in individual market coverage through a special enrollment period (SEP). Throughout the year, employees who are newly hired and offered an ICHRA can also use this SEP to get individual coverage. To help employees understand their ICHRAs, employers must give employees a notice 90 days in advance that includes key information about their HRA offer. See our Update for more on the new ICHRA and other HRA options now available.

The IRS has now issued proposed regulations addressing the interaction between the employer health insurance mandate (under Internal Revenue Code Section 4980H), nondiscrimination rules (under Code Section 105(h) and the ICHRA. Here are highlights:

Affordability. An ICHRA is considered affordable if an employee’s “required HRA contribution” does not exceed a specified percentage of the employee’s household income. The required HRA contribution generally is the excess of the premium for self-only coverage under the lowest-cost silver plan offered in the rating area where the employee resides, over the self-only amount the employer makes newly available to the employee under the ICHRA. To determine the applicable lowest-cost premium, a location-based safe harbor would allow applicable large employers (ALEs) to use a look-back month before the plan year, and a look-back month safe harbor would allow ALEs to use employees’ primary worksite rather than their residence. The existing general affordability safe harbors (W-2, rate of pay, and federal poverty line) would also apply to ICHRAs. ALEs electing to use the safe harbors must do so on a uniform and consistent basis for all employees in a class.

  • CMS Tool. To make this easier, the Centers for Medicare & Medicaid Services (CMS) has developed an ICHRA Employer Lowest Cost Silver Plan Premium Look-up Table to help employers decide whether to offer an ICHRA and find the lowest-cost silver plan for the applicable location in states using the federal Exchange platform. This tool will give employers access to health insurance premium data by geographic location. The tool provides specific rate information for the least expensive plan in a certain category (the “lowest cost silver plan”) based on an eligible employee’s age and geography. Employers can use this tool in deciding the funding level for an ICHRA. In particular, ALEs can use this tool to determine whether their offer of coverage through an ICHRA would be considered affordable based on standards established in the new HRA rules. CMS also posted a blog to provide more information about the provided resources, and published a presentation about the new HRA rule and affordability standards.

  • MEC and Minimum Value. An offer to a full-time employee (FTE) to participate in an ICHRA will be considered an offer of minimum essential coverage (MEC) for purposes of avoiding the 4980H(a) penalty, for which an employer is liable if the employer fails to offer at least 95% of its FTEs (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan and at least one FTE receives a premium tax credit (PTC). An employer can also avoid a 4980H(b) penalty, which applies if a FTE receives a PTC and that employee either was not offered MEC or was offered MEC that was not affordable or not providing minimum value (MV) by using an ICHRA if the ICHRA is considered affordable and provides MV. An ICHRA that meets the affordability standard is treated as providing MV, so by offering an affordable ICHRA, an ALE will avoid a penalty.

  • Information Reporting. Future guidance will be provided on information reporting on Form 1095-B and Form 1095-C for ICHRAs, likely in updated forms and instructions, which will not be required until early 2021.

Self-Insured Plan Nondiscrimination. Code Section 105(h) contains nondiscrimination rules prohibiting self-insured health plans from discriminating in favor of highly compensated individuals (HCIs) with respect to eligibility or benefits. The benefits test includes a uniformity requirement that any maximum reimbursement limit attributable to employer contributions be uniform for all participants, and not vary based on a participant’s age or years of service. If a plan fails the benefits test, benefits provided under the discriminatory plan will be taxable to the HCI. Note that an ICHRA that only reimburses insurance premiums is treated as an insured plan and is not subject to the Code Section 105(h) rules.

Two nondiscrimination safe harbors are proposed for ICHRAs.

  • First, the maximum amount available under an ICHRA may vary within a class of employees or between classes without violating the uniform employer contribution requirement if (a) within each class, the maximum dollar amount only varies in accordance with the “same terms” requirement under the ICHRA rules, and (b) with respect to differences in the maximum dollar amount for different classes, each class is set forth in the ICHRA rules.

  • Second, an ICHRA that satisfies the age-variation exception under the ICHRA rules will not fail to meet the nondiscriminatory benefit requirement solely due to the age-based variation.

Note that satisfying the terms of these safe harbors does not automatically satisfy the requirement that the ICHRA be nondiscriminatory in operation. Therefore, among other situations, if a disproportionate number of HCIs qualify for and utilize the maximum ICHRA amount allowed under the same terms requirement based on age in comparison to the number of non-HCIs who qualify for and use lower ICHRA amounts based on age, the ICHRA may be found to be discriminatory (and excess reimbursements of the HCIs will be included in their income).

These new rules are only relevant to ICHRAs and do not apply to excepted benefit HRAs. While the ICHRA approach may not fit the benefit strategies for many employers, it may be attractive to those companies and employees who are seeking a more defined contribution approach to health care coverage. Should you have questions, contact your Conner Strong & Buckelew account representative toll free at 1-877-861-3220. For a complete list of Legislative Updates issued by Conner Strong & Buckelew, visit our online Resource Center.

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