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Employers May Offer Two New Types of Health Reimbursement Arrangements in 2020

July 31, 2019

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Under final rules issued last month, employers can offer two new types of health reimbursement arrangements or HRAs: individual coverage HRAs ("ICHRAs") and excepted benefit HRAs ("EBHRAs"). HRAs are self-funded, account based plans that reimburse employees for qualified medical expenses on a tax-free basis. The final rules apply for plan years beginning on or after January 1, 2020. While the rules are complex, the new ICHRAs and EBHRAs offer new planning opportunities for employers.

ICHRAs

Under the new rules, employers may use ICHRAs to reimburse premiums that their employees pay for individual health insurance purchased on the open market or at an Affordable Care Act ("ACA") insurance exchange. Prior to these final rules, HRAs had to be "integrated" with group health coverage in order to avoid penalties under the ACA, which meant employers could not use HRAs to reimburse premium expenses for an employee's individual health coverage. The new rules permit an ICHRA to be used to reimburse individual coverage if six conditions are met:

  • Actual Enrollment: Employees covered by the ICHRA must be enrolled in individual medical coverage or Medicare. When an employee's individual coverage terminates, remaining amounts in the ICHRA are forfeited.
  • No Choice for Employees in Any Class: Employers may not offer employees in the same "class" a choice between a traditional group health plan and the ICHRA. The classes that apply for this rule are listed below.
  • Uniform Terms: The ICHRA must be offered on the same terms to all employees in a class. Generally, this would require that the same dollar amount be made available for reimbursements to all employees within a class, although there are exceptions that would permit higher amounts to be made available based on an employee's age or number of dependents.
  • Opt Out: Individuals must have a right to opt out of the ICHRA coverage both annually and at termination of employment.
  • Ongoing Substantiation of Coverage: Employers must obtain initial and annual substantiation of covered employees' enrollment in individual coverage or Medicare, such as an employee's signed attestation. The regulations include a model attestation form that employers can use to meet the substantiation requirement.
  • Notice to Employees: Employers must provide an annual notice of the right to opt out of the ICHRA coverage, 90 days prior to the beginning of the plan year. The notice is intended to make employees aware that being covered by the ICHRA may prevent them from receiving a premium tax credit at an ACA exchange that could be more valuable than the employer's contribution to the ICHRA. The IRS has provided model language for the notice that can be used, but is not required.

Although employers cannot offer current employees in any class a choice of participation in the employer's group health plan or a new ICHRA, the new rules do allow an employer to offer the ICHRA to a subclass of "new hires" as of a certain date, while still maintaining a group health plan for existing employees in that same class.

There are 10 permitted classes of employees (plus combinations of the 10) that can be used to differentiate offers of coverage: full-time, part-time, salaried, non-salaried, employees at a primary site of employment in the same rating area, seasonal, collectively bargained, those who have not satisfied a waiting period, non-resident aliens with no U.S. source income, and certain temporary employees (i.e. staffing agency employees). For certain classes, a minimum class size applies, meaning the class must include at least the minimum number of employees for the ICHRA to be offered to that class. Classes of employees are determined at the level of the entity that is the common-law employer of the employees in a particular class, rather than at the controlled group level. This will provide employers with some flexibility in structuring differing ICHRA arrangements for different subsidiaries within a controlled group.

While retirees are not considered a separate class, the new rules do not affect the current ability of employers to offer stand-alone HRAs for retiree-only groups. Retiree-only plans still do not need to comply with the ACA "market reforms." If an ICHRA covers both active and former employees, employees remain in the class they were in at termination of employment and the ICHRA must be provided on the same terms to active and former employees.

The new ICHRA is more flexible than the currently available qualified small employer HRA ("QSEHRA") and may be useful for employers wishing to offer some health coverage to employee classes not currently covered by the employer's group health plan. For example, ICHRAs could be used for part-time, seasonal, or employees who have not completed the waiting period and are thus not eligible for the employer's traditional group health coverage. It may also be possible to offer an amount under an ICHRA as necessary to avoid triggering the more onerous employer shared responsibility penalties under the ACA.

There are also safe harbor conditions that will allow the employer to avoid having the individual health insurance coverage funded through the ICHRA considered ERISA coverage. However, the ICHRA itself remains subject to ERISA, when offered by private sector employers.

Excepted Benefit HRA

The other type of new HRA now permissible under the final rules is an Excepted Benefit HRA ("EBHRA"), which could act as a general purpose HRA, although this is limited to a maximum reimbursement amount of $1,800 per year. The new EBHRA must meet four requirements:

  • The employer must offer a group health plan to the same groups of employees that are offered the EBHRA, although employees are not required to enroll in the group health plan in order to participate in the EBHRA.
  • The maximum amount that can be credited to each employee's EBHRA account is $1,800 per year, as adjusted for inflation (using CPI). The EBHRA may be used to reimburse premiums for excepted benefits, group health COBRA premiums, and any other Internal Revenue Code section 213(d) expense.
  • Certain premiums cannot be reimbursed, including Medicare, individual medical and group health plan premiums (other than COBRA group health premiums).
  • The EBHRA must be available on the same terms to all similarly situated individuals, regardless of any health factor. Enrollment in the EBHRA cannot be conditioned on declining enrollment in the employer's group health plan.

Along with an EBHRA, employers can continue to offer an HRA under existing rules that only reimburses expenses for "excepted benefits."

If you have questions about the new HRAs, or would like to discuss offering one of the new HRAs in your specific situation, please contact a member of the Hanson Bridgett Employee Benefits Group.

For more information, please contact:

Elizabeth Masson

415-995-5106 Direct Phone
415-995-3593 Fax

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Judith Boyette

415-995-5115 Direct Phone
415-995-3577 Fax

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Erica Russell

415-995-5895 Direct Phone
415-995-3443 Fax

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