The Internal Revenue Code and implementing IRS guidance recognize various types of account-based health coverage, e.g., healthcare flexible spending accounts (FSAs), health savings accounts (HSAs), health reimbursement arrangements (HRAs), and qualified small employer health reimbursement arrangements (QSEHRAs). These account-based approaches also enjoy certain federal income and payroll tax exemptions.2
On June 20, 2019, the three agencies responsible for administering the Patient Protection and Affordable Care Act (PPACA) -- the Treasury, Labor, and Health and Human Services Departments (hereafter the PPACA regulators) -- recognized an individual coverage HRA (ICHRA) which permits under certain circumstances an employer to use an HRA to reimburse employees for PPACA marketplace coverage on an income and payroll tax exempt basis effective with the 2020 plan year.3 Implementing this idea was complicated by certain decisions made when PPACA’s marketplace was implemented in 2014.
During the period from 2013 through 2015, the PPACA regulators decided that:
- HRAs must be integrated with group health plan coverage that is compliant with the mandates of Public Health Service Act Section 2711, which restricts the imposition of lifetime and annual dollar limits on essential health benefits, and Section 2713, which mandates the coverage of certain preventive care services with no member cost sharing,
- Employers may not reimburse employees for PPACA marketplace coverage, and
- Offering PPACA marketplace coverage does not satisfy PPACA’s employer shared responsibility provision that extends to applicable large employers (50 or more full-time employees as defined in PPACA).4
In December 2016, Congress enacted the 21st Century Cures Act. That statute includes a provision permitting small employers to create QSEHRAs which allow those employers to fund accounts to reimburse their employees for PPACA marketplace coverage as an alternative to group health coverage. The inflation adjusted contribution limits for QSEHRAs in 2019 are $5,150 for self-only coverage and $10,450 for other than self-only coverage.5
After Congress failed to repeal and replace PPACA early in President Trump’ administration, the President issued an executive order, dated October 12, 2017, requiring in pertinent part that:
the Secretaries of the Treasury, Labor, and Health and Human Services shall consider proposing regulations or revising guidance, to the extent permitted by law and supported by sound policy, to increase the usability of HRAs, to expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup coverage.6
The PPACA regulators issued this proposed rule on October 29, 2018,7 and finalized the rule on June 20, 2019, creating individual coverage ICHRAs to be used in the PPACA marketplaces. The principal differences between the ICHRA and the QSEHRA is that the ICHRA can be used by all sizes of employers without any annual contribution limits. Other ICHRA features are similar to QSEHRAs, e.g., neither an ICHRA nor a QSEHRA can be offered as an alternative to traditional group health coverage. In both cases, thought was given to avoid disrupting the PPACA marketplace.
The 2019 rule also created excepted benefit HRAs (EBHRAs). Unlike HRAs that only reimburse the costs of excepted benefits, like dental and vision care, EBHRAs can reimburse medical care expenses in certain circumstances. Employers can continue to offer excepted benefit only HRAs.
Private sector employers who want to avail themselves of the new ICHRA option should understand that the ICHRA itself is a group health plan which must comply with Employee Retirement Income Security Act (ERISA) reporting, disclosure, and administrative requirements. The final rule includes standards for keeping the reimbursed individual coverage separate from that ERISA plan.8
Employees who opt for an ICHRA must enroll in qualified individual coverage in order to obtain reimbursement from the ICHRA. The qualified selected individual coverage must comply with PPACA requirements, including Sections 2711 and 2713. The qualified individual coverage may be obtained from the PPACA marketplace or outside that marketplace as long as it is not short term, limited duration or solely excepted benefits coverage. Medicare coverage also qualifies if the employer employs fewer than 20 persons.9
The ICHRA plan document:
- May establish classes of employees as described in the final rule (e.g., full time, part time, seasonal, collectively bargained groups). The ICHRA can be issued to some but not all classes. For example, the employer may offer traditional coverage to full time and collectively bargained classes and ICHRAs to part time and seasonal classes. The minimum class size is (1) ten employees for an employer with fewer than 100 employees, (2) Ten percent of the total number of employees for an employer with 100 to 200 employees, and (3) Twenty employees for an employer with more than 200 employees.
- Generally must offer ICHRA coverage on the same terms to all class members. However, the specified employer contribution may be adjusted based on family size and employee age.10 The plan document also must address the extent to which (if any) (a) the HRA can be used for IRC § 213(d) deductible medical expenses other than individual health insurance and (b) any HRA balance carries over from plan year to plan year.
- Must establish reasonable procedures to substantiate that qualified individual coverage is in place for ICHRA participating employees. The PPACA regulators have provided a model substantiation form.11
- Provide required notice of the availability of ICHRA coverage at least 90 days before the beginning of the plan year in order to allow participating employees to secure quality individual coverage for the beginning of the plan year.12 The notice must explain that the employee will not be eligible for a premium tax credit for PPACA marketplace coverage.13 The PPACA regulators have provided a model notice.14
- Must allow employees to opt out of an ICHRA at least annually so that they may claim the premium tax credit if they otherwise are eligible and if the ICHRA is considered unaffordable.
Applicable large employers subject to PPACA’s employer shared responsibility mandate may treat an ICHRA as an offer of coverage under that mandate provided that the employer contribution to the HRA creates affordable coverage for PPACA purposes.15 According to the final rule, an HRA is affordable for a month if the employee’s required HRA contribution for the month does not exceed 1/12 of the product of the employee’s household income for the taxable year and the required contribution percentage. The required HRA contribution is the excess of the lowest cost silver plan’s monthly premium in the employee’s rating area over the monthly self-only HRA distribution amount.16 For 2020, the required contribution percentage is 9.78 percent of an employee's household income.17
The final rule also creates the EBHRA, a different new category of HRA. The EBHRA is treated as an excepted benefit for PPACA purposes. An employer can offer an EBHRA to supplement its traditional group health coverage by reimbursing member cost sharing and non-covered expenses. An employee can enroll in an EBHRA without enrolling in traditional group or individual coverage, which distinguishes the EBHRA from other types of HRAs.18
An EBHRA must:
- Limit its annual contribution to $1,800 annually (indexed for inflation).
- Be offered in conjunction with traditional group health coverage.
- Must not be used to reimburse group health plan, individual health insurance or Medicare premiums.
- Must be uniformly available to all similarly situated individuals as required by The Health Insurance Portability and Accountability Act’s prohibition against discrimination based on health status.19
An EBHRA may reimburse COBRA premiums, short term limited duration insurance premiums, and other excepted benefit coverage such as dental and vision coverage.20
According to the preamble to final rule, the PPACA regulators estimate that roughly 800,000 employers will offer ICHRAs to pay for more health insurance for more than 11 million employees and family members by 2029.21 This should be boon for the PPACA marketplace. In contrast to the association health plan and short-term limited duration health plan rules, which also stem from the President’s October 2017 executive order, this rule has not drawn a legal challenge.22