United States: New Final Rules Permit Individual Coverage Health Reimbursement Arrangements

Rachel C. Shim is a Partner in Holland & Knight's Philadelphia office.

Austin K. Stack is a Associate in Holland & Knight's Los Angeles office.

Highlights

  • The U.S. Departments of Health and Human Services, Labor and the Treasury (collectively, the Departments) issued Final Rules regarding a new type of health reimbursement arrangement (HRA) – the individual coverage HRA (ICHRA). The Final Rules, issued on June 13, 2019, impose various requirements for an HRA to qualify as an ICHRA.
  • The ICHRA will allow employees to use employer ICHRA contributions to purchase individual health insurance, including insurance purchased on the marketplaces formed under the Affordable Care Act, provided that certain requirements are satisfied.
  • Employers will be able to offer an ICHRA as soon as Jan. 1, 2020.

The U.S. Departments of Health and Human Services, Labor and the Treasury (collectively, the Departments) issued final rules (Final Rules) regarding a new type of health reimbursement arrangement (HRA) – the individual coverage HRA (ICHRA). The ICHRA will allow employees to use employer ICHRA contributions to purchase individual health insurance, including insurance purchased on the marketplaces formed under the Patient Protection and Affordable Care Act of 2010 (ACA), provided that certain requirements are satisfied. In addition, an offer of an ICHRA counts as an offer of coverage under the ACA's employer mandate, though the amount of the employer contribution to the ICHRA will determine whether the ICHRA is considered affordable. Under prior guidance from the Internal Revenue Service (IRS), employers were effectively prevented from offering HRAs that employees could use to purchase individual coverage.

The Final Rules, issued on June 13, 2019, impose various requirements for an HRA to qualify as an ICHRA. These requirements include:

  • The Employee and Employee's Dependents Must Be Enrolled in Individual Health Insurance Coverage: An ICHRA must require that a covered employee and any covered dependents are enrolled in individual health insurance coverage. The new ICHRAs can integrate with many types of individual insurance coverage including 1) individual insurance coverage purchased through or outside of an ACA marketplace, 2) student health insurance coverage, 3) individual insurance coverage obtained in states that have received a Section 1332 waiver, 4) individual catastrophic coverage and 5) coverage under Medicare Parts A, B, C or D and Medigap.
  • Upon Termination of Individual Coverage, ICHRA Coverage Ceases: If any individual covered by the ICHRA ceases to be covered by individual health insurance, then the ICHRA cannot reimburse expenses incurred by that individual after coverage ceases. If the covered employee and all covered dependents cease individual health insurance coverage, then the participant must forfeit the ICHRA balance, and may only receive reimbursement for healthcare premiums and costs incurred prior to the termination of coverage.
  • The Employer Must Generally Offer an ICHRA on the Same Terms to All Employees in the Same Class: The Final Rules specify certain classes of employees. While an ICHRA may be offered on different terms to different classes of employees, if an employer offers an ICHRA to anyone in a class of employees then it must generally be offered on the same terms to all employees within that class. Some of the permissible classes included in the Final Rules are: 1) full-time employees, 2) part-time employees, 3) salaried employees, 4) non-salaried employees, 5) employees in a particular location, 6) seasonal employees and 7) collectively bargained employees.
  • The Employer May Provide Greater ICHRA Contributions Based on Age or Number of Dependents: An employer can provide greater contributions to employees in a class based on the number of dependents the employee is covering or the age of the employee, as long as the same terms apply to everyone in the class. For example, an employer could offer $1,500 for employee-only coverage under the ICHRA, $3,500 for the employee and one dependent, and $5,000 if the employee and more than one dependent are covered by the ICHRA. However, if increased contributions are based on age, the maximum dollar amount made available to the oldest participant(s) cannot be more than three times the maximum dollar amount made available to the youngest participant(s).
  • The Employer Cannot Offer a Traditional Group Health Plan and an ICHRA to the Same Participants: If an employer offers a class of employees an ICHRA, the employer cannot offer a traditional group health plan to anyone in that class of employees.
  • Certain Classes Have a Minimum Class Size Requirement: If an employer offers a traditional group health plan to one or more classes of employees and offers an ICHRA to one or more other classes of employees, a minimum class size requirement will generally apply. The minimum class size is determined by the number of employees the employer reasonably expects to have as of the first day of the plan year. If the employer has fewer than 100 employees, then the minimum class size is 10. If the employer has between 100 and 200 employees, then the minimum class size is equal to 10 percent of the total number of employees (rounded down to a whole number). If the employer has more than 200 employees, then the minimum class size is 20. The class size is based on the number of employees offered ICHRA coverage, not the number of employees who actually enroll in the ICHRA. If this minimum class size requirement is violated, the IRS will disregard the classes used by the employer. All employees will be treated as single class with different coverage terms, which means the ICHRA will fail to satisfy the Final Rules.
  • The ICHRA Must Establish Reasonable Procedures to Substantiate Individual Coverage: An ICHRA must establish reasonable procedures to confirm that the participants and dependents covered by the ICHRA are actually enrolled in individual health insurance coverage for the plan year. The Final Rules provide that this substantiation requirement can be satisfied by a document from a third party confirming enrollment in individual health insurance coverage, or by an attestation by the participant. However, an attestation by the participant will not be sufficient if the employer has actual knowledge that an individual covered by the ICHRA is not or will not be enrolled in individual health insurance coverage. In addition, the ICHRA must require proof of individual coverage prior to each new request for reimbursement from the ICHRA. The Final Rules state that the ongoing attestation can be incorporated into the ICHRA reimbursement request form. The U.S. Department of Labor (DOL) has provided model attestations that an employer can, but is not obligated, to use.
  • Written Notice Must Be Given to Each Participant: No later than 90 days prior to the beginning of each plan year, a written notice must be given to eligible employees informing them of various aspects of the ICHRA, including a statement of the participant's right to opt out of and waive future reimbursements from the ICHRA. The DOL has provided a model notice that an employer can, but is not obligated, to use.

ICHRAs that satisfy the foregoing requirements can reimburse eligible employees for individual insurance premiums and other eligible medical expenses. In designing an ICHRA, employers can select which types of medical expenses are or are not reimbursable. When designing ICHRAs, employers can elect to limit reimbursements to individual insurance premiums only, or alternatively, could allow for the reimbursement of individual insurance premiums as well as out-of-pocket costs, such as copayments, deductibles or coinsurance. If an employer chooses the latter, however, it will have to satisfy additional requirements in order to comply with nondiscrimination requirements of the Internal Revenue Code of 1986, as amended.

Employers will be able to offer an ICHRA as soon as Jan. 1, 2020. However, if an employer chooses to offer an ICHRA for 2020, the required notice will need to be timely provided and employees will generally need to enroll in individual health insurance during the open enrollment period at the end of 2019 (generally lasting from Nov. 1, 2019 to Dec. 15, 2019), unless they have Medicare.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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