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Individual Coverage HRA (ICHRA) Update: Treasury and IRS Issue Proposed Rules on Affordability

This past summer, the Departments issued their final rule detailing compliance for employers when offering an individual coverage HRA (ICHRA).

ICHRAs are the vehicle with which any size employer may offer employees reimbursements of premiums for individual health coverage.

The final rule clarifies that HRAs are group health plans and must meet affordability and minimum value in order to avoid any of the Employer Shared Responsibility Provision (ESRP) penalties. The rule states that:

  • Employers can avoid the 4980H(a) penalty for failure to offer if they offer minimum essential coverage (MEC) to 95% of all full-time employees – IHCRAs are MEC
  • Employers can avoid the 4980H(b) penalty if the ICHRA is affordable and meets minimum value
    • Affordability is achieved if an employee’s required contribution to the ICHRA is equal to or lower than the maximum monthly affordability as determined by percentage of household income (HHI)
      • Example: the maximum applicable monthly premium for someone with HHI of $2,500 per month ($30,000 per year), is $244.50 per month (IRS affordability percentage of 9.78% for 2020 x $2,500 monthly HHI)
      • Affordable if employee’s required contribution (lowest cost silver plan in market minus the employer’s HRA contribution) is less than or equal to $244.50 per month

The final rule points to the need for further clarification to determine affordability. In Treasury’s and IRS’s review of an employer’s obligations under the Affordable Care Act (ACA), namely, the ESRP, they now create a new proposed rule to help employers determine whether their ICHRA offer is affordable.

Posted to the Federal Register on September 30, 2019, these Departments provide guidance and seek individual feedback regarding the affordability determination.

Proposed Rule

The proposed rule provides the following optional safe harbors for employers and employers may combine any of the safe harbors when implementing their ICHRA plan:

  • Lowest Cost Silver Plan (LCSP) – rates in the individual market are based upon age for each of the ACA-defined metal tiers (bronze, silver, gold, and platinum)
    • The final rule translates this to a per employee determination. In other words, the age and residence of the employee determines the lowest cost silver plan for that employee
    • The new proposed safe harbors allow employers base affordability on:
      • the primary worksite of the employee rather than employee residence
      • the lowest age band in the individual market for the employee’s applicable location rather than employee’s specific age
      • the rates existing on January 1 of the prior calendar year (if the employer has a calendar year plan) or January 1 of the current year (if the employer has a non-calendar year plan) – see CMS employer LCSP look-up tool for January 1, 2019,
      • To aid employers, CMS has announced implementation of the:
  • ACA affordability responsibilities include offers of coverage to all full-time employees and specific notification and reporting requirements
    • The ACA requires employers to offer affordable coverage that meets minimum value
    • The new proposed optional safe harbors allow employers to comply with ACA rules by:
      • Using the same 4980H affordability safe harbors as defined for ESRPs, namely the employee’s W-2, rate of pay, or federal poverty line, rather than using HHI
      • Expanding the minimum value definition to state that all ICHRAs meet minimum value if they are affordable under the safe harbors
      • Extending the same ESRP rules about tobacco and wellness premium adjustments when considering ICHRA premium, i.e., employers should use non-tobacco rates and forgo inclusion of wellness incentives when determining affordability
      • Confirming that there are no changes to health plan reporting under §6055, i.e., plans using Forms 1094-B and 1095-B, which are non-ALE health plans
      • Committing to provide additional future guidance to ALE’s responsible for reporting under §6056, i.e., Forms 1094-C and 1095-C

Next Steps

The Department’s solicitation of comments includes feedback on other methods of determining affordability, whether employers need more clarity on “primary site of employment,” timing of determining employee residence when employees change location, sufficiency of look-back safe harbor to determine LCSP premium, and interaction with section 125 cafeteria plan rules.

These comments are due by December 29, 2019. Taxpayers may rely on these proposed rules for plan years beginning January 1, 2020, and until six months after any future final rules are issued.

When it comes to staying on top of the latest in healthcare and benefits legislation, our team of compliance experts has your back—Register for the upcoming webinar for an overview of recent compliance developments: Quarterly Legislative and Regulatory Update.

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