IRS Seeks to Clarify ICHRA Rules in Proposed Regulations
The IRS recently issued proposed regulations that clarify how the Internal Revenue Code’s employer shared responsibility and self-insured health plan nondiscrimination rules apply to Health Reimbursement Arrangements that are integrated with individual health insurance coverage (ICHRAs).
Beginning in 2020, ICHRAs are permitted under regulations that expand the use of HRAs. Those regulations, along with IRS Notice 2018-88, indicated that the tax agency would be issuing additional guidance on these topics. The proposed regs clarify and refine the concepts discussed in Notice 2018-88. Here are some highlights.
Employer shared responsibility
The proposed regs provide safe harbors that would simplify affordability determinations for applicable large employers (ALEs).
An ICHRA is considered affordable if an employee’s “required HRA contribution” doesn’t 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, one safe harbor would allow ALEs to use a look-back month before the plan year. Another would allow ALEs to use employees’ primary worksites rather than their residences.
The Centers for Medicare and Medicaid Services has released a tool to help employers find the lowest-cost silver plan for the applicable location in states using the federal Health Insurance Marketplace (or “Exchange”) platform. 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 uniformly and consistently for all employees in a class. An affordable ICHRA is treated as providing minimum value under Internal Revenue Code Section 4980H. The preamble confirms that, by merely offering an ICHRA, an ALE offers an eligible employer-sponsored plan that’s considered in determining whether the ALE offered coverage to enough full-time employees (and dependents) to avoid a Sec. 4980H(a) penalty. Future guidance will be provided on information reporting for ICHRAs, which won’t be required until early 2021.
Nondiscrimination safe harbors
Two nondiscrimination safe harbors are proposed. 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:
- Within each class, the maximum dollar amount varies only in accordance with the “same terms” requirement under the ICHRA rules
- 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 won’t fail to meet the nondiscriminatory benefit requirement solely because of the age-based variation. The preamble cautions that ICHRAs must also be nondiscriminatory in operation and may fail to meet this requirement if, for example, a disproportionate number of highly compensated individuals qualify for and use the maximum amount allowed based on age.
In addition, it confirms that an ICHRA that only reimburses insurance premiums is treated as an insured plan and isn’t subject to the Sec. 105(h) rules. (Although the Affordable Care Act’s nondiscrimination rules for insured plans may apply, compliance with those rules isn’t currently required.)
Taxpayers generally may rely on the proposed regulations for plan years beginning before the date that’s six months after final regulations are published. Comments have been requested on various topics, including issues raised when employers allow ICHRA participants to pay the portion of their premiums not covered by the ICHRA with cafeteria plan salary reductions. They’re due by December 29, 2019.
If your organization is interested in adopting an ICHRA, work with your professional advisors to familiarize yourself with the proposed regulations.