The Departments of Treasury, Labor, Health and Human Services have jointly published final regulations in response to Executive Order 13813, which directed the Departments to expand the use of health reimbursement accounts (“HRAs”) and to allow an employer to reimburse its employees on a pretax basis for premiums for individual health insurance policies. The final regulations allow an employer to set up two new categories of HRAs: an Individual Coverage Health Reimbursement Account (“ICHRA”) for employees who are not eligible for the employer’s group health plan and who buy individual health insurance policies, and an Excepted Benefit HRA, which can be used by employees to pay premiums for excepted benefits (such as dental and vision), short-term limited duration plans, deductibles and other non-covered medical expenses, and COBRA premiums. The final regulations are effective for plan years beginning after December 31, 2019.
Background: The IRS had previously taken the position that an employer cannot reimburse employees for individual health insurance premiums. It considered the reimbursement arrangement (called an “employer payment plan”) to be a group health plan which did not comply with the market reforms of the Affordable Care Act (“ACA”) and could access a $100 per day penalty for each employee who receives reimbursement (up to a maximum of $36,500 per year).
Some relief had been provided under the 21st Century Cures Act which includes a provision allowing small employers (less than 50 employees) to use a Qualified Small Employer HRA (“QSEHRA”) to reimburse employees for medical care (including reimbursement or payment of premiums for individual health insurance policies) instead of offering its employees a group health plan.
ICHRA: The new ICHRAs offer employers significantly more flexibility. For example, it is not limited to small employers and the employer can sponsor a group health plan for one group of employees and offer ICHRAs to another group (subject to certain restrictions).
The ICHRA must meet the following requirements:
- Employees must be enrolled in individual health insurance coverage or Medicare Part A and B or Part C.
- Employees cannot be eligible for a group health plan sponsored by their employer.
- Employees must be able to substantiate enrollment both annually and with each reimbursement request. (The latter can be an attestation by the employee that he or she has individual health coverage on the reimbursement request/claim form.)
- The ICHRA must allow the employees to opt-out of the ICHRA once annually and upon termination of employment.
- The ICHRA must be offered to all employees within a class on the same terms. If the employer wants to offer the ICHRA to only certain groups, it can do so as long as the group is in a permissible class. (For example, full-time employees, part-time employees, seasonal employees, employees covered under a Collective Bargaining Agreement, employees working in the same health insurance rating area, salaried employees and non-salaried employees.)
- Even though benefits must be offered on the same terms for all employees in a class, the reimbursement amounts can be increased for older employees and for employees with dependents.
- If the employer offers an ICHRA to some classes of employees and a group health plan to other classes, the classes must be a minimum size. (For example, 10 employees for an employer with less than 100 employees.)
- An annual notice must be provided to all employees eligible for the ICHRA.
- If an employer is an “Applicable Large Employer” subject to the ACA’s “Employer Shared Responsibility” rules, each full-time employee’s share of the monthly premium for the lowest cost silver plan offered in the rating area where the employee works (after subtracting the employer’s contributions to the ICHRA) must be affordable to avoid certain ACA penalties.
Excepted Benefit HRA: Employers are given additional flexibility under the final regulations with the creation of an Excepted Benefit HRA which can be offered alongside a traditional group health plan. Unlike the limited scope HRAs available prior the final regulations (which could only reimburse employees for limited scope vision and dental coverage), the Excepted Benefit HRA can also reimburse expenses unrelated to excepted benefits (such as deductible, co-insurance amounts and non-covered medical expenses), COBRA premiums and short-term limited duration insurance (“STLDI”).
The Excepted Benefit HRA must meet the following requirements:
- The employer must offer a traditional group health plan to the employees offered the Excepted Benefit HRA. However, the employees do not have to enroll in the traditional group health plan.
- The amount the employer puts into the Excepted Benefit HRA cannot exceed $1,800 per year.
- The Excepted Benefit HRA must be made available to similarly situated employees on the same terms. (For example, it would be permissible to offer different terms to full-time and part-time employees.)
- An ICHRA and an Excepted Benefit HRA cannot be offered to the same group of employees.
- The Excepted Benefit HRA cannot reimburse premiums for Medicare Part A, B, C and D, individual health coverage and group health insurance coverage (other than COBRA).
If you have any questions about this Alert, please feel free to call (919.781.4000) or e-mail your Wyrick Robbins contact or one of the following members of our Employee Benefits & Executive Compensation group: Gray Hutchison (email@example.com) or San Parikh (firstname.lastname@example.org).
NOTICE: This Client Alert provides merely an overview and summary information regarding the requirements for these notices and filings. Please note that not all potential details and nuances have been addressed, and this Client Alert does not involve analysis of specific facts concerning your company or reach any conclusion with respect to any material federal tax issues for any specific taxpayer.