Background

On June 20, 2019, the Departments of Labor, Health and Human Services and the Treasury (the Departments) issued final regulations that permit employers to offer an HRA that can integrate with individual market medical coverage (so long as it meets certain criteria) and be utilized by employers as an alternative to the traditional group health plan coverage they may offer, if applicable.

The Departments refer to these types of arrangements as Individual Coverage HRAs (ICHRAs). ICHRAs are employer-funded account-based health plans that reimburse employees, on a non-taxable basis, for qualified medical expenses and premiums for employees’ individual market medical coverage.

What are the benefits of offering an Individual Coverage HRA to employees?

Individual Coverage HRAs (ICHRAs) are available to employers of any size (subject to certain limitations). The plans are flexible and permit employers to decide the following:

• Maximum reimbursement amount for participating employees without a governmentally imposed minimum or maximum employer contribution amount
• Which medical expenses will be covered under the ICHRA (including individual market medical coverage premiums)
• Classes of employees to whom the ICHRA will be offered

ICHRAs may be useful to employers of all sizes, including applicable large employers (ALEs) with employees to whom coverage would not usually be extended (such as for part-time or seasonal employees) and ALEs seeking to extend coverage to a few more full-time employees to avoid employer mandate penalties under the Affordable Care Act (ACA).

ICHRAs also offer tax advantages to both employers and employees. ICHRAs are not considered wage/salary reimbursements but are considered health/welfare plan contributions, so they are treated as tax-advantaged business expenses. In addition, in most cases an employer’s contributions to, and any benefits provided by, an ICHRA are excluded from an employee’s taxable income. Furthermore, as long as the individual market medical coverage an employee is enrolled in is not an Exchange/Marketplace policy, the employee may pay any portion of the premium for individual market coverage not reimbursed by the ICHRA through a salary reduction agreement as part of a Section 125 cafeteria plan (if allowed under the terms of the cafeteria plan) on a pre-tax basis.

What medical expenses of an employee can be reimbursed through an ICHRA?

Employers may limit ICHRA reimbursements to individual market medical premiums and qualified medical expenses, or only allow reimbursement for qualified healthcare expenses related to excepted benefits such as vision/dental expenses (to create the option between HSA-compatible or non-HSA compatible ICHRA plans), both of which can be offered to employees within the same employee class. Further, other ways an ICHRA may be designed to be HSA-compatible include restricting ICHRA reimbursements solely to medical premiums (including premiums for individual market HDHP coverage), post-HDHP deductible expenses, or any combination of the forgoing. This is discussed further in Q8.

ICHRAs can also be used to reimburse costs associated with Medicare (Parts A, B and C) and Medicare supplemental insurance policies. ICHRAs can reimburse healthcare costs incurred by the employee and the employee’s spouse, dependents and children younger than 27 years old at the end of the taxable year.

How does an employer set up an ICHRA?

ICHRAs are set up similarly to regular HRAs. All plan sponsors will need to create a plan document properly describing the rules surrounding the ICHRA, regardless of whether they are subject to ERISA. Plan sponsors that are subject to ERISA will also need to create and distribute a Summary Plan Description for the ICHRA. Also, depending on what rules the employer/plan sponsor is subject to, it must also properly deliver any applicable notices that employer health plans are generally subject to (e.g., Notice of HIPAA Privacy Practices, Medicare Part D Notice, WHCRA, CHIP Notice, COBRA General Notice, QMCSO).

An employer would also create an unfunded or notional account for each participating employee. These are bookkeeping accounts to which an employer’s ICHRA contributions for each eligible employee are allocated.

Once an employee incurs qualifying expenses (premiums or other healthcare expenses associated with individual market coverage), the ICHRA would reimburse the employee up to the balance of the employee’s ICHRA account.

Any portion of the premium for an employee’s individual market medical coverage that is not covered by the ICHRA may be paid for by the employee on a pre-tax basis, so long as an employer’s Section 125 cafeteria plan includes the ability for employees to make such payments through a salary reduction agreement and provided that the individual market coverage the employee is enrolled in is not purchased through the Exchange/Marketplace.

What restrictions apply to Individual Coverage HRAs?

Employers are responsible for ensuring employees are eligible for reimbursements from the ICHRA by confirming that the employee (and any applicable family members) participating in the ICHRA is enrolled in individual medical insurance (purchased on or off Exchange) or enrolled in Medicare coverage. Any expenses incurred during a time in which an applicable individual is not enrolled in either individual market coverage or Medicare coverage are non-reimbursable, as that individual is not considered eligible for reimbursements from the ICHRA due to their failure to remain enrolled in individual market/Medicare coverage.

Employees enrolled only in group medical coverage, short-term limited duration coverage (STLDI) and/or an excepted benefit plan(s) are ineligible for reimbursements under an ICHRA. Additionally, sponsors offering an ICHRA cannot offer traditional group health coverage to the same class of employees offered the ICHRA.

As mentioned above, employees may not pay for Exchange/Marketplace coverage with pre-tax contributions from their paychecks. It is also important to note that the ICHRA cannot be part of a Section 125 cafeteria plan and must be funded only by the employer, similar to the rules surrounding other HRAs.

What other responsibilities does an employer/ICHRA plan sponsor have? Are there any notice or substantiation requirements?

An ICHRA plan sponsor must give written notice of information related to the ICHRA to all employees (including former employees) eligible for it. ICHRA plan sponsors may use the Federal government’s model notice in the Appendix section of this document to satisfy the notice requirement. The plan sponsor must tailor the ICHRA model notice to match the specifics of the employer’s ICHRA coverage throughout the notice, which requires modification of the areas of the notice, in the italicized prompts contained in brackets.

An employer may also modify the notice based on other terms of the ICHRA, such as deleting references within the notice to employees’ family members if the plan sponsor excludes reimbursement to the employee for qualified expenses incurred by their family members. A plan sponsor is not required to utilize the model notice, but the Departments consider timely use of the model notice to be in good-faith compliance with the Department’s notice requirement.

Employers/ICHRA plan sponsors are also responsible for requesting information from an employee to substantiate that each participant and dependent enrolled in the ICHRA is or will be enrolled in an individual health coverage for the plan year or portion of the plan year in which the employee and dependent will be covered under the ICHRA. The deadline for employees to substantiate they are/will be enrolled in individual market/Medicare coverage must occur before the first day of the ICHRA plan year, or before the first day in which participation begins (if joining the plan after the first day of the plan year). Following this initial substantiation of coverage, employees must substantiate that they remain enrolled in individual market/Medicare coverage for the month for which medical expenses (including medical premiums) were incurred prior to each expense reimbursement. Compliance with this requirement may be an issue for some employers depending on the process used for reimbursing recurring expenses such as the premiums for individual healthcare coverage.

Employers may adopt the following practices for employees to substantiate coverage:

• Requiring the participant to produce a document from a third party (such as an insurer or from the Exchange) showing the participant and any dependents covered by the ICHRA are, or will be, enrolled in medical coverage (such as an insurance card or explanation of benefits document).
• Obtaining the participant’s attestation stating the participant and ICHRA-covered dependents will be enrolled in medical coverage by the date the coverage begins, along with notifying the employer of the name of the coverage provider.

Regulatory and Legislative Strategy Group