Can an employer provide health care coverage for its employees by simply setting aside cash for them on a tax-favored basis (in an HRA – a health reimbursement arrangement), and otherwise get out of the complexities of sponsoring an ERISA health care coverage program? Until now, the answer to that question was “NO” because that type of design would not meet a number of the requirements of the Affordable Care Act (ACA). But on June 13, 2019, new final regulations were issued by the U.S. Departments of Labor, Treasury and Health and Human Services that will permit such an arrangement beginning in 2020.
The regulations call such an arrangement an individual coverage HRA (ICHRA). Under an ICHRA, the employer funds an HRA for each participating employee with amounts that will be used to purchase individual health insurance. The amounts must be uniform among employees, although they can vary based on age and number of dependents. The employee can utilize salary reduction under a cafeteria plan to supplement the ICHRA employer-funded amounts for the purchase of insurance. The employer then allows each employee to choose individual health insurance coverage and use the HRA amounts (and cafeteria plan amounts) to pay for it.
In this way, an employee covered by an ICHRA will be able to pay the entire premium with pre-tax dollars. This is in stark contrast to an employee who currently purchases health insurance on an ACA exchange – such a purchase is currently made with after-tax dollars. But starting in 2020, an employer can deliver pre-tax treatment to employees while leaving the shopping and choice of coverage to the individual employee. (Interestingly, in order to get this favorable tax treatment, the employee must purchase the insurance “off exchange” and not at an ACA exchange.)
For ACA purposes, the ICHRA arrangement – the HRA and the employee’s chosen individual coverage – will be viewed as an integrated welfare benefit plan. But for ERISA purposes (e.g. fiduciary responsibility, reporting and disclosure), the underlying individual coverage for any given employee will not be viewed as part of an ERISA plan. The amount funded in the ICHRA will have to be tested for affordability and minimum value under the ACA, just like any other employer health plan coverage, to satisfy the employer mandate and avoid any ACA penalties.
These regulations roll out a brand new concept, and there are a lot of complexities that need to be understood and evaluated. For example, the employee will have to understand that by signing up for ICHRA treatment, she is obligating herself to maintain coverage throughout the year. Furthermore, she is in effect opting out of any premium support under the Exchange, as long as the ICHRA meets the affordability and minimum value tests. The employer will be obligated to provide employees with an annual notice making this point – the Department of Labor has already promulgated a model notice.
It is unlikely that employers will be flocking to institute ICHRAs in 2020. But in the long term, the idea of getting out of the business of designing employee health care coverage for employees, and instead relying on a defined contribution model of just providing a certain amount of cash, may be very appealing to some employers. It will be interesting to see how the marketplace (insurance companies and third-party advisors) responds to this new design opportunity.