Individual coverage and excepted benefit HRAs for employees
ARTICLE | April 24, 2023
Authored by RSM US LLP
Many employers want to provide financial assistance to employees for health insurance premiums and other medical costs even though they do not offer a group health plan. In addition, some employers do sponsor a group health plan but would like to provide benefits to employees not eligible for the plan (such as part-time employees). A health reimbursement arrangement (HRA) may be a good option for these employers.
HRAs are account-based health plans that employers can use to reimburse employees for health insurance premiums and other medical expenses on a tax-free basis. Individual coverage HRAs (ICHRAs) and excepted benefit HRAs (EBHRAs) are specific types of HRAs that any size employer can adopt.
This article explores the design features of ICHRAs and EBHRAs. For information on other types of HRAs, check out our insights on tax-advantaged health reimbursement arrangements for employees.
Individual coverage HRAs
Any employer can offer an Individual Coverage HRA to its employees. ICHRAs generally provide more flexibility than other types of HRAs.
Employers can offer an ICHRA regardless of whether they also offer a traditional group health plan to employees. However, the ICHRA can only be offered to employees who are not offered a traditional group health plan. In other words, an employer cannot give an employee the choice of being in a traditional group health plan or in an ICHRA. Employers can offer a traditional health plan to one class of employees and an ICHRA to a different class. For example, if an employer offers a traditional group health plan to its full-time employees, it could offer the ICHRA to part-time employees who aren’t eligible for the traditional group health plan. An employer also could offer a traditional group health plan to current employees but offer only an ICHRA to new employees hired after a given date. Classes may be defined by work status (such as full-time versus part-time or salaried versus hourly), geographic location, or other factors. If an employer offers a traditional health plan to some employees and an ICHRA to other employees, a minimum class size rule may apply.
An ICHRA is funded entirely by the employer, and the employer has discretion to determine the maximum dollar amount that it wants to contribute for a year. The ICHRA must be offered on the same terms to all employees within a class of employees, except that the contribution amount can be increased for older workers or for workers with more dependents. The maximum contribution amount for the oldest worker in a class can be up to three times the contribution amount for the youngest worker in the class. Employers can contribute the full amount or a prorated amount for employees entering the plan midyear or experiencing a change in their number of dependents during the year.
In order to receive funds from an Individual Coverage HRA, an employee must be enrolled in individual health insurance or Medicare (Parts A and B or C). Individual health insurance is major medical insurance purchased by the employee through the Health Insurance Marketplace (also called the Exchange) or directly from an insurance company (off-Exchange coverage). Short-term, limited-duration insurance and insurance solely for dental or vision expenses do not qualify.
Employees who gain access to an ICHRA during a year are entitled to a special enrollment period and are not required to wait until the next annual open enrollment period in the individual market in order to purchase or change their coverage. Employees must attest upon enrollment in the ICHRA and when submitting claims for reimbursement that they have individual health insurance or Medicare. The federal agencies have drafted model attestation forms for these purposes. Funds in the ICHRA can be used on a tax-free basis to reimburse employees for individual health insurance premiums and other medical expenses for themselves and their family members. At the option of the employer, unused amounts in the ICHRA can roll over from year to year.
Premium tax credits
Federal guidance addresses how ICHRAs interact with the premium tax credits that employees may receive on health insurance that they purchase on the Exchange. Premium tax credits are government subsidies that lower the cost of the premiums. An employee is not eligible for premium tax credits if the employee is:
- enrolled in the ICHRA, or
- eligible, but not enrolled, in the ICHRA and the ICHRA meets the ACA’s affordability requirement. An employee is eligible for premium tax credits if the employee declines the ICHRA coverage and the ICHRA is not affordable.
Because of this, employees must be allowed to opt out of an ICHRA. Employees, in conjunction with the Exchange, determine whether an ICHRA is affordable based on:
- their household income,
- the amount the employer contributes to the ICHRA, and
- the premium for the lowest-cost silver health plan available to the employee on the Exchange.
Employers must provide a notice to employees eligible to participate in the ICHRA informing them of the terms of the ICHRA. The notice must state the date that the ICHRA coverage begins, whether dependents can be covered by the ICHRA and the amount of the employer’s ICHRA contribution. In addition, the notice must explain the interaction of the ICHRA with the premium tax credits that employees may be eligible to receive on health insurance purchased through the Exchange. The notice must be provided annually at least 90 days before the start of the ICHRA plan year. For a new ICHRA established fewer than 120 days before the start of its first plan year, the notice must be provided by the effective date of the ICHRA. Notices for employees hired during a plan year must be provided by the date they are eligible to participate in the ICHRA. The federal agencies have drafted a model notice that employers can customize and give to employees.
Even though the premiums for individual health insurance can be reimbursed through an employer’s Individual Coverage HRA, the insurance is not treated as an employer-sponsored plan under ERISA if certain conditions are met. ERISA is a federal law that governs employee benefit plans. In general, the employer cannot select or endorse any particular insurance carrier or coverage, and cannot receive any cash, gifts, or other consideration in connection with an employee’s selection or renewal of the insurance. An employee’s purchase of the insurance must be completely voluntary, and each employee must be notified annually by the employer that the insurance is not subject to ERISA.
Employers can allow employees to pay premiums for off-Exchange individual health insurance on a tax-favored basis through the employer’s cafeteria plan. Consequently, if the employer’s ICHRA doesn’t fully reimburse the employee for the cost of the coverage, the employee could be given the option to use pretax payroll deductions to pay the balance of the premium. Pretax payroll deductions cannot be used for Exchange coverage.
Under the ACA, large employers are required to offer ACA-compliant coverage to their full-time employees or pay an employer-shared responsibility payment penalty to the IRS. This requirement is commonly known as the employer mandate. Large employers are those with an average of at least 50 full-time employees (including full-time equivalent employees) in the prior calendar year. The employer’s health coverage is ACA-compliant if it meets minimum essential coverage, minimum value, and affordability requirements. The federal agencies have determined that ICHRAs meet the minimum essential coverage requirement and will meet the minimum value requirement if the ICHRA is affordable. In general, affordability is based on:
- an employee’s compensation,
- the amount the employer contributes to the ICHRA, and
- the premium for the lowest-cost silver health plan available to the employee on the Exchange taking into account the employee’s age and location (residence or primary worksite).
The federal government has developed a tool employers can use to determine the lowest-cost silver plans in states using the federal Exchange. Consequently, a large employer may be able to meet the employer mandate by offering its employees an ICHRA rather than a traditional group health insurance plan.
Employers offering an ICHRA are required to file an annual Form 1095-B or Form 1095-C to the IRS and provide a copy to employees. In addition, they may need to file an annual Form 720, Quarterly Federal Excise Tax Return, by July 31 each year to report and pay the Patient-Centered Outcomes Research (PCOR) fee.
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This article was written by Jill Harris, Lauren Sanchez and originally appeared on 2023-04-24.
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