Proposed Rules Allow the Use of HRAs to Pay For Individual Market Coverage

On Tuesday, October 23, the Departments of Treasury, Labor, and Health and Human Services (the “Departments”) released long-awaited proposed regulations regarding health reimbursement arrangements (“HRA”) and other account-based group health plans (the “Proposed Regulations”).  Notably, the Proposed Regulations effectively reverse Obama-era guidance to now allow employees to use HRAs to pay for premiums for individual health insurance purchased either on and off the Exchanges.

I.  Background

The Proposed Regulations are the last outstanding item from President Trump’s Executive Order No. 13813 entitled “Promoting Healthcare Choice and Competition Across the United States” (the “Executive Order”).  The Executive Order directed the Departments to consider issuing sweeping new healthcare guidance in a stated effort to lower premium costs and increase choice in the individual health insurance market.  The Executive Order focused on policy changes addressing three types of coverage: (1) broadening the ability of small employers to purchase association health plans (“AHPs”); (2) lengthening the duration of, and allowing consumers to renew, short-term, limited-duration insurance (“STLDI”); and (3) expanding the use and availability of HRAs.  The AHP and STLDI rules were finalized earlier this year.

By allowing employees to pay for individual health insurance premiums with HRA funds, the Proposed Regulations depart significantly from Obama-era guidance, which expressly prohibits the use of an HRA or other employer funds to pay or reimburse premiums for insurance purchased in the individual insurance market.  Under that guidance,^[1] the Departments provided that an HRA (or other employer-sponsored arrangement designed to pay for health coverage purchased in the individual market) for active employees must be “integrated” with another group health plan to satisfy the Affordable Care Act’s (“ACA”) market reform requirements.  The stated legal rationale for this earlier guidance was that a stand-alone HRA or other similar arrangement for active employees would fail to satisfy two of the ACA’s “market reform” provisions: the prohibition against annual dollar limits on essential health benefits (“EHBs”) and the requirement to provide certain preventive services without cost-sharing.

II.  HRA Integration and Excepted Benefits

The Proposed Regulations remove the current prohibition on using HRA funds to purchase individual health insurance coverage, provided certain conditions are met (thereby creating opportunities for “Individual Coverage HRAs” or “ICHRAs”).  In addition, the Proposed Regulations create a new version of stand-alone HRAs that employees can use to pay for out-of-pocket medical expenses (“excepted benefit HRAs” or “EBHRAs”).

As discussed in detail below, both approaches include nondiscrimination rules that limit their use.  According to the Departments, the imposition of the proposed nondiscrimination rules is designed to “prevent negative consequences” – i.e., discrimination against older and sicker individuals and significant destabilization of the individual insurance market.

A.  The New HRA Integrated with Individual Health Insurance Coverage

As noted above, prior guidance from the Departments generally provides that a stand-alone HRA (or other employer-funded arrangement) cannot satisfy all of the ACA’s market reform provisions and requires an HRA to be integrated with qualifying group health plan coverage.  The Proposed Regulations would permit an HRA to be integrated with certain qualifying individual health plan coverage in order to satisfy the market reforms.  In order to be “integrated” with individual market coverage, the Proposed Regulations provide that the ICHRA must meet several conditions:

• Any individual covered by the ICHRA must be enrolled in health insurance coverage purchased in the individual market and must substantiate and verify that they have such coverage;
• The employer may not offer the same class of individuals both an ICHRA and a “traditional group health plan”;
• The employer must offer the ICHRA on the same terms to all employees in a “class”;
• Employees must have the ability to opt-out of receiving the ICHRA; and,
• Employers must provide a detailed notice to employees.

Each of these requirements is discussed in more detail below.

1.  Requirement that All Individuals Covered by the ICHRA Are Enrolled in Individual Health Insurance Coverage

In order to be integrated with individual market health insurance coverage, any participant (regardless of whether a current and former employee) and dependent who can receive reimbursements from the ICHRA must be enrolled in individual market health insurance coverage for each month that they are covered by the ICHRA.  Substantiation of enrollment in such health insurance coverage plan is required.

For this purpose, the Proposed Regulations treat all individual market health insurance as subject to, and compliant with, the ACA’s market reforms.  Thus, the ICHRA can be integrated with any individual market health insurance policy except excepted benefits (within the meaning of Internal Revenue Code (“Code”) section 9832, ERISA section 733, PHSA section 2791) and STLDI.

GROOM INSIGHT: Because of the requirement that an individual be enrolled in qualifying individual health insurance coverage for the month, in order to access ICHRA funds, as noted below, the Departments have proposed a fairly significant substantiation of coverage requirement on employers sponsoring the ICHRA.

If a participant or dependent who can receive reimbursements from the ICHRA fails to be covered by individual market health insurance for a month, the participant or dependent may not participate in the  ICHRA for that month (in accordance with COBRA and other applicable laws).

GROOM INSIGHT: Notably, the Departments indicate in the preamble to the Proposed Regulations that an ICHRA is allowed to be integrated with grandfathered health plans, and likely also with health plans sold in states with ACA section 1332 waivers, even if the underlying coverage has annual or lifetime dollar limits or charges a co-payment or deductible for preventive services.  These coverages are an exception to the general rule in the Proposed Regulations that the “integrated” individual insurance coverage otherwise meet the ACA’s market reform provisions.

2.  Prohibition Against Offering Both an ICHRA and a Traditional Group Health Plan to the Same Class of Employees

In general, an employer may not offer an ICHRA to a class of employees if the employer offers a “traditional group health plan” to the same class of employees.  A “traditional group health plan” is defined as any group health plan except (i) an account-based health plan, and (ii) a plan that consists solely of excepted benefits.

Classes of Employees

Under the Proposed Regulations, employers are permitted to divide their workforce into several specified classes of employees.  If the employer offers an ICHRA to an employee in a given class, it must offer the ICHRA on the same terms to all employees in that class.  These classes are:

1. Full-time employees;
2. Part-time employees;
3. Seasonal employees;
4. Employees in a unit covered by a collective bargaining agreement in which the employer participates;
5. Employees who have not satisfied a waiting period that meets the requirements of PHSA section 2708 (generally, no longer than 90 days other than for variable-hour employees whose hours of service cannot be determined in advance);
6. Employees who are younger than 25 at the beginning of the plan year;
7. Foreign employees who work abroad; and
8. Employees who work in the same rating area.

With respect to the first three classes noted above, the Proposed Regulations provide that employers have the choice of defining “full-time,” “part-time,” and “seasonal” employees according to either (a) Code section 105(h) or (b) Code section 4980H, so long as the definition used is consistent across all three classes of employees.

Notably, the Proposed Regulations do not permit employers to distinguish between salaried and hourly employees.  In prohibiting the use of salaried employees and hourly employees as distinct classes, the Departments noted their concern that employers could too easily switch individual employees between salaried and hourly status, thus gaming the system and potentially discriminating against certain employees.  This will likely be a significant hurdle for many employers in deciding whether to offer ICHRAs.

GROOM INSIGHT: Although the Proposed Regulations are not entirely clear on this point, it appears the employee classes can be applied using a common law employer standard and not on a controlled group basis.  If so, this should provide additional, and helpful, flexibility for controlled group employers considering the use of an ICHRA.

In addition to the classes enumerated above, employers will be permitted to create additional classes comprised of employees who fit into two or more of the enumerated classes.  For example, an employer could distinguish between part-time employees covered by a collective bargaining agreement and full-time employees covered by the same agreement.

The Proposed Regulations also provide interesting rules regarding former employees.  Specifically, as proposed, in determining in which class a former employee belongs, the Proposed Regulations would require that former employees be treated as being in the same class to which they belonged immediately prior to their separation from service.

GROOM INSIGHT: Notably the current rules that permit retiree-only HRAs are still in effect, and thus the integration rules only appear to apply where the ICHRA covers both active and former employees.

GROOM INSIGHT:  The Proposed Regulations permit an employee to salary reduce on a pre-tax basis through a cafeteria plan to pay for any portion of the premium for individual health coverage that is not covered by the ICHRA, but only for coverage that is purchased off-Exchange. This is because Code section 125(f)(3) prohibits the use of cafeteria plans to purchase a qualified health plan that is offered on-Exchange.  The ability to pay a portion of the premium through salary reductions under a cafeteria plan is considered to be a term of the ICHRA, and, therefore, must be made available on the same terms to all employees in the same class.

3.  Same-Terms Requirement

Subject to three notable exceptions discussed below, employers that offer an ICHRA to a class of employees must offer the ICHRA on the same terms and conditions to all employees within the same class.  Interestingly, the Departments prohibit the use of “benign discrimination” – that is, the offering of a more generous ICHRA to individuals based on an adverse health factor (e.g., diabetes, cancers, or chronic illnesses).

GROOM INSIGHT:  The Departments’ decision in this regard is notable because certain federal rules allow for such benign discrimination in other circumstances (for example, HIPAA’s wellness rules).  Thus, employers will need to be mindful that practices that are acceptable in some spheres (such as providing for enhanced HRA contributions as a wellness incentive for individuals with a health factor under HIPAA), may not be permissible when offered in connection with an ICHRA.

Age

In a bow to the reality of how individual health plans are priced (i.e., per the ACA, individual insurance premiums can increase by up to 300% based on an individual’s age), the Proposed Regulations would permit an employer to increase the maximum amount available to a participant under an ICHRA based on an increase in a participant’s age.  The Proposed Regulations make clear, however, that the same increase must apply to all similarly aged participants in the same class of employees.

The Departments note that they plan to issue guidance “in the near term” describing a safe harbor that would allow increases in the maximum dollar amount made available under an ICHRA due to a participant’s age without violating the nondiscrimination rules of Code section 105(h).

GROOM INSIGHT:  There have been many open questions regarding the Code section 105(h) rules, which is currently a “no-rule” topic for the IRS.  It will be interesting to see if this future guidance addresses any of these open questions or will be limited to the discrete issue of how employers may vary benefits or coverage based on an employee’s age.

Number of Dependents

The maximum dollar amount available under an ICHRA may also increase as the number of the participant’s dependents covered under the ICHRA increases.  Again, the increase must be made on a uniform basis within the class and is another example of the Departments’ recognition of how individual insurance coverage is priced in the market (i.e., with premiums increasing based on the number of enrolled dependents).

Former Employees

An ICHRA is treated as offered on the same terms even if the employer offers the ICHRA to some, but not all, former employees within a class.  To the extent an ICHRA is offered to former employees, however, it must be offered to the former employees on the same terms as it is offered to all other members of the class.  As noted above, for purposes of applying this rule, the Proposed Regulations provide that the former employee is a member of the class in which he or she belonged immediately prior to his or her separation from service.

GROOM INSIGHT: Unused amounts in an ICHRA may be carried over from year to year without violating the uniform availability rules, provided that access, methodology, and formulas for determining carryover amounts are applied uniformly within the class.

4.  Opt-out Provisions

For any month for which an individual is covered by an ICHRA, the individual is not eligible for a Code section 36B premium tax credit (“PTC”) for that same month.  For that reason, the Proposed Regulations provide that employers that offer ICHRAs must allow participants to opt-out of and waive future reimbursements from the ICHRA at least annually.  Additionally, on termination of employment, either the amount in the ICHRA must be forfeited or participants must be given an opportunity to permanently opt-out of future reimbursements so as not to adversely affect PTC-eligibility.

5.  Substantiation and Verification of Individual Health Insurance Coverage

In order to be integrated, an ICHRA must implement and follow “reasonable” procedures to verify that all participants and dependents covered by the ICHRA are enrolled in individual health insurance coverage (other than excepted benefits or STLDI) during the plan year.  For these purposes, reasonable procedures may consist of (1) documentation by a third party, or (2) an attestation by the participant.  Notably, the Proposed Regulations provide that new verification is required prior to any expense being reimbursed.

GROOM INSIGHT:  The requirement to verify coverage prior to reimbursing any expense may not be that onerous for ICHRAs that use paper or electronic requests, but would appear be very difficult for ICHRAs that use debit cards since it is unclear how someone could verify that they have individual coverage prior to each use of the debit card, unless perhaps a statement on the debit card itself would suffice.  Additionally, for ICHRAs that reimburse monthly premiums (which should be the norm), it would appear that the sponsoring entity will need to substantiate enrollment in qualifying individual insurance coverage on at least a monthly basis.

The ICHRA may rely on the documentation or attestation unless there is actual knowledge that any individual covered by the ICHRA is not, or will not be, enrolled in individual health insurance coverage during the plan year.

GROOM INSIGHT:  Thankfully, the Proposed Regulations allow for the use of employee attestations regarding enrollment in qualifying individual insurance coverage.  Additionally, it is helpful that the Proposed Regulations make clear that sponsoring entities may rely on the attestation absent actual knowledge to the contrary.

6.  Notice Requirements

An ICHRA is required to provide written notice to eligible employees at least 90 days before the beginning of each plan year that their participation in an ICHRA will render them ineligible for a PTC.  For participants who are not eligible for the ICHRA at the beginning of the plan year, the Proposed Regulations provide that the notice must be given no later than the date on which the participant is first eligible to participate in the ICHRA.

The notice must include all of the following information:

• A description of the terms of the ICHRA, including the maximum dollar amount made available;
• A statement of the right of the participant to opt-out of and waive future reimbursement under the ICHRA;
• A description of the potential availability of the PTC if the participant opts out of and waives the ICHRA and that the ICHRA is not affordable under the proposed PTC regulations;
• A description of the PTC eligibility consequences for a participant who accepts the ICHRA;
• A statement that the participant must inform any Exchange to which they apply for advance payments of the PTC of the availability of the ICHRA;
• The amount of the ICHRA, the number of months the ICHRA is available to participants during the plan year, whether the ICHRA is available to their dependents, and whether the participant is a current or former employee;
• A statement that the participant should retain the written notice because it may be needed to determine whether the participant is allowed the PTC;
• A statement that the ICHRA may not reimburse any medical care expense unless the substantiation requirements are met;
• A statement that it is the responsibility of the participant to inform the ICHRA if the participant or any dependent whose medical care expenses are reimbursable by the ICHRA is no longer enrolled in individual health insurance coverage; and
• If applicable, a statement to advise participants that individual health insurance coverage integrated with the ICHRA is not subject to ERISA.

GROOM INSIGHT:  To comply with the notice requirement, the ICHRA must determine the amounts that will be newly made available for the plan year prior to the start of the plan year. A similar requirement applies under the PTC portion of the Proposed Regulations.

The notice could include other information, as long as the additional information does not conflict with the required information above.  The notice will not need to include information specific to a participant.

GROOM INSIGHT:  The Proposed Regulations generally do not change the current rules for HRAs integrated with group health plans, Medicare, or Tricare.

B.  The New “Excepted Benefit” HRA

As noted above, the Proposed Regulations would also allow for the use of a type of stand-alone HRA that can only reimburse medical expenses and certain premiums (“EBHRA”).

The inclusion of the EBHRA appears to be an acknowledgement by the Departments that many employers, prior to the enactment of the ACA and the issuance of Notice 2013-54, enjoyed their ability to offer this type of arrangement to employees.  The fact that it was funded entirely by employers and could carry over from year to year made it attractive to employees, who used it for a full range of out-of-pocket medical expenses in the same manner as a health Flexible Spending Account (“FSA”) (in fact, these two accounts were frequently offered by employers together, and the IRS guidance (Notice 2002-45) even provided an “ordering” rule that would allow the health FSA, which had to be forfeited at year end, to be used first).  There were also no restrictions on the amount that could be credited to the HRA.  The good news is that this stand-alone HRA is a viable option again, albeit with several new restrictions, including an $1,800 annual limit (subject to annual indexing.)

GROOM INSIGHT:  An EBHRA is the form of HRA that employers should offer if their desire is to provide a relatively modest annual amount to employees that can be used on a tax-free basis for a full range of medical expenses and the employer has no interest in monitoring what, if any, other coverage employees may have.

Using their existing statutory authority as provided by Code section 9832(c)(2) (and parallel provisions in ERISA and the PHSA), the Departments have created a new HIPAA excepted benefit category to describe the stand-alone EBHRA.  More specifically, the Departments are exercising their authority to identify “[s]uch other similar, limited benefits as are specified in regulations,” such as limited scope dental and vision and long-term care benefits, to establish the EBHRA.

The significance of making this EBHRA an excepted benefit is that the ACA’s market reform rules do not apply, so there is no need to worry about how the HRA can satisfy the prohibition on annual dollar limits on EHBs or the preventive care requirements.  Status as an excepted benefit also means that the employee who is covered under the EBHRA is not considered enrolled in “minimum essential coverage” and would therefore not be precluded from receiving a PTC for coverage purchased on an Exchange if the employee satisfies the income limitations and other requirements (e.g., was not offered coverage by the employer that satisfies the affordability and minimum value requirements under the ACA).

The following requirements must be satisfied in order for an HRA to qualify as an EBHRA:

• The employer must offer other, non-account based, medical coverage to employees that is not an excepted benefit (g., not dental or vision-only). There is no requirement for this other coverage to be affordable or have minimum value and there is no requirement that employees actually enroll in this other coverage.
• The amount of new employer contributions each year cannot exceed $1,800. This amount is proposed to be indexed using C-CPI-U each year, beginning in early fall.  If an amount carries over from year to year in the EBHRA, that does not count against the $1,800 limit.  If an employer offers more than one EBHRA to an employee, the EBHRAs must be aggregated and the aggregated amount may not exceed $1,800.
• The EBHRA may be used to reimburse medical expenses and premiums or contributions for COBRA, excepted benefit health coverage (e.g., dental and vision), or STLDI, but may not be used to reimburse premiums or contributions for other medical coverage (individual or group).
• The EBHRA must be made available on a uniform basis to all similarly situated employees, as defined in the HIPAA nondiscrimination regulations (e., groups that are based on a bona fide employment-based classification such as full-time, part-time, occupation, collectively bargained employees, geographic distinctions, length of service, date of hire).

GROOM INSIGHT:  The uniform basis rules for EBHRAs are different from the rules that apply to ICHRAs, which must be offered to employees in a particular class, as described above.

• An employer is not permitted to offer both an ICHRA and an EBHRA to the same group of employees.

III.  Premium Tax Credit

Under the general PTC rules, an employee who is eligible for an HRA (and a dependent who can receive reimbursements from an HRA (“a related individual”)) are not eligible for a PTC for a month if (1) the individual is enrolled in the HRA, or (2) the HRA is affordable and provides minimum value.  The Proposed Regulations provide that, like other HRAs, coverage under an ICHRA for a month renders an individual ineligible for a PTC for that month.  As stated above, this is why the Proposed Regulations require the employer to provide participants with the periodic ability to opt-out of and waive future reimbursements under an ICHRA.   Under the Proposed Regulations, an employee (and a related individual) who is offered, but opts out of, an ICHRA is ineligible for a PTC for any month the ICHRA is affordable and provides minimum value.

GROOM INSIGHT:  Whether an employee would choose to receive a PTC over participation in the ICHRA will depend on the particular employee’s circumstances, including the amount of the PTC vs. the amount available under the ICHRA.

Affordability

The affordability rules in the Proposed Regulations are fairly complicated, but are largely consistent with the current affordability rules for other HRAs.  Generally, they provide that an ICHRA is considered affordable for an employee (and a related individual) for a month if the employee’s “required HRA contribution” does not exceed 1/12th of 9.5% (indexed) of the employee’s household income for the year.   The formula to calculate the employee’s “required HRA contribution” generally is as follows:

• the monthly premium for the lowest cost self-only silver plan available to the employee through the exchange for the rating area in which the employee resides, minus
• the monthly self-only ICHRA amount newly made available for the plan year (e., not counting rollovers from the prior year) divided by the number of months in the plan year the ICHRA is available to the employee.

The Departments state that choosing the silver plan aligns the PTC eligibility rules with respect to ICHRAs with the PTC eligibility rules for offers of non-HRA employer-sponsored coverage.

Minimum Value

The minimum value rule is much simpler – because the lowest cost silver plan used for the affordability test will always provide minimum value, the Proposed Regulations provide that an ICHRA is treated as always providing minimum value.

GROOM INSIGHT:  The term employee’s “required HRA contribution” is confusing since under the HRA rules, an employee is generally not permitted to make contributions to an HRA.  The use of this term, however, does not change the general rule prohibiting employee contributions to an HRA.

The PTC rules are important for employers that are subject to the employer mandate because the employer mandate penalties are only triggered when a full-time employee receives a PTC.  Also, the calculation of the employee’s “required HRA contribution” will be relevant for reporting the lowest cost self-only coverage offered to the employee on the Form 1095-C.

IV.  Employer Mandate

Under the current employer mandate rules, a large employer is subject to penalties in a month if it either: (1) fails to offer an employer-sponsored plan to at least 95% of its full-time employees and their dependents, and at least one full-time employee receives a PTC for the month; or (2) it satisfies part (1) but a full-time employee receives a PTC for the month because the plan was not affordable, did not provide minimum value, or the employee did not receive an offer of coverage.

An HRA is an employer-sponsored plan that can satisfy the employer mandate requirements.  This was true prior to the issuance of the Proposed Regulations and would remain the case after the finalization of the Proposed Regulations.  However, employers generally did not previously use an HRA to satisfy their employer mandate obligations because, as noted above, under existing guidance, stand-alone HRAs did not (and do not) satisfy certain of the ACA’s market reform requirements, thus potentially subjecting employers to material financial penalties if they used a stand-alone HRA strategy for employer mandate compliance purposes.

Notably, the Proposed Regulations do not provide specific rules regarding how an ICHRA can satisfy the employer mandate requirements.  The Departments state that they intend to issue follow-up guidance that provides a safe harbor for purposes of determining whether an employer that offers an ICHRA is treated as having made an offer of coverage that provides minimum value for purposes of the employer mandate, regardless of whether the employee declines the ICHRA and receives a PTC.  The Departments clarify that the current affordability safe harbors in the employer mandate regulations continue to apply.

GROOM INSIGHT:  It is welcome news that the Departments expect to make clear in future guidance how employers can use an ICHRA to meet their employer mandate obligations (and avoid related penalties).  There are, however, many open questions regarding what the future guidance will provide.  For example, does an employee need to be eligible to receive reimbursements under the ICHRA for a given month for it to count as an offer of coverage?   If so, whether a full-time employee triggers a penalty could be out of the employer’s control since an employee may always independently decide to drop individual insurance coverage.

Also, for affordability purposes, it seems administratively very difficult for an employer to determine affordability using the lowest cost silver plan available to the employee in the rating area in which the employee resides when the employer has employees living in numerous locations.  A safe harbor rule with respect to affordability would thus be welcome, such as the ability to use the lowest cost silver plan available in the rating area in which the employer’s principal place of business is located.

V.  Individual Health Insurance Coverage and ERISA Plan Status

The Proposed Regulations reiterate that an HRA itself is a group health plan that is subject to ERISA, including its fiduciary duties as well as the reporting and disclosure rules.  This is true whether the HRA is an ICHRA or an EBHRA.

The Proposed Regulations do, however, effectively except the individual insurance coverage integrated with the ICHRA from the scope of ERISA so long as certain criteria are met.  More specifically, the Departments state in the preamble that the guidance will “clarify that the ERISA terms ‘employee welfare benefit plan,’ ‘welfare plan,’ and, as a direct result, ‘group health plan’ would not include the individual health insurance coverage the premiums of which are reimbursed by an HRA and certain other arrangements,” but only if certain criteria are satisfied, including that the sponsoring entity “is not involved in the selection of the individual health insurance coverage.”  Thus, to the extent that the criteria is satisfied, the related individual insurance is not considered part of the HRA/employer-sponsored arrangement.

The stated rationale for the DOL’s clarification is “to provide employees, employers, employee organizations, and other plan sponsors; health insurance issuers; state insurance regulators; and other stakeholders with assurance that insurance policies sold as individual health insurance coverage, and subject to comprehensive Federal (and state) individual market rules … are not part of an HRA or certain other arrangements for purposes of ERISA.”

GROOM INSIGHT:  With the development of private retiree health exchanges, facilitated and marketed over the past several years, many questions arose regarding the ERISA status of the individual insurance.  The clarifying guidance should be welcome news for employers and other stakeholders that have struggled to divine the circumstances under which the individual insurance itself could become part of the employer’s premium reimbursement arrangement or otherwise become subject to ERISA.  As discussed below, however, certain of the proposed criteria may raise additional compliance burdens or questions that hopefully will be clarified in final regulations.

Significantly, the Departments make clear that ERISA and/or “group health plan” treatment also does not apply to an arrangement that allows an employee to utilize a cafeteria plan to salary reduce wages on a pre-tax basis to pay the portion of the premium for individual market insurance coverage that is not covered by the ICHRA or a Qualified Small Employer Health Reimbursement Arrangement (“QSEHRA”) (a QSERHA is a recent statutorily-created HRA for small employers).  Thus, employers that offer an ICHRA or QSEHRA can also offer a related cafeteria plan for use by their employees in paying for their share of the premium on a pre-tax basis.

GROOM INSIGHT:  The Departments’ guidance regarding the treatment of salary reduction arrangements offered alongside an ICHRA or QSEHRA is welcome news as it will help reduce the costs of a defined contribution health strategy by ensuring that employees can pay for their share of off-Exchange individual health insurance coverage with tax-free dollars.  This guidance is significant because Notice 2013-54 took the position that such an arrangement creates a group health plan that would violate the ACA’s market reforms.  Thus, such an arrangement has not been permissible since 2013.  Now, an employer again can allow employees to salary reduce on a pre-tax basis to pay for off-Exchange individual market insurance coverage – allowing the entire premium for the coverage to be paid on a tax-advantaged basis – so long as it is offered alongside an ICHRA or QSEHRA.

In order for the individual insurance to be considered separate and apart from the HRA (or other account-based plan), the Proposed Regulations set forth the following criteria that would need to be satisfied:

• The purchase of any individual health insurance coverage is completely voluntary for employees;
• The sponsor does not select or endorse any particular issuer or insurance coverage (note: providing general contact information regarding availability of health insurance in a state is permissible);

GROOM INSIGHT:  The proposed criteria that the employer not endorse any specific individual insurance coverage is likely to raise some additional questions, especially in the context of private exchange models.  For example, it is unclear whether it would remain permissible for an employer to utilize a private exchange model that includes a subset of the carriers available in a given rating area or otherwise provide financial incentives for the use of certain carriers over others.

• Reimbursement for premiums is limited to qualifying individual health insurance coverage;
• The sponsor receives no consideration in the form of cash or otherwise in connection with the employee’s selection or renewal of health insurance coverage; and,

GROOM INSIGHT:  This prohibition on the receipt of consideration by the sponsoring entity is not surprising given ERISA’s existing fiduciary duties and prohibitions on self-dealing set forth in ERISA sections 406 and 408.  Nonetheless, employers and other stakeholders will need to be careful to ensure that they are not receiving economic value in connection with employee’s purchase of the individual insurance policies (including not only return/sharing of broker commissions on the policies, but also indirect economic value, such as reduced ASO fees on other services, for example).

• Each plan participant is notified annually that the individual health insurance coverage is not subject to ERISA. Additional rules apply with respect to specific types of HRAs.

VI.  Individual Market Special Enrollment Periods

Under existing guidance, per the ACA, an individual can only enroll in individual health insurance coverage, both on- and off-Exchange, during an open enrollment or a special enrollment period.  Now that the Departments are issuing proposed rules to facilitate employer-funding of employees’ individual insurance coverage through the use of ICHRA, additional rules are needed to address access to such coverage, for example, at time of initial eligibility (e.g., hire), the employer’s annual enrollment, and upon the occurrence of certain mid-year enrollment rights into the ICHRA.

Specifically, the Proposed Regulations create a new special enrollment period for employees and their dependents if they gain access to and enroll in an ICHRA.  Also, because only employees and dependents enrolled in minimum essential coverage can use a QSEHRA, the special enrollment period also applies to QSERHAs.  This rule applies both where the employer begins offering the ICHRA or QSEHRA mid-year and where the employee becomes eligible for the ICHRA or QSEHRA mid-year (e.g., a mid-year hire).   The special enrollment period begins on the first day of the first month following the individual’s plan selection.  There is also an advance enrollment period of sixty days in advance of the gain of access to the ICHRA or QSEHRA.

GROOM INSIGHT:  The current open and special enrollment periods continue to apply, so individuals could also enroll in individual health insurance coverage at other times that are not tied to gaining access to the ICHRA or QSEHRA—for example, the loss of ICHRA or QSHERA coverage.

VII.  Applicability Date

The proposed ICHRA and EBHRA provisions, as well as the ERISA plan clarification provisions, apply to group health plans and health insurance issuers for plan years beginning on or after January 1, 2020.  The proposed PTC provisions take effect for taxable years beginning on and after January 1, 2020, and the special enrollment period provisions take effect on January 1, 2020.

Unlike most other regulations issued in proposed form, taxpayers and others may not rely on the Proposed Regulations.  This means that until Final Regulations are issued and go into effect, employers offering HRAs that do not satisfy the existing Obama-era guidance may be subject to significant penalties.

[1] IRS Notice 2013-54 and DOL Technical Release 2013-03.