By Tulay Turan, J.D.
Proposed regulations discuss employer responsibilities and create safe harbors for health reimbursement arrangements and other group health plans.
The IRS has issued proposed regulations that clarify the application of the employer shared responsibility provisions and certain nondiscrimination rules to health reimbursement arrangements (HRAs) and other account-based group health plans integrated with individual health insurance coverage or Medicare (individual coverage HRAs). The regulations also provide certain safe harbors with respect to the application of those provisions to individual coverage HRAs. Employers generally are permitted to rely on the proposed regulations (Proposed rule, 84 FR 51471, September 30, 2019).
Background. In June 2019, the IRS issued final regulations that expanded the potential use of HRAs and other account-based group health plans by allowing the integration of HRAs with individual health insurance coverage, subject to certain conditions (final integration regulations). In conjunction with those regulations, the IRS also issued regulations under Code Sec. 36B (final PTC regulations) to provide guidance regarding the circumstances in which an individual coverage HRA would be considered to be affordable and to provide minimum value (MV). Both those sets of regulations apply for plan years beginning on or after January 1, 2020.
Affordability. In general, an eligible employer-sponsored plan is affordable for an employee if the amount the employee must pay for self-only coverage whether by salary reduction or otherwise for a plan does not exceed a percentage of the employee’s household income. An eligible employer-sponsored plan also provides MV if the plan’s share of the total allowed costs of benefits provided under the plan is at least 60 percent of the costs and if the plan provides substantial coverage of inpatient hospitalization and physician services.
As with other types of employer-sponsored coverage, employers that offer individual coverage HRAs will not know employees’ household incomes. Therefore, the proposed regulations provide that an employer offering an individual coverage HRA to a class of employees may use safe harbors in determining whether the cost of the HRA is affordable.
Premium tax credits. Certain taxpayers are eligible for Code Sec. 36B premium tax credits (PTCs) to help with the cost of individual health insurance coverage enrolled in through an exchange. Taxpayers are eligible for a PTC if they satisfy several requirements for the coverage month. Among other requirements, under Code Sec. 36B(c)(2), a month is not a coverage month for an individual if either (1) the individual is eligible for coverage under an eligible employer-sponsored plan and that coverage is affordable and provides MV; or (2) the individual enrolls in an eligible employer-sponsored plan, even if the coverage is not affordable or does not provide MV.
Under the final PTC regulations, an individual coverage HRA is considered to be affordable for a month if the employee’s required HRA contribution for the month does not exceed 1/12 of the product of the employee’s household income for the taxable year and the required contribution percentage. The required HRA contribution is the excess of: (1) The monthly premium for the lowest cost silver plan for self-only coverage of the employee offered in the Exchange for the rating area in which the employee resides (the PTC affordability plan), over (2) in general, the self-only amount the employer makes newly available to the employee under the individual coverage HRA for the month (the monthly HRA amount).
Look-back month safe harbor. Under the final PTC regulations, the affordability of an individual coverage HRA for a month is determined, in part, based on the cost of the PTC affordability plan for that month. For example, an employee’s required contribution for January 2020 for an individual coverage HRA would be based on the cost of the PTC affordability plan for January 2020.
In determining an employee’s required HRA contribution for a calendar month, for purposes of Code Sec. 4980H(b), an applicable large employer member may use the monthly premium for the applicable lowest cost silver plan for January of the prior calendar year for calendar year plans, or January of the current calendar year for non-calendar year plans.
Location safe harbor. An ALE may determine an employee’s required HRA contribution for a calendar month based on the cost of the applicable lowest cost silver plan for the location of the employee’s primary site of employment. An employee’s primary site of employment generally is the location at which the employer reasonably expects the employee to perform services on the first day of the plan year (or on the first day the individual coverage HRA may take effect, for an employee who is not eligible for the individual coverage HRA on the first day of the plan year), except that the employee’s primary site of employment is treated as changing if the location at which the employee performs services changes and the employer expects the change to be permanent or indefinite. In that case, in general, the employee’s primary site of employment is treated as changing no later than the first day of the second calendar month after the employee has begun performing services at the new location.
Current HHI safe harbors. The proposed regulations provide that an employer offering an individual coverage HRA to a class of employees may use the household income (HHI) safe harbors (Form W-2, rate of pay, or federal poverty line) in determining whether the offer of the HRA is affordable for purposes of Code Sec. 4980H(b). The proposed regulations clarify how the HHI safe harbors apply to an offer of an individual coverage HRA. Specifically, the current HHI safe harbors assume that the employee’s required contribution will be based on the lowest-cost self-only coverage that provides MV that the employer offers to the employee. The proposed regulations clarify that, in applying the HHI safe harbors to an offer of an individual coverage HRA, the employee’s required HRA contribution is to be used, taking into account any other applicable safe harbors under the proposed regulations.
Consistency requirement. Use of any of the safe harbors is optional for an ALE. However, rather than providing that a consistency requirement applies based on reasonable categories of employees as set forth in Reg. §54.4980H-5(e)(2)(i)), the proposed regulations provide that an ALE may choose to apply the safe harbors for any class of employees as defined in the final integration regulations, provided the ALE does so on a uniform and consistent basis for all employees in the class. The proposed regulations base the consistency requirement for the safe harbors in the proposed regulations on the classes of employees in the final integration regulations for the sake of consistency with those rules and to reduce complexity for employers in complying with both sets of rules.
Reporting requirements. An ALE that offers an individual coverage HRA to its full-time employees, just like all ALEs, is required to satisfy the Code Sec. 6056 reporting requirements. The proposed regulations do not propose to amend the regulations under Code Sec. 6056. It is anticipated that guidance regarding reporting in connection with individual coverage HRAs will be provided in other administrative guidance, including forms and instructions.
Individual coverage HRAs are group health plans and, therefore, are eligible employer-sponsored plans that are minimum essential coverage. Accordingly, reporting under Code Sec. 6055 is required for individual coverage HRAs. In general, the employer is the entity responsible for this reporting. The proposed regulations do not propose to amend the regulations under Code Sec. 6055. However, the Treasury Department and the IRS note that because the individual shared responsibility payment under Code Sec. 5000A was reduced to zero for months beginning after December 31, 2018, the Treasury Department and the IRS are studying whether and how the reporting requirements under Code Sec. 6055 should change, if at all, for future years.
Application of tobacco surcharge and wellness incentives. The final PTC regulations provide that for purposes of determining the premium for the lowest cost silver plan used to determine the employee’s required HRA contribution: (1) if the premium differs for tobacco users and non-tobacco users, the premium taken into account is the premium that applies to nontobacco users; and (2) the premium is determined without regard to any wellness program incentive that affects premiums unless the wellness program incentive relates exclusively to tobacco use, in which case the incentive is treated as earned. The proposed regulations incorporate these rules by reference for purposes of determining the affordability plan and the associated premium.
Nondiscrimination requirements. The proposed regulations provide that an individual coverage HRA that satisfies the age variation exception under the same terms requirement at Reg. §54.9802-4(c)(3)(iii)(B) will not be treated as failing to satisfy the requirements to provide nondiscriminatory benefits under Reg. §1.105-11(c)(3)(i) solely due to the variation based on age.
More generally, the proposed regulations also provide that if the maximum dollar amount made available varies for participants within a class of employees, or varies between classes of employees, then with respect to that variance, the individual coverage HRA does not violate the requirement in Reg. §1.105-11(c)(3)(i) that any maximum limit attributable to employer contributions must be uniform for all participants, if within each class of employees, the maximum dollar amount only varies in accordance with the same terms requirement and, with respect to differences in the maximum dollar amount made available for different classes of employees, the classes of employees are classes of employees set forth in Reg. §54.9802-4(d).
Application of cafeteria plan rules. An employer may not permit employees to make salary reduction contributions to a cafeteria plan to purchase a qualified health plan (including individual health insurance coverage) offered through an Exchange. However, for an employee who purchases off-Exchange individual health insurance coverage, the employer may permit the employee to pay the balance of the premium for the coverage through its cafeteria plan.
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