Pension & Benefits News Final regulations clarify HRAs integrated with individual coverage
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Monday, January 25, 2021

Final regulations clarify HRAs integrated with individual coverage

By Pension and Benefits Editorial Staff

The IRS has released final regulations clarifying the application of the employer shared responsibility provisions and certain nondiscrimination rules to health reimbursement arrangements (HRAs) integrated with individual health insurance coverage or Medicare and to provide certain safe harbors with respect to the application of those provisions to individual coverage HRAs. These are also intended to facilitate the adoption of individual coverage HRAs by employers.

Shared responsibility affordability requirements. 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 minimum value (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 final 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.

Location safe harbor.Under existing premium tax credit (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 Treasury Department and the IRS have concluded that the cost of the affordability plan at an employee’s primary site of employment is a reasonable proxy for the cost of the affordability plan at the employee’s residence, while avoiding the burdens that may arise for some employers in keeping records of their employees’ current residences.

Therefore, the final regulations provide that the an employer may use the lowest cost silver plan for the employee for self-only coverage offered through the Exchange where the employee’s primary site of employment is located for determining whether an offer of an individual coverage HRA to a full-time employee is affordable. Further, the regulations provide that the location safe harbor may be used in combination with the other safe harbors provided in the regulations.

Age safe harbor. Under existing premium tax credit regulations, for any given employee, affordability is based on the particular employee’s relevant circumstances, including the particular employee’s age. The new final regulations do not provide a safe harbor for the age used to determine the premium of an employee’s affordability plan. Rather, affordability of the offer of an individual coverage HRA is determined, in part, based on each employee’s age.

Look back month safe harbor. Under existing PTC regulations, the affordability of an individual coverage HRA for a month is determined, in part, based on the cost of the premium tax credit 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.

Under the new final regulations, an employer offering an individual coverage HRA with a calendar-year plan year may use the look-back month safe harbor. However, the regulations provide additional specificity, to take into account that even within a calendar year, from calendar month to calendar month, the lowest cost silver plan in an employee’s applicable location may change due to plan termination or because the plan that was the lowest cost silver plan closes to enrollment (sometimes referred to as plan suppression). Therefore, the final regulations provide that in determining an employee’s required contribution for any calendar month, an employer offering an individual coverage HRA with a calendar-year plan year may use the monthly premium for the lowest cost silver plan for January of the prior calendar year.

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