Employers May Offer Two New Types of Health Reimbursement Arrangements in 2020
Under final rules issued last month, employers can offer two new types of health reimbursement arrangements or HRAs: individual coverage HRAs ("ICHRAs") and excepted benefit HRAs ("EBHRAs"). HRAs are self-funded, account based plans that reimburse employees for qualified medical expenses on a tax-free basis. The final rules apply for plan years beginning on or after January 1, 2020. While the rules are complex, the new ICHRAs and EBHRAs offer new planning opportunities for employers.
Under the new rules, employers may use ICHRAs to reimburse premiums that their employees pay for individual health insurance purchased on the open market or at an Affordable Care Act ("ACA") insurance exchange. Prior to these final rules, HRAs had to be "integrated" with group health coverage in order to avoid penalties under the ACA, which meant employers could not use HRAs to reimburse premium expenses for an employee's individual health coverage. The new rules permit an ICHRA to be used to reimburse individual coverage if six conditions are met:
Although employers cannot offer current employees in any class a choice of participation in the employer's group health plan or a new ICHRA, the new rules do allow an employer to offer the ICHRA to a subclass of "new hires" as of a certain date, while still maintaining a group health plan for existing employees in that same class.
There are 10 permitted classes of employees (plus combinations of the 10) that can be used to differentiate offers of coverage: full-time, part-time, salaried, non-salaried, employees at a primary site of employment in the same rating area, seasonal, collectively bargained, those who have not satisfied a waiting period, non-resident aliens with no U.S. source income, and certain temporary employees (i.e. staffing agency employees). For certain classes, a minimum class size applies, meaning the class must include at least the minimum number of employees for the ICHRA to be offered to that class. Classes of employees are determined at the level of the entity that is the common-law employer of the employees in a particular class, rather than at the controlled group level. This will provide employers with some flexibility in structuring differing ICHRA arrangements for different subsidiaries within a controlled group.
While retirees are not considered a separate class, the new rules do not affect the current ability of employers to offer stand-alone HRAs for retiree-only groups. Retiree-only plans still do not need to comply with the ACA "market reforms." If an ICHRA covers both active and former employees, employees remain in the class they were in at termination of employment and the ICHRA must be provided on the same terms to active and former employees.
The new ICHRA is more flexible than the currently available qualified small employer HRA ("QSEHRA") and may be useful for employers wishing to offer some health coverage to employee classes not currently covered by the employer's group health plan. For example, ICHRAs could be used for part-time, seasonal, or employees who have not completed the waiting period and are thus not eligible for the employer's traditional group health coverage. It may also be possible to offer an amount under an ICHRA as necessary to avoid triggering the more onerous employer shared responsibility penalties under the ACA.
There are also safe harbor conditions that will allow the employer to avoid having the individual health insurance coverage funded through the ICHRA considered ERISA coverage. However, the ICHRA itself remains subject to ERISA, when offered by private sector employers.
Excepted Benefit HRA
The other type of new HRA now permissible under the final rules is an Excepted Benefit HRA ("EBHRA"), which could act as a general purpose HRA, although this is limited to a maximum reimbursement amount of $1,800 per year. The new EBHRA must meet four requirements:
Along with an EBHRA, employers can continue to offer an HRA under existing rules that only reimburses expenses for "excepted benefits."
If you have questions about the new HRAs, or would like to discuss offering one of the new HRAs in your specific situation, please contact a member of the Hanson Bridgett Employee Benefits Group.
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