IRS Offers Ways for Individual Coverage HRAs to Comply with Tax Code
IRS Notice Proposes Solutions to Make Individual Coverage HRAs Compliant with Internal Revenue Code
As discussed in our October 29 alert, a proposed rule would allow “individual coverage HRAs” to reimburse certain classes of employees some of their individual health insurance premiums starting 2020 (but only after regulators issue a final rule). The IRS is now proposing guidance on how that will work under the §4980H employer shared responsibility mandate for applicable large employers (ALEs) and under §105(h) self-funded plan non-discrimination testing.
IRS Notice 18-88 outlines several core concepts:
- An individual coverage HRA is proposed to count toward the §4980H(a) requirement for ALEs to offer coverage to 95% of FT (and their dependents).
- So the individual coverage HRA might be able to replace MEC-only plans and skinny preventive plans if the employee classes provided such plans today match up with the class descriptions allowed under the individual coverage HRA
- This can potentially count as affordable, minimum value coverage, too, possibly helping ALEs escape the §4980H(b) penalty as well (MEC-only and skinny preventive plans do not provide minimum value and therefore cannot prevent a §4980H(b) penalty).
- An employer would use the lowest-cost silver plan for that employee minus the individual coverage HRA amount to see if the coverage could meet an existing affordability safe harbor, but this can get complex, so some additional safe harbors are proposed:
- The employer could use silver rates for the zip code where the employee works (a location safe harbor) rather than where the employee resides (since using the residence would require the employer to look up rates in multiple zips and the residence could change)
- A calendar year individual coverage HRA could use the prior year’s Exchange rates (a calendar year safe harbor)
- A non-calendar year individual coverage HRA could assume the first month’s affordability calculation is safe for the entire individual coverage HRA plan year when it crosses two calendar years (a non-calendar year safe harbor)
- The employer would report these offers and estimated costs under these various safe harbors on ACA reporting
Under the §105(h) non-discrimination testing rules that apply to HRAs as self-funded plans:
- HRAs that only reimburse premiums are exempt from §105(h) already, so no further guidance is needed when the individual coverage HRA only reimburses premiums, not claims
- Keep in mind that most HRAs cannot lawfully reimburse individual coverage premiums today, so we don’t usually see this outside of qualified small employer HRAs (QSEHRAs), but the recent proposed rule is offering another restricted way to make individual premium payments possible for more employers starting 2020
- HRAs that aren’t offered to highly compensated individuals (HCIs) are exempt from §105(h) already, so no further guidance is needed when the individual coverage HRA is not offered to any HCIs (e.g., when it’s only offered to part-time)
- For all other individual coverage HRAs:
- Since they’re proposed to allow different amounts by certain classes as identified in the recent proposed rule, those allowed distinctions are proposed to avoid a testing failure; and
- Since they’re proposed to allow different amounts by age, then so long as the differences by age are uniform across the entire class of employees and are in relation to the increase in individual Exchange rates where at least one employee resides, then those differences are proposed to avoid a testing
Public comments will be accepted through December 28, 2018.
Please let your IMA Benefits team know if you have any questions; we will continue to monitor regulator guidance and offer meaningful, practical, timely information.