A New Way to Provide Employee Health Insurance in the COVID-19 Era
Individual coverage health reimbursement arrangements allow employers to reimburse employees for buying their own health insurance.
Employers of all shapes and sizes are reevaluating their options when it comes to employee benefit planning. Starting in 2020, employers have a new health savings tool at their disposal: the individual coverage health reimbursement arrangement (ICHRA).
Surveys suggest that the uncertainty caused by the pandemic has motivated more employers to explore the ICHRA option as a way to keep health costs fixed — while simultaneously giving employees more flexibility to make their own health insurance decisions.
Many employers are set to begin offering the ICHRA option as early as 2021, so advisors should brush up on the characteristics of these powerful health savings tools to help small business and individual clients alike address their health planning needs.
ICHRAs: The Basics
Under prior law, employers could not reimburse employees for individual health insurance premiums via the tax-preferred HRA structure because HRAs were deemed to fail certain prohibitions imposed by the ACA. In 2019, however, the DOL, Department of Health and Human Services (HHS) and Treasury changed course to develop a new set of rules that expanded employer options for providing coverage via ICHRAs starting in 2020.
The new rules would allow employers to reimburse premiums for individual health insurance coverage through ICHRAs if the several specific conditions are satisfied. First, all individuals enrolled in the ICHRA must actually enroll in individual coverage. If an individual ceases to be enrolled in individual coverage, the ICHRA must stop reimbursing their medical expenses (on a prospective basis only). Individuals who are still within the grace period with respect to paying their premiums for individual coverage are considered enrolled in individual coverage. Employers are permitted to rely upon employee certification as long as they don’t have knowledge to the contrary.
The employer can’t offer the ICHRA coverage option to one class of employees if it offers group health coverage to others in the same class of employees. Further, the HRA must be offered on the same terms to members of employees within a given class of employees where consistent definitions are used to determine employee classifications.
Permissible classes of employees include part-time employees, full-time employees, seasonal workers, hourly workers, salaried workers, new hires and workers employed or not employed through a temporary staffing agency.
In response to concerns that the expanded HRA option could allow employers to push sicker workers into the individual markets by manipulating the “class of employees” requirement, the agencies imposed strict limits on the class sizes in certain situations.
While these restrictions may be detailed, there are no limits to the amount that the employer can reimburse under the ICHRA structure. Further, employers can choose whether to reimburse insurance premiums, only qualified medical expenses or both.
Pay Attention to These Potential Traps
ICHRAs shift the risk of rising health costs to the employee (to a certain extent). However, for applicable large employers to use ICHRAs, they must continue to satisfy the affordability elements of the ACA employer mandate. This means that the employer must calculate whether its health contribution to each employee satisfies the mandate. The IRS has released a safe harbor that employers can rely upon, although the cost of an ICHRA will continue to vary depending upon geographic location.
Under the first safe harbor, the employer can calculate whether the ICHRA is affordable based upon the minimum cost of a silver plan offered through the health insurance marketplace in the employee’s location. Under the second safe harbor, the employer can use the prior year’s cost of a silver plan in the month of January. Of course, these safe harbors require the employer to engage in a separate calculation to determine whether each ICHRA is affordable.
Further, for the ICHRA to be ERISA-exempt, the employer is prohibited from endorsing any specific health insurance carrier or coverage option. While it remains unclear how strict the IRS’ enforcement of this rule will be, employers should pay close attention. Even inadvertently recommending a plan to employees could be interpreted as endorsement—meaning that the employer could become subject to ERISA filing and reporting requirements.
The employer must also be careful to comply with the nondiscrimination rules that apply in the context of traditional group health coverage versus the ICHRA, as well as for amounts reimbursed under the ICHRA to any given employee.
The ICHRA can provide a valuable cost-control option for employers. Given current economic uncertainties, this employment benefit option might be particularly attractive for employers looking to control costs in 2021 and beyond.