Final IRS Regulations Address Application of Employer Shared Responsibility and Nondiscrimination Rules to ICHRAs

The IRS has announced final regulations that clarify how the Code’s employer shared responsibility and self-insured health plan nondiscrimination rules apply to HRAs that are integrated with individual health insurance coverage (ICHRAs) under rules issued in June 2019 (see our Checkpoint article). The final regulations, which have not yet been scheduled for publication in the Federal Register, adopt the proposed regulations (see our Checkpoint article) with only minor changes. They generally apply to plan years beginning after December 31, 2019. However, taxpayers may rely on the proposed regulations for plan years that begin before the date that is six months after the final regulations are published in the Federal Register. Here are highlights:

• Employer Shared Responsibility. ICHRA offers by an applicable large employer (ALE) are taken into account in determining whether the ALE offered coverage to enough full-time employees (and dependents) to avoid a Code § 4980H(a) penalty. Also, an ALE is not subject to a Code § 4980H(b) penalty with respect to a full-time employee who receives a premium tax credit if the ALE offered the employee affordable ICHRA coverage. (An affordable ICHRA is deemed to provide minimum value for Code § 4980H purposes.) An ICHRA is considered affordable if an employee’s “required HRA contribution” does not exceed a specified percentage of the employee’s household income. The required HRA contribution generally is the excess of the premium, based on the employee’s age, for self-only coverage under the lowest-cost silver plan offered in the rating area where the employee resides, over the self-only amount the employer makes newly available to the employee under the ICHRA. The regulations adopt optional safe harbors to simplify ALEs’ affordability determinations. Important safe harbor provisions include—

  • General Conditions. The safe harbors may be used alone or in combination but must be used uniformly and consistently for all employees within a class of employees receiving an ICHRA offer. The generally applicable affordability safe harbors (W-2, rate of pay, and federal poverty line) may be used instead of household income to determine an ICHRA’s affordability.
  • Look-Back Month. A look-back month safe harbor allows ALEs to use the premium for January of the prior calendar year for calendar-year ICHRAs, or the premium for January of the current calendar year for non-calendar-year ICHRAs. The premium is calculated using the employee’s age for the current plan year and location for the current month (not the employee’s age and location for the look-back month).
  • Location. A location safe harbor allows ALEs to use the applicable premium for the employee’s primary site of employment—the location where the ALE reasonably expects the employee to perform services—rather than the employee’s residence. Remote employees’ residences are considered their primary site of employment if they do not (a) work on the ALE’s premises; or (b) have an assigned office space to which they may reasonably be expected to report on a daily basis if required. The location safe harbor includes provisions for employees who change employment sites and clarifies that ALEs may rely on employees’ reported residence information unless the ALE knows the information is incorrect.
  • Age. The employee’s age is determined on the first day of the plan year, or on the date the ICHRA may first become effective for an employee who becomes eligible during the plan year. The preamble confirms that an employee-by-employee premium determination is necessary—based on each employee’s age—and explains why the IRS rejected requests for an age-based safe harbor.
• Nondiscrimination (Code § 105(h)). Two nondiscrimination safe harbors are adopted as proposed. First, the maximum amount available under an ICHRA may vary within a class of employees or between classes without violating the uniform employer contribution requirement if (a) within each class, the maximum dollar amount only varies in accordance with the “same terms” requirement under the ICHRA rules, and (b) with respect to differences in the maximum dollar amount for different classes, each class is permitted under the ICHRA rules. Second, an ICHRA that satisfies the age-variation exception under the ICHRA rules will not fail to meet the nondiscriminatory benefit requirement solely due to the age-based variation. The preamble cautions that ICHRAs must also be nondiscriminatory in operation and may fail to meet this requirement if, for example, a disproportionate number of highly compensated individuals qualify for and utilize the maximum HRA amount based on age. It also confirms that an ICHRA that only reimburses insurance premiums is treated as an insured plan and is not subject to the Code § 105(h) rules (although health care reform’s nondiscrimination rules for insured plans may apply, compliance with those rules is not currently required—see our Checkpoint article).

EBIA Comment: The close alignment between the proposed and final regulations will be welcome news for ALEs that have already adopted ICHRAs. As they analyze affordability, ALEs may be interested in CMS’s premium look-up tool, which allows users to enter relevant data for each employee to find the applicable premium in states using the federal Exchange platform. ALEs should also be mindful of the Code §§ 6055 and 6056 reporting obligations for ICHRAs. These regulations do not address reporting, but ALEs can find guidance on this topic in the applicable forms and instructions. For more information, see EBIA’s Consumer-Driven Health Care manual at Sections XXIII (“HRAs: Nondiscrimination”) and XXVIII.B (“Individual Coverage HRAs (ICHRAs)”). See also EBIA’s Health Care Reform manual at Sections XXVIII (“Shared Responsibility for Employers (Play or Pay Penalty Tax)”) and XXXVI.D (“Information Reporting of Employer-Sponsored Coverage (Applicable Large Employers)”), and EBIA’s Form 1094/1095 Workbook at Section VIII.C (“Completing Form 1095-C”).

Contributing Editors: EBIA Staff.