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Individual Coverage HRA: How Does it Work?

by Jack

In January 2020, employers will be able to offer a new type of HRA called an "Individual Coverage HRA". Although the regulations are still being hashed out, here's what we know so far about how these new HRAs will work.

For background, a Health Reimbursement Arrangement (HRA) is a vehicle that allows employers to help employees pay for medical expenses with tax-advantaged dollars. The most common types of HRAs are called Section 105 HRAs, named after the Internal Revenue Code Section 105, which created and regulates most types of HRAs today. 

What we're calling an "Individual Coverage HRA" is a special type of Section 105 HRA that allows for reimbursement of individual health premiums and medical expenses.

We're eagerly watching for changes and updates and will keep you up to date as we learn more.

Here's what we know now:

Where did the "Individual Coverage HRA" come from?

In October 2018, the U.S. Departments of the Treasury, Health and Human Services, and Labor proposed new regulations to expand the usability of health reimbursement arrangements (HRAs). This is the 3rd and final part of President Trump's Executive Order from October 2017 (E.O. 13813) to reform the health system through regulatory changes. You can see the press release, accompanying fact sheet, and proposed rule itself here. In addition to the individual coverage HRA, another type of HRA was created from these proposed rules called an "Excepted Benefit HRA.

The next piece of information we got about Individual Coverage HRAs was on November 19th when the IRS and Treasury released Notice 2018-88. This notice provides initial guidance and likely safe harbors as well as requests for comments. This information provides us a great glimpse into how these new HRAs may actually function.

How does an Individual Coverage HRA work?

In summary, employers will be able to reimburse employees tax-free for insurance that they purchase themselves. It can also be used to reimburse medical expenses if allowed by the employer.

Unlike traditional group plans (also called "defined benefit" plans), the HRA approach (also called a "defined contribution" plan) gives employers significant budget control and flexibility in design. Employers can set the reimbursement limits and determine who is eligible to participate as long as employees are treated fairly. 

Learn about tax-free reimbursement

What are the requirements for an Individual Coverage HRA?

The proposed rules would require that several conditions be met for the Individual Coverage HRA to work:

  • Individual employees (and their dependents) must be covered by a health insurance plan
  • The design of the HRA does not intentionally or unintentionally discriminated (to prevent risk shifting)
  • Employees in the same "employee class" are offered an HRA on the "same terms"

What are the proposed "employee classes" and how do they work?

The proposed employee classes in regulations include:

  • Full-Time Employees
  • Part-Time Employees
  • Seasonal Employees
  • Employees covered by a collective bargaining agreement
  • Employees who have not satisfied a waiting period for coverage
  • Employees under age 25
  • Non-Resident aliens with no US-based income
  • Employees whose primary site of employment is in the same rating area

This means that employers could offer different reimbursement amounts or even different types of coverage to different classes of employees.

This is a big upgrade over QSEHRA, which allows employers to choose whether to include or exclude classes of employees similar to the list above but not to offer different offerings.

For example, under the proposed rules, employers could offer full-time employees a traditional group plan and part-time employees an Individual Coverage HRA. Or employers could offer an HRA with certain reimbursement rates to an office in one geography and a different HRA with different reimbursement amounts to an office in another location (based on the rating area criteria above).

What can it help pay for?

The Individual Coverage HRA is designed to help employees pay for individual health insurance premiums. In addition, it can also help pay for medical expenses provided that the employee has substantiated he or she has health insurance coverage. This is similar to the rules in effect governing QSEHRA.

Is there a minimum or maximum number of employees needed?

No, there are no minimums and no maximums. Employers over 50 full-time employees may have to meet a minimum contribution in order to avoid ACA corporate mandate penalties.

What are the contribution limits?

No limits have been provided and none were suggested in the initial rule. Traditional 105 HRAs are only limited by employee wages and the "fair terms" requirements.

Can large employers offer an Individual Coverage HRA to meet the corporate mandate?

Yes. The IRS is expected to provide calculations and benchmarks to help large employers (ALE) subject to the corporate mandate determine what their minimum HRA contributions will have to be in order to satisfy the mandate.

Initial guidance and examples were provided in Notice 2018-88 as well as ideas on potential safe harbors for large employers (ALEs). These safe harbors are important to make Individual Coverage HRAs more practical and less administratively burdensome for large employers. The initial safe harbors include:

  • Employee location: Allowing ALEs to base HRA rates based on their primary business location instead of every employee's actual address
  • Calendar year and non-calendar years: Provisions for HRA plan years that are different from individual insurance plan years
  • Affordability: Allowing ALEs to estimate an employee's Household wages using one of three different methods: Form W-2 Wages, Rate of Pay, or Federal Poverty Line.

Another safe harbor based on employee ages was also discussed but not yet provided. The IRS is asking for comments on how this might be practically implemented.

How much must an employer contribute to meet the Minimum Value (MV) requirements and avoid corporate mandate penalties?

IRS Notice 2018-88 provides our first glimpse into how this might work. Employers will be able to utilize some of the safe harbors listed above or able to do their own calculations--providing they apply them consistently to different employee classes. 

In general, the HRA contributions made by an employer using an Individual Coverage HRA must be high enough that an employee could purchase the lowest cost silver plan in his or her market and not pay more than 9.86% of his or her income out-of-pocket.

For example, Employer ABC is offering employees an Individual Coverage HRA. Employee A is 40 years old. The lowest silver cost plan for self-only coverage in Employee A's rating area is $7,000 a year. Using the safe harbors described above, Employer ABC estimates Employee A's household income to be $15,000 and offers $6,000 through the HRA.

This is deemed "affordable" for MV sake and Employer ABC would be compliant because Employee A's effective contribution of $1,000 (The cost of the lowest silver plan $7,000 less the available HRA funds of $6,000) is less than 9.86% of Employee A's total income of $15,000 ($1,000/$15,000 = 6.67%).

Can Employees participate in the HRA and receive Premium Tax Credits (PTC)?

No, employees cannot receive both HRA contributions and tax credits (PTC). However, provisions in the proposed rule would allow employees to "opt out" of the HRA permanently for at least a year, in which case employees would be eligible for tax credits.

Can an Individual Coverage HRA work with other types of HRAs?

Because an Individual Coverage HRA requires no group health plan be offered to the same class of employees, we know it will not work with the new Excepted Benefits HRA or with traditional Section 105 HRAs integrated with a group health plan. It may be able to work with QSEHRA but the benefits would likely be redundant.

However, the proposed rules do allow employers to offer different benefit solutions to different classes of employees (assuming the classes are defined in a fair manner). An employer could offer an Excepted Benefits HRA to one class (say, part-time employees) and a QSEHRA to full-time employees.

When will we learn more about the final rules?

Comments for the proposed rules as well as the IRS and Treasury guidance are due on December 28, 2018. We will likely see the final rule and guidance issued a few months into 2019.

When can I set up an Individual Coverage HRA?

The proposed rules recommend that these new HRAs become effective January 1st, 2020. That means starting in Q4 2019, you can start setting these up for your firm for 2020.Request a meeting with our small business experts

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Hi, I'm Jack! I wrote this blog to help people make smart health insurance decisions. I am a small business owner, a husband, and a dad to three boys, so I've seen firsthand how important understanding insurance decisions can be. As a co-founder of Take Command Health and a licensed health professional, I've been recognized as a leading expert on healthcare transparency and defined contribution arrangements (QSEHRA). I've been featured in the New York Times, Wall Street Journal, Dallas Morning News, Forbes and others. Learn more about me and connect with me on our about us page. Thanks!