ICHRAs and ACA Affordability Rules

Posted December 17th, 2019

Effective January 1, 2020, many employers will have the option of offering individual coverage HRAs (“ICHRAs”) to reimburse employees for individual health insurance coverage.  ICHRAs allow employers to satisfy the Affordable Care Act (“ACA”) mandate to offer health insurance to full-time employees in a manner distinct from sponsoring traditional insured or self-funded group health coverage.  However, the affordability and minimum value requirements, as well as the annual reporting requirement, under the ACA apply to ICHRAs in the same manner as traditional group health coverage.  On September 30, 2019, the IRS published a proposed rule on how these rules affect ICHRAs.

The proposed rule confirms that an ICHRA qualifies as an employer-sponsored plan for purposes of the ACA’s 95% offer requirement.  Employers who are Applicable Large Employers (“ALEs”) and who offer an ICHRA to at least 95% of full-time employees and their dependents will not be liable for the Section 4980H(a) penalty.  This would also be the case if an employer offered a combination of ICHRA coverage and traditional group health coverage to all employees, with different classes of employees being eligible for one, but not both, of the options.

An ICHRA may use the same affordability safe harbors as traditional group health plans to determine if coverage is affordable for purposes of the Section 4980H(b) penalty.  The employee’s contribution for coverage is based on the excess cost of the premium for self-only coverage under the lowest-cost silver plan offered in the area where the employee resides over the monthly amount for self-only coverage provided by the employer through the ICHRA.

The proposed rule offers two safe harbor options for employers to assist in determining the applicable lowest-cost premium.  Both safe harbors can be taken into account to determine affordability.  These include the “look-back month” safe harbor and “location” safe harbor.

For calendar-year plans using the look-back month safe harbor, the premium for the applicable lowest-cost silver plan for January of the prior calendar year plan is used to determine affordability.  For a non-calendar-year plan, the calculation should be based on the premium for the applicable plan in January of the current calendar year.  For both calendar and non-calendar year plans, the premium must take into account the employee’s age and residence – these factors will affect what the lowest-cost premium would be for a given employee.

The location safe harbor takes into account the cost of the applicable lowest-cost silver plan for the location of the employee’s primary site of employment.  For employers with a single work location, this may greatly simplify the affordability calculation.  Employers will need to consider how worksite locations, remote workers, and workers with offsite assignments may affect the primary site of employment for certain employees or groups of employees.

While the proposed rules are not final, employers planning to sponsor ICHRAs in 2020 should look to this guidance in determining employer contribution amounts and planning for ACA compliance in 2020.

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