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Guest Article: Individual Coverage HRAs: A Brief Introduction
To assist our clients with questions about specialized employee benefits, Thrun has developed a close relationship with Steven D. Lowe, P.C. The following article was drafted by Attorney Steven Lowe. Questions about those topics may be directed to him at (517) 575-0720.
By Steven Lowe, Steven D. Lowe, P.C.
Many school officials are familiar with Health Reimbursement Arrangements (HRAs) and understand that they are a type of employer-funded, account-based plan used to reimburse employees for medical expenses. The usefulness of traditional HRAs is limited, however, by federal agency interpretations of the Affordable Care Act (ACA).
In 2019, federal regulations established a new type of HRA, the Individual Coverage HRA (ICHRA), which became available to employers on January 1, 2020. Importantly, schools subject to the ACA’s employer coverage mandate may satisfy that mandate by providing ICHRAs.
The ICHRA is an alternative to traditional group health plan coverage that combines an HRA with individual health insurance coverage. An ICHRA helps schools control health insurance costs through planning opportunities inherent in its flexibility.
- An employee eligible for an ICHRA uses the funds provided by the school to purchase individual health insurance on the private market or on the Exchange. An employee covered by Medicare can use an ICHRA for Medicare Parts A and B, or Part C. The coverage cannot, however, be short-term limited-duration insurance or consist solely of dental, vision, or similar “excepted benefits.”
- Employees participating in ICHRAs can shop for individual health insurance coverage that meets their needs and the needs of their families at the best price.
- Employees must enroll in individual health insurance (or Medicare) for each month the employee (or the employee’s family member) is covered by the ICHRA. If an employee ceases to be covered under an individual policy, the employee forfeits the ICHRA and will no longer be reimbursed for medical premiums incurred after coverage termination. The school must establish a reasonable procedure for employees to substantiate their individual coverage.
ICHRA Eligibility Structure
The school can structure employee eligibility for ICHRAs based on 11 defined classes:
- full-time employees,
- part-time employees,
- employees working in the same geographic location (generally, the same insurance rating area, state, or multi-state region),
- seasonal employees,
- employees in a unit of employees covered by a particular collective bargaining agreement,
- employees who have not satisfied a waiting period,
- non-resident aliens with no U.S.-based income,
- salaried workers,
- non-salaried workers (such as hourly workers),
- temporary employees of staffing firms, or
- any group of employees formed by combining two or more of these classes.
Each class must have a minimum number of employees, which depends on the school’s total number of employees. The school can set different eligibility standards for different classes; however, the eligibility standards within a class must be uniformly applied. Additional points to consider:
- As to each employee class identified by the school, the school may offer either traditional group health plan coverage or ICHRAs, but not both. The school cannot offer employees an election between traditional group health plan coverage and an ICHRA allowance.
- The school has discretion to choose the monthly allowance of tax-free money to make available to employees in those employee classes that are offered ICHRAs. Different classes can have different monthly allowances. Everyone in a class must be offered the same allowance, except that amounts offered within a class may be increased for older workers or for workers with more dependents. The school can allow unused amounts in any year to roll over from year to year.
- An ICHRA may be offered with a cafeteria plan through which the employee can salary reduce, on a pre-tax basis, the difference between the premium for the employee’s individual health insurance coverage and the amount of the allowance under the ICHRA. This feature is not allowed, however, for individual coverage
purchased on the Exchange because other rules prevent cafeteria plan money from being used to pay premiums for individual coverage obtained on the Exchange.
- An offer of an ICHRA counts as an offer of coverage under the ACA’s employer mandate. In general, whether a school that offers an ICHRA owes a payment under the employer mandate will depend on whether the ICHRA allowance is affordable. The school will need to contribute a sufficient amount for the ICHRA to be considered affordable.
Additional complex rules, regulations, and notice requirements apply to ICHRAs. It is likely that a smaller school would find in-house administration of an ICHRA plan daunting and perhaps even a greater administrative commitment than traditional group health insurance. School officials should expect, however, that third-party administrators that are experienced in HRA administration will soon be implementing ICHRA programs to offer schools relief from the burdens of in-house administration while helping schools achieve the flexibility and cost-savings anticipated by the regulations.