An HR Expert Breaks Down the ICHRA & the EBHRA

In today’s episode of Healthcare Simplified, we are talking about the new HRA rules released earlier this month that allow for two new types of Health Reimbursement Arrangements (HRA) available to employers. HRA’s have been around for a while and have gone through some changes with the various requirements under Health Care Reform/ACA.

Sandy’s going to try to help us understand how employers and employees can potentially benefit from having any of these types of HRA benefits.

What are HRAs?

Health reimbursement arrangements (HRAs) are a type of account-based health plan that employers can offer as part of their employee benefit program to reimburse employees for certain medical care expenses.

In very simple terms, an HRA is an employer-funded arrangement for the benefit of plan participants – no participant contributions are allowed. Traditionally, HRA’s could be offered, either integrated with a traditional group health plan, or as a “stand-alone” benefit to reimburse employees for certain out of pocket medical costs such as health plan deductibles or copays. Although Health Care Reform has significantly narrowed the range of permissible stand-alone designs.

HRA’s are considered a health plan under ERISA, Internal Revenue Code and PHSA regulations, as a self-insured health plan. They are tax-favored plans under Code 105 and 106, so the benefits are not taxable to the employee and employers also receive a tax deduction for these funds.

The employer/plan sponsor can determine the type of HRA it offers employees:

  • a full (General-Purpose) HRA coupled with an HDHP that could reimburse qualified and substantiated medical expenses (213(d) expenses) of the employee and their spouses and dependents *under age 27),

  • a Retiree-only HRA,

  • a Limited Scope HRA that cover only accepted benefits like vision or dental expenses.

  • or a small employer health plan alternative benefit, called a Qualified Small Employer HRA (QSEHRA). Although QSEHRA’s are similar to other HRA’s they are not considered a “group health plan” for most purposes under the relevant regulations so have some specific requirements that are different from other HRA’s.

Are new designs being introduced?

New rules released by the Departments of Labor, Health and Human Services, and the Treasury (collectively, the Departments) permit employers to offer a new “Individual Coverage HRA” as an alternative to traditional group health plan coverage, subject to certain conditions.

The new rules also create another, limited kind of HRA that can be offered in addition to a traditional group health plan, called an Excepted Benefit HRA.

These new designs become available to implement as of January 1, 2020.

What has initiated the need to develop all of these different types of HRA’s?

Traditional HRA’s were designed to integrate with other group health plans or to reimburse costs associated with group health plans. HRA’s are prohibited from integrating with individual health plans. Yet, with the creation of the Health Exchanges under PPACA, small employers are finding it more and more difficult trying to offer affordable group health coverage to their employees. Many of the insurance carriers have backed away from the small group market through the Exchanges, and aren’t offering SHOP plans, so there are fewer plan options to offer and many state-run Exchanges require minimum percentage participation to be able to offer a group plan.

Many small employers have stopped offering group coverage so employees are on their own to find health coverage and there, up until now, have been restrictions where employers could not help subsidize, as tax-favored benefit, individual policy premiums for employees including Medicare premiums. This has been a real head-ache for small employers trying to attract and keep qualified talent.

For example, in DC, coverage in the individual and small-group markets is only available through DC Health Link, the state-run exchange; there’s no option to select an off-exchangeplan.

Plus, Although Federal individual mandate penalty was reduced to $0 with 2019 tax year, DC has enacted an individual mandate that took effect as of January 2019 (Massachusetts also has an individual mandate, and New Jersey also has one as of 2019; Vermont will have an individual mandate in 2020).

This cry for help by small employers resulted in the introduction of the QSEHRA at the end of 2016. But there are still some requirements for QSEHRA that just didn’t solve all the issues for small employers.

Some of the limitations are statutory annual funding caps; benefits are only tax-free to the employee if they have qualified MEC health plan coverage; not a “health plan” so no COBRA continuation option. Can only be offered if no other group health coverage is offered, including excepted benefits like vision or dental insurance. And, only available for employers with fewer than 50 FTE’s.

So, now there are 2 more HRA options that hope to not only provide a better alternative option for small employers, but, also enable large employers that may have their own challenges meeting the employer shared responsibility MEC and affordability requirements under PPACA, to have some other options to offer employees.

What additional benefits do these new HRA options offer?

We need to look at each one separately as they are intended to provide very different benefits.

Individual Coverage HRA (ICHRA)

The first one – the Individual Coverage HRA can be offered by any size employer. An employer can continue to offer a traditional health plan, including tradition HRA’s and also offer this ICHRA – just not to the same group of employees.

Employees can be put into different defined classification groups eligible only for the traditional health plan or only for the ICHRA without violating any of the plan eligibility nondiscrimination rules. This is could be very helpful to ALE’s having trouble meeting the shared responsibility affordability requirements because of a very diverse workforce and pay ranges. End up putting in a plan that offers the bare minimum to be able to be affordable to the lower pay group, but tends not to offer very good benefits. This way, the employer can offer say the hourly classified employees the ICHRA, which enables them to purchase any individual market (on or off-Exchange) health plan and be able to use employer funds to pay the premium or at least a part of the premium and have the health plan of their choice – this is huge.

The employer can still offer traditional group health coverage to other approved employee classifications. Or offer the ICHRA to PT employees that are not eligible to participate in the group health plan.

For very small employers that would fall into the non-TEFRA group market (where they are not required to offer group health coverage to Medicare-eligible employees or spouses, employees or employee spouses covered under Medicare Part A and B or C can use the employer funded ICHRA to pay Medicare premiums.

There is no annual contribution cap like there are for QSEHRA’s, so the employer has a lot of flexibility regarding plan design. They can even contribute more to employees in the same employee classification group based on age or number of covered dependents without violating the “same terms” requirement or any of the various plan nondiscrimination rules.

The biggest advantage of this new ICHRA is that, employees may be allowed to contribute through the employer’s Section 125 Cafeteria Plan, pre-tax dollars to pay any of their individual plan (or Medicare) insurance premium that is over and above what is paid through the ICHRA, under certain conditions. This will be a huge change in the Section 125 qualified benefit options as well!

The Excepted Benefit HRA (EBHRA)

The second new HRA is the Excepted Benefit HRA – not to be confused with a limited scope HRA for excepted benefit only expenses.

This HRA can only be offered with a non-HDHP traditional group health plan – so different from the standard HRA or the new ICHRA.

These “Excepted Benefit HRAs” permit employers to finance additional medical care (for example to help cover the cost of copays, deductibles, or other expenses not covered by the primary health plan) even if the employee declines enrollment in the traditional group health plan.

The HRA cannot be used to reimburse individual health insurance premiums, group health plan premiums (other than COBRA), or Medicare premiums, although it can reimburse premiums for accepted benefits, such as dental and vision coverage, as well as for STLDI.

The unused funds can be rolled over to the next year, but there is a statutory cap on funding at $1,800 per year per participant (indexed for inflation beginning in 2021).

Additional Information

These HRA’s are available as of January 1, 2020. So, if a small employer is not able to offer a traditional health plan they can now offer an ICHRA instead.

There is a participant notice requirement – 90 days before the start of a new plan year, some limited exception if can’t meet that 90 days.

Any employee that participates in the ICHRA is not eligible for the premium tax credit for any month participating in the ICHRA

The ICHRA is an ERISA health plan so is subject to COBRA, plan document, SPD and reporting requirements, etc.

ICHRA does not disqualify HSA-eligible individual.

The employee classification allowance is defined under the HRA rules – 11 allowed employment-based classification allowed. Although you can combine any of these to create a new classification, you can’t just make up a classification.

Large employers (ALE’s), if offering ICHRA will want to make sure meets the Employer shared responsibility affordability requirements.

This blog is based off of our Healthcare Simplified podcast. To hear this episode, and many more like it, you can subscribe to Healthcare Simplified.

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