PART III: Options for the 50+-Employee Company
In our final installment of this series, we will explore the Individual Coverage Health Reimbursement Arrangement (ICHRA) – essentially the only arrow in the quiver of a “large” employer looking for a Medicare reimbursement plan. The ICHRA rule, finalized in June of 2019, gives employers a way to integrate a health reimbursement arrangement (HRA) with individual coverage or Medicare so that employees may be given funds to spend in the individual market in lieu of a traditional group health plan.
The Nuts & Bolts
An ICHRA, an account-based health plan funded exclusively by an employer, can be set up to reimburse all employee, spouse, and/or dependent expenses that meet the Section 213(d) definition of a medical expense, or the plan can be designed to reimburse only particular medical expenses (e.g., premiums for individual coverage). An ICHRA can also be designed to be compatible with an HSA reimbursing only individual health coverage premiums or post-deductible expenses. For the 50+ FTE-employer, however, it is important to remember that coverage through an ICHRA is still subject to the ACA’s affordability requirements. So, for example, for 2021, an employer’s ICHRA allowance must be high enough to enable employees to purchase the lowest-cost silver plan on an ACA marketplace exchange by combining their ICHRA funds with no more than 9.83% of their adjusted gross income.
There are no limits on the annual amount an employer may contribute for each participant, and the unused balance may carry over from year to year or not, at the employer’s discretion. Though an ICHRA is not “portable” in the strict sense of the word, an employer may decide to pay out the unused balance at the time of an employee’s separation from employment.
In order to pass muster, all covered employees must be enrolled in individual health insurance coverage (providing unlimited coverage for essential health benefits and first-dollar benefits for preventive care), Medicare Parts A and B, or Medicare Part C for each month they are covered by the ICHRA. An ICHRA may be used to reimburse premiums for Medicare and Medicare supplemental health insurance (Medigap), as well premiums for Parts A, B, C, and D. The IRS rules, found at Reg. 54.9802-4(c), spell out what is additionally required for plan to qualify as an ICHRA. Essentially, an employer:
- Must have a written Plan Document;
- Must distribute a Summary Plan Description (SPD) within 90 days of the employee becoming a plan participant;
- Must offer the HRA on the same terms to all individuals within a class of employees (with limited exceptions);
- Cannot offer the HRA to any employee that is offered a traditional group health plan;
- Must allow participants to opt out of and waive future reimbursements from the HRA annually;
- Must establish reasonable procedures to substantiate that participating employees and their families are enrolled in individual health coverage or Medicare while covered by the HRA – both annually and before each reimbursement; and;
- Must provide eligible employees with a written notice at least 90 days before the beginning of each plan year.
The third element above – dealing with “classes” of employees, could benefit from some unpacking. An employer may offer an ICHRA to certain classes of employees and not to others, and these classes may be applied separately to each common-law employer, rather than over the whole “controlled group”, which provides a bit more flexibility than might be initially apparent. Since ICHRA eligibility is limited to “common law employees”, self-employed individuals, partners, and 2% shareholders may not participate.
Once a class is designated, it must remain in effect for the entire plan year. The allowable “classes” are as follows:
- Full-time employees (defined as regularly scheduled to work at least 30 hours per week);
- Part-time employees (defined as those regularly scheduled to work fewer than 30 hour per week);
- Employees covered under a collective bargaining agreement;
- Employees in their waiting period;
- Nonresident aliens with no U.S.-source income;
- Salaried employees;
- Hourly employees;
- Employees in different geographic locations;
- Temporary employees; and
- Any combination of the above categories (e.g. part-time union employee vs. full-time union employee covered under the same collective bargaining agreement).
The rules require certain classes to include a certain minimum percentage of employees if the employer offers both a group health plan and the ICHRA:
- Full-time employees;
- Part-time employees;
- Salaried employees;
- Hourly employees; and
- Employees in different geographic locations.
If the employer offers a group health plan and an ICHRA that is set up with one of these classes of employees, that class must meet minimum percentage thresholds depending on the employer’s size:
- If the employer has 100 or fewer employees, the class must have at least 10 employees;
- If the employer has between 100 to 200 employees, the class must have at least 10% of the total number of employees;
- If the employer has more than 200 employees, the class must have at least 20 employees.
The last “wrinkle” among the classification rules is that an employer is only permitted to offer one option within each class. In other words, the employer has to offer all employees within a particular class either the employer-sponsored group health plan or the ICHRA, but cannot make both options available within the same class. What the government does not want employers doing, of course, is offering the group health plan to the younger, healthier employees within the class, resulting in lower premiums, and forcing the older, sicker employees in the class to participate in the ICHRA.
“Same Terms & Conditions”
Within each classification, all employees must be treated the same – for the most part. Thus, while all employees within the class must have the same waiting period, etc., the amount of benefits within each class may vary based age and family size; the benefits within a class may manifest a 3:1 ratio based on age. This means that the oldest member within a class may get up to three times as much as the amount being offered to the youngest member of the class. The differing benefit amounts based on age and family size must be uniform. For example, if the benefits vary based on family size, all families with three individuals within the same class must receive the same amount of benefits.
Under the final rule, an ICHRA sponsor will not be subject to the Employee Retirement Income Security Act (ERISA) for the individual coverage, provided enrollment in that coverage is “completely voluntary” and there is no employer endorsement. According to Elizabeth Schumacher of the U.S. Department of Labor, what this means is that “Employers and plan sponsors can continue to help people shop for coverage,” provided this assistance is “unbiased, neutral, and uniformly available.” In other words, employers cannot steer employees towards certain coverage or receive financial consideration based on the employee’s choice.
This Isn’t Complicated Enough for Me – What about HSA’s?
An individual must be covered under a high deductible health plan (HDHP) and have no disqualifying coverage in order to be eligible to make or receive HSA contributions. Thus, whether or not an employee covered under an ICHRA is HSA-eligible will depend on how the ICHRA is set up. If the participant can be reimbursed the premiums for individual health policies plus other general medical expenses, then the participant is not HAS-eligible. On the other hand, if the ICHRA will only pay premiums and excepted benefits or preventive care expenses, then the participant would be considered HSA-eligible. Stated another way, participating in an ICHRA that only reimburses premiums for individual health policies, excepted benefits (i.e. vision and dental), and preventive care will not, in itself, disqualify the participant from making or receiving HSA contributions.
What this means is that an employer may offer employees within the same class the option to elect an ICHRA that will only reimburse premiums, excepted benefits and preventive care expenses and another ICHRA that will reimburse premiums and general medical expenses for those that want to participate in non-HDHP’s. Basically, an employer can establish two ICHRAs: One for employees who want to establish HSA’s and another for those who do not. The ICHRA for those with HSA’s will limit reimbursement only to premiums, excepted benefits, and preventive care, while the ICHRA for those employees who do not want HSA’s can reimburse general medical expenses besides premiums.
Got it? Those with questions on the above are encouraged to take advantage of this user-friendly Internal Revenue Service flowchart.