As we previously reported, on June 13, the Departments of Health and Human Services, Labor, and the Treasury (collectively, the "Departments") issued a coordinated set of final regulations ("final rules") permitting employers to, among other things, make individual coverage health reimbursement arrangements (ICHRAs) available to their employees for the purposes of purchasing individual market health insurance coverage. The final rules address how an employer determines whether coverage provided under an ICHRA is "affordable" for purposes of complying with the Affordable Care Act's (ACA's) employer shared responsibility standards, which are codified in section 4980H of the Internal Revenue Code. In recently issued proposed regulations (the "proposed affordability rule"), which are the subject of this post, the Internal Revenue Service (IRS) addresses how employers might determine whether coverage under an ICHRA is affordable.
Prior law generally barred employers from making health reimbursement arrangements (HRAs) available to enable employees to purchase health insurance of their choice in the individual health insurance market. These arrangements, which were generically referred to as "stand-alone" HRAs, were deemed under prior guidance to fail to satisfy the following requirements added by the ACA:
Public Health Service Act section 2711, which generally bars group health plans from imposing annual or lifetime limits on the dollar amount of benefits (the "annual dollar limit prohibition"); and Public Health Service Act section 2713, which requires non-grandfathered group health plans to provide preventive services without imposing any cost-sharing requirements (the "preventive services requirement"). In a 2017 executive order, President Trump directed the Departments of Labor, Health and Human Services and the Treasury to review regulations issued under the ACA to, among other things:
Create rules that allow employees to use health reimbursement arrangement (HRA) funds to pay health care premiums for plans employees purchase on the individual market, such as through the ACA's Marketplace exchanges
The Final Rules
The final rules, which are in response to the President's order, enable ICHRAs to be applied to the purchase of health insurance in the individual market. The final rules leave certain issues unaddressed, however, most notably with respect to the determination of the circumstances under which an ICHRA offered by an applicable large employer (ALE) is affordable. ALEs (generally, those employers with, on average, 50 or more full-time and full-time equivalent employees in the previous calendar year) are exposed to excise tax penalties if at least one employee qualifies for and receives a premium tax credit from the state exchange or marketplace, and:
The employer either does not offer minimum essential coverage to substantially all (i.e., at least 95 percent) of its full-time employees and their dependents; or The employer offers such coverage, but the coverage is either unaffordable or fails to provide minimum value. (Minimum value coverage is, essentially, major medical coverage that includes physician and inpatient hospital services.) Under the final rule, an employee who is offered coverage under an ICHRA that is affordable is barred from receiving premium tax credits. (The individual market coverage that an employee accesses with his or her ICHRA is deemed to provide minimum value.) Thus, an employer that offers an individual coverage to substantially all its full-time employees and their dependents is not subject to excise tax penalties. Coverage is "affordable" for this purpose if the employee's contribution towards self-only coverage does not exceed the required contribution percentage of...