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Individual Coverage HRA: Choice and affordability in employee health benefits

On Friday, June 14, 2019, President Donald J. Trump announced the expansion of Health Reimbursement Arrangements (HRA) to benefit small businesses and their employees. The new Individual Coverage HRA (ICHRA) returns consumer choice and affordability to employer-based health coverage.

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Video: President announces new Individual Coverage HRA (ICHRA) for American health care freedom (1:19)

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Jump to a section:

How HRAs work

Advantages for employer, employees

ICHRA distinctives

Premium reimbursement, Any number of employees

ICHRA rules

Traditional group health plans, Same terms requirement, Employee classifications, FSA & HSA coordination

Plan document requirement

Plan design options, Launch your ICHRA, Prep for success

Administration

Employee elections, Proof of coverage

Integration of individual health coverage

Non-standard coverage types, Coverage types that cannot be integrated, Spouse group health plan exception

Reimbursements

Substantiation, Medicare, Section 125 plan for balance of premium

Affordability

ALEs only

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How HRAs work

Health Reimbursement Arrangements are employer-funded accounts that reimburse employees for eligible medical expenses. No employee contributions are allowed.

Since an HRA is funded only by the employer, the employer sets the rules of the plan. At least that’s how it was until ObamaCare came along.

ACA attack on HRAs

The Affordable Care Act (ACA, 2010) deconstructed HRAs to align them with mandates in the law.

First, employers could no longer provide an HRA that reimbursed employees for medical expenses unless the employer first provided a group health plan.

Then, the employer-sponsored group health plan had to meet the essential benefits and no lifetime limits requirements applied under the ACA.

This put HRAs out of reach for most small employers, and persons working for these businesses lost health coverage entirely.

Those under the large employer mandate (50+ employees) had to buy into the more expensive ACA cookie-cutter group health plans. Year after year, premium hikes cut into the company’s ability to grow and operate efficiently as well as their employees’ family budgets.

Market impact

In his announcement, President Trump said that the individual health coverage market will end up seeing a 50% increase, which will have the result of lowering individual health coverage premiums.

Also, it is expected that 90% of employers implementing the new ICHRA will be companies with 20 or fewer employees.

Advantages for employers

• Employers providing the individual care HRA are not required to sponsor a group health plan for those employees;
• The ICHRA is available to employee groups of any size;
• There is no minimum or maximum limit on the amount of funding an employer may provide;
• Broad latitude is given to defining employee classification groups for variations in the type of coverage offered and the level of the individual care HRA benefit;
• Participants provide required proof of coverage; no further employer processing required;
• Integrates with Medicare (for eligible employees);
• Can work with HSAs and health FSAs; and,
• The individual care HRA is the most flexible and affordable option yet in employer-sponsored health plans.

Advantages for employees

The ICHRA works much the same as other HRAs, with the following important differences:

• Reimburses premiums from open market or exchange;
• Can also reimburse employees for all other IRS 213(d) allowed medical expenses (see IRS Publication 502) in addition to IC premium;
• Available to businesses with any number of employees;
• Participating employees are no longer eligible for a premium tax credit for coverage purchased on an exchange; and,
• Employees may opt out of HRA reimbursements to retain eligibility for premium tax credit.

Reimburse premiums from open market or exchange

Most HRAs reimburse for eligible medical expenses that are not health plan premiums, with the exception of a policy that only covers excepted benefits (vision and dental). It is the employer’s responsibility to select, sponsor, and maintain a group health plan for employees with all the accompanying requirements of ERISA and COBRA.

The ICHRA reimburses participating employees for individual coverage health plan premiums as well as other medical expenses. And, since the employee chooses, purchases, and maintains their health plan, ERISA and COBRA do not apply to an ICHRA.

Any number of employees

While the QSEHRA was a boon to the “qualified small employers” that fit within its “fewer than 50 employees” rule, the ICHRA is available to employers of any size.

No premium tax credit

ICHRAs are designed to reimburse employees for the purchase of individual coverage purchased on the open market or on an ACA exchange.

However, employees buying health coverage on an exchange will not be eligible for a premium tax credit.

An employer may not offer an ICHRA and a traditional group health plan (GHP) to employees within the same class.

However, an employer may offer an ICHRA to one class of employees and a traditional GHP to another class.

• 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.

Exception for older workers and number of dependents

Higher benefit amounts are allowed within a class of employees for older workers and those with more dependents.

Minimum class size rule

Employers offering only the ICHRA to workers within all employee classifications, there is no minimum employee group size.

However, when an employer offers a GHP to one or more class of employee and an ICHRA to one or more other classes, the minimum class size rule may apply to classes being offered the ICHRA. The minimum class size ranges from 10 to 20 employees, based on total number of employees.

HIPPA

HIPPA privacy rules apply to an ICHRA:

• A separate class may not be established which will discriminate in eligibility requirements or benefit amount based solely on specific health factors.
• Special enrollment periods (SEP) will be provided when certain life events occur, such as the birth of a child, divorce, marriage, death of a spouse, and others (see list of qualifying life events at healthcare.gov).

Health FSA and HSA

Employers may continue to offer a health Flexible Spending Arrangement (FSA) and/or a Health Savings Account (HSA) to employees with an ICHRA.

FSA

The ICHRA qualifies as the “other group health plan coverage not limited to excepted benefits” necessary for health FSA participation.

HSA

An individual considered eligible to contribute to a Health Savings Account must be covered by a high deductible health plan (HDHP) and have no other coverage that will pay the HDHP deductible. An ICHRA may reimburse employees for HSA-eligible HDHP premiums.

When an ICHRA is designed to reimburse individual health insurance coverage premiums and only medical expenses paid once the HDHP deductible is met (a post-deductible HRA), it does not disqualify an otherwise eligible individual.

However, when the ICHRA is not limited to covering individual health premiums and post-deductible medical expenses but can also reimburse expenses that fall within the HDHP deductible, it is not HSA compatible.

Since some employees may choose to purchase an HSA-compatible HDHP while others will choose non-HDHP individual health coverage, employers may offer both regular and post-deductible (HDHP) individual coverage HRAs to workers in an employee classification so long as it is otherwise offered on the same terms.

All benefit plans must have a written plan document to qualify for tax-favored treatment of premium payments, contributions, and reimbursements. This is in the IRS rules for all HRAs, including the individual coverage model.

The plan document states all of the information about the plan including how it works, amount of benefits, who sponsors the plan (employer), who administers the plan (sponsor or agent), and all of the legal information required by the IRS, DOL, and ACA.

It is a fairly complex document, and that’s why we’re here. Core Documents provides everything an employer needs to establish a tax-saving benefit plan in one convenient and affordable package. Our Core ICHRA plan document package will be priced in line with our other HRAs at $199, and that’s a one-time fee, not an annual subscription.

Before ordering

But first, there are some decisions an employer has to make about their individual coverage HRA, so it can be stated properly within the plan document.

Free plan design consultation

As you read more about the options (below), detailing the HRA may seem a little daunting at first. Make it easy by taking up our offer of a complimentary, no-obligation plan design consultation.

We hope you will contact Core Documents’ certified plan consultants by phone at 1-888-755-3373, or send your questions in an email.

Plan design options

Define employee classes

The best way to begin is by defining the classes of employees that will be used in the ICHRA to further decide plan benefits. As explained in Same Terms (under ICHRA rules), classes can be set by several criteria and combinations of criteria.

Will part-time employees be eligible to participate? What about seasonal or temporary workers? Will the company grandfather existing employees under the current traditional health plan while new hires are provided the ICHRA? Do participants with more dependents receive a higher benefit?

Some elements of a plan can have a variance within the same class (a higher benefit for older workers is one example) while most other differences in benefit terms and amounts have to be assigned separate classes.

All of this is covered in detail in the Same Terms rule section.

Decide on plan specifics

Once you have set up the employee classes, set the plan rules for them.

The individual coverage HRA is the most flexible of all plan models. The employer provides all the funding, so the employer makes pretty much all the choices in plan design.

Here are just a few of the options left open to the company sponsoring the plan (all can vary by employee classification group):

Amount of HRA benefit per year

With no minimum or maximum funding limit set by the rules, the HRA benefit amount is entirely up to the employer.

What the plan will reimburse

Employers have the option of reimbursing employees for all IRS 213(d) allowed medical expenses (see IRS Publication 502) or to limit the plan to reimbursing only IC health insurance premiums.

Pre-funding

The annual HRA benefit can be made fully available to participants on the first day of the plan year, or credited on a monthly basis.

Rollover option

What happens to unused funds at the end of the year? It’s up to you.

Like all HRAs, individual coverage models run on a 12-month plan year. Just when that plan year begins and ends is up to the employer.

Most plan years begin January 1 and end December 31; however, it can be any 12-month period. Some companies correlate the HRA plan year with their fiscal or tax year begin and end dates.

This is the only time of the year that health insurance can be purchased unless the participant or a covered dependent has a qualifying life event that opens a special enrollment period.

For the first plan year of an ICHRA, this is not a problem because a special enrollment period exception is made for participants gaining access to an ICHRA for the first time.

However, participants wanting to make a change in their individual coverage provider in later plan years will only be able to do so during the standard insurance open enrollment period.

It is not required but may be helpful for employers on non-calendar plan years to formally remind employees of the open enrollment period prior to the January 1 that falls within the HRA plan year so that any wanting to change their individual health coverage will not miss the opportunity.

Cancel existing GHP

Companies that presently sponsor an employee group health plan and do not plan to grandfather it for existing employees must cancel the policy prior to the start of the ICHRA plan year (January 1, 2020, or after).

Ordering your plan document package

The Core ICHRA plan document package will be available for only $199 (electronic distribution) as soon as the rules allow that individual coverage products are released for sale.

No annual fee

Core Documents plan document packages come to you for a one-time fee. There’s no required renewal or subscription fee. You only pay for an update when one is needed, and then at a reduced price.

Fast service

You may choose either the standard electronic delivery service (.pdf) or a deluxe version that adds a printed binder for your convenience. Either way, the .pdf comes to you quickly, usually within the same business day.

If you would like to receive an alert when there is more ICHRA news and when the Core ICHRA plan document package is available, please register here.

The order form for the Core ICHRA will be similar to our other HRA plan document packages. You may download and print that form to see the type of information requested and make preliminary notes.

As always, feel free to contact us via email or phone if you have questions.

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Ready to order? Click here.

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Launch your Individual Coverage HRA

A Core ICHRA plan document package includes:

• Signature-ready plan document;
• Corporate resolution to adopt an Individual Coverage HRA;
• Summary Plan Description (SPD)
• Individual Coverage HRA Notice
• Employee election form;
• Annual substantiation of coverage form;
• Ongoing substantiation of coverage (for reimbursement requests); and,
• Administrative handbook.

1. Sign the plan document in the two places indicated

Keep it on file and available in case of an IRS audit, the DOL requesting a copy, an employee asking to view the document, and for administrative guidance.

The plan document is not filed with the IRS, DOL, or any other government entity.

2. Distribute to every eligible employee, at least 90 days before the start of each plan year:

• Individual Coverage HRA Notice;
• Summary Plan Description;
• Employee election form; and,
• Annual substantiation of coverage form.

(Employers may find it convenient to include the ongoing substantiation of coverage form as well.)

Election and substantiation forms must be signed by employees, returned to the employer, and kept on file

Prepare for success: employees

The success of your ICHRA will depend in part on its acceptance by the employees eligible to participate. Telling an employee that the company will reimburse them for their purchase of individual health coverage may not be enough to get a high rate of buy-in, especially for individuals who have not looked into buying health insurance before now. Buying individual health insurance is just as daunting (if not more so) than shopping for a group health plan. You can improve your chances of successful participation in the ICHRA helping employees with where to start and how to learn more by sharing just a little bit of information with them.

Written notice exchange information

The required written notice informs employees that they need to purchase individual health coverage from either the exchange or open market, and HHS promises additional resources to help individuals offered an ICHRA understand the concept of the ACA affordability provision and how that determines eligibility for a premium tax credit if they opt out of the ICHRA. This promised help will also address coverage dates, the annual enrollment period, and special enrollment periods.

There is no promise in the rules about helping employees with making a decision on purchasing individual health coverage.

Company may not sponsor or endorse

Employers are forbidden by law to sponsor or endorse specific individual health coverage providers, agents, or plans.

However, an employer may provide general information on how to find a provider or agent, or what to look for in an individual health coverage policy.

This can be as simple as providing a list of online resources:

 

Resource	Provided by	Description
3 things to know before you pick a health insurance plan	HealthCare.gov	Choosing a health insurance plan can be complicated. Knowing just a few things before you compare plans can make it simpler.
Pick the Best Health Care Plan for You	AARP	What you need to know about buying medical insurance on your own.
The Basics of Choosing a Health Insurance Plan	The Balance	Whether you choose a group plan or an individual plan, there are important choices to be made.
Your Step-by-Step Guide to Choosing a Health Insurance Plan	NerdWallet	The health insurance landscape can be tricky to navigate. Here’s a start-to-finish guide to choosing the best plan for you and your family.
PlanFinder	HealthCare.gov	This Plan Finder website is provided by the federal government to help you find private health plans available outside the Health Insurance Marketplace.
eHealthInsurance	eHealth	Our online tools, free quotes, and licensed agents are here to help you find a plan.

Employee elections

Employee election of coverage is for the duration of the plan year and may only be changed during the plan’s annual open enrollment period unless the participant wishes to opt out of the ICHRA or qualifies for a special enrollment period.

Opt-out provision

The employer must offer, at least once per plan year, an opportunity for participants to opt out of the ICHRA.

Proof of coverage

Annual substantiation of coverage for the plan year

An individual coverage HRA must require proof of individual health coverage no later than the first day of the plan year. The employer may set any reasonable date that meets this rule.Also, when an employee or dependent becomes eligible after the first day of the plan year, initial substantiation of coverage is required within a reasonable timeframe as determined by the employer.

Ongoing substantiation for reimbursement requests

The employee must provide ongoing substantiation of individual health coverage with every request for reimbursement for the participant and their dependents throughout the plan year.

Acceptable types of substantiation

The IRS has provided model forms for both annual and ongoing substantiation. View the annual form here, and for the ongoing form, here.

These forms and the written notice are customized in your Core ICHRA plan document package.

Reliance upon substantiation

An employer may rely upon the attestation provided by the participant unless there is knowledge on the part of the employer-HRA that the employee or dependent is not or will not be enrolled in individual health coverage (as stated on the substantiation form) for the month or applicable part of the plan year.

Most participants in an ICHRA will purchase standard individual health coverage either on the open market or through an ACA exchange. All policies available on the exchange are qualifying health plans that cover essential health benefits and minimum value, and most policies offered on the open market are as well.

There are policies that do not qualify for integration with an ICHRA. This may be because it is a group policy (as in a spouse’s group plan) or it does not provide essential health benefits or minimum value (STLDI and others). Integration of non-standard individual health coverage types is explained here.

Coverage that can be integrated

Student health insurance

An HRA may be integrated with student health insurance coverage that meets requirements set in 45 CFR 147.145; however, self-insured student health coverage may not be integrated since self-insured student plans are exempt from ACA coverage rules.

Medicare

An individual coverage HRA may be integrated with Medicare Part A and B or Part C. The HRA may reimburse premiums for Medicare or Medigap insurance.

Integration with Medicare is permitted whether or not the HRA is subject to MSP provisions.

TRICARE (military)

Technically, TRICARE cannot be integrated with an ICHRA because it is a group plan. However, since it is addressed in the rules as follows, it is included in this section.

An employee who is offered an individual coverage HRA and is enrolled in TRICARE must also be covered by an individual health policy (or Medicare).

The individual health policy (or Medicare) will be integrated with the HRA (TRIARE cannot be integrated).

Coverage that may not be integrated

Only individual health coverage that provides essential health benefits and minimum value with no annual or lifetime limits may be integrated with an ICHRA.

The following types of individual coverage health plans violate one or more of these rules and cannot be integrated with an individual coverage HRA:

Short-term Limited Duration Insurance

Health Sharing Ministries

Association Health Plans

Dental, vision, or other plans that cover only excepted benefits

and

Spousal Group Coverage

An individual coverage HRA may not integrate any group health plan. This includes coverage as a dependent through a spouse’s group health coverage.

Substantiation of expenses

As explained under Proof of Coverage, employees must submit annual and ongoing substantiation of coverage prior to the start of the plan year and with every request for reimbursement during the plan year.

The individual coverage HRA must also require substantiation of expenses when reimbursement is requested, including for individual health insurance premiums.

Acceptable substantiation will document the expense with a description of what was purchased, on whose behalf it was purchased (participant or covered dependent), its medical purpose, and the amount.

Medicare reimbursements

An ICHRA reimburses premiums for Medicare Part A, B, C, or D, and for so-called Medigap policies.

While an individual coverage HRA can be limited to pay only premium expense, only non-premium expense, or only certain types of expense, it cannot be limited to paying “only expenses not covered by Medicare”.

Using a Section 125 POP to pay balance of premium

Just as employees expect to pay a part of the premium for group health insurance in an employer-sponsored Section 125 Cafeteria Plan, most employees will also contribute to the premium for individual health coverage in an ICHRA.

Unless the individual health coverage policy is purchased through an exchange, the employer may allow these payments to be made with pre-tax employee dollars through the company’s Section 125 plan. The pre-tax salary reduction will be applied through regular payroll deductions, and the employer will send the amount for premium payment to the individual health coverage insurer.

This is only available for amounts to cover the part of individual coverage premiums that will not be reimbursed by the HRA. A participant may not pay for the premium and then be reimbursed for that amount.

For example, an employee buys a health insurance policy (not through an exchange) with an individual coverage premium of $800 per month. His ICHRA onthly benefit is $500. The employee pays $500 outright to the insurer and is reimbursed tax-free by the HRA.

For the other $300, the employer processes a pre-tax salary deduction and forwards payment directly to the insurer on behalf of the employee.

When both spouses have an ICHRA

Should both spouses be offered an individual coverage HRA by their employer, the two HRAs may purchase the same individual coverage policy to be integrated with both HRAs.

Only ALEs (applicable large employers with 50 or more employees) are subject to Section 4980H for affordability compliance.

An employee will only qualify for a premium tax credit on an exchange when the employer’s offer of coverage is unaffordable (or the employer is not an ALE).

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