An Expert’s Thoughts on Individual Coverage HRAs

Are You Ready for the New ICHRA Rules?

Now that the rules are out, the million dollar question is: are the new Individual Coverage HRAs (ICHRAs) going to gain traction with employers? (Yes, we have another new acronym to memorize – ICHRA).

I think it is easy to assume that the ICHRA may not be a good solution for most employers. After all, in a tight labor market how many employers will be interested in dropping their group health plan (GHP) in favor of paying for individual health insurance policies? Due to provisions that allow an employer to offer the ICHRA to just some employees, I believe there may be a significant number of employers who will seriously consider this approach.

The Most Important Rules

I want to share some thoughts about ways employers may consider deploying an ICHRA as part of their benefits strategy, so I am not going to cover the new ICHRA rules in this post (if you want those details, check out our issue brief here and my earlier blog post here. However, there are four essential rules you must understand.

  1. Employers cannot offer an ICHRA to the same class of employees who are eligible for an employer-sponsored GHP. It has to be one or the other. Classes can be combined to form an eligible subclass (e.g. salaried workers in a particular rating area), and different classes can be offered to employees of different employee identification numbers (EINs) within a controlled group. The eligible employee classes include:
    • Full-time vs. Part-time
    • Salaried vs. Non-Salaried
    • Seasonal employees (as defined under either §105(h) or §4980H)
    • Employees working in the same geographic location (insurance rating area, state, or multi-state region)
    • Employees covered by a collective bargaining agreement
    • Employees who have not satisfied a waiting period
    • Non-resident aliens with no U.S.-based income
    • Some temporary employees hired through staffing firms
  2. An employee class must contain a minimum number of eligible employees. This rule is designed to make it harder for employers to target a small group of employees or a particular participant. Class size is based on the number of employees at the company – Employer with less than 100 employees – min. class size = 10 eligible employees; 100–200 employees = 10% of total employees; 200+ employees = 20 eligible employees.
  3. Even if an eligible class is set up based on the ICHRA rules, the employer must consider relevant Section 125 and Section 105(h) non-discrimination rules. For example, an employer offering a self-insured GHP to salaried employees in a particular rating area and an ICHRA to the rest of the company would probably violate Section 105(h) if the employees offered the GHP were principally highly compensated employees.
  4. Offering an ICHRA to a full-time employee will be considered an offer of minimum essential coverage, and the IRS is working on rules for how affordability will be determined, so Applicable Large Employers (ALEs) will be able to use the ICHRA to meet their 4980H requirements.

How Might an Employer Use the Class System to Define Eligibility?

Every day I hear about situations where it might make sense for an employer to consider an ICHRA. These are examples:

  • A large employer who wants to offer some small benefit to part-time employees who are not currently eligible for the GHP.
  • An employer with a population of employees in a particular area with very low participation where they have trouble meeting a carrier’s participation requirements
  • A small employer who wants to offer the GHP only to the salaried employees.

But far more interesting to me is that the ability to combine classes of employees (and to vary classes by EIN within a controlled group) creates an opportunity for employers to become very “creative.” Imagine an employer with 500 employees working in 5 EINs (all part of a controlled group) and multiple locations throughout the country. What if the employer wanted to carve out the hourly employees, working at EIN #3, in a particular rating area in one state, and offer that subgroup of employee an ICHRA instead of the GHP? As long as that subgroup contains at least 20 eligible employees, it could work. Of course you would need to look into the discrimination rules, but an arrangement like this could pass.

Don’t forget that employers always need to be careful about targeting employees with health problems. An employee who feels targeted could have a claim under the HIPAA rules against discrimination based on health status and ERISA 510. But even taking these risks into consideration, many employers will be looking into this approach.

The rules also allow an employee to use the ICHRA to reimburse Medicare premiums and Medicare Supplement plans. Watch for a new blog post on this issue very soon.

Boy Scout Motto

I am not going to try to predict how many employers will actually offer an ICHRA to some of their employees, but I am confident that many will consider it and will have questions. As their trusted advisor, you have the responsibility to understand these rules and be able to advise employers appropriately.  If you can’t help your clients think through the risks and benefits of an ICHRA, I am sure someone else will be happy to do it for you! My advice at this point is follow the Boy Scout motto – “Be Prepared”!

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