ICHRA Final Regulations Released

This week the IRS released final regulations clarifying how an individual coverage HRA (ICHRA) must be designed to satisfy §4980H offer of coverage requirements, §§6055 and 6056 employer reporting requirements, and benefit nondiscrimination rules. The rules finalize what was set forth in the proposed regulations released late in 2019 with no significant changes. The final regulations are summarized below, but can be found here – https://www.irs.gov/pub/irs-drop/td-9949.pdf

§4980H (Employer Mandate) 

An ICHRA that is affordable will automatically meet minimum value requirements.

The employee contribution for affordability purposes is determined by subtracting the monthly amount available via the ICHRA from the lowest cost silver plan on the public Exchange. The employee contribution cannot exceed 9.83% (in 2021) of the employee’s household income, or one of the affordability safe harbors (i.e. FPL, rate of pay, or Form W-2). The lowest cost silver plan available to a particular employee is generally dependent upon the employee’s residence and age. However, to make it easier for employers, any or all of the following safe harbors may be used:

  • Age – The employer may use the employee’s age on the first day of the plan year, or when the employee is first eligible for the ICHRA.
  • Location – The employer may use the employee’s primary site of employment instead of the employee’s residence.
  • Exchange Plan Rates – For a calendar year plan, the employer may use the monthly premium for the lowest cost silver plan for January of the prior calendar year. For a non-calendar year plan, the employer may use the monthly premium for January of the current calendar year.

§§6055 and 6056 Employer Reporting 

An ICHRA meets the definition of minimum essential coverage (MEC) and is a self-funded group health plan, so employers are required to report coverage information annually for all individuals enrolled in the ICHRA. Small employers (<50 FTEs) should report coverage information using Form 1095-B. Applicable large employers will generally report coverage information in Part III of Form 1095-C. Reporting may also be required by states with an individual mandate in place (e.g. CA, MA, NJ, RI and DC).

Applicable large employers who offer ICHRAs to full-time employees must report offer of coverage information in Part II of Form 1095-C. Specifically, the employer must provide the employee’s age as of January 1st, use the newly created Codes 1L – 1S to indicate the type of offer on Line 14, indicate the employee contribution on Line 15, and provide zip code information for the employee’s residence or primary site of employment on Line 17.

Nondiscrimination

ICHRAs are self-funded group health plans subject to §105(h) nondiscrimination rules, which generally require that employer contributions cannot vary by age, or in a way that favors highly compensated individuals. However, ICHRAs that comply with the requirement to offer uniform coverage to all participants within a particular class, varying ICHRA funding only by age (3:1 ratio) and tier of coverage, are permitted under §105(h) nondiscrimination rules. The IRS warns that an offer of ICHRA coverage could still be discriminatory under §105(h) for reasons other than differing employer funding amounts. For example, if a disproportionate number of older, highly compensated individuals take advantage of the maximum ICHRA reimbursement available (which might be more for older employees), the ICHRA may be found to be discriminatory under §105(h), potentially resulting in highly compensated individuals being taxed on reimbursements received. In addition, for employers who choose to offer an ICHRA to some employees while maintaining a traditional group medical plan for another class of employees, this could result in a discriminatory self-funded group medical plan if the remaining employees eligible for or participating in the traditional group medical plan are mostly highly compensated individuals or key employees.

The regulations suggest that employers who permit employees to pay their portion of the monthly premiums purchased off-Exchange through the employer’s cafeteria plan may create discrimination issues under §125 rules for cafeteria plans, but indicated this needs to be addressed in further guidance.

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