Earlier this year the IRS released final regulations regarding the relationship between Employer Shared Responsibility Provisions (ESRP) and individual coverage Health Reimbursement Arrangements (HRAs). And then they were withdrawn by the Biden administration for review.
In this piece, we will dive into what the regulations clarify and how employers should proceed. Before getting into the specifics, it is important to first understand what a Health Reimbursement Arrangement is and how it relates to individual coverage.
What is a Health Reimbursement Arrangement?
Health Reimbursement Arrangements are non-taxed account-based health plans that provide both employers and employees with more control over health-related costs and medical expenses. HRAs are offered as reimbursements to employees for payment towards monthly medical premiums and health insurance-related costs.
What do the HRA regulations explain?
The previously issued regulations clarify non-discrimination provisions around the offering of HRAs, outline the usage of HRAs, and explain how employers should code them on the annual 1094-C and 1095-C forms.
In addition, the regulations introduce new HRA-related safe harbors for determining individual coverage HRA affordability. Healthcare.gov, states “An individual coverage HRA is considered affordable for an employee if the monthly premium the employee would pay (after the employer’s reimbursement) for the self-only lowest cost Silver plan available to them through the Marketplace in their area is less than 9.83% of 1/12 of the employee’s household income.” The regulations provide two safe harbors that employers can use for proving HRA affordability, the Look-Back Month Safe Harbor and the Location Safe Harbor. Below we explain how to administer the two.
What is the Look-Back Month HRA Safe Harbor?
The Look-Back Month HRA Safe Harbor allows an employer to leverage the monthly premium for the lowest-cost silver plan from a month during the previous calendar year for determining the cost of the current individual coverage reimbursement. For example, if your organization is looking to reimburse an employee’s HRA costs for January 2021, the lower-cost silver plan from January 2020 could be used.
When leveraging the Look-Back Month Safe Harbor, employers should use the employee’s current age and the location for the current month. Usage of the previous month’s information only applies to the premium costs.
What is the Location HRA Safe Harbor?
The Location HRA Safe Harbor allows employers to use an employee’s primary site of employment as the location for determining HRA premium reimbursement. The employee’s primary site of employment location acts as a proxy for determining what is affordable for an employee to satisfy establishing ACA affordability. For example, if an employee reports to the business location in San Diego, despite the headquarters location being in Los Angeles, the employment site in San Diego should be used for determining the employee’s HRA cost.
Since COVID-19, a number of employers have engaged in telecommuting and working remotely. The IRS provides additional guidance for remote workers and states specifically that employees who regularly perform work and may be required to report specific work-related premises should use the reporting site as the location. Workers who work from home or another location that is not the employer’s property should use the employee’s primary residence at the primary site of employment.
Can age be used as a safe harbor for proving HRA affordability?
The regulations state that “For an employee who is or will be eligible for an individual coverage HRA on the first day of the plan year, the employee’s applicable age for the plan year is the employee’s age on the first day of the plan year.” Employers should note that employees who become eligible for ICHRA coverage during the plan year should use the new age for the remainder of the coverage period. Due to nuances around age banding affordability, the current HRA regulations clarify that there is no age-specific safe harbor. However, this could change once the Biden administration completes its review.
Both the Look-Back Month and Location HRA safe harbors protect employers against 4980H(b) penalties and can be used in combination with the traditional ACA Safe Harbors, W-2, Rate of Pay, and Federal Poverty Level.
How could the HRA regulations change?
When the Biden administration took office in January, one of its top priorities was to identify legislation passed by the Trump administration that harmed the ACA. Through a series of executive orders, the administration gave federal agencies the authority to review existing regulations to identify any aspects inconsistent with the ACA.
The HRA regulations as they were intended by the former presidency could contain provisions that undermine the ACA’s ability to provide greater access to quality, affordable healthcare. For these reasons, the HRA regulations as they were released earlier this year could be amended to ensure alignment with Biden’s pro-ACA agenda.
It is hard to say at this point exactly what the administration will do following its review of the HRA regulations. Employers looking to stay caught up with breaking IRS news should consult with an expert in ACA compliance like Trusaic so they are not at risk of practicing dated, inaccurate information.
Draft 2021 ACA reporting instructions
Employers should note that both the Location and Look-Back Month HRA Safe Harbors are included in the draft 2021 ACA filing instructions as new codes for Line 14. The fact that the draft reporting instructions do include these new HRA safe harbors suggests that the bulk of the legislation could remain once the Biden administration completes its review. However, draft instructions can change so employers should be on alert for developments as they’re issued.
As a reminder to employers, effective January 2020, employers are allowed to extend offers of HRA to employees in lieu of an offer of employer-sponsored healthcare coverage to satisfy the requirements of the ACA’s Employer Mandate.
Under the ACA’s Employer Mandate, Applicable Large Employers (ALEs) are employers with 50 or more full-time employees and full-time equivalent employees. ALEs are required to:
- Offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV)
- Ensure that the coverage is deemed affordable based on one of the IRS-approved methods for calculating affordability
Failure to adhere to these two requirements could subject your organization to Internal Revenue Code (IRC) Section 4980H penalties.
If your organization needs assistance establishing affordability conditions for your workforce, or applying the new codes to your annual ACA 1094-C and 1095-C reporting forms, contact us to learn about our full-service ACA compliance solution. If you’re not confident in your ACA processes, we recommend getting a free ACA compliance score. For simple, detailed instructions on the ACA’s Employer Mandate, download the 2021 ACA Essential Guide for Employers.
For information on ACA penalty amounts, affordability percentages, important filing deadlines, steps for responding to penalty notices, and best practices for minimizing IRS penalty risk, download the ACA 101 Toolkit.