The idea of health reimbursements arrangements (HRAs) where employers reimburse employees for certain medical costs on a tax-advantaged basis are not new. But their use became questionable under the Affordable Care Act (ACA) when employers faced potential penalties if they offered them (see Notice 2013-54). Now, under a final rule issued jointly by the Departments of Labor, Health and Human Services, and the Treasury, employers of any size can offer a new Individual Coverage HRA starting Jan. 1, 2020, as an alternative to traditional group health coverage without running afoul of ACA. What's more, beginning Jan. 1, 2020, employers with traditional group health coverage can offer a supplemental type of HRA, called an Excepted Benefit HRA, to help employees pay for what traditional health coverage does not (e.g., vision and dental care).

ICHRAs

Employers can adopt Individual Coverage Health Reimbursement Arrangements (ICHRAs) to enable employees to pay for individual coverage on or off a government Exchange or Medicare while retaining the tax advantages associated with traditional group health coverage (i.e., tax-free treatment for reimbursements to employees; exemption from payroll taxes on reimbursements). The ICHRA is a notational account from which employer reimburses employees according to the terms of the plan; no annual contributions by the employer are made to a trust as is the case with a qualified retirement plan.

The reimbursement amount is fixed annually by the employer (the government does not control this amount) and can be used to buy individual health insurance (other than short-term or limited duration insurance or coverage solely for dental, vision, or similar excepted benefits). It is anticipated that ICHRAs will enable small employers to provide coverage to their staff without significant administrative costs. Large employers subject to the employer mandate under the Affordable Care Act (ACA) can use ICHRAs provided they meet ACA requirements.

An employer using an ICHRA must offer it on the same terms to all individuals within a class of employees. The classes include full-time employees, part-time employees, seasonal employees, etc. However, this nondiscrimination requirement is not violated if the amount of reimbursement is increased for older workers and workers with dependents.

An employer can permit an employee to make a salary reduction contribution to the company's cafeteria plan to cover the cost of health insurance in excess of the ICHRA's reimbursement on a pre-tax basis. However, this is restricted to paying for coverage purchased off an Exchange.

An ICHRA can reimburse employees not only for their health insurance premiums, but also for additional expenses. However, if an employer wants to also offer a Health Savings Account (HSA), it must restrict the ICHRA to premiums for the purchase of a high-deductible health plan (HDHP). This is because an HDHP is a prerequisite to an HSA.

It is entirely up to an employer to decide what happens to amounts that employees do no use up within the year. The employer can retain the unused funds or permit them to be carried forward to the following year. There is no dollar limit on this carryforward.

An employer must provide notice of eligibility to participate in an ICHRA. This notice must explain to an employee how an ICHRA interacts with the premium tax credit. If the reimbursement fixed by the employer makes coverage "affordable" for the employee (the amount that the employee must pay over and above the reimbursement for a self-only silver plan on the Exchange does not exceed 1/12 of his or her household income), then the employee cannot receive government assistance via a premium tax credit for coverage through an Exchange. But an employee with deemed affordable coverage can use reimbursements to purchase off the Exchange.

In order to receive reimbursement, an employee must attest to the employer that he or she has obtained coverage. There is a sample notice and sample attestation forms that can be used to satisfy the notice and attestation requirements.

EBHRAs

Employers that want to enhance their traditional group health coverage for employees can offer an Excepted Benefit Health Reimbursement Arrangement (EBHRA). The EBHRA is offered in conjunction with and not as a substitution for traditional group health insurance. However, an employee does not have to be enrolled in the company's health plan to receive reimbursements from an EBHRA. The EBHRA cannot be offered as a supplement to an ICHRA because an ICHRA is not traditional group health coverage.

The EBHRA can reimburse an employee for co-payments, deductibles, and excepted benefits (dental and vision coverage). It cannot reimburse an employee for traditional health insurance premiums.

The EBHRA must be offered uniformly to all similarly-situated individuals. The government, not the employer, sets the annual reimbursement limit. For 2020, the limit is $1,800; it will be adjusted for inflation after that.

QSEHRAs

Several years ago, legislation authorized a special type of HRA for small employers, called Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). These continue to be a viable option for a company that is not subject to the employer mandate and does not have any other group health plan.

Like ICHRAs, these plans are used to reimburse employees for their individually-obtained health coverage. But unlike ICHRAs, the annual reimbursement limit is fixed by the government. For 2019, the annual reimbursement for self-only coverage is $5,150; for family coverage it is $10,300 (the 2020 reimbursement cap has not yet been announced). The IRS has fleshed out details about QSEHRAs in Notice 2017-67.

Conclusion

ICHRAs and EBHRAs are an administrative solution to a need in the marketplace. QSEHRAs have been implemented through legislation. Whether and to what extent all of these options will used by employers remains to be seen. The government expects that once ICHRAs are fully implemented, an estimated 800,000 employers will offer reimbursements to 11 million employees and family members. Expect to see additional guidance from the IRS on ICHRAs and EBHRAs.

Sidney Kess, CPA-attorney, is of counsel at Kostelanetz & Fink and senior consultant to Citrin Cooperman & Company.