With the new individual coverage health reimbursement arrangement (ICHRA) scheduled to become available in early 2020, you might be wondering if the ICHRA satisfies the employer mandate.
What is the employer mandate?
First, let’s dive into what the employer mandate is and who it affects.
Under the Affordable Care Act’s employer shared responsibility provision, employers with an average of 50 or more full-time equivalent employees during the preceding calendar year are considered applicable large employers, or ALEs. They must offer minimum essential coverage (MEC) that is affordable and provides minimum value to full-time employees and their dependents.
Those provisions are what we call the employer mandate, or sometimes “the pay or play provisions.”
How is affordability and minimum value defined in terms of the ICHRA?
To understand how the ICHRA can help an employer meet the requirements of the mandate, let’s discuss what the “minimum value” and “affordability” requirements are.
- Affordability. To be considered affordable, health insurance for employees should cost no more than 9.78% of the employee’s household income, using the lowest cost silver plan on the local exchange as a standard and incorporating the employer’s ICHRA contributions. This means that the lowest cost silver plan premium, minus the employer’s ICHRA monthly allowance, must be less than 9.78% of the employee’s household income for the month. If this requirement is met, the ICHRA is considered affordable and may satisfy the employer mandate.
- Minimum value. According to the ACA, a health plan meets the minimum value standard if it’s designed to pay at least 60% of the total cost of medical services for a standard population and its benefits include substantial coverage of physician and inpatient hospital services. In this case, any major medical coverage an employee purchases on the individual market should satisfy this requirement, and thus satisfy the employer mandate.
Meeting the requirements and calculating contributions with the ICHRA
In order to participate in the ICHRA, an employee must have a minimum essential coverage (MEC) policy. The MEC policies that qualify for the ICHRA will almost always meet the minimum value requirement - so, that’s one half of the mandate down.
Keep in mind that while having a qualified individual coverage plan is a requirement to participate, the employer is responsible for contributing enough to the HRA that the affordability requirement is satisfied. The employee will use those contributions to pay for their individual coverage.
So far, the notices relating to the ICHRA have not proposed a specific calculation to determine minimum HRA contributions. Those involved in the legislation of the plan recognize that determining affordability for individual employees can become a huge administrative hassle for the employer. Because of that, IRS Notice 2018-88 proposes three safe harbors employers could use to determine whether the ICHRA is affordable for the employee:
- Location. With this safe harbor, employers could use the employee’s primary site of employment as the standard for affordability calculations.
- Affordability. With this safe harbor, employers could estimate an employee’s income using measures like the employee’s W-2, or rate of pay.
- Calendar year. With this safe harbor, employers who institute an ICHRA for the following calendar year could use the existing year’s estimates as a baseline for affordability.
While some details are yet to be revealed, the ICHRA will allow business owners to satisfy the employer mandate. The last word regarding guidelines for the ICHRA and how those will affect the employer mandate is expected before 2020. We anticipate getting more clarification on how to calculate minimum contributions as well as learning more about participation requirements in the coming weeks.
We’ll continue to watch as things unfold and provide updates on this exciting new option as they become available. To learn more about your options now and for next year, please contact one of our skilled personalized benefits advisors.