We’ve got great news here at PeopleKeep—last week brought a major win for small business health benefits.
After several months of work, the federal government finalized a rule that creates two new health reimbursement arrangements (HRAs) and increases HRA flexibility for all businesses.
The highly anticipated final rule, which was released Thursday, June 13, adds two new HRA options for the 2020 calendar year. Beginning January 1, 2020, businesses can offer an individual coverage HRA (ICHRA) and an excepted benefit HRA to their employees.
The new HRAs are available to businesses of all sizes, but we believe the ICHRA will especially benefit small businesses looking for new alternatives to group health insurance.
In this post, we’ll briefly go over the background on the new rule and what it does. Then, we’ll cover how the final rule differs from the proposed rule released last year, what the final rule means for small businesses, and how you can learn more about the ICHRA.
Let’s dive in.
Where did the new HRA rule come from?
For years, HRAs have been a popular way for businesses to reimburse employees’ medical expenses. After the passage of the Affordable Care Act (ACA), though, that changed.
In 2013, IRS Notice 2013-54 issued guidance on the ACA that significantly limited businesses’ ability to offer HRAs. The IRS said that while HRAs integrated with group health insurance satisfy key ACA provisions, HRAs integrated with individual health insurance do not.
Small businesses got some relief in December 2016 when Congress created the qualified small employer HRA (QSEHRA). With a QSEHRA, businesses with fewer than 50 employees can reimburse employees tax-free for medical expenses, including individual health insurance.
Seeking to expand HRAs even further, President Donald Trump issued an executive order in October 2017 directing the Departments of the Treasury, Labor, and Health and Human Services to reexamine IRS Notice 2013-54 and find a way for all businesses to integrate the HRA with individual coverage.
In October 2018, the Departments responded with a proposal that would essentially undo the IRS ruling and create two new HRAs. For the next 90 days, the public issued commentary and suggestions on the rule (you can see the comments PeopleKeep submitted here).
The Departments considered all the comments and incorporated some into their final rule, which was released last Thursday.
What does the rule do?
The rule revises IRS Notice 2013-54 to allow HRAs to integrate with individual health insurance.
The newly permitted HRA, called the individual coverage HRA (ICHRA), is available to businesses of all sizes beginning January 1, 2020. With the ICHRA, businesses offer employees a monthly allowance of tax-free money. Employees then buy the health care services they want, including individual health insurance, and the business reimburses them up to their allowance amount.
The ICHRA is similar in many ways to the QSEHRA, but comes with looser guidelines on benefit structure and tighter guidelines on employee eligibility (see “Individual coverage HRA (ICHRA) vs. qualified small employer HRA (QSEHRA): How do they compare?”).
The rule also creates the new excepted benefit HRA, which allows businesses with group health insurance to offer an HRA that reimburses employees for items like dental and vision insurance and short-term health insurance premiums.
Finally, the rule grants a special enrollment period (SEP) to employees who become newly eligible for either the ICHRA or the QSEHRA. Employees can use the SEP to enroll in individual health insurance outside of the open enrollment period.
What’s new in the final rule?
The final rule is a revision of the proposed rule the Departments released in October 2018. Although the final rule is very similar to the proposed rule, there are some differences.
The most important differences include:
- Three new employee classes for the ICHRA (and one class removed)
- New guidelines on varying HRA contributions by age
- New minimum size guidelines for ICHRA employee classes
- A new rule regarding new hires
- Additional guidelines for verifying that employees have individual coverage
- Clarification on Medicare as qualifying coverage for the ICHRA
Let’s explore these changes one at a time.
Revised ICHRA employee classes
When the ICHRA was first proposed, the Departments suggested allowing employers to determine eligibility and monthly allowance amounts by nine employee classes:
- Full-time employees
- Part-time employees
- Seasonal employees
- Employees covered under a collective bargaining agreement
- Employees in a waiting period
- Employees under age 25
- Foreign employees who work abroad
- Employees in different locations, based on rating areas
- A combination of two or more of the above
This would mean employers could choose to offer the ICHRA only to certain classes, as well as to offer different monthly allowance amounts to different classes.
While the final rule retains the employee classes feature, it makes some changes.
First, it eliminates the under age 25 class. The Departments felt this class would create the potential for adverse selection and, as it isn’t usually included in the way benefits are structured, decided to remove it from the final rule.
Second, the Departments added three new classes:
- Salaried employees
- Hourly employees
- Temporary employees of staffing firms
These classes were frequently requested during the comment period (including by PeopleKeep) and will allow employers to make more distinctions among employees when determining eligibility and allowance amount.
New ICHRA contribution guidelines based on age
In the proposed HRA rule, the Departments allowed businesses to give employees within an employee class different allowance amounts based on the employee’s age and family size.
The Departments retained this feature in the final rule, but added some guidelines. Specifically, employers can only make distinctions based on age if they offer older employees a larger allowance amount. The allowance amount for the oldest employees within a class cannot be more than three times the allowance amount for the youngest employees in that class. For example, if a business chose to create a class of full-time, salaried employees and offer the youngest employees in that class $200 a month, it could offer the oldest employees in the class up to $600. Any larger allowance amounts would be prohibited.
There are no similar guidelines for allowance amount based on family size.
New minimum size guidelines for ICHRA employee classes
Both the proposed rule and the final rule allow the ICHRA to be offered alongside group health insurance, as long as no employee class has a choice between group health insurance and the ICHRA.
Some commenters were concerned that employers could manipulate the ICHRA’s employee class feature, however, by making very small employee classes that force sicker employees off the company’s group policy.
To prevent this, the final rule introduces new guidelines for creating employee classes. If employers are offering both an ICHRA and group health insurance and want to base eligibility on full-time or part-time status, salaried or hourly pay structure, or geographic location, those classes must meet a certain minimum size standard.
These minimum sizes vary by employer size. They are:
- 10 employees for employers with fewer than 100 employees
- 10 percent of the total number of employees for employers with between 100 and 200 employees
- 20 employees for employers with more than 200 employees
If employee classes don’t reach this size, the employer can’t use them to determine ICHRA eligibility.
Minimum employee class sizes don’t apply for eligibility based on temporary employment status, collective bargaining agreements, seasonal employee status, or whether an employee is a foreign national or in a waiting period.
Minimum employee class sizes also don't apply if your business is offering only an ICHRA.
A new rule regarding new hires
The Departments provided guidelines for offering the ICHRA to new employees while maintaining group coverage for existing employees.
Through the final rule, employers can offer new hires an ICHRA while grandfathering current employees (who are in the same employee class) on a group health insurance plan.
For example, if employers currently offer group health insurance to part-time employees but want to offer the ICHRA to new part-time employees, it can do so.
Employers still can’t offer any employee a choice between the ICHRA and group health insurance, though.
New guidelines on verifying employees’ insurance status
To participate in the ICHRA, employees and their dependents must be covered by individual health insurance. While the proposed rule said employers needed to verify employees’ health insurance status, it didn’t offer firm guidelines on how this should happen.
The final rule gives more information. Before employees can participate in the ICHRA, employers must verify that the employees have individual coverage. This needs to happen at least once annually.
Additionally, employers must verify employees’ insurance status before they reimburse each of the employee’s submitted expenses.
This verification can occur in a number of ways, including self-attestation by the employee.
Clarification on Medicare and the ICHRA
The final rule clarifies that Medicare Parts A and B and Medicare Part C all qualify as individual health insurance coverage, and employees enrolled in this coverage can participate in the ICHRA.
Employees enrolled in other health care programs, including health care sharing ministries like Medi-Share, are not eligible to participate in the ICHRA.
What the final rule means for small businesses
The final rule is a big advancement for small businesses.
With the ICHRA and excepted benefit HRA, small businesses have two new options to consider for 2020. The ICHRA is especially valuable, since businesses can:
- offer as much or as little as they like in monthly allowances,
- structure eligibility and allowance amounts by employee class, and
- permit employees to waive the HRA in favor of premium tax credits (providing the HRA is considered “unaffordable” to qualifying employees).
To offer the ICHRA in 2020, businesses should make a decision before November 1. This will give employees time to learn about their new benefit and enroll in an individual health insurance policy during open enrollment.
For small businesses that offer group health insurance but want to provide an additional benefit, the excepted benefit HRA is a great option. In 2020, businesses can reimburse employees up to $1,800 for dental, vision, and short-term health insurance premiums, among other things.
Where can I learn more about the ICHRA?
If you’re interested in learning more about the ICHRA, PeopleKeep has plenty of great resources.
For a complete overview of the ICHRA and how it works, check out “What is the individual coverage HRA (ICHRA)?”
Additional articles include:
- The individual coverage HRA (ICHRA)’s employee classes: how do they work?
- The individual coverage HRA (ICHRA): pros and cons
- Individual coverage HRA (ICHRA) vs. qualified small employer HRA (QSEHRA): how do they compare?
- ICHRA eligible expenses: what are they?
- Individual coverage HRA (ICHRA) plan documents: what are the requirements?
- How to set up an individual coverage HRA (ICHRA)
- Does the ICHRA satisfy the employer mandate?
- What to expect from the individual coverage HRA (ICHRA) in 2020
The final HRA rule is a big win for small businesses, and PeopleKeep is excited about its potential. The ICHRA is an especially robust new offering that should help thousands of small businesses offer health benefits for the first time.
Alongside the QSEHRA, the two new HRAs form a great lineup of health benefits options. And with the new special enrollment periods for both the ICHRA and the QSEHRA, employers have the security of knowing their employees can get the most out of their health benefit straight away.
For more information and a chance to get your questions answered, be sure to sign up for PeopleKeep’s webinar on Thursday, June 20.
You can also leave your questions in the form of a comment below!