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IRS Regulations Outline Affordability Safe Harbors For ICHRAs
The IRS recently issued final regulations, which, among other things, address Individual Coverage Health Reimbursement Arrangements (ICHRA). These arrangements became available at the beginning of 2020, and allow employers to provide defined non-taxed reimbursements to employees for qualified medical expenses incurred in securing individual health care coverage (including Medicare), including monthly premiums and out-of-pocket costs such as co-payments and deductibles. In summary, the final regulations provide several specific safe harbors for ICHRAs from the ACA penalties for applicable large employers (ALEs) for failing to provide “affordable coverage.”
For example, under the final regulations, an employer can determine whether an offer of an ICHRA to a full-time employee is “affordable” under the ACA by using the lowest-cost silver plan for self-only coverage offered through a Health Insurance Marketplace (or “exchange”) where the employee’s primary site of employment is located, rather than the employee’s residence. However, remote employees’ residences are considered their “primary site of employment” if they do not work on the ALE’s premises or have an assigned office space at a job site other than the employer’s premises to which they may reasonably be expected to report on a daily basis.
As self-insured medical plans, ICHRAs are subject to the Internal Revenue Code’s nondiscrimination rules, which prohibit discrimination in favor of highly compensated individuals when it comes to planning eligibility or benefits. Accordingly, employers generally may not vary ICHRA contribution amounts to participants. The final regulations, however, include nondiscrimination safe harbors. The maximum reimbursement the employer offers under an ICHRA can differ within a class of employees or between classes if the arrangement provides: 1) the same maximum dollar amount to all employees who are members of a particular class of employees; and/or 2) the maximum dollar amount made available to an employee for any plan year increases as the age of the employee increases. The final regulations do caution, however, that ICHRAs must also be non-discriminatory in their operation. They may fail to meet this requirement if, for example, a disproportionate number of highly compensated individuals qualify for and utilize the maximum ICHRA amount based on age.
The final regulations reference other safe harbors, including the generally applicable affordability safe harbors (W-2, rate of pay, and federal poverty line), which may be used instead of household income to determine an ICHRA’s affordability. Employers and plan administrators will want to carefully review the IRS’ final regulations, including any subsequently issued guidance and rules for ensuring compliance with the applicable safe harbors.