Recently, the IRS released proposed regulations that provide how employers can offer Individual Coverage Health Reimbursement Accounts (ICHRAs) that are considered “affordable” under the Affordable Care Act (ACA). Employers now have the option to contribute funds toward full-time employees’ Individual Coverage Health Reimbursement Accounts (ICHRAs), rather than offer them coverage through an employer-sponsored plan, to meet their obligations under the Affordable Care Act’s (ACA) Employer Mandate. The IRS released regulations which outline how employers can determine the amount they must contribute to ICHRAs so they are considered “affordable” under the ACA.
- IRS proposed regulations outline how ALEs can determine the amount to contribute to ICHRAs to meet their obligations under the Employer Mandate;
- ALEs must contribute enough to an employee’s ICHRA so the cost of self-only coverage under the “lowest cost silver plan on the Exchange” is less than a percentage of their household income (which can be determine using one of the three affordability safe harbors); and
- ALEs can use new proposed safe harbors to determine the applicable “lowest cost silver plan on the Exchange.”
Under the ACA “Employer Mandate,” Applicable Large Employers (ALEs), those with 50+ full time and full-time equivalent employees in the prior year, must offer full-time employees and their dependents affordable, minimum value coverage, or potentially face a penalty.
In June 2019, a final rule was released that created ICHRAs, which allowed ALEs to fulfill their obligation to offer “minimum value affordable coverage” by providing their full-time employees with “affordable” ICHRAs. An ICHRA is considered “affordable” if the cost of purchasing self-only coverage on the lowest cost Marketplace Exchange silver plan (LCSP) minus any employer contribution to the ICHRA was less than a certain percentage of an employee’s household income. For more on ICHRAs (such as notice and COBRA requirements), see our blog.
The final rule was unclear “how exactly” employers could determine the applicable LCSP and employees’ household income. The newly released IRS regulations provide guidance on how to determine these amounts and meet the affordability standard, as discussed below.
If an ALE decides to offer an ICHRA to satisfy their obligations under the Employer Mandate, they must determine the amount to contribute to the ICHRA so the plan is considered “affordable” for full-time employees.
In 2020, an ICHRA would be “affordable” if:
(Lowest cost Marketplace silver plan self-only coverage) – (Employer ICHRA contributions) < 9.78% x (Employee’s Household Income)
Therefore, in order for employers to determine required contributions, they must first determine the applicable LCSP and employees’ household income. We break down the steps for determining these amounts below.
Percentage of Employee’s Household Income
Under the ACA, coverage is considered affordable to an employee if the cost of employee-only coverage is less than a certain percentage of their household income. This percentage changes annually and for 2020, the cost to employees must be less than 9.78% of their household income.
Since employers may not know employees’ household income, an employer may substitute employees’ household income with a “safe harbor” option, which can include the federal poverty level (FPL), the employee’s rate of pay, or their W-2 (collectively referred to as the general affordability safe harbors).
Employers can use any one of the three safe harbors to determine the maximum cost to employees that would make coverage “affordable” to them.
Federal Poverty Level: If the employer uses the FPL safe harbor to determine employees’ household income, the cost to employees for self-only coverage under the LCSP on the Exchange must be less than $101.79 per month in 2020, which is 9.78% of the federal poverty level ($12,490) divided over 12 months.
Rate of Pay: Employers can use an employee’s hourly or monthly rate of pay to determine their household income. For example, if a salaried employee makes $5,000 per month, the cost to that employee for self-only coverage under the LCSP on the Exchange must be less than $489 per month, which is 9.78% of employee’s $5,000 monthly salary.
W-2: Employers can use the wages listed on an employee’s W-2 to determine employee’s household income. For example, if an employee’s W-2 states that they earned $50,000 that year, the cost to that employee for self-only coverage under the LCSP on the Exchange must be less than $407.50 per month, which is 9.78% of $50,000 divided over 12 months.
Employers can use any one of the three safe harbors when calculating affordability for ICHRAs. In other words, the employer must contribute a certain amount to ICHRAs so the cost to employees fall below 9.78% of their household income, as determined by one of the three safe harbors.
Cost of Self-Only Coverage for the Lowest Cost Silver Plan (LCSP)
The IRS regulations expand on which LCSP employers should use when performing their calculations. Since the cost of coverage purchased through the Exchange varies by geographic location (even within states), time period, age, and other factors, the IRS regulations provide guidance and safe harbors for employers to determine the applicable LCSP.
To determine the applicable cost of self-only coverage for the LCSP, employers will have to determine the following for each employee:
- the applicable location (employee’s primary site of employment or residence);
- their applicable age; and
- the applicable time period (the prior year’s January rates for calendar year plans or that year’s January rates for non-calendar year plans).
The steps for determining the above factors are discussed below.
The cost of purchasing healthcare through the Exchange varies by geographic location. Therefore, an employer must determine which location applies to employees in order to ascertain the LCSP. The IRS regulations allow employers to utilize either an employee’s primary site of employment (using a “location safe harbor”) or the employee’s residence for the calendar month for the applicable location.
Identifying the primary site of employment: An employee’s primary site of employment is the location at which the employer reasonably expects to the employee to perform services on the first day of the plan year (or the first day the ICHRA may take effect for employees who are not eligible for the ICHRA on the first day of the plan year).
Changes in the primary site of employment: If the employee’s primary site of employment changes and that change is expected to be permanent or indefinite, the employer must change the employee’s primary site of employment to the new location no later than the first day of the second calendar month the employee starts working there.
Offsite employees: The primary site of employment for employees who regularly work from home or other worksites not associated with the employer is the employer’s location that they are expected to work at or report to (such as a teleworker’s “home office”). If the employee is not assigned to one of the employer’s locations, the employee’s residence is considered their primary site of employment.
Identifying the employee’s residence: Employers who decide not to use the location safe harbor (primary site of employment) to determine the applicable location can use LCSP based on the employee’s residence.
The premium for an employee may be based on their age. Therefore, employers must determine the applicable age for their employees when determining the LCSP.
For an employee who is eligible for an ICHRA on the first day of the plan year, employers should use their age on the first day of the plan year.
For an employee who becomes eligible for an ICHRA during the plan year, employers should use that employee’s age on the date they become eligible.
Premiums on the LCSP may vary for employees who reside or work in the same location because of differences in their age. The IRS regulations declined to implement an “age-based safe harbor” that would allow employees to use a universal age to determine the premiums applicable to all employees.
The IRS suggests that the employer can use the age of its oldest employee if the employer wants to determine a uniform amount to contribute to all employees’ ICHRA to ensure they are affordable for all employees.
Note on Employer Contributions and the Age Discrimination in Employment Act (ADEA): On January 7, 2021, the Equal Employment Opportunity Commission (EEOC) released an opinion letter that addresses employer contributions to ICHRAs and compliance with the ADEA. The letter states that employers can offer ICHRAs in compliance with the ADEA by either (1) contributing the same amount to all employees or (2) contributing the same percentage of premium costs to all employees. Further, the EEOC states that employers can provide a higher contribution to older employees.
Applicable time period
Since employers must determine their contributions to ICHRAs prior to the beginning of the plan year, employers must know how much to contribute to meet “affordability” before they know the LCSP for that year. To solve for this issue, the IRS regulations provide for a “look back safe harbor” whereby employers can look back to the cost of purchasing healthcare at a certain date in time.
For calendar year plans: An employer may use the monthly premium for the applicable plan from January of the prior calendar year.
For non-calendar year plans: An employer may use the monthly premium for the applicable plan from January of the current calendar year.
Applicable Lowest Cost Silver Plan (LCSP)
Once an employer determines the applicable location, age, and time period for an employee, as discussed above, the employer can determine the premiums for self-only coverage of the applicable LCSP.
The Centers for Medicare and Medicaid (CMS) plans to publish an annual lowest cost silver plan (LCSP) premium look up table, which allows employers to access the LSCP data by geographic location.
Employer A is an ALE and wants to offer an ICHRA to their full-time employees starting January 1, 2020. Employer A has one office in City B, where all of their employees work. Employer A should look at the LCSP offered in City B in January 1, 2019 to determine how much to contribute to ICHRAs for all employees since:
- the primary site of employment for all employees is City B (using the location safe harbor); and
- the ICHRA is a calendar year plan (using the look back safe harbor).
Employee E will be 50 years old as of January 1, 2020. The cost of self-only coverage for the LCSP in City B in January 1, 2019 for a 50-year-old was $500 per month, or $6,000 per year.
Therefore, Employer A must contribute an amount to Employee E’s ICHRA so that the cost to Employee E for self-only coverage ($6,000 minus Employer A’s contribution) is less than 9.78% of their household income.
Employer A uses the FPL safe harbor to determine their full-time employees’ household income and, thus, the cost to Employee E must be less than $1,221.48 per year or $101.79 per month (9.78% of the federal poverty level).
This means that Employer A must contribute at least $398.21 per month or $4,778.52 per year to Employee E’s ICHRA to deem it “affordable” for Employee E and avoid any potential penalties. The calculations are outlined below:
(Lowest cost Marketplace silver plan self-only coverage) – (Employer ICHRA contributions) < 9.78% x (Employee’s Household Income)
($6000/year) – (Employer ICHRA Contribution) < $1,221.48/year
Employer’s Contribution at least $4,778.52/year or $398.21/month
Assuming Employee E is the oldest employee, Employer A could theoretically contribute at least $4,778.52 per year to all of their employees’ ICHRAs to make them affordable for all employees (because the cost of coverage for younger employees will be cheaper than the cost of coverage for Employee E).
Employers may limit the offer of ICHRAs to certain classes of employees and may vary the eligibility and benefits between different classes of employees. However, the employer must offer the same terms and conditions within a class of employees, subject to certain exceptions. One exception is the age variation rule, which provides that an employer may vary contributions by age if they are offered under the “same terms” to employees of the same age and the contributions made to the oldest employee is not more than three times the contribution of the youngest employee.
Non-discrimination Testing: ICHRAs are self-insured plans that are subject to Section 105(h) non-discrimination testing (NDT) and generally cannot discriminate in favor of highly compensated employees. However, under the proposed regulations an ICHRA will not fail NDT just because employees receive different contributions based on their age under the age-variation rule, as outlined above. Please check with your NDT vendor before setting up different contribution strategies for different classes of employees.
Practical Considerations for ICHRAs
Practically, it will be difficult for ALEs to utilize ICHRAs to satisfy their obligations under the Employer Mandate since the cost of the applicable LCSP will vary by location and age. Thus, it will be difficult for employers to determine a “uniform” amount to contribute to ICHRAs that would make it “affordable” for all employees.
It is more feasible for employers to offer ICHRAs to employees (such as part-timers) who they are not required to offer coverage to under the ACA (meaning the employer would not have to ensure affordability).
It is important to remember that these are proposed regulations that have yet to be finalized. Individuals have until the end of this year to submit comments on the proposed regulations.
The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog.