Healthcare coverage became an employer-offered benefit during World War II as the result of the federal government’s wage and price controls. Since that time, Medicare has become an important part of how healthcare is provided to individuals who reached the age of 65, who became disabled, or who were diagnosed with end stage renal disease. When Medicare entered the mix, a number of additional rules to protect those eligible for Medicare were also added to protect the Medicare system. Now, an employer seeking to contain health benefit costs must consider not only tax considerations, but Medicare and ERISA and other requirements. Thus, when the federal government agencies started designing a new way to facilitate the purchase of individual health insurance, they had to design around decades of rules, regulations, and policy considerations in the move back to a pre-World War II individual obligation to purchase health insurance to avoid violating the interim changes in legal requirements.
New Tool Basic Concept
Employers seeking to contain healthcare costs may want to consider implementing an individual coverage health reimbursement arrangement (an ICHRA) under the final regulation published on June 20, 2019. The ICHRA does not move the responsibility back fully to the employee alone, but instead provides an employer established account which the employee may access for medical expenses, including health insurance premiums, provided the individual provides proof they have purchased health insurance. If considered just as an account without consideration of all of the governing laws, it sounds like a way to place a dollar limit on healthcare costs for each employee; however, the legal world is never that simple, and the preamble to the final regulations demonstrate the complex rules required to be navigated bring this new tool out and the guidance still needed.
The final regulations governing some of the rules applicable to this potential new tool will be effective as of January 1, 2020. However, before employers begin to use this tool they will want to first review the guidance that is still to come on the interaction of this new tool with the Medicare Secondary Payer rules and the Employer Shared Responsibility Assessable Tax under Code section 4980H (ESRAT) (the tax assessed against certain employers who fail to offer coverage to 95% of full-time employees, or against such employers whose full-time employees seek coverage on the Affordable Care Act marketplaces and receive a healthcare tax credit if the employer’s coverage is not affordable and does not provide minimum value). Employers will want to carefully review the impact of the additional guidance still to be issued, along with other laws that may impact the arrangement such as the calculation of the “regular rate of pay” under the proposed regulations under the Fair Labor Standards Act, 84 Fed. Reg. 1188 (March 29, 2019), and existing decisions on such determinations, particularly as related to opt-out payments.
Since the Patient Protection and Affordable Care Act (the ACA) was enacted, group health plans have had to provide certain benefits and meet certain standards which meant stand-alone plans that provided account-defined health benefits as the only group health plan violated the ACA, if such arrangement was the only group health plan offered. So any movement to a defined contribution method of providing health benefits (other than in a retiree-only plan exempt from the ACA) meant the employer faced multiple violations of the ACA. The ICHRA provides a new way an employer may offer a defined contribution group health benefit in a somewhat limited amount determined by the employer. It does that primarily by permitting the employer to count the individual health insurance policy selected by the employee to fulfill the ACA benefit mandates. The ability to mitigate the impact of healthcare inflation or overutilization over time will depend upon such things as whether the employer is subject to the ESRAT, how the minimum contribution required to be made to the employee’s ICHRA account is calculated, and how the individual health insurance premiums alter and set the standard for the minimum ICHRA contribution.
ICHRA—Not a Health Savings Account
An ICHRA is an employer funded health reimbursement account that is funded by and held by the employer. When an employee leaves employment or ceases to be eligible for the ICHRA, the bookkeeping account for the ICHRA is forfeited by the employee and the employer does not lose the funds. The employer sponsoring the ICHRA is responsible for administering the ICHRA so that only qualified medical expenses are reimbursed and only if the individual has proof of purchasing an individual health insurance policy. The ICHRA on its own is a group health plan and must comply with the applicable laws as a group health plan.
On the other hand a Health Savings Account is a separate account owned by the individual employee and when the employee leaves employment the Health Savings Account goes with the employee because the employee owns it. The employee is responsible for how the funds are used and reporting any use for non-medical expenses on the employee’s personal income tax return.
Since the ICHRA is a group health plan and the Health Savings Account is an individual account, the employer sponsoring the ICHRA has more administrative responsibilities with respect to the ICHRA to maintain the tax compliance requirements. This section only highlights of few of the differences and is not intended to be a complete comparison.
A High Level Look at the Requirements
The final regulations follow many of the original proposed regulations, but expand the usefulness of the ICHRA tool.
- Employers may offer only the ICHRA to a group of employees if it is the only health benefit offered to the class of employees. The classes allowed as permitted ways to segregate employees to offer different benefits are the following:
- Full-time employees
- Part-time employees
- Seasonal employees
- Employees included in a collective bargaining unit covered by a CBA
- Employees who are not covered by a collective bargaining agreement
- Employees who have not completed the waiting period for coverage
- Non-resident aliens with no U.S. source income
- Employees paid on a salaried basis
- Employees who are not paid on a salaried basis
- Employees whose primary site of employment is in the same geographic rating area
- Employees who under the facts and circumstances are employees of an entity that hired the individuals for temporary placement at an entity that is not the common law employer of the individual
- New hires after a prospective date
- A group of participants that is a combination of two or more of the above classifications
Some of the classifications above have specified definitions at other places in the Internal Revenue Code listed in the final regulation. An employer can use different new hire dates prospectively for separate classes of employees to implement the ICHRA design at different times for different groups. Some of the classifications above and combinations of classes can only be used if the classification also passes the minimum class size requirement.
- An ICHRA must condition an enrolled employee’s eligibility for ICHRA reimbursements upon the employee providing proof that the individual (and any dependents) are covered by in an individual health insurance policy that meets the ACA requirements.
- No traditional group health plan can be offered to the classification of employees offered the ICHRA.
- The ICHRA must be offered on the same terms and conditions to all persons within the classification that is offered the ICHRA. If more than one class of employees is offered the ICHRA, the ICHRA can differ among the classes as long as the terms and conditions are the same within each separate classification. (The final regulations permit some specified variations within a class due to number of dependents, age, and carryover amounts from prior years.)
- A notice with specified content must be provided annually to the employees offered the ICHRA reminding the employees that the individual health insurance coverage is not part of an ERISA plan and does not include the protections of ERISA and other requirements. This notice must be provided at least 90 days and no less than 30 days before the ICHRA coverage would take effect. This notice would also explain the potential impact of an individual’s enrollment in an ICHRA on the individual’s eligibility for the premium tax credit. This is separate and apart from other required ERISA notices which have their own timing requirements.
- An individual offered an ICHRA must annually be given the opportunity to opt-out of the ICHRA coverage and waive future reimbursements under the ICHRA in the event there are amounts rolling over from prior plan years. Employers considering offering an ICHRA should do so considering the implications of how their opt-out is designed under the Fair Labor Standards Act and the 9th Circuit’s decision in Flores v. City of San Gabriel. (The final regulation did not address if an opt-out payment made in connection with the annual opt-out election opportunity would violate the prohibition on providing incentives for a Medicare eligible individual to not enroll in group health plan coverage under the ICHRA.)
- There are record-keeping requirements that will require the employer to track and obtain attestations from the employee regarding individual health insurance coverage purchased before reimbursing medical expenses.
The employer can define what other medical expenses it may reimburse under the ICHRA in addition to individual health insurance premiums.
Changes to group health plans, which are subject to ERISA, require employers to communicate such changes or reductions in benefits to employees and such changes can often raise employee relations issues. Implementing the ICHRA to a group of employees who previously were eligible to elect coverage under one or more traditional defined benefit health plan will likely trigger a summary of material reduction in benefits describing the change which needs to be drafted considering the disclosure requirement and the potential employee relations consequences. Employers may want to use one of the new provisions in the final regulations to implement changes gradually by using, for instance, the new hire rule, provided the new hires are not members of a collective bargaining unit with whom the employer has a collective bargaining agreement in place.
New Tool Permits Gradual Transition to Account Based Health Plan
One of the expansions permits an employer to offer the ICHRA only to newly hired employees. If an employer offers such coverage just for all new employees, it must be available to all employees within a subclass on the same terms and conditions. If the ICHRA is offered to all newly hired employees who are hired after a prospective date, then the minimum class size rule will not apply to that group. If the ICHRA is offered to new hires only within one specific class who are hired after a specific prospective date, then such group would be required to satisfy the minimum class size rule as well. The final regulation did not address if a person who is rehired can be classified using the new hire rule using the most recent hire date or if there is a minimum absence period which transforms a former employee into a new hire when such individual is rehired.
Classification Minimum Size Requirement
If an employer changes its coverage to base it on employee classifications, the employer also must be certain some classifications comply with minimum size requirements. This test applies to certain classifications and to the combination of a new hire classification with another classification such as new hires who are hired as non-salaried employees on or after January 1, 2020. The number of class members in a classification, for a classification subject to the minimum size requirement, to be valid is defined to be at least 10 people if the employer has fewer than 100 employees, whereas if the employer has between 100 and 200 employees the minimum class size is 10% rounded to the next full number, and if the employer has more than 200 employees, the minimum number of members is 20 employees. The employer size is determined not based on historical records, but by the number of employees that the employer reasonably expects to employ on the first day of the plan year.
The ICHRA permits the employer to fund a certain dollar level of benefits for healthcare coverage which the participant uses to purchase individual health coverage that fits individual’s needs on the market. The individual then submits to the employer an attestation proving that individual health insurance coverage was purchased for reimbursement under the ICHRA. The insurance may be purchased on the insurance market or exchange created under the ACA or the federal marketplace or state marketplace. Model forms for attestation and for the notice were issued with the guidance.
Cost Containment Limited by ESRAT Compliance Requirements
The employer’s cost and risk is limited in the initial year to the dollar amount offered per employee under the ICHRA for the group to whom only the ICHRA is offered. However, for an employer subject to the ESRAT and who wants to avoid assessment of the ESRAT, the financial obligation in subsequent years will likely need to consider cost and utilization increases in premiums in the individual market, which may likely translate into increased ICHRA account contributions necessary to maintain coverage that is affordable and provides minimum value to avoid assessment of the ESRAT on the employer.
While some private exchanges were developed after the ACA was enacted, the final regulations may facilitate such exchanges, provided that the employer is mindful of the changes needed to maintain the ICHRA as an employer-sponsored plan and to avoid inclusion of the individual health insurance coverage as part of the employer-sponsored plan under ERISA. The requirements limit the employer’s activities with respect to selecting or endorsing any health insurance policy and with respect to receiving any direct or indirect compensation related to the sale of such individual health insurance policies. Some private exchanges for retirees have provided the exchange administration to employers for “free” as long as the retirees were limited to using the private exchange for purchase of their coverage. So employers will need to use caution if private exchanges are considered to either avoid having the policies become part of the employer’s ERISA group health plan, or to consider whether the employer might be able to comply with the individual policies included on the private exchange, if such policies include the additional rights a participant would have under a group health plan, such as COBRA continuation coverage, the Mental Health Parity and Addiction Equity Act, among others.
While this tool lets an employer enforce a dollar limit it will contribute toward each employee’s health insurance coverage each year and in that way contain costs and shift the risk of high costs or adverse experience to the individual and his or her selected insurer, the longer term implications also need to be considered. Employers who had 50 or more full-time employee equivalents in the prior calendar year and are subject to the ESRAT must consider whether the offering of coverage under the ICHRA provides minimum value and meets the affordability standard in order to avoid being assessed tax under the ESRAT. As long as the ESRAT remains in effect under the ACA, an employer’s use of the ICHRA will likely require an employer contribution at a sufficient level to satisfy the “affordability” requirements under the ESRAT. Affordability was based on the cost of a certain level of coverage available on the market. If the cost of coverage on the market increases, it is likely that the cost of use of the ICHRA will also need to increase so that the employer’s funding of the ICHRA results in affordable coverage and provide minimum value. The employer’s obligation to fund the ICHRA is likely to increase if the cost of individual premiums increase as such premiums are a factor in measuring affordability for the employer to plan its ICHRA contributions to avoid the assessment of the ESRAT. At this time, regulations on how the ESRAT will determine if the ICHRA provides coverage that is affordable and provides minimum value have not yet been proposed. Further guidance to define the amount by which an ICHRA must be funded so that it counts as an offer of affordable coverage by the employer which will preclude the assessment of the ESRAT.
Cafeteria Plan Interaction and Potential Amendment Required
The final regulations permit a new tool. Previously employers had not been able to allow salary reductions to find the purchase of individual health policies that were purchased on the ACA marketplace. In order to supplement the payments under the ICHRA with pretax deductions from participant salaries, the individual must purchase coverage outside of the ACA exchanges and marketplaces, then the premiums for such policies can be reimbursed on a pre-tax basis. Employers will need to consider which plan documents must be modified when adding an ICHRA. Employers may want to not only modify the health plan document, but also amend its cafeteria plan. Employers must consider establishing new administrative procedures to deal with notices and attestations required for ICHRA.
The regulation is effective as of January 1, 2020, but additional guidance is still needed on some key legal issues to avoid violating other laws or risking the assessment of the ESRAT an those risks combined with the normal timeline for health benefit planning for the new calendar year, may mean this is more likely a strategy for plans subject to the ESRAT or with Medicare eligible participants or beneficiaries for 2021. Employers should carefully consider all changes required to implement the administrative steps added by an ICHRA as well as what individual coverage is available to purchase I the geographic areas in which the employer’s business operates. Given the breadth of the changes involved in switching from one or more defined benefit traditional health plans to an ICHRA, careful advance planning and employee communications will be a key factors for a successful implementation.
The final regulations also established that excepted benefit health reimbursement arrangements can be offered. These are accounts for reimbursing health expenses for dental or vision benefits or as post deductible expenses to coordinate with high deductible health plans.
Additional Guidance to Come
The Internal Revenue Service indicated that a proposed regulation on the interaction of the ESRAT with an ICHRA will be forthcoming so that employers subject to the ESRAT will be able to ascertain what level of contribution might be necessary to avoid imposition of the ESRAT. The U.S. Department of Health and Human Services also indicated that it will issue guidance about how Medicare Secondary Payer provisions will be enforced against the ICHRA and how the HIPAA Privacy and Security rules might apply or might qualify for an exemption. The U.S. Department of Labor’s proposed regulations on the determination of the regular rate of pay for purposes of calculating overtime comment period closed on May 28, 2019, before the ICHRA regulations were issued. We will need to wait and see if, when issued in final form, they consider the ICHRA or any opt-out payment available as the result of the annually mandated opt-out election.
This is a high-level summary of the new ICHRA final rules. No one should rely on the above as legal guidance about the new rules for offering the ICHRA. Each employer needs to assess its situation, its employees, the availability of individual health insurance policies in the geographic areas in which it operates, and its other recruitment and employee retention tools when deciding whether to move forward with adding an ICHRA. This does not address all aspects of the final regulation on the ICHRA, and no action should be taken in reliance solely upon these comments.
 Milton Friedman, “The Folly of Buying Healthcare at the Company Store” (February 3 ,1993), reprinted in The Wall Street Journal, “WSJ 130 A History of the World, as Seen Through the Eyes of the Wall Street Journal Since its Debut in 1889” (July 8, 2019).
 Flores v. City of San Gabriel, 824 F.3d 890 (9th Cir. 2016), cert. den’d.137 S.Ct. 2117 (2017).
 It is not clear if the salaried v. non-salaried basis of distinguishing will build off of the exempt from overtime and non-exempt concepts under the Fair Labor Standards Act which are currently in the process of being reconsidered in proposed regulations issued at 84 Fed. Reg. 10900 (March 22, 2019). It would make sense for an employer to only need to program their systems once for this sort of distinction, and it would simplify administration.
 824 F.3d 890 (9th Cir. 2016), cert. den’d.137 S.Ct. 2117 (2017).
 ERISA §104(b).
Churches Should Watch for IRS Letters Seeking to Assess the Employer Shared Responsibility Tax
The Internal Revenue Service recently announced that the next round of 226J Letters will be issued to churches about the ESRAT. The representative who announced this indicated that the letters would be sent between late June and August. Churches should watch for these 226J letters to ensure they are responded to within the 30-day deadline.
U.S. Department of Health and Human Services Clarifies Permitted Health Plan Disclosures
Health plans can disclose protected health information to another covered entity for its own healthcare operations purposes or for the healthcare operations of the entity receiving the information, provided the information disclosed is the minimum necessary. This is permitted when each entity has a relationship to the individual whose PHI is being disclosed, the disclosure is for healthcare operations (e.g., care coordination or continuity of care) or healthcare fraud and abuse detection or compliance. For group healthcare plans using carve out providers for certain services (e.g., specialty networks for transplants or surgeries or certain types of care) the new Q&A clarifies that the communications between those separate providers are permitted. Similarly, where an employee is enrolled in a network medical plan and also in a dental plan, this permits the two plans to communicate regarding which services each may be covering for an individual without asking the individual to authorize the communication/disclosure.
The questions and answers also addressed another type of disclosure and the limits on such disclosure under the rules for disclosures for the purpose of marketing.
Another Disability Claim Consideration Omission Proves Problematic
The U.S. Seventh Circuit Court of Appeals in Lacko v. United of Omaha Life Ins. Co., __ F.3d ___, (7th Cir. June 12, 2019) found that any independent reviewer’s review of a long and short term disability plan claim failed to consider all of the diagnoses the individual suffered from and the impact of the medications for such conditions on her ability to function. The selective characterization of the records and failure to consider portions that supported a disability finding showed the court that the administrator operated under a conflict of interest. The case was remanded for reconsideration consistent with the opinion to consider all of her impairments medically from the medications treating her ailments. The worsening of an earlier condition must be considered a deterioration constituting a change in condition. Plan administrators reviewing claims based on a disabled status need to carefully consider all information submitted about conditions, treatments, the side effects of treatments, and worsening conditions and should document that all such items were considered in making a decision. It is important to remember that claims for a benefit based on a disabled status can occur in many different types of plans, e.g., life insurance, medical, retirement plan, deferred compensation, and short and long term disability plans.