IRS Proposed Regulations to Provide Additional HRA Guidance

Recently published in the Federal Register are IRS proposed regulations to help clarify the application of the employer-shared responsibility provisions and certain nondiscrimination rules pertaining to health reimbursement arrangements (HRAs) and other account-based group health plans that are integrated with individual health coverage or Medicare. The proposed regulations provide certain safe harbors with respect to the individual coverage HRA provisions. The IRS hopes these proposed regulations will spur adoption of individual coverage HRAs by employers.

The IRS proposes adding a location-based safe harbor to Internal Revenue Code Section (IRC Sec.) 4980H, Employer Shared Responsibility Provisions, which can be relied upon when determining affordability to its full-time employees (and their dependents) by an applicable large employer (ALE), who is defined as having an average of 50 or more full-time employees during the preceding calendar year. Under this safe harbor, an ALE would be allowed to use the lowest cost silver plan for self-only coverage offered through the Exchange in the rating area in which the employee’s primary site of employment is located, instead of the lowest cost silver plan in the rating area in which the employee resides. This safe harbor will help alleviate employer burden that could result from requiring that affordability be based on each employee’s place of residence, as employees may change residence locations from time to time, and maintaining up-to-date records may be difficult.

For purposes of this location safe harbor, the proposed regulations provide that an employee’s primary site of employment generally is the location at which the employer reasonably expects the employee to perform services on the first day of the plan year (or on the first day the individual coverage HRA may take effect, for an employee who is not eligible for the individual coverage HRA on the first day of the plan year). The employee’s primary site of employment is treated as changing if the location at which the employee performs services changes and the employer expects the change to be permanent.

The proposed regulations do not provide an age-based safe harbor under IRC Sec. 4980H for the age used to determine the premium of an employee’s affordability plan. Rather, the affordability needs to be based on each employee’s age. The IRS acknowledges that this can be burdensome to employers and is seeking comments on the administrative issues this may raise, as well as on safe harbors that would ease these burdens.

The proposed regulations also provide a safe harbor for the requirement to provide nondiscriminatory benefits under Treasury Regulation 1.105-11(c)(3)(i). This safe harbor states that an individual coverage HRA will not be treated as failing the aforementioned nondiscrimination requirements solely due to the benefits varying based on age—so long as the individual coverage HRA satisfies the age variation exemption under the same terms requirement (Treasury Regulation 54.9802-4(c)(3)(iii)(B)). However, this safe harbor does not automatically satisfy the prohibition on nondiscriminatory plan operation as a whole.

 

The proposed regulations under IRC Sec. 4980H are proposed to apply for periods beginning after December 31, 2019, and the proposed regulations under IRC Sec. 105(h) are proposed to apply for plan years after December 31, 2019.

The Treasury Department and the IRS are seeking public comments on these proposed regulations, which need to be submitted by December 29, 2019. Proposed regulations by the IRS generally may be relied upon by taxpayers in their proposed form.

Watch Ascensus.com for any further information about this guidance.