As we approach the two-year anniversary of the introduction of the individual coverage HRA (ICHRA), it is useful to remember the context of the very same anniversary for the ICHRA’s spiritual predecessor: the 401(k) plan.
Section 401(k) went into effect on January 1, 1980. Its introduction created the first major opportunity for employers to offer defined contribution retirement plans, and employers quickly began jumping on the bandwagon. The long-term growth of the 401(k) plan’s adoption and prominence has been unquestionably successful.
The ICHRA is now the new kid on the defined contribution-block since taking effect January 1, 2020, the 40 birthday of the 401(k) Plan. Just two years after §401(k) took effect, some of the country’s largest employers—including Johnson & Johnson, PepsiCo, JC Penney, and Honeywell—were in the process of offering 401(k) plans to their employees as of January 1, 1982.
Now the fledgling ICHRA is reaching the same inflection point as employers finally have a viable pathway to establishing a legitimately defined contribution health plan approach. The gears are in motion for ICHRAs to enjoy a similar rise into the mainstream consciousness beginning with its two-year mark on January 1, 2022, as prominent employers will consider adopting the vehicle in a manner parallel to the initial rise of the 401(k) plan.
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Improvements Still Needed
As ICHRAs begin to mirror the rapid growth of 401(k) plan with more industry and employer awareness, they will also have growing pains in the same manner as the 401(k). Accompanying those pains will almost certainly be the same legislative and regulatory revisions that have been a fixture of defined contribution retirement plans through the decades.
While in concept the ICHRA represents the gold standard of an employer-sponsored defined contribution health plan approach, there are technical hiccups in the current regulatory framework that present the clearest low-hanging fruit for immediate regulatory attention.
This post highlights three areas for improvement that could instantly begin paving the way to the inevitable ICHRA mainstream adoption if quickly addressed by the regulatory departments:
- New ICHRA Advance Notice Requirements
- Employee Choice Between ICHRA and Traditional Group Health Plan
- Flat Dollar Affordability Safe Harbor
Proposed ICHRA Change #1: New ICHRA Advance Notice Requirements
The ICHRA rules currently provide that employers must provide the required notice to employees at least 90 calendar days before the beginning of each plan year. This 90-day advance deadline includes an employer adopting an ICHRA for the first time.
Unfortunately, many employers making the decision to offer an ICHRA are not able to make all the decisions and take all the steps necessary to prepare and distribute an ICHRA notice 90 days in advance of the first plan year. For a calendar-year ICHRA, this means employers must notify employees of the ICHRA no later than October 3. That creates an arbitrarily early decision point for employers to satisfy.
The result is that many employers considering an ICHRA will have the 90-day notice barrier cause delayed implementation to a subsequent year. At this point with limited awareness of the ICHRA option, many employers do not have the ICHRA consideration in mind far enough in advance of the standard renewal season to prepare for such decisions and communications to be made by October 3.
Potential Solution #1: Rely on the New Employer Rule
There is a special exception to the rule for a new employer that is established 120 days before the start of the first ICHRA plan year. In that case, the new employer must provide the required notice no later than the date on which the ICHRA first takes effect (as opposed to 90 days in advance).
One easy solution to this issue would be to simply extend this new employer rule to apply to any new ICHRA adoption. In other words, any existing employer first offering an ICHRA to employees could also rely on the same new employer rule to provide the ICHRA notice no later than the date the ICHRA is to take effect (e.g., Jan. 1).
Potential Solution #2: Reduce the Advance Notice Timeframe
Another easy solution would be to simply decrease the standard 90-day advance notice requirement for employers first adopting the ICHRA. For example, the employer would be required to provide the ICHRA notice 30, 45, or 60 days in advance of the date the ICHRA is to take effect.
Although this would not be quite as helpful as the first proposal, it would significantly limit the number of situations where employers initially choose not to offer the ICHRA solely because of the advance notice requirements.
The ICHRA rules currently impose strict class limitations on the type and size of employee groups that can be offered the traditional group health vs. the ICHRA. These rules are designed with a particular concern for the potential adverse selection issues that could arise if employers utilized the ICHRA in a manner designed to disproportionately direct bad risk to the individual market (and out of its own traditional group health plan).
The result is that employers are prohibited from offering employees the option to choose between the traditional group health plan and the ICHRA. Each permitted employee class can be offered either the ICHRA or the traditional group health plan—but not both.
The inability to offer employees the choice between the traditional group health plan and the ICHRA is unnecessarily preventing potential early adopters from taking the plunge. If employers could add the ICHRA as an option for employees to choose from among, for example, the standard HMO, PPO, and HDHP offerings under the traditional group health plan, many more employers would begin experimenting with ICHRAs.
For example, employers could make an ICHRA available at an amount tied to the lowest employer-share of the premium associated with the traditional group health plan options. Employees could then choose that ICHRA defined contribution amount or one of the standard plan options. This first-step approach would be an almost no-cost method for employers to start introducing the concept and making inroads in employee familiarity. It would also likely result in younger, healthier employees choosing this route because of the lower funding levels associated.
Potential Solution #1: Employee Choice
Permit employers to make the ICHRA available to employees as a choice between it and the traditional group health plan options.
In the preamble to the final regulations, the Departments acknowledge comments stating that “the prohibition on offering employees a choice between a traditional group health plan and an individual coverage HRA…would restrict choice for employees and flexibility for employers.” They also recognize that “[l]ower-risk employees might choose individual coverage HRAs, while higher-risk employees might elect to remain in their employer’s traditional group health plan.” If that were to occur, the individual market would have a disproportionate increase in good risk, creating a much-improved marketplace for consumers.
Nonetheless, the departments prohibited such choice on the basis that “employers would also face strong countervailing incentives to maintain (or improve) the average health risk of participants in their traditional group health plans.” While that does remain a possibility and a source for potential concern, the ICHRA’s broader and more mainstream adoption potential to improve the risk pool of the individual market should significantly outweigh that cause for cynicism.
The Departments estimate that five million individuals moving from traditional group health plan coverage to ICHRA coverage at the standard group market 4-to-1 ratio of healthy to unhealthy could by itself decrease individual market rates by 3%. It is hard to envision a scenario where the injection of additional full-time workforce into the individual market would cause material adverse effects to that downward pressure.
Potential Solution #2: Small Employer Exemption
Permit only employers in the small group market to make the ICHRA available to employees as a choice between it and the traditional group health plan.
Employers in the small group market have little to no incentive to shift risk out of their traditional group health plan because the fully insured small group plans are community rated. The Departments recognized this different incentive model for small group market employers in the preamble to the final regulations. Nonetheless they declined to create the exception because they “would not expect many small employers to offer this choice,” “it would increase the complexity of the final rules,” and “it could cause some uncertainty for issuers.”
While those are at least potentially sources for mild concern, the ability for small employers to begin experimenting with the ICHRA on a broader scale by taking the much less disruptive step of pairing the ICHRA alongside the traditional group health plan (as opposed to replacing it for classes of employees) should be the primary motivating factor in opening up this alternative avenue at least for small employers.
Proposed ICHRA Change #3: Flat Dollar Affordability Safe Harbor
The ACA employer mandate rules permit employers to choose among three safe harbors for determining affordability:
- Federal Poverty Line Affordability Safe Harbor
- Rate of Pay Affordability Safe Harbor
- Form W-2 Affordability Safe Harbor
For plan years beginning in 2021, the affordability threshold is set at 9.83%.
The IRS recently finalized affordability regulations specific to ICHRAs. The rules relied on the lowest cost silver plan for determining whether the employer’s ICHRA offered sufficient funds to meet one of those affordability safe harbors. The lowest cost silver plan was based on the rating area where ethe employee resides or works.
However, those finalized rules had not yet been published as of the end of the Trump administration, and the Biden administration withdrew them for further review under the direction of the new regulatory management. This provides an opening to make improvements to the ICHRA affordability rules before re-finalizing them.
There are two primary employer advantages of the ICHRA approach as an alternative to the traditional employer-sponsored major medical group health plan:
- Reduced cost; and
- Simplified administration.
The requirement to stratify ICHRA allocations based on the age and location of every particular full-time employee compromises both of these goals.
The preamble to the proposed regulations recognizes this concern, stating that “if an employer wants to make a single amount available under an individual coverage HRA to a class of employees and ensure it avoids an employer shared responsibility payment under section 4980H(b), in general, the employer can use the age of the oldest employee in the class of employees to determine the amount to make available under the HRA to that class of employees” (emphasis added). However, this one-size-fits-all approach is not practical because it would require an extreme increase in ICHRA allocation expense. The affordability threshold is far greater for an age-64 employee than an age-20 employee.
The alternative employee-by-employee approach is equally problematic because although it addresses the cost issue, it creates massive administrative complications. As the IRS notes in the preamble to the proposed regulations, “the PTC affordability plan is based on the particular employee’s relevant circumstances, including the particular employee’s age.” This means that “even for employees residing in the same location (or working at the same location if the location safe harbor is applied), the cost of the applicable affordability plan is determined on an employee-by-employee basis (emphasis added)” The resulting quagmire is a different ICHRA allocation required to satisfy affordability for each age and location of employees. That requires extensive analysis, coordination, systems support—not to mention the employee communication challenges.
Potential Solution: Flat Dollar Affordability Safe Harbor
The standard affordability rules for a traditional group health plan have a fantastic simplified safe harbor that relies on a basic dollar threshold. The federal poverty line affordability safe harbor provides that an ALE’s coverage will automatically be deemed affordable for all full-time employees if the monthly employee-share of the premium for the lowest cost plan option (which provides minimum value) at the employee-only tier does not exceed 9.83% (2021) of the continental U.S. federal poverty line for a single individual that is in effect within six months before ethe first day of the plan year, divided by 12.
For plan years beginning in 2021, that sets a clean and fixed threshold of $104.52/month that employers can charge employees for their lowest cost plan option and guarantee the offer will meet the ACA affordability standard. This approach is generally slightly more expensive than the alternative affordability safe harbors, but the advantages of not having to run an analysis based on the employee’s rate of pay or Form W-2 compensation are significant.
The ICHRA desperately needs an equivalent flat dollar threshold whereby employers can ensure the ICHRA will be treated as an affordable offer of coverage to full-time employees of all ages and locations for only a slight increase in cost. The proposal here would be to piggyback off the federal poverty line affordability threshold ($104.52/month in 2021) to reach an equivalent ICHRA standard.
The ICHRA Flat Dollar Affordability Safe Harbor Proposal
There are two steps to this proposal:
- Take the average nationwide lowest cost silver plan monthly premium of self-only coverage on the Exchange (FFE-only or combination of FFE and state-based) for a set average age (e.g., 45-year-old individual), determined a set period in advance of to the ICHRA plan year (e.g., six months prior to the plan year).
- To meet the proposed safe harbor, employer monthly ICHRA contributions must be sufficient to provide that an employee would not have to contribute more than the current federal poverty line affordability safe harbor threshold ($104.52/month in 2021) for such average plan cost.
CMS releases comprehensive Open Enrollment Reports each year in April with extensive information that can be used for this purpose. It also provides public use files to make the specific data available.
For example, assume the first step resulted in a $574.95/month average based on the most recent data released for the first of half of 2020. The employer could therefore satisfy the flat dollar affordability safe harbor by contributing at least $470.43/month in 2021 ($574.95 – $104.52). In other words, an annual employer contribution of at least ,645.16 to the ICHRA for the plan year would automatically satisfy affordability for all full-time employees in 2021, regardless of employee age or location.
Removing the extreme complication of ICHRA allocations that must vary by age and location satisfies the first goal of simplified administration. It also at least has the potential to meet the second goal of reduced cost because this averaging approach does not require catering a one-size-fits-all approach to the oldest (and most expensive by a factor of 3-to-1) participant.
While it is true that for some employees the ICHRA allocation will not actually be affordable based on their age or location, such employees can still access the §36B premium tax credit based on true household income and additional factors that do not need to be taken into account with §4980H safe harbors. As noted in the preamble to the proposed regulations: “Whether or not an employee has been offered affordable coverage for purposes of eligibility for the PTC is determined under section 36B(c)(2)(C)(i) and the regulations thereunder (as opposed to the section 4980H safe harbors).”
ICHRAs are on the well-beaten path to becoming a household name in the coming year. However, there will be bumps along the road of their inevitable growth to mainstream prominence. Just as with the 401(k) plan, there will likely be decades of legislative and regulatory fine tuning of the rules to better meet the needs of employers and employees as participation increases begin to expose areas for improvement.
These three proposals are only the low-hanging fruit that could be addressed by the Departments with minor modifications to the existing regulatory framework. They would make ICHRAs far more viable immediately to a wide array of employers. If the retirement plan history teaches us anything on this point, most of those employers are likely interested in at least considering a defined contribution health plan approach that could move the industry more in line with the now prevalent 401(k) structure.
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