On January 7, 2021, the EEOC issued an opinion letter regarding individual coverage health reimbursement arrangements (ICHRAs) under the ADEA. The letter was in response to an inquiry submitted by a professional association representing health insurance agents, brokers, consultants and employee benefit specialists. Specifically, the opinion considers whether an employer can offer an ICHRA with a defined contribution or specified percentage formula without violating the ADEA.
ICHRAs present potential challenges when offered to older employees. The ADEA prohibits discrimination against those 40 years of age and older with respect to compensation, terms, conditions or privileges of employment (including fringe benefits). ICHRAs are a type of HRA created by 2019 regulations that can be integrated with individual health insurance coverage (as opposed to group health coverage, as is required for other types of HRAs). Employers may sponsor an ICHRA that offers a defined contribution (i.e., a set dollar amount, such as $300 per month) or a specified percentage (e.g., 30%) towards premium costs. However, individual health insurance policies are priced based upon factors that include the applicant’s age, so older individuals often pay a higher cost than younger applicants for the same coverage. If an employer sponsors an ICHRA that offers a defined contribution or a specified percentage towards premium costs, then older employees may pay more out-of-pocket for the policies than younger employees. This disparity in the cost paid by older employees could be discriminatory under the ADEA.
The opinion notes that an employer using the defined contribution formula is making the same amount available to each employee regardless of age, so this does not violate the ADEA prohibition against providing lesser compensation to older employees based on age. Additionally, there is no violation of the contributory fringe benefit rules, which do not allow older workers to assume a greater portion of the cost of a fringe benefit than younger workers, because the employees are not required to contribute to the ICHRAs. Although older workers may pay a greater amount for the individual health insurance policies bought using ICHRA funds, these policies are not considered ADEA-covered employee benefit plans because the employer does not select, offer or make these policies available to employees. Therefore, an ICHRA with a defined contribution formula that provides the same dollar amount to each covered employee does not violate the ADEA.
The opinion goes on to explain that a set percentage design may result in the employer providing larger amounts to older workers. Employers providing a greater level of compensation to older employees because of their age would not violate the ADEA. The opinion explains that this would be the case regardless of whether the employer structured the formula as a set percentage of the premium cost or instead chose to increase the dollar amount available for older workers to offset age-based increases in health coverage costs.
The EEOC opinion is limited to the application of the ADEA to the scenarios presented. However, employers who offer ICHRAs (or are considering doing so) should be aware of this opinion.
EEOC Opinion Letter »
PPI Benefit Solutions does not provide legal or tax advice. Compliance, regulatory and related content is for general informational purposes and is not guaranteed to be accurate or complete. You should consult an attorney or tax professional regarding the application or potential implications of laws, regulations or policies to your specific circumstances.
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