IRS Issues Final Rules Applying Employer Mandate and Nondiscrimination Rules to ICHRAs

On January 10, 2021, the Department of the Treasury released final regulations related to Individual Coverage HRAs (ICHRAs) and the application of the employer mandate and nondiscrimination. The final regulations contain only minor changes from the proposed rules and guidance.

Under the rules, an employer of any size may use an ICHRA to pay for or reimburse the cost of employees' individual health policies. The employer cannot offer any group health plan to the same classification of employees being offered the ICHRA, although an employer could also offer a dental only or vision only plan to those employees. The same terms and reimbursements must apply within the same classification, though the employer may increase the maximum reimbursement based on family size and age.

The ICHRA is subject to COBRA and ERISA, which means it is subject to the SPD, Form 5500, and fiduciary requirements. The individual policies themselves are not subject to ERISA. Expenses must be substantiated before reimbursement.

A notice relating to the ICHRA must be provided to eligible employees at least 90 days before the beginning of each plan year or no later than the date an employee is first eligible to participate in the ICHRA. The notice must include specific and detailed information. A model notice is available on the DOL site .

An ALE may use an ICHRA to satisfy its obligations under the employer mandate. The minimum value standard can be met through the substantiation of qualifying individual coverage. The cost of individual coverage must be affordable to the employee. In order to be affordable, the employee’s cost for the lowest cost self-only silver coverage in the rating area in which they live minus the employer’s ICHRA contribution must be no greater 9.83% (for 2021) of the employee’s earnings. There are two safe harbors relevant to this calculation.

• Location safe harbor. The employer may use employment location as the rating area, rather than the employee’s residence. However, if an employee does not normally work at the employment location (for example, they normally work from home), the employment location cannot be used. The final rules clarify that the employer should use the address that is expected to be permanent or indefinite when determining location. In other words, temporary changes in location would be disregarded.
• Look-back month safe harbor. A calendar year ICHRA may use the rates of January of the previous year. A non-calendar year ICHRA may use the rates of January of the current year for the entire plan year. Also, an employer may use an employee’s age at the start of the plan year for the entire plan year.

Employers who have already adopted ICHRAs may want to review the preamble of the regulations as it has detailed information about administration. Employers interested in learning more about ICHRAs should contact their consultant.

Final Regulations »