By now you most likely remember the Employer Mandate, the ACA’s provision that applicable large employers (ALEs) must offer coverage to their employees and dependents that is affordable and provides minimum value. The Employer Mandate still applies today which means all ALEs must continue to adhere to this mandate, or face penalties!
There’s been quite a buzz about the new Individual Coverage Health Reimbursement Arrangement, or ICHRA, and you may be wondering if ICHRA satisfies the Employer Mandate. Let’s look into this further!
First, let’s define what the ICHRA is.
The Individual Coverage Health Reimbursement Arrangement, or ICHRA, is a new regulation from the Departments of Treasury, Labor and Health and Human Services that was finalized in June 2019. The ICHRA is a tax-advantaged employee benefit plan that reimburses employees for their medical care expenses up to a maximum dollar amount set by the employer. Employees enroll in individual coverage and the employer makes a monthly contribution to each employee to assist with their expenses.
According to the IRS, the ICHRA is a great way for businesses to focus on what they do best – serving their customers instead of managing complex health benefit plan designs for their employees.
So, how about ICHRA and the Employer Mandate?
In relation to the Employer Mandate, let’s take a look at how ICHRA affects affordability and minimum value. Under the Affordable Care Act’s employer shared responsibility provision, employers with an average of 50 or more full-time employees are considered applicable large employers, also known as ALEs. They must offer coverage to their employees that is both affordable and provides minimum value.
An offer of ICHRA counts as an offer of Minimum Essential Coverage under the Employer Mandate, and to fully avoid part B of the Employer Mandate, the ICHRA needs to be affordable. That’s right, offering an ICHRA that is deemed affordable meets both part A and B of the ACA’s Employer Shared Responsibility mandate. Affordability is determined on the amount the employer makes available under the HRA but in general terms, an employer will need to contribute a sufficient amount for the offer of the ICHRA to be considered affordable.
Let’s take a step back and define minimum value and affordability further:
According to the IRS, an employer-sponsored plan provides minimum value if it covers at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan which includes substantial coverage of physician and inpatient hospital services. In the case of the ICHRA which requires the employee to purchase a plan on the individual market, this would satisfy this requirement since most major medical coverage purchased on the individual market is compliant with the mandate.
Again, the employer needs to contribute a sufficient amount to the ICHRA to be deemed affordable, but they can’t just blindly make a contribution. There are ways to calculate the affordability. Generally, it is difficult for an employer to determine affordability because they will most likely not know the household income of their employees. Luckily, there are three safe harbors that employers can use to determine whether the ICHRA is affordable for their employees. If an ALE’s offer of coverage is affordable using any of these safe harbors, that is, the employee’s required contribution is no more than 9.5% of the baseline in the applicable safe harbor, then the offer of coverage is deemed affordable regardless of whether it was affordable based on the employee’s household income.
The three safe harbors are:
-the Form W-2 wages safe harbor
-the rate of pay safe harbor
-the federal poverty line safe harbor
*An informative Q&A regarding minimum value & affordability is available on the IRS website HERE.
The employer is essentially responsible for contributing enough to the HRA for the affordability requirement to be satisfied. Again, the affordability can be calculated by using one of the safe harbors above.
What does this all mean?
At a glance, as long as affordability and minimum value is met, the ICHRA satisfies the Employer Mandate for applicable large employers and can be an excellent plan choice for employers of all sizes.
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