New Opportunities Provided by the Final HRA Regulations

1. New Opportunities Provided by the Final HRA Regulations July 24, 2019 Kim Wilcoxon, Partner Kim.Wilcoxon@ThompsonHine.com

2. Today’s Presentation • Overview of the two new types of HRAs that will be available beginning in 2020 • Comparison of the new HRAs to currently-available and commonly used HRAs • Discussion of how the HRAs may satisfy the ACA employer mandate • Additional considerations • Requirements for establishing and maintaining the HRAs

3. Overview of New HRAs

4. New HRAs • Individual Coverage HRA • Allows employees to use non-taxable employer contributions to purchase individual insurance • May also reimburse any other Code Section 213(d) medical expenses • Employer may not offer a traditional group health plan to employees eligible for this type of HRA • The HRA must be offered, and generally must be offered on the same terms, to all members of a permitted class

5. Permitted Classes • *As defined by Code Section 105(h) or 4980H – employer must choose before the beginning of the plan year and include definition in plan document

6. New HRAs • Excepted Benefit HRA • Allows employees to use non-taxable employer contributions to reimburse Code Section 213(d) medical expenses other than premiums for • Individual health insurance (with certain exceptions) • Group health plans (with certain exceptions) • COBRA premiums may be reimbursed • Medicare Parts A, B, C or D • Employer must offer a traditional group health plan to employees eligible for this type of HRA, but need not integrate the HRA with any health plan • Different from an HRA that reimburses only excepted benefits

7. Comparison to Common Existing HRAs

10. *Unless the plan meets exceptions specified in the HIPAA privacy/security rules ** May be reported on the medical plan SBC

11. Possible Combinations

12. Possible Combinations

13. Possible Combinations

14. Application of ACA Employer Mandate

15. Employer Mandate Refresher • 4980H(a) penalty: • Employer offers coverage to less than 95% of its ACA full-time employees • At least one ACA full-time employee purchases a Marketplace policy and qualifies for a premium tax credit • 4980H(b) penalty: • Employer offers coverage to at least 95% of its ACA full-time employees • Employer does not offer affordable, minimum value coverage to at least one ACA full-time employee • That employee purchases a Marketplace policy and qualifies for a premium tax credit

16. Impact on Employer Mandate • An employer that offers an Individual Coverage HRA: • Will have made an offer of coverage under 4980H(a) • Will need to offer an affordable HRA in order to avoid a penalty under 4980H(b) • Notice 2018-88 proposed a safe harbor and requested comments • Treasury/IRS plan to issue proposed regulations addressing comments from Notice 2018-88 • Determination likely will be similar to the affordability determination for the premium tax credit, with certain modifications

17. Impact on Premium Tax Credit Eligibility • Individual who is covered by an Individual Coverage HRA is ineligible for the premium tax credit • Individual who is eligible for, but opts out of, an Individual Coverage HRA is ineligible for the premium tax credit for any month in which the HRA is affordable and provides minimum value coverage • HRA coverage is affordable if the employee’s “required HRA contribution” does not exceed: (1/12) x (employee’s household income) x (required contribution percentage) Note: Additional details regarding premium tax credit eligibility apply but are outside the scope of this presentation

18. Impact on Premium Tax Credit Eligibility • The required HRA contribution is equal to: The monthly premium for the lowest cost silver plan for self-only coverage available to the employee through the Marketplace for the rating area in which the employee resides minus The amount newly made available to the employee for self-only coverage for the plan year ÷ the number of months in the plan year that the HRA is available to the employee • The required contribution percentage is 9.56%, adjusted for inflation (9.86% for 2019)

19. Impact on Premium Tax Credit Eligibility - Example • Employer’s self-only contribution for a plan year is $3,000 • Employee’s household income is $20,000 • Employee is enrolled in a calendar year Individual Coverage HRA for the full calendar year • Monthly premium for lowest cost silver plan is $400 • Required contribution percentage is 9.86%

20. Affordability As Proposed Under Notice 2018-88 – Example 1 • Employer’s self-only contribution for a plan year is $3,000 • Employee’s household income is $20,000 • Employee is enrolled in a calendar year Individual Coverage HRA for the full calendar year • Monthly premium for lowest cost silver plan is $400 • Required contribution percentage is 9.86%

21. Affordability As Proposed Under Notice 2018-88 – Example 2 • Employer’s self-only contribution for a plan year is $3,000$1,200 • Employee’s household income is $20,000$45,000 • Employee is enrolled in a calendar year Individual Coverage HRA for the full calendar year • Monthly premium for lowest cost silver plan is $400 • Required contribution percentage is 9.86%

22. Additional Considerations

23. Application of ERISA • Individual insurance purchased through an HRA will not be subject to ERISA or treated as a group health insurance if: • The purchase of individual insurance is completely voluntary • The employer does not select or endorse any particular issuer or individual health insurance coverage • Employer may provide general contact information for insurance available in a state and may provide general health insurance educational information • Reimbursement is limited to individual health insurance coverage that does not consist solely of excepted benefits • Employer does not receive consideration in connection with the employee’s selection or renewal of individual insurance coverage • This requirement is not intended to affect the plan’s ability to reimburse the employer for certain administrative expenses • Each plan participant receives an annual notice that the individual insurance coverage is not subject to ERISA

24. Application of ERISA • Rule applies to • Individual Coverage HRA • QSEHRAs • Retiree-only HRAs • Other HRAs that are offered to fewer than two current employees on the first day of the plan year • Cafeteria plans that allow employees to pay for the portion of individual insurance premiums not covered by the integrated HRA or QSEHRA

25. Impact on HSAs • Limited-purpose and/or post-deductible individual coverage HRAs will not disqualify individuals from eligibility for HSA contributions • It is the employer’s responsibility to ensure that a post-deductible HRA does not reimburse expenses before the employee satisfies the deductible • A limited purpose HRA that permits reimbursement of premiums is not disqualifying coverage unless the individual uses the HRA to purchase disqualifying coverage

26. Individual Market Special Enrollment • An individual will have a special enrollment right to enroll in individual health insurance coverage (through or outside the Marketplace) when the individual newly gains access to an Individual Coverage HRA • Applies when employer first begins to offer the plan • Applies when employee first becomes eligible • Individuals may request enrollment up to 60 days in advance of the effective date of the HRA coverage • Individual health insurance coverage must become effective as of the later of • The first day of the first month following the individual’s plan selection • The first day of the first month coincident with or next following the effective date of the HRA coverage

27. Requirements for Individual Coverage HRAs

28. Individual Insurance Market Stabilization • Scenario 1 • 1,000 individuals each pay $100 in premiums to Insurance Company (total $100,000) • 1 paying individual incurs $25,000 in claims • Net gain of $75,000

29. Individual Insurance Market Stabilization • Scenario 2 • 1,000 individuals each pay $100 in premiums to Insurance Company (total $100,000) • 1,000 paying individuals each incur $25,000 in claims (total $25,000,000) • Net loss of $24,900,000

30. Individual Insurance Market Stabilization

31. ACA Market Reform Rules • Group health plans may not impose annual or lifetime dollar limits on essential health benefits • Non-grandfathered plans must cover all recommended preventive care services

32. Overview of Requirements • Participants and any dependents covered by the HRA must be enrolled in individual health insurance that complies with the ACA rules on lifetime/annual dollar limits and coverage of preventive services • HRA must be offered on the same terms to all members of the same class • Class-based rules apply on an employer-by-employer basis, not on a controlled group basis • Minimum class size requirement may apply • Initial and annual notices must be provided • Model notice is available • Participants must be given the opportunity to opt out of coverage annually (but not during the plan year) and upon termination The regulations also describe a safe harbor under which individual insurance policies do not become the employer’s ERISA plans

33. Requirement to Maintain Individual Insurance Coverage • HRA must require participants and any dependents covered by the HRA to be enrolled in individual health insurance that complies with the ACA rules on lifetime/annual dollar limits and coverage of preventive services • This requirement will not be met if the participant is enrolled in • Excepted benefits • Short-term limited duration insurance • TRICARE • All other coverage in the individual insurance market is presumed to be compliant with the ACA rules • No exclusion for coverage in states with a Section 1332 state innovation waiver • No exclusion for catastrophic policies • No exclusion for grandfathered or grandmothered policies • No exclusion for student health insurance

34. Requirement to Maintain Individual Insurance Coverage • Due to the interaction of various federal rules relating to Medicare and individual insurance, a Medicare-eligible individual may be enrolled in Medicare instead of an individual insurance policy • If not enrolled in individual coverage, the covered person must be enrolled in Medicare Part A and B or Medicare Part C • The participant and all dependents do not need to be enrolled in the same type of coverage • Ex: Employee is enrolled in Medicare Parts A and B while the dependents are enrolled in an individual insurance policy • All other individual coverage HRA rules apply in the same manner • Future guidance is expected to address how the Medicare Secondary Payer mandatory reporting rules apply to Individual Coverage HRAs

35. Requirement to Maintain Individual Insurance Coverage • If any covered individual ceases to be enrolled in individual insurance coverage, expenses incurred by that individual after such coverage ceases may not be reimbursed • If all covered individuals cease to be enrolled in individual insurance coverage, the participant must forfeit the HRA • Note: Loss of coverage under an HRA due to cessation of enrollment in individual insurance coverage is not a COBRA qualifying event

36. Requirement to Maintain Individual Insurance Coverage • There is no requirement that an HRA cover all of a participant’s dependents • However, the HRA must comply with the ACA’s rules on coverage for children until age 26 • The HRA could be designed to allow the participant to exclude certain dependents

37. Requirement to Maintain Individual Insurance Coverage • The HRA must implement reasonable procedures to substantiate the required coverage • The procedures must require substantiation annually before the beginning of each plan year and with every reimbursement request • The procedures may require the participant to provide either of the following • (Annual substantiation requirement only) A document from a third party confirming enrollment of the participant and applicable dependents, such as • Explanation of benefits or • Insurance card or • A document from an Exchange confirming that the individual completed an application and plan selection • Attestation by the participant, including the date coverage began and name of provider

38. Requirement to Maintain Individual Insurance Coverage • The employer may establish the deadline for providing the annual substantiation • The substantiation generally must be provided before the beginning of the plan year • For employees hired during the plan year or within 90 days before the beginning of the plan year, the employer may establish a separate deadline for providing substantiation • Deadline must be prior to the effective date of coverage • The annual substantiation must indicate that the individual coverage applies for the full plan year • If the individual policy year does not match the HRA plan year, the procedures may require attestation that the participant will obtain coverage for the remainder of the HRA plan year

39. Requirement to Maintain Individual Insurance Coverage • The HRA may rely on the documentation or attestation unless the HRA has actual knowledge that the participant or covered dependent is not - or will not be – enrolled in individual health coverage for the applicable time period • If the HRA gains actual knowledge, the HRA may not permit further reimbursement of expenses incurred during the time period covered by the inaccurate documentation/attestation • The HRA has actual knowledge if any of the following entities has actual knowledge • The HRA • The plan sponsor • Any entity acting in an official capacity on behalf of the HRA

40. Class-Based Rules • Employer may not offer the same class of employees a choice between the employer’s traditional group health plan and the HRA • “Traditional group health plan” does not include • A plan that offers only excepted benefits • Another account-based plan • The HRA must be offered on the same terms to all employees within the same class Class-based rules apply separately to each employer and do not apply on a controlled group basis

41. Requirement to Offer to Full Class • The HRA may be offered only to a subset of former employees within a class • If the HRA is offered to a former employee, it must be offered on the same terms applicable to employees in the same class • An HRA may not vary the maximum reimbursement amount by age or years of service • A former employee is considered to be in the same class that he or she was in immediately prior to separation from service • Remember: Retiree-only HRAs are exempt from these rules

42. Requirement to Offer Same Terms to Class • The rules do not establish minimum or maximum reimbursement amounts. Those amounts may be determined by the plan sponsor but must satisfy the “same terms” requirements • An HRA will not be considered to have been offered on the same terms if the plan is designed to reimburse the same percentage of each employee’s individual health insurance premiums

43. Requirement to Offer Same Terms to Class • The maximum reimbursement amount for a class may increase based on age • The same maximum reimbursement amount must apply to all employees of the same age in the same class • The maximum reimbursement amount available to the oldest participant cannot be more than three times the maximum reimbursement amount available to the youngest participant • Age may be determined under any reasonable method, so long as • The same method is used for all participants in the same class and • The method is determined before the beginning of the plan year

44. Requirement to Offer Same Terms to Class • The maximum reimbursement amount for a class may increase based on number of dependents covered • The same maximum reimbursement amount must apply to all employees with the same number of dependents in the same class

45. Requirement to Offer Same Terms to Class • If an employee is hired during the plan year, the HRA may provide the full maximum reimbursement amount or may use a reasonable proration method • If the HRA varies the maximum reimbursement amount by number of dependents and the employee adds or loses a dependent during the plan year, the HRA may determine the maximum reimbursement amount • Based on the number of dependents as of the first plan year or • Using a reasonable proration method for the rest of the year • For both situations, the HRA’s approach must be the same for all members of the same class and must be determined before the beginning of the plan year

46. Requirement to Offer Same Terms to Class • The method for determining whether previously-credited amounts remain available must be the same for all participants in the same class • The “maximum reimbursement amount” will not include any amounts carried over from a prior year • The “maximum reimbursement amount” will not include any amounts transferred from another HRA

47. HRA Transfers • Unused amounts in an Individual Coverage HRA may be transferred to • Another Individual Coverage HRA • Group Health Plan integrated HRA • Medicare/Tricare integrated HRA • Unused amounts in an integrated group health plan HRA may be transferred to • Another Group Health Plan integrated HRA • Individual Coverage HRA • Medicare/Tricare integrated HRA • Unused amounts in a Medicare/Tricare integrated HRA may be transferred to • Another Medicare/Tricare integrated HRA • Individual Coverage HRA • Group Health Plan integrated HRA • Unused amounts in an HRA may not be cashed out or transferred to an FSA or HSA

48. Requirement to Offer Same Terms to Class • The Plan Sponsor may offer employees in a class a choice between an HSA-compatible Individual Coverage HRA and a non-HSA-compatible Individual Coverage HRA • Both HRAs must be offered to all employees in the class on the same terms • The timing of credits to the HRA (annually, monthly, quarterly, etc.) must be the same for all employees in the same class

49. Requirement to Offer Same Terms to Class • The ability to use salary reductions under a cafeteria plan to pay for the portion of premiums not covered by the HRA is a term of the HRA that must be applied in the same way to all employees within a class • Cafeteria plans may not provide for the purchase of Marketplace policies • Cafeteria plans may provide for the purchase of individual policies outside the Marketplace

50. Permitted Classes • *As defined by Code Section 105(h) or 4980H – employer must choose before the beginning of the plan year and include definition in plan document