Churches Can Once Again Reimburse Employee Health Care Costs

New rules issued in 2019 by the US Department of Labor, US Department of Health and Human Services, and US Department of the Treasury (collectively, the Departments) fundamentally transformed the way many employers assist employees with their health care costs.

This significant development will again allow employers to:

Employers commonly used these methods to provide health insurance for employees for over half a century, but they had been made unlawful by the Affordable Care Act (ACA or Obamacare).

The Affordable Care Act contains several reforms of the insurance market (market reforms) that apply to group health plans, including the following:

Prior to the enactment of the ACA, the tax code contained a number of popular tax-favored options for covering employees’ health care costs, including employer payment plans (EPPs). But since EPPs typically did not incorporate the two market reforms listed above, they were illegal under the Affordable Care Act. This meant that employers that continued to use EPPs, which had been used for over half a century to pay some or all the costs of employees’ health care, faced a staggering penalty of $100 per day ($36,500 per year) per employee.

For additional background information on the Obamacare reforms discussed above, see my article, “ Are Church-Paid Medical Insurance Benefits Taxable? ”

The use of EPPs was partially restored by two significant developments:

Both developments are addressed below.

Under the 21st Century Cures Act (2016), a QSEHRA is generally not a group health plan under the tax code and thus is not subject to the group health plan requirements. Most importantly, this means that a QSEHRA will not be assessed the $100 per day per employee penalty for failure to comply with the market reforms that apply to group health plans.

In brief, a QSEHRA is defined as an arrangement that:

The relief from the $100 per day excise tax will not benefit all churches. A church may be subject to the penalty if, for example, it offers an employer payment plan or health reimbursement arrangement (in which an employer reimburses the employee for medical expenses generally of the employee and family members) and

Section 6652(o) of the tax code provides a penalty of $50 per employee (up to a maximum of $2,500 per calendar year per eligible employer) for failure to provide a written notice (see IRS Notice 2017-20).

The law’s provision of relief from the $100 per day per employee penalty for noncompliant group plans is effective retroactively.

Churches that have used an employer payment plan in the past, or that are using one now, should bear in mind the following points:

For additional background information and other pertinent details, see IRS Notice 2017-20 and my article “New Act Restores Tax-Free Premium Reimbursements for Many.”

The new rules released by the Departments permit employers to offer a new individual coverage health reimbursement arrangement (ICHRA) as an alternative to traditional group health plan coverage, subject to certain conditions. Among other medical care expenses, ICHRAs can be used to reimburse premiums for individual health insurance chosen by the employee, promoting employee and employer flexibility, while also maintaining the same tax-favored status for employer contributions toward a traditional group health plan.

Specifically, this significant development will again allow employers to

As mentioned earlier, this benefit was commonly used by employers in the past to provide health insurance for employees, but was made illegal by the Affordable Care Act.

The new rules also increase flexibility in employer-sponsored insurance by creating another, limited kind of health reimbursement arrangement (HRA) that can be offered in addition to a traditional group health plan. These “excepted benefit” HRAs” (EBHRAs) permit employers to reimburse dental, vision, long-term care, COBRA, and the cost of copays, deductibles, or other expenses not covered by the primary plan even if the employee declines enrollment in the traditional group health plan. However, individual insurance premiums are not eligible for reimbursement under EBHRAs.

Most importantly, the new rules will provide hundreds of thousands of employers a better way to offer health insurance coverage and millions of workers and their families a better way to obtain coverage. The ICHRA rules will especially help small employers, who face larger administrative costs from offering a traditional group health plan, compete for talent. Many small employers struggle to offer coverage to their employees, and a significant number of small employers have stopped offering coverage since 2010.

The Departments estimate that once employers fully adjust to the new rules, roughly 800,000 employers will offer ICHRAs to pay for insurance for more than 11 million employees and family members, providing these Americans with more options for selecting health insurance coverage that better meets their needs.

ICHRAs provide tax advantages because the reimbursements provided to employees do not count toward the employees’ taxable wages. In effect, ICHRAs extend the tax advantage for traditional group health plans (exclusion of premiums, and benefits received, from federal income and payroll taxes) to reimbursements of individual health insurance premiums.

Employers may also allow employees to pay for health insurance purchased outside the ACA-created health insurance exchange (off-exchange) on a tax-favored basis, using a salary reduction arrangement under a cafeteria plan, to make up any portion of the individual health insurance premium not covered by the employee’s ICHRA.

In most cases, the ICHRA rules will increase worker options for health insurance coverage, allowing workers to shop for plans in the individual market and select coverage that best meets their needs. These rules will also result in coverage being more portable for many workers.

Church leaders should note the following additional information about ICHRAs.

An ICHRA reimburses employees for their medical care expenses (and sometimes their family members’ medical care expenses), up to a maximum dollar amount that the employer makes available each year. Qualifying medical expenses are listed in IRS Publication 502. The employer can allow unused amounts in any year to roll over from year to year.

Employees must enroll in individual health insurance (or Medicare) for each month the employee (or the employee’s family member) is covered by the ICHRA. This can be individual health insurance offered on or off an Exchange. However, it cannot be short-term, limited-duration insurance (STLDI) or coverage consisting solely of dental, vision, or similar “excepted benefits.”

Employers that offer an ICHRA must offer it on the same terms to all individuals within a class of employees, except that the amounts offered may be increased for older workers and for workers with more dependents.

You cannot offer an ICHRA to any employee to whom you offer a traditional group health plan. However, you can decide to offer an ICHRA to certain classes of employees and a traditional group health plan (or no coverage) to other classes of employees. Employers may make distinctions, using classes based on the following status:

To prevent adverse selection in the individual market, a minimum class size rule applies if you offer a traditional group health plan to some employees and an ICHRA to other employees. The minimum class size is 10 employees for an employer with fewer than 100 employees.

Employers can contribute as little or as much as they want to an ICHRA. However, an employer must offer the ICHRA on the same terms to all employees in a class of employees, except that employers can increase the amount available under an ICHRA based on the employee’s age or number of dependents.

Employers must provide a written notice to eligible participants regarding the ICHRA and its interaction with the premium tax credit. Employers must also have reasonable procedures to substantiate that participating employees and their families are enrolled in individual health insurance or Medicare, while covered by the ICHRA. Employees must also be permitted to opt out of an ICHRA at least annually so they may claim the premium tax credit if they are otherwise eligible and if the ICHRA is considered unaffordable.

If an employee opts out of the ICHRA, the employer generally will not have any responsibility with respect to the individual health insurance itself that is purchased by the employee, because it will not be considered part of an employer-sponsored plan, provided:

Here are the answers to some key questions about ICHRAs and EBHRAs:

Can an employer offer an ICHRA to satisfy the employer mandate?

First, only certain employers—in general, those with at least 50 full-time employees, including full-time equivalent employees, in the prior year—are applicable large employers subject to the employer mandate. An offer of an ICHRA counts as an offer of coverage under the employer mandate.

In general, whether an applicable large employer that offers an ICHRA to its full-time employees (and their dependents) owes a payment under the employer mandate will depend on whether the ICHRA is affordable. This is based, in part, on the amount the employer makes available under the ICHRA. Therefore, if you are an applicable large employer and want to avoid an employer mandate payment by offering an ICHRA, in general, you will need to contribute a sufficient amount for the offer of the ICHRA to be considered affordable.

May an employer allow employees to pay any portion of the premium for their individual health insurance that is not covered by the ICHRA on a tax-preferred basis by using a salary reduction arrangement under a cafeteria plan?

The Internal Revenue Code provides that an employer may not permit employees to make salary reduction contributions to a cafeteria plan to purchase coverage offered through an Exchange. However, that restriction does not apply to coverage that is purchased off an Exchange. Therefore, if an employee buys individual health insurance outside an Exchange and the ICHRA doesn’t cover the full premium, the employer could permit the employee to pay the balance of the premium for the coverage on a pretax basis through its cafeteria plan, subject to other applicable regulations.

Yes. Although the Departments expect that the rule will especially benefit small and mid-sized employers, employers of all sizes may offer an ICHRA, subject to the conditions in the ICHRA rules.

There may be scenarios in which you wish to offer a reimbursement plan in addition to a traditional group health plan—for example, to help cover the cost of copays, deductibles, or non-covered expenses. EBHRAs generally allow for higher levels of employer contributions than health flexible spending arrangements (FSAs) and can permit rollover of unused amounts from year to year. Beginning in 2020, reimbursement arrangements can be offered as “excepted benefits” which are exempt from many federal health care requirements that don’t work well for account-based plans. Employees may use these EBHRAs even if they do not enroll in the traditional group health plan (or in any other coverage), which distinguishes the EBHRA from other HRAs.

To qualify as excepted benefits:

The EBHRA will help some of the growing number of employees who have been opting out of their employer’s traditional group health plan because the employee’s share of premiums is too expensive.

The Departments’ supplementary information to the final rule note that “an employer may not both offer an ICHRA and provide a QSEHRA.”However, “the final rules do not change the ability of eligible employers to provide QSEHRAs. Rather, the final rules provide an opportunity for all employers, including those who may or may not qualify to sponsor a QSEHRA, to sponsor an individual coverage HRA.”

Many employee benefits professionals are suggesting that employers use QSEHRAs instead of ICHRAs unless