The IRS has followed up on its recently proposed Health Reimbursement Arrangements (HRA) regulations with guidance on some open issues. Notice 2018-88 specifically addresses the interplay between HRAs and two Internal Revenue Code requirements: the employer mandate under the Affordable Care Act (Code Section 4980H) and the nondiscrimination rules for self-funded health plans (Code Section 105(h)).

Employer Mandate

The new guidance addresses a number of concerns under the employer mandate, particularly regarding HRAs designed (at least in part) to purchase health coverage in the individual market ("individual coverage HRAs"):

• The employer mandate standard is met if a group health plan satisfies two tests. An employer that funds an HRA meets the first test—the one most likely to result in large penalties—if the HRA is made available to at least 95% of its full-time employees and their dependents.

• Under the second test, an employer will need to pay an assessment based on the number of full-time employees that receive a premium tax credit in purchasing coverage on a public health insurance exchange. An employee would not be eligible for a premium tax credit if the employee is offered HRA coverage that provides affordable minimum value coverage.

• An individual coverage HRA will be affordable based on how much the employee would need to contribute (as a percentage of compensation) for self-only coverage in the lowest cost silver plan available to the employee after taking into account the amount available through the HRA.

• The guidance identifies certain safe harbors and other rules that may simplify the calculation of affordability.

• As provided in the proposed regulations, an individual coverage HRA will provide minimum value as long as it is affordable, with or without application of the new safe harbors.

It is worth keeping in mind that the employer mandate applies only to employers with at least 50 full-time employees or full-time equivalents. Small employers that implement individual coverage HRAs would not be subject to these rules.

Self-Funded Health Plan Nondiscrimination Rules

Section 105(h) of the Internal Revenue Code prohibits self-funded health plans from offering a benefit to any highly compensated participant that it does not also offer to every non-highly compensated participant. The proposed HRA regulations allow individual coverage HRAs to differentiate among specified classes of employees. The new guidance provides that future rules will allow employers to contribute different amounts to HRAs for different classes of employees. However, the classes will be limited to those specified in the proposed regulations. The contributions within a class must be the same for all class members with one exception: Contributions for older employees may increase with the cost of individual insurance in the relevant market based on age.

It is important to note that the nondiscrimination rules under section 105(h) of the Code do not apply to an HRA that reimburses only individual health insurance premiums. For the nondiscrimination rules to apply, the HRA will need to be available to reimburse other expenses.

Comments on the new guidance are due December 28.