Health Reimbursement Arrangements and Other Account-Based Group Health Plans, 28888-29027 [2019-12571]

Download as PDF 28888 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 54 [TD 9867] RIN 1545–BO46 DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Parts 2510 and 2590 RIN 1210–AB87 DEPARTMENT OF HEALTH AND HUMAN SERVICES 45 CFR Parts 144, 146, 147, and 155 [CMS–9918–F] RIN 0938–AT90 Health Reimbursement Arrangements and Other Account-Based Group Health Plans Internal Revenue Service, Department of the Treasury; Employee Benefits Security Administration, Department of Labor; Centers for Medicare & Medicaid Services, Department of Health and Human Services. ACTION: Final rule. AGENCY: This document sets forth final rules to expand opportunities for working men and women and their families to access affordable, quality healthcare through changes to rules under various provisions of the Public Health Service Act (PHS Act), the Employee Retirement Income Security Act (ERISA), and the Internal Revenue Code (Code) regarding health reimbursement arrangements (HRAs) and other account-based group health plans. Specifically, the final rules allow integrating HRAs and other accountbased group health plans with individual health insurance coverage or Medicare, if certain conditions are satisfied (an individual coverage HRA). The final rules also set forth conditions under which certain HRAs and other account-based group health plans will be recognized as limited excepted benefits. Also, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) are finalizing rules regarding premium tax credit (PTC) eligibility for individuals offered an individual coverage HRA. In addition, the Department of Labor (DOL) is finalizing a clarification to provide assurance that the individual health jbell on DSK3GLQ082PROD with RULES2 SUMMARY: VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 insurance coverage for which premiums are reimbursed by an individual coverage HRA or a qualified small employer health reimbursement arrangement (QSEHRA) does not become part of an ERISA plan, provided certain safe harbor conditions are satisfied. Finally, the Department of Health and Human Services (HHS) is finalizing provisions to provide a special enrollment period (SEP) in the individual market for individuals who newly gain access to an individual coverage HRA or who are newly provided a QSEHRA. The goal of the final rules is to expand the flexibility and use of HRAs and other accountbased group health plans to provide more Americans with additional options to obtain quality, affordable healthcare. The final rules affect employees and their family members; employers, employee organizations, and other plan sponsors; group health plans; health insurance issuers; and purchasers of individual health insurance coverage. DATES: Effective date: These final rules are effective on August 19, 2019. Applicability dates: The final rules generally apply for plan years beginning on or after January 1, 2020. However, the final rules under Code section 36B apply for taxable years beginning on or after January 1, 2020, and the final rules providing a new special enrollment period in the individual market apply January 1, 2020. See Section VI of the SUPPLEMENTARY INFORMATION section for more information on the applicability dates. FOR FURTHER INFORMATION CONTACT: Christopher Dellana, Internal Revenue Service, Department of the Treasury, at (202) 317–5500; Matthew Litton or David Sydlik, Employee Benefits Security Administration, Department of Labor, at (202) 693–8335; David Mlawsky, Centers for Medicare & Medicaid Services, Department of Health and Human Services, at (410) 786–1565. Customer Service Information: Individuals interested in obtaining information from the DOL concerning employment-based health coverage laws may call the EBSA Toll-Free Hotline at 1–866–444–EBSA (3272) or visit the DOL’s website (www.dol.gov/ebsa). In addition, information from HHS on private health insurance coverage and coverage provided by non-federal governmental group health plans can be found on the Centers for Medicare & Medicaid Services (CMS) website (www.cms.gov/cciio), and information on healthcare reform can be found at www.HealthCare.gov. PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 SUPPLEMENTARY INFORMATION: I. Background A. Executive Order On October 12, 2017, President Trump issued Executive Order 13813,1 ‘‘Promoting Healthcare Choice and Competition Across the United States,’’ stating, in part, that the ‘‘Administration will prioritize three areas for improvement in the near term: association health plans (AHPs), shortterm, limited-duration insurance (STLDI), and health reimbursement arrangements (HRAs).’’ With regard to HRAs, the Executive Order directs the Secretaries of the Treasury, Labor, and HHS to ‘‘consider proposing regulations or revising guidance, to the extent permitted by law and supported by sound policy, to increase the usability of HRAs, to expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup coverage.’’ The Executive Order further provides that expanding ‘‘the flexibility and use of HRAs would provide many Americans, including employees who work at small businesses, with more options for financing their healthcare.’’ B. HRAs and Other Account-Based Group Health Plans 1. In General An account-based group health plan is an employer-provided group health plan that provides for reimbursement of expenses for medical care (as defined under Code section 213(d)) (medical care expenses), subject to a maximum fixed-dollar amount of reimbursements for a period (for example, a calendar year). An HRA is a type of accountbased group health plan funded solely by employer contributions (with no salary reduction contributions or other contributions by employees) that reimburses an employee solely for medical care expenses incurred by the employee, or the employee’s spouse, dependents, and children who, as of the end of the taxable year, have not attained age 27, up to a maximum dollar amount for a coverage period.2 The reimbursements under these types of arrangements are excludable from the employee’s income and wages for federal income tax and employment tax purposes. Amounts that remain in the HRA at the end of the year often may 1 82 FR 48385 (Oct. 17, 2017). The executive order was issued on October 12, 2017 and was published in the Federal Register on October 17, 2017. 2 See IRS Notice 2002–45, 2002–2 CB 93; Revenue Ruling 2002–41, 2002–2 CB 75; and IRS Notice 2013–54, 2013–40 IRB 287. E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations be used to reimburse medical care expenses incurred in later years, depending on the terms of the HRA. HRAs are not the only type of account-based group health plan. For example, an employer payment plan is also an account-based group health plan. An employer payment plan is an arrangement under which an employer reimburses an employee for some or all of the premium expenses incurred for individual health insurance coverage, or other non-employer sponsored hospital or medical insurance. This includes a reimbursement arrangement described in Revenue Ruling 61–146, 1961–2 CB 25, or an arrangement under which the employer uses its funds directly to pay the premium for individual health insurance coverage or other nonemployer sponsored hospital or medical insurance covering the employee.3 Other examples of account-based group health plans include health flexible spending arrangements (health FSAs) and certain other employer-provided medical reimbursement plans that are not HRAs.4 jbell on DSK3GLQ082PROD with RULES2 2. Application of the Patient Protection and Affordable Care Act to HRAs and Other Account-Based Group Health Plans The Patient Protection and Affordable Care Act, Public Law 111–148, was enacted on March 23, 2010 and the Health Care and Education Reconciliation Act of 2010, Public Law 111–152, was enacted on March 30, 2010 (collectively, PPACA). PPACA 3 For more information about employer payment plans, see IRS Notice 2013–54, Q&A–1 and Q&A– 3, and IRS Notice 2015–17, Q&A–4 and Q&A–5, 2015–14 IRB 845. 4 For simplicity, the preamble generally refers only to HRAs, but references to HRAs should also be considered to include other account-based group health plans as defined in the final rules, unless otherwise specified. This term does not include QSEHRAs, under Code section 9831(d); medical savings accounts (MSAs), under Code section 220; or health savings accounts (HSAs), under Code section 223. In addition, for purposes of the final rules, the term ‘‘HRA or other account-based group health plan’’ does not include an employer arrangement that reimburses the cost of individual health insurance coverage through a cafeteria plan under Code section 125 (cafeteria plan premium arrangements); however see later in this preamble for a clarification that plan sponsors may offer such an arrangement in addition to an individual coverage HRA. A QSEHRA is not a group health plan for purposes of the market requirements of the Code (except as provided in Code section 4980I(f)(4)), parts 6 and 7 of ERISA, and titles XXII and XXVII of the PHS Act, and is not included in the definition of HRAs and other account-based group health plans for purposes of the final rules or this preamble. A QSEHRA is, however, considered a group health plan under the PHS Act for purposes of part C of title XI of the Social Security Act (42 U.S.C. 1320d et seq.). See PHS Act section 2791(a)(1), as amended by the 21st Century Cures Act (Cures Act), Public Law 114–255, section 18001(c). VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 reorganized, amended, and added to the provisions of part A of title XXVII of the PHS Act relating to health coverage requirements for group health plans and health insurance issuers in the group and individual markets. The term ‘‘group health plan’’ includes both insured and self-insured group health plans. PPACA also added section 715 to ERISA and section 9815 to the Code to incorporate the provisions of part A of title XXVII of the PHS Act, PHS Act sections 2701 through 2728 (the market requirements), into ERISA and the Code, making them applicable to group health plans and health insurance issuers providing health insurance coverage in connection with group health plans. In accordance with Code section 9831(b) and (c), ERISA section 732(b) and (c), and PHS Act sections 2722(b) and (c) and 2763, the market requirements do not apply to a group health plan or a health insurance issuer in the group or individual market in relation to the provision of excepted benefits described in Code section 9832(c), ERISA section 733(c), and PHS Act section 2791(c).5 See the discussion later in this preamble for additional background on excepted benefits. In addition, in accordance with Code section 9831(a)(2) and ERISA section 732(a), the market requirements do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year.6 PHS Act section 2711, as added by PPACA, generally prohibits group health plans and health insurance issuers offering group or individual health insurance coverage 7 from 5 While the PPACA amendments to PHS Act section 2722(b) and (c) (formerly PHS Act section 2721(c) and (d)) could be read as restricting the exemption for excepted benefits so it applies only with respect to subpart 2 of part A of title XXVII of the PHS Act, HHS does not intend to use its resources to enforce the market requirements with respect to excepted benefits offered by non-federal governmental plan sponsors and encourages states to adopt a similar approach with respect to issuers of excepted benefits. See 75 FR 34537, 34539–34540 (June 17, 2010). 6 While the PPACA amendments to title XXVII of the PHS Act removed the parallel provision at section 2722(a) (formerly PHS Act section 2721(a)), HHS follows a similar approach for retiree-only non-federal governmental plans and encourages states to adopt a similar approach with respect to health insurance issuers of retiree-only plans. See 75 FR 34537, 34539–34540 (June 17, 2010). 7 PHS Act section 2711 applies to grandfathered health plans, except that the annual dollar limit prohibition does not apply to grandfathered individual health insurance coverage. Grandfathered health plans are health plans that were in existence as of March 23, 2010, and that are only subject to certain provisions of PPACA, as long as they maintain status as grandfathered health plans under the applicable rules. See 26 CFR 54.9815–1251, 29 CFR 2590.715–1251, and 45 CFR 147.140. PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 28889 establishing for any individual any lifetime or annual limits on the dollar value of essential health benefits (EHBs), as defined in PPACA section 1302(b). PHS Act section 2711, however, does not prevent a group health plan, or a health insurance issuer offering group or individual health insurance coverage, from placing an annual or lifetime dollar limit for any individual on specific covered benefits that are not EHBs, to the extent these limits are otherwise permitted under applicable law.8 HRAs are subject to PHS Act section 2711. An HRA generally will fail to comply with PHS Act section 2711 because the arrangement is a group health plan that imposes an annual dollar limit on EHBs that the HRA will reimburse for an individual.9 8 For information regarding EHBs, see HHS’s February 25, 2013 final rules addressing EHBs under PPACA section 1302 (78 FR 12834 (Feb. 25, 2013)); see also HHS Notice of Benefit and Payment Parameters for 2016 (80 FR 10871 (Feb. 27, 2015)). In addition, HHS issued final rules providing states with additional flexibility to define EHBs, starting with plan years beginning on or after January 1, 2020. See 45 CFR 156.111 (83 FR 16930 (April 17, 2018)). The current rules under PHS Act section 2711 include a definition of EHBs that applies for plans that are not required to cover EHBs. See 26 CFR 54.9815–2711(c), 29 CFR 2590.715–2711(c), and 45 CFR 147.126(c). As explained later in this preamble, the rules set forth in this document include amendments to the definition of EHBs under the PHS Act section 2711 rules to reflect the updated final EHB rules. 9 As explained in prior guidance, the Departments of Labor, the Treasury and HHS (the Departments) have determined that the annual dollar limit prohibition is not applicable to certain accountbased group health plans that are subject to other statutory provisions limiting the benefits available under those plans. See 80 FR 72192, 72201 (Nov. 18, 2015). Specifically, the Departments have explained that the annual dollar limit prohibition does not apply to health FSAs that are offered through a cafeteria plan under Code section 125 (cafeteria plan) because PPACA section 9005 specifically limits salary reduction contributions to health FSAs to $2,500 (indexed for inflation) per year. Notwithstanding this exclusion for certain health FSAs from the application of the annual dollar limit prohibition, rules under Code section 125 provide that health FSAs are not permitted to reimburse employees for premiums for health insurance coverage. See Code section 125(d)(2)(A) and proposed 26 CFR 1.125–5(k)(4) (72 FR 43938, 43959 (Aug. 6, 2007)). Similarly, although MSAs and HSAs generally are not treated as group health plans subject to the market requirements, the Departments have concluded that the annual dollar limit prohibition would not apply to an MSA or HSA even if a particular arrangement did satisfy the criteria to be a group health plan because both types of arrangements are subject to specific statutory provisions that limit the contributions. See 75 FR 37188, 37190 (June 28, 2010); see also IRS Notice 2004–2, Q&A–1 and Q&A–3, 2004–2 IRB 269, which defines an HSA as a tax-exempt trust or custodial account and a high-deductible health plan as a health plan; see also DOL Field Assistance Bulletin No. 2004–01, available at https:// www.dol.gov/agencies/ebsa/employers-andadvisers/guidance/field-assistance-bulletins/200401 and DOL Field Assistance Bulletin No. 2006–02, E:\FR\FM\20JNR2.SGM Continued 20JNR2 28890 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations PHS Act section 2713, as added by PPACA, generally requires nongrandfathered group health plans, and health insurance issuers offering nongrandfathered group or individual health insurance coverage, to provide coverage for certain preventive services without imposing any cost-sharing requirements for these services.10 Nongrandfathered HRAs are subject to and fail to comply with PHS Act section 2713 because, while HRAs may be used to reimburse the costs of preventive services, HRAs do not reimburse such costs after the HRAs have reimbursed the maximum dollar amount for a coverage period, and therefore HRAs fail to provide the required coverage, and violate the prohibition on imposing cost sharing for preventive services.11 jbell on DSK3GLQ082PROD with RULES2 3. Prior Rules and Guidance on Integration of HRAs and Other AccountBased Group Health Plans The Departments previously issued rules and subregulatory guidance regarding the application of PHS Act sections 2711 and 2713 to HRAs.12 The available at https://www.dol.gov/agencies/ebsa/ employers-and-advisers/guidance/field-assistancebulletins/2006-02, which provide guidance regarding HSAs not constituting ‘‘employee welfare benefit plans’’ covered by ERISA Title I where employer involvement with the HSA is limited. Therefore, the final rules do not apply to MSAs, HSAs, or, in certain circumstances, health FSAs. 10 See also 26 CFR 54.9815–2713, 29 CFR 2590.715–2713, and 45 CFR 147.130. 11 Because MSAs and HSAs generally are not treated as group health plans, these arrangements are not subject to PHS Act section 2713. Health FSAs are group health plans and, unless they are excepted benefits, will fail to satisfy the requirements of PHS Act section 2713 unless they are integrated with other coverage that satisfies these requirements. For more information about the application of PHS Act section 2713 to health FSAs, see IRS Notice 2013–54, Q&A–7; DOL Technical Release No. 2013–03, Q&A–7, issued on September 13, 2013, available at https://www.dol.gov/agencies/ ebsa/employers-and-advisers/guidance/technicalreleases/13-03; and CMS Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare Arrangements, September 16, 2013, available at https:// www.cms.gov/CCIIO/Resources/Regulations-andGuidance/Downloads/cms-hra-notice-9-162013.pdf. 12 Rules and subregulatory guidance issued on this topic include: (1) 75 FR 37188 (June 28, 2010); (2) FAQs about Affordable Care Act Implementation (Part XI), available at https://www.dol.gov/sites/ default/files/ebsa/about-ebsa/our-activities/ resource-center/faqs/aca-part-xi.pdf or https:// www.cms.gov/CCIIO/Resources/Fact-Sheets-andFAQs/aca_implementation_faqs11.html; (3) IRS Notice 2013–54 and DOL Technical Release No. 2013–03 and CMS Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare Arrangements; (4) IRS FAQ on Employer Healthcare Arrangements, available at https://www.irs.gov/affordable-care-act/employerhealth-care-arrangements; (5) FAQs about Affordable Care Act Implementation (Part XXII), available at https://www.dol.gov/sites/default/files/ ebsa/about-ebsa/our-activities/resource-center/faqs/ aca-part-xxii.pdf or https://www.cms.gov/CCIIO/ VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 rules and guidance generally provide that, if an HRA is ‘‘integrated’’ with other group health plan coverage that complies with PHS Act sections 2711 and 2713, the HRA is considered to be in compliance with those sections because the combined arrangement complies with them. The rules and guidance also provide that HRAs may be integrated with Medicare and TRICARE coverage if certain conditions are satisfied, but may not be integrated with individual health insurance coverage for purposes of complying with PHS Act sections 2711 and 2713.13 More specifically, in the preamble to the 2010 interim final rules under PHS Act section 2711, the Departments provided that HRAs may be integrated with ‘‘other coverage as part of a group health plan’’ that complies with PHS Act section 2711 in order for the HRAs to be considered to satisfy PHS Act section 2711.14 The interim final rules did not, however, set forth rules for implementing integration; the integration methods were set forth in later subregulatory guidance and subsequently included in the final rules under PHS Act section 2711 issued in 2015. On September 13, 2013, the Treasury Department and the IRS issued Notice 2013–54, the DOL issued Technical Release 2013–03, and HHS issued contemporaneous guidance explaining that HHS concurred with the DOL and Treasury Department guidance.15 This guidance stated that an HRA may not be Resources/Fact-Sheets-and-FAQs/Downloads/ FAQs-Part-XXII-FINAL.pdf; (6) IRS Notice 2015–17, issued on February 18, 2015; (7) 80 FR 72192 (Nov. 18, 2015); (8) IRS Notice 2015–87, 2015–52 IRB 889, issued on December 16, 2015; (9) IRS Notice 2016– 17, 2016–9 IRB 358, issued on February 5, 2015; DOL Technical Release No. 2016–01, issued on February 5, 2016, available at https://www.dol.gov/ agencies/ebsa/employers-and-advisers/guidance/ technical-releases/16-01; and CMS Insurance Standards Bulletin, Application of the Market Reforms and Other Provisions of the Affordable Care Act to Student Health Coverage, issued on February 5, 2016, available at https://www.cms.gov/ CCIIO/Resources/Regulations-and-Guidance/ Downloads/student-health-bulletin.pdf; (10) FAQs about Affordable Care Act Implementation Part 33, available at https://www.dol.gov/sites/default/files/ ebsa/about-ebsa/our-activities/resource-center/faqs/ aca-part-33.pdf or https://www.cms.gov/CCIIO/ Resources/Fact-Sheets-and-FAQs/Downloads/ACA– FAQ-Set-33-Final.pdf; (11) FAQs about Affordable Care Act Implementation Part 37, available at https://www.dol.gov/sites/default/files/ebsa/aboutebsa/our-activities/resource-center/faqs/aca-part37.pdf or https://www.cms.gov/CCIIO/Resources/ Fact-Sheets-and-FAQs/Downloads/FAQs-Part37.pdf; (12) 83 FR 54420 (Oct. 29, 2018); and (13) IRS Notice 2018–88, 2018–49 IRB 817, issued on November 19, 2018. 13 26 CFR 54.9815–2711(d)(4), 29 CFR 2590.715– 2711(d)(4), and 45 CFR 147.126(d)(4). 14 See 75 FR 37187, 37190–37191 (June 28, 2010). 15 See CMS Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare Arrangements. PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 integrated with individual health insurance coverage for purposes of PHS Act sections 2711 and 2713, but described methods for integrating an HRA with another group health plan.16 The Departments later incorporated the provisions of this guidance into the final rules issued in 2015 under PHS Act section 2711 17, which are summarized later in this section of the preamble. On November 6, 2014, the Departments issued FAQs about Affordable Care Act Implementation (Part XXII).18 Q&A–1 reiterated and clarified prior subregulatory guidance by explaining that if an employer offers its employees cash to reimburse the purchase of individual health insurance coverage, the payment arrangement is a group health plan, without regard to whether the employer treats the money as a pre-tax or post-tax benefit to the employee, and it may not be integrated with individual health insurance coverage, and, therefore, will fail to comply with PHS Act sections 2711 and 2713.19 On February 18, 2015, the Treasury Department and the IRS issued Notice 2015–17. Q&A–3 provided that an arrangement under which an employer reimburses (or pays directly) some or all of the medical care expenses for employees covered by TRICARE constitutes an HRA and may not be integrated with TRICARE to comply with PHS Act sections 2711 and 2713 because TRICARE is not a group health 16 In addition to describing the integration methods, IRS Notice 2013–54 and DOL Technical Release No. 2013–03, in Q&A–5, provided that, whether or not an HRA is integrated with other group health plan coverage, unused amounts that are credited to the HRA while the HRA is integrated with other group health plan coverage may be used to reimburse medical care expenses in accordance with the terms of the HRA after an employee ceases to be covered by the integrated group health plan coverage without causing the HRA to fail to comply with PHS Act sections 2711 and 2713. In IRS Notice 2015–87, Q&A–2, however, the Departments clarified that an HRA that includes terms permitting the purchase of individual health insurance coverage, even if reimbursement is only allowed after the employee ceases to be covered by other integrated group health plan coverage, fails to be integrated with other group health plan coverage and therefore fails to comply with PHS Act sections 2711 and 2713. 17 See 80 FR 72192 (Nov. 18, 2015). 18 See FAQs about Affordable Care Act Implementation (Part XXII), available at https:// www.dol.gov/sites/default/files/ebsa/about-ebsa/ our-activities/resource-center/faqs/aca-part-xxii.pdf or https://www.cms.gov/CCIIO/Resources/FactSheets-and-FAQs/Downloads/FAQs-Part-XXIIFINAL.pdf. 19 The Treasury Department and the IRS note that the information included in this preamble is not intended to be guidance regarding the proper federal tax treatment or consequences of any particular arrangement, except to the extent the preamble addresses the application of Code sections 36B, 9801, 9802, 9815, 9831, and 9832 and PHS Act sections 2711 and 2713. E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations plan for integration purposes. However, Q&A–3 stated that an HRA that pays for or reimburses medical care expenses for employees covered by TRICARE may be integrated with another group health plan offered by the employer for purposes of PHS Act sections 2711 and 2713 if: (1) The employer offers a group health plan (other than the HRA) to the employee that does not consist solely of excepted benefits and that provides minimum value (MV); (2) the employee participating in the HRA is enrolled in TRICARE; (3) the HRA is available only to employees who are enrolled in TRICARE; and (4) the HRA is limited to reimbursement of cost sharing and excepted benefits, including TRICARE supplemental premiums. Q&A–3 of Notice 2015–17 also provided that an employer payment plan through which an employer reimburses (or pays directly) all or a portion of Medicare Part B or D premiums for employees may not be integrated with Medicare coverage to comply with PHS Act sections 2711 and 2713 because Medicare coverage is not a group health plan. However, under the notice, this type of employer payment plan may be integrated with another group health plan offered by the employer for purposes of PHS Act sections 2711 and 2713 if: (1) The employer offers a group health plan (other than the employer payment plan) to the employee that does not consist solely of excepted benefits and that provides MV; (2) the employee participating in the employer payment plan is actually enrolled in Medicare Part A and B; (3) the employer payment plan is available only to employees who are enrolled in Medicare Part A and Part B or D; and (4) the employer payment plan is limited to reimbursement of Medicare Part B or D premiums and excepted benefits, including Medigap premiums. Notice 2015–17 also includes a general reminder that, to the extent such an arrangement is available to active employees, it may be subject to restrictions under other laws, such as the Medicare secondary payer (MSP) provisions.20 See later in this preamble for a discussion of the rules provided in the 2015 rules under PHS Act section 2711 allowing Medicare Part B and D reimbursement arrangements to be integrated with Medicare in certain limited circumstances (that is, generally, for HRAs sponsored by employers with fewer than 20 employees). On November 18, 2015, the Departments finalized the proposed and 20 See later in this preamble for a clarification of the meaning of this statement included in IRS Notice 2015–17, regarding the MSP provisions. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 interim final rules under PHS Act section 2711, incorporating certain subregulatory guidance regarding HRA integration, and making various additional clarifications (the 2015 rules).21 The 2015 rules incorporate prior subregulatory guidance that HRAs may not be integrated with individual health insurance coverage for purposes of complying with PHS Act sections 2711 and 2713. Consistent with the initial subregulatory guidance, the 2015 rules provide two methods for integration of HRAs with other group health plan coverage.22 The first method applies to HRAs integrated with other group health plan coverage that provides MV (the MV Integration Method).23 The second method applies to HRAs integrated with other group health plan coverage that does not provide MV (the Non-MV Integration Method).24 Both the MV Integration Method and the Non-MV Integration Method require that: (1) The HRA plan sponsor offer the employee a group health plan other than the HRA (non-HRA group coverage); (2) the employee receiving the HRA be enrolled in non-HRA group coverage, even if the non-HRA group coverage is not offered by the HRA plan sponsor, such as a group health plan maintained by an employer of the employee’s spouse; 25 and (3) the HRA be made available only to employees who are enrolled in non-HRA group coverage, regardless of whether such coverage is provided by the HRA plan sponsor. For both integration methods, the non-HRA group coverage may not consist solely of excepted benefits and, for the MV 21 See 80 FR 72192 (Nov. 18, 2015). To the extent the 2015 rules did not incorporate or modify the prior subregulatory guidance, that guidance remains in effect. 22 These two methods of integration were originally discussed in IRS Notice 2013–54, Q&A– 4, and DOL Technical Release No. 2013–03. 23 See 26 CFR 54.9815–2711(d)(2)(ii), 29 CFR 2590.715–2711(d)(2)(ii), and 45 CFR 147.126(d)(2)(ii). 24 See 26 CFR 54.9815–2711(d)(2)(i), 29 CFR 2590.715–2711(d)(2)(i), and 45 CFR 147.126(d)(2)(i). 25 In IRS Notice 2015–87, Q&A–4, the Departments clarified that an HRA that may be used to reimburse the medical care expenses of an employee’s spouse or dependents (a family HRA) may not be integrated with self-only coverage of the employee under the employer’s non-HRA group health plan. On January 12, 2017, the Departments issued guidance to clarify that a family HRA is permitted to be integrated with a combination of coverage under qualifying non-HRA group health plan coverage for purposes of complying with PHS Act sections 2711 and 2713, provided that all of the individuals who are covered under the family HRA are also covered under qualifying non-HRA group coverage. See FAQs about Affordable Care Act Implementation Part 37, available at https:// www.dol.gov/sites/default/files/ebsa/about-ebsa/ our-activities/resource-center/faqs/aca-part-37.pdf or https://www.cms.gov/CCIIO/Resources/FactSheets-and-FAQs/Downloads/FAQs-Part-37.pdf. PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 28891 Integration Method, the non-HRA group coverage offered by the employer and in which the employee enrolls must provide MV. In addition, both the MV Integration Method and the Non-MV Integration Method require that, under the terms of the HRA, an employee (or former employee) be permitted to permanently opt out of and waive future reimbursements at least annually from the HRA. Both integration methods also require that, upon termination of employment, either the funds remaining in the HRA are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements under the HRA. For this purpose, forfeiture of the funds remaining in the HRA, or waiver of future reimbursements under the HRA, occurs even if the forfeited or waived amounts may be reinstated upon a fixed date, the participant’s death, or the earlier of the two events. The two methods differ with respect to the expenses that the HRA may reimburse. Under the MV Integration Method, the HRA may reimburse any medical care expenses, but under the Non-MV Integration Method, the HRA may reimburse only co-payments, coinsurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care that does not constitute EHBs.26 The 2015 rules also include a special integration method for certain arrangements offered by employers that are not required to offer, and do not offer, non-HRA group coverage to employees who are eligible for Medicare coverage (generally, employers with fewer than 20 employees), but that offer non-HRA group coverage that does not consist solely of excepted benefits to employees who are not eligible for Medicare.27 For these employers, an 26 Although, in general, an HRA integrated with non-HRA group coverage fails to comply with PHS Act section 2711 if the non-HRA group coverage with which the HRA is integrated does not cover a category of EHB and the HRA is available to cover that category of EHB and limits the coverage to the HRA’s maximum benefit, the Departments have provided that if the non-HRA group coverage satisfies the MV Integration Method, an HRA will not be treated as failing to comply with PHS Act section 2711, even if the non-HRA group coverage with which the HRA is integrated does not cover a category of EHB and the HRA is available to cover that category of EHB and limits the coverage to the HRA’s maximum benefit. See IRS Notice 2013–54, Q&A–6. 27 See 26 CFR 54.9815–2711(d)(5), 29 CFR 2590.715–2711(d)(5), and 45 CFR 147.126(d)(5). The 2015 rules did not address the Medicare integration rules that apply to employers who are required to offer non-HRA group coverage to employees who are eligible for Medicare (generally, employers with 20 or more employees). For a discussion of those rules, see IRS Notice 2015–17 and the discussion in this preamble. E:\FR\FM\20JNR2.SGM 20JNR2 28892 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations HRA that may be used to reimburse premiums under Medicare Part B or D may be integrated with Medicare (and deemed to comply with PHS Act sections 2711 and 2713) if the employees who are offered the HRA are enrolled in Medicare Part B or D, the HRA is available only to employees who are enrolled in Medicare Part B or D, and the HRA complies with the opt-out and forfeiture rules under the MV Integration Method and Non-MV Integration Method. These employers may use either of the non-Medicarespecific integration methods, as applicable, for HRAs offered to employees who are ineligible for Medicare. C. HIPAA Nondiscrimination Provisions Prior to the enactment of PPACA, titles I and IV of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), Public Law 104–191, added Code section 9802, ERISA section 702, and PHS Act section 2702 (HIPAA nondiscrimination provisions). The Departments published final rules implementing the HIPAA nondiscrimination provisions on December 13, 2006 (the 2006 rules).28 PPACA section 1201 reorganized and amended the HIPAA nondiscrimination provisions of the PHS Act. Although Code section 9802 and ERISA section 702 were not amended, the requirements of PHS Act section 2705 were incorporated by reference into Code section 9815 and ERISA section 715.29 As amended by PPACA, the nondiscrimination provisions of PHS Act section 2705 largely reflect the 2006 rules and extend the HIPAA nondiscrimination protections (but not the wellness program exception) to the individual market. These provisions generally prohibit group health plans and health insurance issuers in the group and individual markets from discriminating against individual participants and beneficiaries in eligibility, benefits, or premiums based on a health factor.30 28 71 FR 75013 (Feb. 12, 2007). section 1201 moved the HIPAA nondiscrimination provisions from PHS Act section 2702 to PHS Act section 2705, with some modifications. 30 The HIPAA nondiscrimination provisions set forth eight health status related factors. The eight health factors are health status, medical condition (including both physical and mental illnesses), claims experience, receipt of healthcare, medical history, genetic information, evidence of insurability, and disability. These terms are largely overlapping and, in combination, include any factor related to an individual’s health. 66 FR 1377, 1379 (Jan. 8, 2001). jbell on DSK3GLQ082PROD with RULES2 29 PPACA VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 Q&A–2 of FAQs about Affordable Care Act Implementation (Part XXII) 31 provided that, if an employer offers only employees with high claims risk a choice between enrollment in a traditional group health plan or cash, the arrangement would not comply with the market requirements, citing PHS Act section 2705 (which is incorporated by reference into Code section 9815 and ERISA section 715), as well as the HIPAA nondiscrimination provisions of Code section 9802 and ERISA section 702. The Q&A explained that these arrangements violate the nondiscrimination provisions regardless of whether: (1) The cash payment is treated by the employer as pre-tax or post-tax to the employee, (2) the employer is involved in the selection or purchase of any individual market product, or (3) the employee obtains any individual health insurance coverage. The Departments explained that offering cash as an alternative to health coverage for individuals with adverse health factors is an eligibility rule that discourages participation in the traditional group health plan, in contravention of the HIPAA nondiscrimination provisions. D. Excepted Benefits Code section 9831, ERISA section 732, and PHS Act sections 2722 and 2763 provide that the requirements of chapter 100 of the Code, part 7 of ERISA, and title XXVII of the PHS Act do not apply to excepted benefits. Excepted benefits are described in Code section 9832, ERISA section 733, and PHS Act section 2791. There are four statutory categories of excepted benefits, including limited excepted benefits. Under the statutory provisions, limited excepted benefits may include limited scope vision or dental benefits, benefits for long-term care, nursing home care, home healthcare, or community-based care, or any combination thereof, and ‘‘such other similar, limited benefits as are specified in regulations’’ by the Departments.32 To be excepted benefits under this category, the benefits must either: (1) Be insured and provided under a separate policy, certificate, or contract of insurance; or (2) otherwise not be an integral part of the plan.33 The 31 See FAQs about Affordable Care Act Implementation (Part XXII), available at https:// www.dol.gov/sites/default/files/ebsa/about-ebsa/ our-activities/resource-center/faqs/aca-part-xxii.pdf or https://www.cms.gov/CCIIO/Resources/FactSheets-and-FAQs/Downloads/FAQs-Part-XXIIFINAL.pdf. 32 See Code section 9832(c)(2), ERISA section 733(c)(2), and PHS Act section 2791(c)(2). 33 See Code section 9831(c)(1), ERISA section 732(c)(1), and PHS Act section 2722(c)(1) and PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 Departments previously exercised the authority to specify additional types of limited excepted benefits with respect to certain health FSAs, certain employee assistance programs, and certain limited wraparound coverage.34 Coverage that consists of excepted benefits is not minimum essential coverage (MEC).35 Therefore, an individual offered or covered by an excepted benefit is not deemed ineligible for the PTC by virtue of the excepted benefit offer or coverage.36 Further, the offer of an excepted benefit by an employer is not considered to be an offer of MEC under an eligible employer-sponsored plan for purposes of Code section 4980H, the employer shared responsibility provisions. Thus, an employer does not avoid a payment under Code section 4980H by virtue of an offer of an excepted benefit.37 E. Premium Tax Credit 1. In General Code section 36B allows for the PTC to be available to applicable taxpayers to help with the cost of individual health insurance coverage obtained through an Exchange.38 Under Code section 36B(a) and (b)(1) and 26 CFR 1.36B–3(d), a taxpayer’s PTC is the sum of the premium assistance amounts for all coverage months during the taxable year for individuals in the taxpayer’s family. Under Code section 36B(c)(2), a month is not a coverage month for an individual if either: (1) The individual is eligible for coverage under an eligible employer-sponsored plan and the coverage is affordable and provides MV; or (2) the individual is enrolled in an eligible employer-sponsored plan, even if the coverage is not affordable or does not provide MV.39 An eligible employer-sponsored plan includes coverage under a self-insured (as well as an insured) group health plan 40 and is MEC unless it consists solely of excepted benefits.41 2763(b). See also 79 FR 59130, 59131–59134 (Oct. 1, 2014) discussing the application of these requirements to benefits such as limited-scope dental and vision benefits and employee assistance programs. 34 See 26 CFR 54.9831–1(c)(3)(v), (vi), and (vii); 29 CFR 2590.732(c)(3)(v), (vi), and (vii); and 45 CFR 146.145(b)(3)(v), (vi), and (vii). 35 See Code section 5000A(f)(3). 36 See Code section 36B(c)(2)(B). 37 See Code section 4980H(a)(1) and (b)(1). See also 26 CFR 54.4980H–1(a)(14). 38 Exchanges are entities established under PPACA section 1311 through which qualified individuals and qualified employers can purchase health insurance coverage. 39 See Code section 36B(c)(2)(C)(iii) and 26 CFR 1.36B–2(c)(3)(vii)(A) and 1.36B–3(c). 40 See 26 CFR 1.5000A–2(c). 41 See Code section 5000A(f)(3) and 26 CFR 1.5000A–2(g). E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations An HRA is a self-insured group health plan and, therefore, is an eligible employer-sponsored plan. Accordingly, under existing rules, an individual is ineligible for the PTC for the individual’s Exchange coverage for a month if the individual is covered by an HRA or is eligible for an HRA that is affordable and provides MV for the month. jbell on DSK3GLQ082PROD with RULES2 2. Affordability and Minimum Value Under Code section 36B(c)(2)(C) and 26 CFR 1.36B–2(c)(3)(v)(A)(1) and (2), an eligible employer-sponsored plan is affordable for an employee, or for an individual who may enroll in the coverage because of a relationship to the employee, if the amount the employee must pay for self-only coverage whether by salary reduction or otherwise (the employee’s required contribution) does not exceed a specified percentage of the employee’s household income. The percentage is adjusted annually. However, 26 CFR 1.36B–2(c)(3)(v)(A)(3) provides an employee safe harbor under which an eligible employer-sponsored plan is not considered affordable for the entire plan year of the eligible employer-sponsored plan if, at the time an individual enrolls in a qualified health plan (QHP) offered through an Exchange, the Exchange determines that the eligible employer-sponsored plan is not affordable.42 Thus, the employee safe harbor locks in the Exchange’s determination of unaffordability, which is based on estimated household income, even if the eligible employersponsored plan ultimately proves to be affordable based on actual household income for the tax year. Under Code section 36B(c)(2)(C)(ii), an eligible employer-sponsored plan provides MV if the plan’s share of the total allowed costs of benefits provided under the plan is at least 60 percent of the costs. PPACA section 1302(d)(2)(C) provides that, in determining the percentage of the total allowed costs of benefits provided under a group health plan, the rules promulgated by HHS under that paragraph of PPACA apply. In general, HHS rules provide that an eligible employer-sponsored plan provides MV only if the percentage of the total allowed costs of benefits provided under the plan is greater than or equal to 60 percent, and the benefits under the plan include substantial 42 This employee safe harbor does not apply if the individual does not respond to a redetermination notice or, with reckless disregard for the facts, provides incorrect information to the Exchange. See 26 CFR 1.36B–2(c)(3)(v)(A)(3). VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 coverage of inpatient hospital services and physician services.43 F. QSEHRAs 1. In General The 21st Century Cures Act (Cures Act) Public Law 114–255 was enacted on December 13, 2016. Cures Act section 18001 amended the Code, ERISA, and the PHS Act to permit an eligible employer to provide a QSEHRA to its eligible employees. The Cures Act provides that a QSEHRA is not a group health plan for purposes of the market requirements, and, as a result, QSEHRAs are not subject to PHS Act sections 2711 and 2713.44 For purposes of these rules, the term ‘‘HRA or other account-based group health plans’’ does not include QSEHRAs, unless otherwise specified. Pursuant to Code section 9831(d), a QSEHRA is an arrangement that generally must be provided on the same terms, subject to certain exceptions, and cannot exceed a prescribed maximum amount.45 For the purpose of identifying who can provide a QSEHRA, the statute provides that an eligible employer is an employer that is not an applicable large employer (ALE), as defined in Code section 4980H(c)(2), and that does not offer a group health plan to any of its employees. The statute also requires that an employer providing a QSEHRA satisfies certain notice requirements including a statement that the employee should provide the information about the permitted benefit to the applicable Exchange if the employee applies for advance payments of the premium tax credit (APTC). On October 31, 2017, the Treasury Department and the IRS issued Notice 2017–67 46 to provide guidance on the 43 See 45 CFR 156.145. See also 80 FR 52678 (Sept. 1, 2015). 44 See Code section 9831(d)(1), ERISA section 733(a)(1), and PHS Act section 2791(a)(1). However, QSEHRAs are group health plans under the PHS Act definition for purposes of part C of title XI of the Social Security Act (42 U.S.C. 1320d et seq.). See PHS Act section 2791(a)(1), as amended by Cures Act section 18001(c). In addition, QSEHRAs were not excluded from ERISA’s definition of employee welfare benefit plan under ERISA section 3(1) and, therefore, remain subject to the requirements for employee welfare benefit plans under ERISA. See H. Rept. 114–634—Small Business Health Care Relief Act of 2016 (the relevant provisions of this bill were passed into law by the Cures Act). Moreover, because QSEHRAs are employee welfare benefit plans, individual health insurance coverage that is reimbursed by a QSEHRA would not become part of an ERISA plan if the conditions of the DOL safe harbor described later in this preamble are satisfied. 45 See Code section 9831(d) and IRS Notice 2017– 67, 2017–47 IRB 517, for additional detail. 46 See IRS Notice 2017–20, 2017–11 IRB 1010, which extended the period for an employer to furnish an initial written notice to its eligible PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 28893 requirements for providing a QSEHRA. If an eligible employer complies with the guidance provided in Code section 9831(d) and Notice 2017–67, it may provide a QSEHRA to its eligible employees and the QSEHRA is not required to comply with PHS Act sections 2711 and 2713 because it is not subject to those requirements. 2. QSEHRAs and the PTC The Cures Act also added provisions to Code section 36B relating to how participation in a QSEHRA affects a taxpayer’s eligibility for the PTC and how participation in a QSEHRA affects a taxpayer’s computation of the PTC. Under Code section 36B(c)(4)(A), if an employee is provided a QSEHRA that constitutes affordable coverage for a month, the month is not a coverage month for the employee or the employee’s spouse or dependents, meaning that the PTC is not allowed for that month. Code section 36B(c)(4)(C) provides that a QSEHRA constitutes affordable coverage for a month if the excess of the monthly premium for the self-only second lowest cost silver plan in the employee’s individual market over 1⁄12 of the employee’s permitted benefit, as defined in Code section 9831(d)(3)(C), does not exceed 1⁄12 of a specified percentage of the employee’s household income. Code section 36B(c)(4)(B) provides that if an employee is provided a QSEHRA that does not constitute affordable coverage for a coverage month, the PTC otherwise allowable for the month is reduced by 1⁄12 of the employee’s annual permitted benefit under the QSEHRA. G. Individual Market Special Enrollment Periods Generally, individuals may enroll in or change to different individual health insurance coverage only during the annual open enrollment period described in 45 CFR 155.410. An individual may qualify for an SEP to enroll in or change to a different Exchange plan outside of the annual open enrollment period under a variety of circumstances prescribed by PPACA section 1311(c)(6)(C) and (D) and as described in 45 CFR 155.420. These SEPs are under the jurisdiction of HHS, and apply to persons seeking individual health insurance coverage through a State Exchange or Federally-facilitated employees regarding a QSEHRA, and see FAQs About Affordable Care Act Implementation Part 35, Q&A–3, available at https://www.dol.gov/sites/ default/files/ebsa/about-ebsa/our-activities/ resource-center/faqs/aca-part-35.pdf and https:// www.cms.gov/CCIIO/Resources/Fact-Sheets-andFAQs/Downloads/FAQ-Part-35_12-20-16.pdf. E:\FR\FM\20JNR2.SGM 20JNR2 28894 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 Exchange (FFE) and, in most cases, to individuals seeking individual health insurance coverage outside an Exchange.47 Paragraph (d) of 45 CFR 155.420 describes the triggering events that qualify individuals, enrollees, and in some cases, their dependents for SEPs on the Exchanges through which they can enroll in a QHP or change from one QHP to another. Paragraph (b) of 45 CFR 155.420 describes the coverage effective dates available in connection with each SEP. Paragraph (c) describes the availability of each SEP relative to its triggering event—that is, whether applicants may select a plan after the event or also before the event. That paragraph also describes the length of time applicants have to select a plan based on their SEP. Paragraph (a)(4) of 45 CFR 155.420 describes the plan changes that current Exchange enrollees and their dependents may make upon qualifying for an SEP. Generally, current Exchange enrollees who qualify for most SEPs may change to another QHP within the same metal level, or ‘‘plan category,’’ as their current QHP. Current enrollees whose dependent(s) qualify for most SEPs may add their dependent(s) to their current QHP, or enroll them in a separate QHP.48 In combination, the rules at 45 CFR 155.420(a)(4) are generally referred to as ‘‘plan category limitations.’’ With regard to individual health insurance coverage sold outside of an Exchange, 45 CFR 147.104(b)(2) provides that health insurance issuers must provide SEPs (referred to in the regulation as limited open enrollment periods) for the triggering events described in 45 CFR 155.420(d), except for certain triggering events listed under 45 CFR 147.104(b)(2). Additionally, 45 CFR 147.104(b)(4)(ii) and (b)(5) apply the SEP availability and coverage effective dates at 45 CFR 155.420 to SEPs available off-Exchange. However, the plan category limitations do not apply outside the Exchanges. 47 Group health plans and group health insurance issuers must provide SEPs under certain circumstances and the Departments have jurisdiction over those provisions. See Code section 9801(f), ERISA section 701(f), and PHS Act section 2704(f); see also 26 CFR 54.9801–6, 29 CFR 2590.701–6, and 45 CFR 146.117. The final rules do not affect the group health plan and group health insurance issuer SEPs, which continue to apply to group health plans, including HRAs, and group health insurance issuers. 48 If an enrollee wants to add their dependent(s) to their current QHP, but the plan’s business rules do not allow the dependent(s) to enroll, then the Exchange must allow the enrollee and his or her dependent(s) to change to another QHP within the same level of coverage, or one metal level higher or lower, if no such QHP is available. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 H. Proposed Rules In response to Executive Order 13813, the Departments published a notice of proposed rulemaking entitled ‘‘Health Reimbursement Arrangements and Other Account-Based Group Health Plans’’ on October 29, 2018 (83 FR 54420) (the proposed rules), which would expand the flexibility and use of HRAs. The proposed rules would expand the use of HRAs in several ways. First, the proposed rules included a proposal to remove the current prohibition against integrating an HRA with individual health insurance coverage 49 under the PHS Act section 2711 rules (the proposed integration rules). The proposed integration rules included a proposal to permit an HRA to be integrated with individual health insurance coverage and, therefore, to satisfy PHS Act sections 2711 and 2713, if the provisions of the proposed rules under 26 CFR 54.9802–4, 29 CFR 2590.702–2, and 45 CFR 146.123 were satisfied. These final rules refer to this type of HRA as an individual coverage HRA. Second, the proposed rules provided an expanded definition of limited excepted benefits, under Code section 9832(c)(2), ERISA section 733(c)(2), and PHS Act section 2791(c)(2)(C), to include certain HRAs that are limited in amount and with regard to the types of coverage for which premiums may be reimbursed, if certain other conditions are satisfied (an excepted benefit HRA) (the proposed excepted benefit HRA rules). The Treasury Department and the IRS also proposed rules under Code section 36B for PTC eligibility for individuals who are offered an individual coverage 49 For purposes of this preamble and the final rules, ‘‘individual health insurance coverage’’ means health insurance coverage offered to individuals in the individual market, but does not include STLDI. See PHS Act section 2791(b)(5). See also 26 CFR 54.9801–2, 29 CFR 2590.701–2, and 45 CFR 144.103. Individual health insurance coverage can include dependent coverage and therefore can be self-only coverage or other-than-self-only coverage. ‘‘Individual market’’ means the market for health insurance coverage offered to individuals other than in connection with a group health plan. See PHS Act section 2791(e)(1). See also 26 CFR 54.9801–2, 29 CFR 2590.701–2, and 45 CFR 144.103. As discussed later in this preamble, ‘‘group health insurance coverage’’ means health insurance coverage offered in connection with a group health plan. Individual health insurance coverage reimbursed by the arrangements described in 29 CFR 2510.3–1(l) (which is finalized in this rule) is not offered in connection with a group health plan, and is not group health insurance coverage, provided all the conditions in 29 CFR 2510.3–1(l) are satisfied. See ERISA section 733(b)(4) and PHS Act section 2791(b)(4). See also 26 CFR 54.9801–2, 29 CFR 2590.701–2, and 45 CFR 144.103. PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 HRA 50 (the proposed PTC rules). DOL proposed a clarification to provide HRA and QSEHRA plan sponsors with assurance that the individual health insurance coverage the premiums of which are reimbursed by the HRA or QSEHRA does not become part of an ERISA plan when certain conditions are satisfied. Finally, HHS proposed changes to rules regarding SEPs in the individual market that would provide an SEP for individuals who gain access to individual coverage HRAs or who are provided QSEHRAs (the proposed SEP rules).51 The Departments requested comments on all aspects of the proposed rules, as well as requesting comments on a number of specific issues. The Departments received over 500 comments in response to the proposed rules from a range of stakeholders, including employers, health insurance issuers, State Exchanges, state regulators, unions, and individuals. No requests for a public hearing were received. After careful consideration of all of the comments, the Departments are finalizing the proposed rules with certain modifications made in response to comments. These modifications are discussed later in this preamble. II. Overview of the Final Rules on Individual Coverage HRAs and Excepted Benefit HRAs—the Departments of the Treasury, Labor, and Health and Human Services A. Integration Rules 1. Integration—In General Consistent with the objectives in Executive Order 13813 to consider proposing rules to expand and facilitate access to HRAs, the proposed rules included a proposal to remove the prohibition on integration of an HRA with individual health insurance coverage, if certain conditions were satisfied. More specifically, in order to ensure compliance with PHS Act sections 2711 and 2713, the proposed rules provided that to be integrated with individual health insurance coverage, the HRA must require participants 52 50 References in the preamble to ‘‘an offer of an individual coverage HRA’’ or to similar phrases mean an offer of an HRA designed to be integrated with individual health insurance coverage under the final rules that will be considered integrated with that individual health insurance coverage for an individual who enrolls in that coverage. 51 On November 19, 2018, the Treasury Department and the IRS issued Notice 2018–88. IRS Notice 2018–88 described a number of proposals related to the application of Code sections 4980H and 105(h) to individual coverage HRAs. For additional discussion of IRS Notice 2018–88, see elsewhere in this preamble. 52 For this purpose, the definition of participant under 26 CFR 54.9801–2, 29 CFR 2590.701–2, and E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 and any dependents 53 covered by the HRA 54 to be enrolled in individual health insurance coverage and to substantiate compliance with this requirement. Further, in order to prevent a plan sponsor from intentionally or unintentionally, directly or indirectly, steering any participants or dependents with adverse health factors away from the plan sponsor’s traditional group health plan and into the individual market, the proposed rules prohibited a plan sponsor from offering employees within a class of employees a choice between a traditional group health plan and an individual coverage HRA. The proposed rules also required that an individual coverage HRA be offered on the same terms to all employees within a class of employees, subject to certain exceptions, and the proposed rules included proposed classes of employees that employers could use for this purpose. The proposed rules also required individual coverage HRAs to allow employees to opt out of and waive future reimbursements under the HRA at certain times, and to provide a notice to eligible participants regarding how the offer of the HRA, or enrollment in the HRA, affects the ability to claim the PTC. This was proposed because an offer of an HRA may affect an individual’s eligibility for the PTC, and enrollment in an HRA does affect an individual’s eligibility for the PTC. 45 CFR 144.103 applies, which is defined as a participant within the meaning of ERISA section 3(7). Under ERISA section 3(7), ‘‘the term ‘participant’ means any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer or members of such organization, or whose beneficiaries may be eligible to receive any such benefit.’’ 53 For this purpose, the definition of dependent under 26 CFR 54.9801–2, 29 CFR 2590.701–2, and 45 CFR 144.103 applies, which is defined as ‘‘any individual who is or may become eligible for coverage under the terms of a group health plan because of a relationship to a participant.’’ 54 The final rules use several terms interchangeably regarding an individual’s individual coverage HRA status. These terms generally parallel those used when referring to group or individual health insurance coverage. Specifically, ‘‘enrolled in’’ and ‘‘covered by,’’ both refer to the status of an individual who is participating in an individual coverage HRA and can request reimbursements for medical care expenses reimbursable under the HRA. The date on which an individual coverage HRA ‘‘takes effect’’ or ‘‘begins’’ refers to the first date on which reimbursable medical care expenses may be incurred. For example, an employee whose individual coverage HRA takes effect on June 1 may request reimbursements for medical care expenses incurred on or after that date, if the individual is enrolled in individual health insurance coverage or Medicare on or before June 1. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 Each of these conditions, and the related comments received, are discussed in the following sections of this preamble. This section of the preamble addresses the more general comments on allowing HRAs to be integrated with individual health insurance coverage. Many commenters supported the proposed rules. Some of these commenters expressed general support for the Departments’ efforts to expand the availability and use of HRAs and the priority the Departments have placed on HRAs. Some commenters stated that the proposed rules would enable employers to offer more affordable health coverage alternatives to employees and could expand health insurance coverage, including for lower-wage and part-time and other particular groups of employees. Some commenters focused on the potential benefits for small employers, commenting that the proposed HRA expansion would create new options for small employers that have otherwise been unable to offer health insurance coverage due to PPACA-related requirements. These commenters asserted that the proposed HRA expansion would help small employers provide meaningful benefits, attract talent, and keep their workforce healthy. Some commenters expressed general support for allowing employers to move to a defined contribution approach for health insurance coverage, including because this likely permits greater employee choice. Some commenters noted that allowing individual coverage HRAs could expand and stabilize the individual health insurance market while providing greater administrative simplicity and reducing administrative costs for employers. In particular, some commenters expressed the view that the proposed rules would strengthen the individual market due to an increased number of individuals in the individual market and because working individuals who would be added to the individual market tend to be of lower health risk than those currently comprising the individual market risk pool. Some commenters also stated that employers may not necessarily be incentivized to segment their risk and, therefore, concerns about adverse selection may be overstated. Some commenters who generally supported the proposed rules emphasized that their support was contingent on any final rules retaining the conditions intended to prevent adverse selection. And some commenters opposed allowing individual coverage HRAs. These commenters stated that the safeguards PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 28895 in the proposed rules were insufficient to prevent market segmentation and destabilization of the individual market. Several of these commenters argued that market segmentation could occur if employers that choose to offer an individual coverage HRA have higherrisk employees than those employers that choose not to offer an individual coverage HRA and that employers may still be able to segment risk based on the proposed classes of employees. Some of these commenters asked that the rules be withdrawn, or at least delayed, until the potential effects on the individual and group markets could be better understood. More generally, commenters expressed a number of concerns regarding adverse selection and riskpool effects of the proposed rules, including that the proposed rules would change the composition of the risk pools for the individual and small group markets, making coverage more expensive and less accessible overall. Some commenters were concerned that the proposed rules would be particularly harmful to self-employed individuals and small business employees because those individuals generally rely on coverage in the individual market and, according to the commenters, the proposed rules would increase premiums in the individual market. Some commenters were also concerned that employers may substantially alter traditional group health plans to the detriment of all employees who rely on that coverage and that there could be negative implications in the small group market for states that have merged their individual and small group market risk pools. One commenter stated that the negative effects of the proposed rules, particularly the increase in individual market premiums and the attendant fiscal cost that the commenter expects to occur, are likely to outweigh the benefits to employers and their employees. Another commenter asserted that the proposed rules would increase premiums due to both adverse selection and issuers’ increased uncertainty regarding the effect of individual coverage HRAs on the individual market. The Departments agree with the commenters who asserted that allowing individual coverage HRAs will expand flexibility and use of HRAs to provide additional options for employers and employees to offer and obtain quality, affordable healthcare. The Departments also agree that individual coverage HRAs would expand coverage and may provide greater administrative E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28896 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations simplicity and reduce administrative costs for employers. The Departments acknowledge the concerns expressed by commenters that allowing individual coverage HRAs could cause adverse selection in the individual market. As explained in the preamble to the proposed rules, allowing individual coverage HRAs could theoretically result in opportunities for employers to encourage higher-risk employees (that is, employees with high expected medical claims or employees with family members with high expected medical claims) to obtain coverage in the individual market, external to the traditional group health plan sponsored by the employer, in order to reduce the cost of traditional group health plan coverage provided by the employer to lower-risk employees. This could happen in a number of ways. For example, if employees were permitted to choose between participating in an employer’s traditional group health plan or an individual coverage HRA, some higher-risk employees might have an incentive to select the HRA and enroll in individual health insurance coverage, depending on the relative generosity of the individual coverage HRA and the individual health insurance coverage as compared to the traditional group health plan. There could be significant differences between these coverage options because individual health insurance coverage generally is required to cover all categories of EHBs, and large group market and self-insured group health plans are not required to do so. An employer could also deliberately attempt to steer employees with certain medical conditions away from the employer’s traditional group health plan. In either case, if disproportionately higher-risk employees enrolled in individual coverage HRAs, this adverse selection could raise premiums in the individual market. Both in promulgating the proposed rules and again in response to comments provided on the proposed rules, the Departments considered the possibility that the individual market could instead be positively impacted. Lower-risk employees might choose individual coverage HRAs, while higher-risk employees might elect to remain in their employer’s traditional group health plan. Such an outcome could result for a host of reasons, including because higher-risk employees may be more risk averse to changing health benefits. Additionally, individual health insurance coverage might have more restrictive provider networks than traditional group health VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 plans and higher-risk employees are generally more sensitive to the make-up of the provider network than lower-risk employees. In addition, lower-risk employees might prefer an individual coverage HRA because it could allow them to spend less on premiums— reducing or potentially eliminating outof-pocket premiums and potentially leaving more funds to cover cost sharing. Further, employers might be discouraged by the legal risk involved with attempting to steer higher-risk employees away from the traditional group health plan. However, employers also would face strong countervailing incentives to maintain (or improve) the average health risk of participants in their traditional group health plans. Therefore, the Departments have determined that there is a risk of some market segmentation and health factor discrimination that could result from allowing individual coverage HRAs, but the Departments also have determined that the risk can be sufficiently mitigated with conditions of the type provided in the proposed rules (and in the final rules) designed to limit adverse selection. Moreover, as discussed in more detail later in this preamble, the Departments considered the comments requesting that the Departments strengthen the conditions intended to limit adverse selection, and the Departments are finalizing those proposed conditions with some changes in response to comments, including adding a minimum class size requirement that will apply to certain classes of employees in certain instances. Regarding the concern raised by commenters that the proposed conditions would not prevent adverse selection if employers with higher-risk employees chose to offer individual coverage HRAs, the Departments took that possibility into account in the regulatory impact analysis. Therefore, taking all of these considerations into account, the Departments have determined that allowing individual coverage HRAs will produce significant benefits, including increased options and coverage, and is not likely to create a material risk of adverse selection in the individual market due to the sufficiency of, and changes to strengthen, the integration conditions intended to mitigate that risk that are finalized in this rulemaking. Accordingly, the Departments are finalizing the proposed rules, including each of the conditions included in the proposed rules, but with various changes and clarifications, as explained later in this preamble. PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 A number of commenters expressed concern about the impact on employees shifting from traditional group health plans to the individual market. Some commenters emphasized that in order to achieve the goals of expanding coverage and increasing choice and flexibility for employers, it is vital that the individual market be stable and well-functioning; otherwise, employers will be unwilling to utilize the expanded flexibility. Some commenters recommended that the Departments delay issuing the final integration rules until insurance in the individual market is more affordable or until clearer information is available regarding the long-term stability of the individual market, including the impacts of other recent changes such as the expansion of STLDI and changes to the PPACA section 1332 waiver program. Some commenters asked the Departments to withdraw the proposed integration rules and, instead, take other actions to stabilize the individual market. One commenter requested that HRA integration with individual health insurance coverage be allowed only if each employee is provided at least three choices for coverage in the individual market. The Departments acknowledge that the extent to which the goals of expanding coverage and options through individual coverage HRAs will be achieved depends on the existence of a stable individual market. Accordingly, the Departments are finalizing the proposed rules with conditions on individual coverage HRAs intended to prevent a negative impact on the individual market. The Departments expect individual coverage HRAs, with the safeguards in the final rules, will substantially increase the size of the individual market and will not result in significant changes in the average health risk of the individual market risk pool. The Departments also understand that currently the stability of the individual market varies a great deal across the country, and that in some places improvement will likely be needed before employers elect to offer individual coverage HRAs. The Departments considered these issues in developing the proposed and final rules and incorporated significant flexibility, including geographic flexibility, to address these issues so that each employer may choose what is best for its workforce. However, the final rules do not require that a minimum number of individual health insurance plans be available to employees in order for the employer to offer an individual coverage HRA. There is no compelling justification for such a requirement, and E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations it is not necessary to ensure compliance with PHS Act sections 2711 and 2713. Employees often have limited choices with respect to the traditional group health plans they are offered, if any, and adopting this type of requirement would unnecessarily prevent certain employers from offering an individual coverage HRA. Further, suggestions regarding changes to the other rules that affect the individual market, in order to improve the individual market, are outside the scope of this rulemaking. Some commenters stated that the proposed rules failed to adequately take into account the differences between traditional group health plans and individual health insurance coverage, the increased burden on employees in choosing and enrolling in a plan in the individual market relative to the burden on employees under a traditional group health plan, and the significance of the change, from the employee’s perspective. Other commenters stated that individuals in the individual market could face more expensive plans, lower employer contributions, narrower networks, and higher cost sharing. Some commenters stated that these individuals could also face more confusion and be provided less assistance, in part due to decreased federal funding for outreach and assistance in the individual market. Some of these commenters asserted what they believed to be the comparative advantages of traditional group health plans, including that those plans are more robust, cost-effective, and consumer-friendly. One commenter expressed general concern about the shifting of employees from a defined benefit health plan system to a defined contribution health plan system, because, according to the commenter, it may result in less comprehensive coverage. The Departments considered, and are aware, that an employee’s experience enrolling in and having coverage under an individual coverage HRA may be different than the experience of enrolling in and having coverage under a traditional group health plan. The Departments took this into account in developing the proposed and final rules, including by requiring the individual coverage HRA to provide a notice to eligible participants explaining the individual coverage HRA and the possible consequences of the HRA being offered and accepted. The Departments understand that employers tend to act in the best interest of their workers in order to recruit and retain talent. Therefore, an employer offering an individual coverage HRA generally will do so because it is a better alternative VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 for a substantial share of their employees than a traditional group health plan or no offer of employersponsored coverage. Further, as described later in this preamble, DOL is also clarifying the extent to which employers may assist employees with regard to enrollment in individual health insurance coverage without resulting in the individual health insurance coverage becoming part of an ERISA plan. In addition, the Departments are continuing to consider ways to assist employees offered an individual coverage HRA, including through clear instructions in the Exchange application process and other possible methods of outreach and assistance. As to the more general comments asserting that traditional group health plans have advantages as compared to individual health insurance coverage, the Departments acknowledge that there are differences. The Departments intend with the final rules to expand the choices available to employers and employees and to make an additional option available for employers, including those that have not previously offered traditional group health plan coverage. Some commenters questioned the Departments’ legal authority with regard to certain aspects of the proposed rules. A few commenters questioned whether the Departments have the authority to allow HRAs to satisfy PHS Act sections 2711 and 2713 by virtue of integration with other coverage, and a few stated that the Departments failed to justify the removal of the regulatory prohibition on integration of an HRA with individual health insurance coverage. Further, a few commenters asserted that the Departments do not have the authority to allow individual coverage HRAs because Congress enacted the Cures Act, which provided a limited exception to the prohibition on HRAs provided in conjunction with individual health insurance coverage in the form of QSEHRAs, and the commenters believe this indicates that Congress did not intend to allow the Departments to otherwise remove the regulatory prohibition on integration of an HRA with individual health insurance coverage. The Departments disagree with these commenters and, instead, have determined that the final rules are justified and within the Departments’ authority. While HRAs are group health plans subject to PHS Act sections 2711 and 2713 and would fail to comply with those provisions if they were offered on their own, PHS Act sections 2711 and 2713 do not speak directly to situations in which an HRA is integrated with PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 28897 other coverage that satisfies those statutory requirements. The Departments have determined that it is reasonable, and consistent with the statutory scheme, to apply PHS Act sections 2711 and 2713 to the integrated arrangement rather than to each of its component parts. As explained earlier in this preamble, the Departments previously determined that it was reasonable to consider an HRA to be compliant with PHS Act sections 2711 and 2713 as long as individuals covered by the HRA had other employer-provided group health plan coverage (including coverage offered by a different employer, such as a spouse’s employer) that satisfied the conditions in PHS Act sections 2711 and 2713, subject to certain other conditions.55 In that case, under the combined arrangement, individuals have the protections intended by PPACA, in addition to the HRA that they generally may use to pay for premiums or other medical care expenses not covered by the group health plan. The Departments now extend this same approach to integration with individual health insurance coverage, which the Departments have determined is similarly justified and appropriate, as individual health insurance coverage is generally subject to and compliant with PHS Act sections 2711 and 2713.56 In developing the proposed and final rules, the Departments considered that the Cures Act provided for QSEHRAs. However, in creating QSEHRAs, Congress did not enact a general prohibition on integrating an HRA with individual health insurance coverage. Instead, Congress allowed a limited HRA that certain small employers may provide that is not a group health plan subject to the market requirements and, thus, need not be integrated with any 55 The Departments note that under IRS Notice 2015–17, HRAs that reimburse certain Medicare premiums and TRICARE expenses may be considered integrated with the group health plan coverage offered to the employee by the employer although the employee is not enrolled in that group coverage and is instead enrolled in Medicare or TRICARE, subject to certain conditions. Further, under 26 CFR 54.9815–2711(d)(5), 29 CFR 2590.715–2711(d)(5), and 45 CFR 147.126(d)(5), an employer payment plan for Medicare premiums offered by certain employers may be considered integrated with Medicare (and considered to be compliant with PHS Act sections 2711 and 2713), subject to certain conditions. 56 Further, for the reasons discussed later in this preamble, the Departments have determined that permitting integration of individual coverage HRAs with Medicare is also justified and appropriate, subject to certain conditions. References in this preamble to an individual coverage HRA integrated with Medicare refer to an individual coverage HRA integrated with Medicare Part A and B or Medicare Part C. E:\FR\FM\20JNR2.SGM 20JNR2 28898 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 other health coverage to satisfy PHS Act sections 2711 and 2713. The fact that Congress provided some flexibility for certain employers by creating QSEHRAs does not preclude the Departments from providing additional flexibility through rulemaking to allow individual coverage HRAs.57 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.58 Moreover, by virtue of providing for QSEHRAs, Congress acknowledged and left intact the Departments’ regulations allowing for integration of HRAs with other group health plan coverage. In so doing, Congress recognized the Departments’ authority to allow HRAs to be integrated with other group health plan coverage, which is the same authority the Departments now extend to allow integration of HRAs with individual health insurance coverage. The Departments acknowledge that the final rules, in allowing individual coverage HRAs, remove the prohibition on an HRA being integrated with individual health insurance coverage that the Departments had previously imposed. As noted earlier in this section of the preamble, in the 2015 rules and the guidance that preceded those rules, the Departments determined that HRAs should not be allowed to be integrated with individual health insurance coverage, even though that insurance coverage is generally subject to and compliant with PHS Act sections 2711 and 2713. The Departments at that time declined to allow integration with individual health insurance coverage because of concerns about adverse selection in the individual market. Since that time, the Departments have observed that many employers, especially small employers, continue to struggle to offer health insurance coverage to their employees.59 Further, 57 Congress has granted the Departments the authority to promulgate regulations as may be necessary or appropriate to carry out the provisions of the Code, ERISA, and the PHS Act that were added as a result of HIPAA and PPACA. See Code section 9833, ERISA section 734, and PHS Act section 2792. 58 The Departments note that an employer may not both offer an individual coverage HRA and provide a QSEHRA, as a result of the QSEHRA rules under Code section 9831(d) and as a result of the conditions that apply to individual coverage HRAs. 59 In 2018, 57 percent of firms offered health benefits to at least some of their workers; 47 percent of employers with three to nine workers offered coverage, while virtually all firms with 1,000 or more workers offered coverage. See Kaiser Family Foundation, ‘‘Employer Health Benefits 2018 Annual Survey’’, Figure 2.2 at https://files.kff.org/ VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 the Departments have had additional time to consider whether, and what type of, conditions would be sufficient to mitigate the risk of adverse selection and health factor discrimination that might otherwise result from allowing HRAs to be integrated with individual health insurance coverage. The Departments have determined that the advantages to employers and employees of individual coverage HRAs warrant allowing them to be offered,60 notwithstanding the concerns regarding potential adverse selection risk to the individual market. This is because the Departments expect that the conditions adopted in the final rules will significantly mitigate the risk of adverse selection. As to the benefits, the final rules will increase flexibility and choices of health coverage options for employers and employees. The increased use of individual coverage HRAs could potentially reduce healthcare spending, particularly less efficient spending, and ultimately result in increased taxable wages for workers in firms that currently offer traditional group health plans. The final rules are also expected to increase the number of low- and moderate-wage workers (and their family members) with health insurance coverage. Accordingly, the Departments disagree with commenters who asserted that the Departments are precluded from allowing individual coverage HRAs because those arrangements were not previously allowed and that such a change is not sufficiently justified. The Departments have considered whether to allow HRAs to be integrated with individual health insurance coverage, and have determined that a change allowing that integration is warranted, subject to a number of significant conditions intended to protect against the risk of adverse selection and health factor discrimination. This change comes after the Departments’ consideration of various factors, including the need to provide employers and employees additional choices with respect to healthcare coverage, the ability of the conditions in attachment/Report-Employer-Health-BenefitsAnnual-Survey-2018. 60 HRA expansion is an Administration priority. In October 2017, the President issued Executive Order 13813, directing the Departments ‘‘to consider proposing regulations or revising guidance, to the extent permitted by law and supported by sound policy, to increase the usability of HRAs, to expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup coverage.’’ The Executive Order further provides that expanding ‘‘the flexibility and use of HRAs would provide many Americans, including employees who work at small businesses, with more options for financing their healthcare.’’ PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 the final rules to mitigate against adverse selection and health factor discrimination, and the anticipated effect of the final rules to increase choice and competition and decrease the number of uninsured individuals. One commenter stated that allowing individual coverage HRAs is contrary to PPACA’s intent to create a stable individual market. The Departments acknowledge that allowing individual coverage HRAs in a way that could lead to large-scale destabilization of the individual market could undermine one purpose of PPACA. However, the Departments have carefully designed the final rules to be consistent with Congress’s intent in enacting both PPACA and HIPAA.61 In developing the proposed and final rules, the Departments considered how to avoid permitting discrimination based on health status or similar practices with respect to offering individual coverage HRAs to employees that might have destabilizing effects on the individual market or lead to higher premiums in that market. The Departments have determined that the risk of market segmentation and health factor discrimination is sufficiently significant to justify including conditions in the final rules intended to mitigate those risks, including strengthening certain conditions provided for in the proposed rules. Additionally, the Departments have determined that the strengthened conditions in the final rules, which are described at length later in this preamble, are both sufficient to mitigate those risks and consistent with HIPAA and PPACA. One commenter stated that it would make little sense to expect individual coverage HRAs to comply with PHS Act sections 2711 and 2713 because HRAs function more like bank accounts than health insurance policies. The Departments recognize that HRAs and health insurance policies can function 61 In 1996, Congress enacted the HIPAA nondiscrimination provisions, which now generally prohibit group health plans and health insurance issuers in the group and individual markets from discriminating against individual participants and beneficiaries in eligibility, benefits, or premiums based on a health factor. In 2010, Congress enacted PPACA, in part, because individual health insurance coverage was not a viable option for many individuals who lacked access to group health plan coverage, given that individual market issuers in many states could deny coverage, charge higher premiums based on an individual’s health risk, or impose preexisting condition exclusions based on an individual’s health risk. To address these issues, PPACA included numerous provisions that were intended to create a competitive individual market that would make affordable coverage available to individuals who do not have access to other health coverage, as set forth in detail in the preamble to the proposed rules. See 83 FR 54420, 54428–54429 (Oct. 29, 2018). E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations differently. However, HRAs are group health plans and, therefore, generally are subject to the market requirements under the PHS Act, except to the extent that they are excepted benefits or are retiree-only HRAs. The Departments lack the statutory authority to exempt HRAs that are otherwise subject to the market requirements from the category of group health plans subject to the market requirements. The final rules allow individual coverage HRAs to comply with the requirements of PHS Act sections 2711 and 2713 in a manner that preserves the protections of those sections. 2. Requirement That All Individuals Covered by an Individual Coverage HRA Be Enrolled in Individual Health Insurance Coverage a. In General jbell on DSK3GLQ082PROD with RULES2 The proposed rules provided that an HRA may be integrated with individual health insurance coverage, and would be considered compliant with PHS Act sections 2711 and 2713, if the HRA requires the participant and any dependent(s) to be enrolled in individual health insurance coverage (other than coverage that consists solely of excepted benefits) 62 for each month each individual is covered by the HRA. Under the proposed rules, if the participants and dependents merely have the ability to obtain individual health insurance coverage, but do not actually have that coverage, the HRA would fail to comply with PHS Act sections 2711 and 2713. Many commenters supported this condition and strongly recommended it be included in the final rules. Commenters that supported the condition stated that it would reduce or prevent the risk of adverse selection and would ensure that employees directed out of the group market have access to a stable individual market. The Departments agree that the requirement to have individual health insurance coverage in order to be covered by an individual coverage HRA is essential and, in order to ensure compliance with PHS Act sections 2711 and 2713, the final rules adopt this requirement, generally as set forth in the proposed integration rules, but with some 62 Throughout this preamble, references to individual health insurance coverage in the context of the integration rules do not include coverage that consists solely of excepted benefits unless otherwise specified. Also, see later in this preamble for a discussion of the conditions that apply if an individual coverage HRA is integrated with Medicare, in which case references to individual health insurance coverage generally are considered to also refer to Medicare. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 clarifications as explained later in this section of the preamble.63 One commenter suggested that the final rules should allow an individual coverage HRA to provide benefits to dependents who are not enrolled in individual health insurance coverage so long as the employee-participant is enrolled in individual health insurance coverage. The Departments decline to adopt this suggestion because the requirements of PHS Act sections 2711 and 2713 apply to group health plans with respect to both participants and dependents.64 b. Individual Health Insurance Coverage With Which an Individual Coverage HRA May Be Integrated Commenters generally supported the rule that individual coverage HRAs must be integrated with individual health insurance coverage as defined in the PHS Act. As discussed in this section of the preamble, several commenters requested clarification regarding whether integration with various types of individual health insurance coverage would be allowed under the proposed rules. Some commenters requested that the final rules only permit integration with individual health insurance coverage that covers all EHBs or that provides comprehensive mental health and substance use disorder benefits. The Departments decline to make revisions in response to these comments because under PPACA, individual health insurance coverage generally is required to cover all EHBs, including mental 63 The Departments note that when an individual enrolls in individual health insurance coverage, the coverage generally will have an effective date that is the first day of a calendar month. Other than for mid-month enrollment of a new child, individual health insurance plans generally are not made available for coverage to start mid-month. Therefore, individual coverage HRA plan sponsors will need to take this into account in designing plan terms for eligibility for individual coverage HRAs, both with respect to employees offered the HRA for the full plan year and for those who become covered by the HRA subsequent to the first day of the plan year, to ensure compliance with the enrollment requirement under the final rules. 64 In addition, the commenter expressed confusion as to how this integration requirement applies to a dependent who is not covered by the individual coverage HRA, including a dependent covered by another type of coverage or a dependent the employee does not want to identify to the employer. While under the final rules an individual coverage HRA must require that each individual covered by the HRA be enrolled in individual health insurance coverage, the final rules do not include a requirement that the HRA cover any particular dependent(s), provided the HRA complies with PHS Act section 2714 and 26 CFR 54.9815–2714, 29 CFR 2590.715–2714, and 45 CFR 147.120 (relating to dependent coverage of children to age 26), nor is there a prohibition on allowing the participant to exclude certain dependents from coverage under the HRA. PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 28899 health and substance use disorder services.65 Commenters also requested that the final rules clarify whether an individual coverage HRA may be integrated with individual health insurance coverage sold in a state that has a waiver under PPACA section 1332.66 Some commenters stated that integration with that coverage should be permitted so long as the waiver does not allow coverage to impose annual or lifetime dollar limits or exclude benefits for preventive services. Other commenters argued that integration with that coverage should not be permitted because it might not satisfy all of the PPACA requirements. The Departments note that although PPACA section 1332 allows states to waive certain provisions of PPACA, it does not allow states to waive PHS Act sections 2711 and 2713. Therefore, the final rules do not prohibit integration of an HRA with individual health insurance coverage obtained in a state with a PPACA section 1332 waiver because individual health insurance coverage obtained in that state will be subject to PHS Act sections 2711 and 2713.67 Other issues with regard to PPACA section 1332 are beyond the scope of this rulemaking. One commenter requested confirmation that HRAs may be integrated with catastrophic plans in the individual market. Another commenter requested that the final rules not allow integration of HRAs with catastrophic plans because of the limited nature of those plans. The Departments note that catastrophic plans, as set forth in PPACA section 1302(e), are a type of individual health insurance coverage available to only certain individuals and that provide only limited benefits until the individual has incurred expenses 65 See PPACA section 1302 and PHS Act section 2707(a). However, the Departments note that grandfathered individual health insurance coverage and ‘‘grandmothered’’ individual health insurance coverage subject to the HHS non-enforcement policy might not cover all EHBs. See later in this preamble for a discussion of ‘‘grandmothered’’ individual health insurance coverage. 66 Under PPACA section 1332, a state can apply for a state innovation waiver from HHS and the Treasury Department, which allows the state, if approved, to implement innovative programs to provide access to quality healthcare. States seeking approval for a state innovation waiver must demonstrate that the waiver will provide access to health insurance coverage that is at least as comprehensive and affordable as would be provided under PPACA without the waiver, will provide coverage to at least a comparable number of residents of the state as would be provided without a waiver, and will not increase the federal deficit. 67 HHS and the Treasury Department evaluate state PPACA section 1332 waiver applications on a case-by-case basis and will include a determination of the interaction with the final rules (if any). E:\FR\FM\20JNR2.SGM 20JNR2 28900 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 sufficient to reach the maximum out-ofpocket limit under PPACA.68 However, catastrophic plans are subject to the market requirements, including PHS Act sections 2711 and 2713. Therefore, the final rules do not prohibit integration of an individual coverage HRA with catastrophic plans. One commenter asked that the Departments prohibit integration with ‘‘grandmothered’’ individual health insurance coverage, as it is not compliant with PPACA. Grandmothered individual health insurance coverage refers to certain non-grandfathered health insurance coverage with respect to which CMS has announced it will not take enforcement action even though the coverage is out of compliance with certain specified market requirements. To date, the CMS non-enforcement policy has been extended to apply to renewals of such coverage through policy years beginning on or before October 1, 2020, provided that all such coverage comes into compliance with the specified requirements by January 1, 2021.69 The Departments note that although grandmothered individual health insurance coverage is subject to a non-enforcement policy for some market requirements, the nonenforcement policy does not extend to compliance with PHS Act sections 2711 and 2713. Accordingly, grandmothered plans are subject to PHS Act sections 2711 and 2713, and under the final rules, an individual coverage HRA may be integrated with grandmothered individual health insurance coverage. One commenter requested clarification as to whether individual health insurance coverage sold through a private exchange model qualifies as coverage that may be integrated with an HRA. To the extent coverage sold through a private exchange model is individual health insurance coverage, within the meaning of the PHS Act,70 an HRA may be integrated with that coverage. However, the Departments note that as part of the final rules DOL is issuing a safe harbor to clarify to 68 To be eligible for a catastrophic plan, an individual must either be under the age of 30 or qualify for a hardship or affordability exemption under Code section 5000A. See PPACA section 1302(e) and 45 CFR 156.155. One commenter suggested that the Departments change the definition of catastrophic plan so that it is available to individuals other than those who are eligible under PPACA section 1302(e). That change is outside the scope of this rulemaking. 69 See CMS Insurance Standards Bulletin Series— INFORMATION—Extension of Limited NonEnforcement Policy through 2020 (March 25, 2019), available at https://www.cms.gov/CCIIO/Resources/ Regulations-and-Guidance/Downloads/LimitedNon-Enforcement-Policy-Extension-ThroughCY2020.pdf. 70 See PHS Act section 2791(b)(5). VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 stakeholders when individual health insurance coverage obtained by a participant in an individual coverage HRA would not be part of an employee welfare benefit plan under ERISA, which would avoid the individual health insurance coverage effectively becoming group coverage. See later in this preamble for discussion of how this safe harbor would apply with respect to individual health insurance coverage offered through web-based platforms, such as private exchanges. One commenter supported the proposal to prohibit integration with individual health insurance coverage that consists solely of excepted benefits, noting that this aspect of the rule is consistent with the limited nature of excepted benefits. The Departments agree. Because coverage consisting solely of excepted benefits is not subject to or generally compliant with PHS Act sections 2711 and 2713, the final rules provide that individual coverage HRAs may not be integrated with individual health insurance coverage that consists solely of excepted benefits. However, as discussed later in this preamble, an HRA that reimburses only excepted benefits is not subject to the market requirements or the final rules. See later in this preamble for a discussion of comments received regarding integration of HRAs with student health insurance coverage, as well as types of coverage other than individual health insurance coverage. Also, see later in this preamble for a discussion of the conditions under which an individual coverage HRA may be integrated with Medicare. c. Proxy Approach To Verify Compliance Under the proposed rules, all individual health insurance coverage (except for coverage that consists solely of excepted benefits) would be treated as being subject to and compliant with PHS Act sections 2711 and 2713. The Departments explained that requiring a participant or an individual coverage HRA to substantiate compliance with PHS Act sections 2711 and 2713 separately for each individual health insurance policy in which a participant or dependent is enrolled would be an unwieldy and overly burdensome task. The Departments acknowledged that this approach would allow integration with grandfathered individual health insurance coverage, which is not subject to, and might not be compliant with, PHS Act sections 2711 and 2713. However, the Departments reasoned that requiring participants or HRAs to substantiate compliance with PHS Act sections 2711 and 2713 separately for PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 each individual health insurance policy in which a participant or dependent is enrolled would be impracticable. An independent assessment of compliance could require the participant or the HRA to identify for each individual health insurance policy in which a participant or dependent is enrolled: (1) Which benefits are considered EHBs for purposes of PHS Act section 2711, and (2) whether all recommended preventive services are covered without cost sharing as required under PHS Act section 2713. The Departments also noted that only a small number of individuals currently are enrolled in grandfathered individual health insurance coverage, and that grandfathered individual health insurance coverage may not be sold to new enrollees and may be renewed by current enrollees only so long as the coverage satisfies strict conditions. Additionally, the Departments noted that the number of individuals with grandfathered individual health insurance coverage has declined each year since PPACA was enacted, and the already small number of individuals who have retained grandfathered coverage is expected to continue to decline each year. Further, the Departments stated that because there are few individuals covered by grandfathered individual health insurance coverage, the Departments anticipate that there will only be extremely limited instances in which these individuals will be offered and accept an individual coverage HRA. Moreover, because new enrollees cannot enroll in grandfathered individual health insurance coverage, employers offering traditional group health plans would not be able to shift workers into this coverage. The Departments also explained that although plans are required to disclose grandfathered status in any summary of benefits provided under the plan, the Departments were concerned that the frequency of this disclosure to participants may be insufficient to substantiate compliance if integration with these policies were prohibited. For these reasons, the Departments preliminarily determined that deeming a policy to be compliant with PHS Act sections 2711 and 2713 for purposes of the proposed rules if it is sold in the individual market, referred to as the proxy approach, strikes an appropriate balance. The Departments also solicited comments on methods by which an HRA could substantiate whether individual health insurance coverage is subject to and complies with PHS Act sections 2711 and 2713, including how an HRA might identify which benefits E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 under the individual health insurance coverage are considered EHBs for purposes of PHS Act section 2711 and whether all recommended preventive services are covered without cost sharing. The Departments solicited comments on whether an alternative approach, such as a requirement that an issuer make a representation about compliance and/or grandfathered status upon request, would be practical, or whether any other methods might be appropriate as an alternative to the proposed proxy approach. Some commenters expressed support for the proxy approach, stating that it would be unreasonable to require employers or participants to substantiate that individual health insurance coverage is compliant with PHS Act sections 2711 and 2713. They stated that the proxy approach is reasonable with respect to grandfathered individual health insurance coverage because the number of individuals with that coverage is declining and consumers may not newly purchase grandfathered individual health insurance coverage.71 However, some commenters encouraged the Departments to prohibit integration with grandfathered coverage because it is not required to comply with the annual dollar limit prohibition or the preventive services requirement.72 Some of these commenters questioned whether the Departments had the legal authority to deem such coverage to be in compliance with PHS Act sections 2711 and 2713. One commenter disagreed with the Departments’ assumption that 71 A few commenters expressed concern with what they understood to be a proposed requirement that the employer verify that each individual health insurance policy in which an employee enrolls complies with PHS Act sections 2711 and 2713. Due to this concern, they suggested safe harbors to avoid imposing this burden on employers, such as only allowing integration with QHPs or plans of a certain metal level, and one commenter suggested implementing a plan compliance certification system. However, the proposed rules did not impose a requirement on the employer to verify the compliance of each individual health insurance policy in which an employee enrolls with PHS Act sections 2711 and 2713. Furthermore, the Departments are not imposing such a requirement in the final rules, and are finalizing the proxy approach. 72 One commenter objected to the Departments’ assertion in the preamble to the proposed rules that only a small number of individuals are currently enrolled in grandfathered individual health insurance coverage. However, the study the commenter cited to support the assertion that there is a substantial amount of grandfathered individual health insurance coverage remaining relates to grandfathered group coverage (not grandfathered individual health insurance coverage). See Kaiser Family Foundation, ‘‘Employer Health Benefits 2018 Annual Survey’’, https://files.kff.org/ attachment/Report-Employer-Health-BenefitsAnnual-Survey-2018. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 employers and employees would be unable to determine if the individual health insurance coverage was compliant with PHS Act sections 2711 and 2713. Another commenter noted that if only a small number of individuals currently are enrolled in grandfathered individual health insurance coverage, prohibiting integration with that coverage should impact very few individuals. One commenter suggested, as an alternative to the proxy approach, that issuers could be required to provide a list of enrolled individuals to the individual coverage HRA. The Departments considered these comments and have determined that requiring a participant or an HRA to substantiate each individual health insurance policy’s compliance with PHS Act sections 2711 and 2713 would be an unwieldy and burdensome task. Further, state and federal regulators review policy forms of issuers in the individual market for compliance with the federal requirements before the products can be offered for sale in the states and undertake market conduct examinations to ensure compliance with federal requirements. Thus, it is reasonable to assume, as a general matter, that a policy sold in the individual market complies with PHS Act sections 2711 and 2713 for purposes of the final rules.73 With respect to grandfathered individual health insurance coverage, the Departments have concluded that it is appropriate to adopt the proxy approach as proposed because the number of individuals with grandfathered individual health insurance coverage is low and expected to decrease; individual coverage HRAs and participants may have difficulty confirming which benefits under the grandfathered plan are considered EHBs for purposes of PHS Act section 2711, whether all recommended preventive services are covered without cost sharing, and whether a particular policy is grandfathered; and grandfathered 73 With respect to the suggested alternative approach to the proxy approach that the Departments could require issuers to provide employers who sponsor individual coverage HRAs with a list of individuals covered by individual health insurance coverage, that alternative approach appears to also include an assumption that the policies sold are in compliance with PHS Act sections 2711 and 2713 (to avoid requiring confirmation of the compliance of each policy enrolled in), while adding burdens on the issuers to track and communicate with employers with whom they would not otherwise interact. For these reasons, the final rules do not adopt this alternative approach. PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 28901 coverage may not be sold to new enrollees.74 d. Forfeiture The proposed rules provided that the requirement that each individual covered by an individual coverage HRA must be enrolled in individual health insurance coverage would apply for each month that the individual is covered by the HRA. The proposed rules further provided that if an individual covered by the HRA fails to have individual health insurance coverage for any month, the HRA would fail to comply with PHS Act sections 2711 and 2713 for that month. Accordingly, the proposed rules required that an individual coverage HRA provide that if any individual covered by the HRA ceases to be covered by individual health insurance coverage, the individual may not seek reimbursement under the HRA for claims that are incurred after the individual health insurance coverage ceases, subject to any applicable continuation-of-coverage requirements. Further, under the proposed rules, if all individuals in a given family who are covered by the individual coverage HRA cease to be covered by individual health insurance coverage, the participant must forfeit the HRA, in accordance with applicable laws (including COBRA and other continuation-of-coverage requirements). One commenter requested that the Departments clarify how the COBRA rules apply when an individual loses access to an individual coverage HRA due to failing to maintain individual health insurance coverage. Other commenters generally requested guidance on the interaction between COBRA and individual coverage HRAs. Generally, HRAs are group health plans subject to COBRA continuation coverage requirements under Code section 4980B and ERISA sections 601 through 608 (COBRA continuation coverage), unless an exception applies.75 Under the COBRA continuation coverage rules, certain individuals who lose employersponsored coverage may elect to continue the coverage by paying a premium.76 In order to qualify for 74 See later in this preamble for a discussion of the conditions that apply to an individual coverage HRA integrated with Medicare, including that the combined arrangement is considered to comply with PHS Act sections 2711 and 2713. 75 Plans sponsored by certain small employers, churches, or governments are not subject to Code section 4980B. See Code section 4980B(d). 76 See Code section 4980B and ERISA sections 601–608. See also 26 CFR 54.4980B–1 et seq. and 29 CFR 2590.606–1, 2590.606–2, 2590.606–3, and 2590.606–4. Non-federal governmental group health E:\FR\FM\20JNR2.SGM Continued 20JNR2 28902 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 COBRA continuation coverage, the loss of coverage must be the result of a ‘‘qualifying event.’’ The Departments clarify that failure by an individual to satisfy the integration requirement of maintaining individual health insurance coverage is not a qualifying event for purposes of COBRA or other continuation of coverage rules. Thus, the loss of eligibility to participate in an individual coverage HRA due to the failure of the individual to maintain individual health insurance coverage does not create a right to COBRA or other group continuation coverage in the individual coverage HRA. However, a loss of coverage due to a termination of employment or a reduction in the number of hours of employment generally is a loss of coverage due to a qualifying event. Thus, for example, an employee covered by an individual coverage HRA who, due to a reduction in hours, is moved to a class of employees who are not offered any group health coverage would have a right to COBRA or other group continuation coverage in the HRA, as would an individual who loses coverage under the HRA due to termination of employment. That HRA COBRA or other group continuation coverage would be conditioned on a timely election of COBRA or other group continuation coverage and payment of COBRA or other group continuation coverage premiums, as well as maintaining (or enrolling in) individual health insurance coverage.77 Alternatively, an employee who loses coverage under an individual coverage HRA for these reasons may qualify for an SEP to change his or her individual coverage either on- or off-Exchange.78 One commenter requested clarification regarding whether a failure to maintain individual health insurance coverage causes retroactive forfeiture of the individual coverage HRA. Under the final rules, the required forfeiture applies prospectively. The individual coverage HRA must allow an employee who loses coverage under the HRA due to failure to maintain individual health insurance coverage to seek reimbursement for substantiated medical care expenses that were incurred during the coverage period prior to the failure to maintain individual health insurance coverage. However, the individual coverage HRA plans offered by state or local governments to their respective employees are subject to parallel continuation of coverage requirements under the PHS Act. See 42 U.S.C. 300bb–1 et seq. 77 See IRS Notice 2002–45 for more information on providing COBRA continuation coverage under an HRA. 78 See 45 CFR 147.104(b)(2) and 155.420(d)(1)(i). VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 may limit the time to submit expenses to a reasonable specified period. The final rules include some modifications to clarify these rules. The final rules also clarify that the prohibition on reimbursing amounts for expenses incurred after an individual’s individual health insurance coverage ceases applies to the individual coverage HRA, rather than to the individual seeking reimbursement. One commenter requested clarification regarding whether an individual with individual health insurance coverage who is in an Exchange grace period 79 is considered to be enrolled in individual health insurance coverage for purposes of this integration requirement. Under the final rules, in the event an individual initially enrolled in individual health insurance coverage fails to pay premiums for the individual health insurance coverage timely and is, therefore, in a grace period, the individual is considered to be enrolled in individual health insurance coverage for purposes of the enrollment requirement, and the HRA must reimburse the individual for expenses incurred during that time period according to the terms of the HRA. If the individual fails to pay the applicable premium(s) by the end of the grace period and individual health insurance coverage is cancelled or terminated, including retroactively, the HRA must require the individual to notify the HRA that the individual health insurance coverage has been cancelled or terminated and the date on which the cancellation or termination is effective. After the individual coverage HRA has received the notice of cancellation or termination, the HRA may not reimburse expenses incurred on and after the date of cancellation or termination of the individual health insurance coverage, which is considered to be the date of termination of coverage under the HRA. Although the commenter specifically asked about grace periods, the final rules have also been revised to address other situations in which coverage is cancelled or terminated retroactively, including rescissions,80 and in those cases, the same rules regarding notification, 79 The Departments note that while 45 CFR 156.270 provides a specific grace period for individuals enrolled in the Exchange who are receiving APTC, this grace period would not be applicable for an individual covered by an individual coverage HRA because the individual will be ineligible for the PTC and APTC. Outside of the context of Exchange coverage for which APTC is being provided, grace periods are determined by state law. 80 See 45 CFR 147.128 for rules regarding rescissions of individual health insurance coverage. PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 reimbursement, and date of termination of coverage would apply.81 One commenter requested that, following separation from service, amounts should remain in a former employee’s individual coverage HRA for out-of-pocket costs and should remain available after the individual has access to other coverage. Under the final rules, a plan sponsor may permit a former employee to have continued access to an individual coverage HRA, and in some circumstances a former employee may be able to elect to continue the HRA under the applicable continuation of coverage requirements. However, the final rules do not include an exception for former employees to the requirement that individuals covered by an individual coverage HRA must be enrolled in individual health insurance coverage. This is because PHS Act sections 2711 and 2713 apply with respect to each individual covered by a group health plan, including any former employee. Therefore, a former employee with an individual coverage HRA is required to be enrolled in individual health insurance coverage to ensure that the former employee has a combined arrangement that is in compliance with PHS Act sections 2711 and 2713.82 3. Prohibition Against Offering a Choice Between an Individual Coverage HRA and a Traditional Group Health Plan to the Same Class of Employees a. In General To address the previously described concerns about potential adverse selection and health factor discrimination, the proposed rules provided that a plan sponsor may offer an individual coverage HRA to a class of employees only if the plan sponsor 81 The Departments note that in considering whether to attempt to recoup reimbursements paid for medical care expenses under an individual coverage HRA, including expenses incurred during a period in which an individual did not have individual health insurance coverage due to a retroactive cancellation or termination of coverage, the individual coverage HRA must consider PHS Act section 2712, which limits a plan’s ability to rescind coverage to instances in which an individual has committed fraud or intentionally misrepresented a material fact. See 26 CFR 54.9815–2712, 29 CFR 2590.715–2712, and 45 CFR 147.128. See also DOL Advisory Opinion 77–08A (advising a health plan that depending on the facts and circumstances, the hardship to the participant or beneficiary resulting from such recovery or the cost to the fund of collection efforts may be such that it would be prudent, within the meaning of ERISA section 404(a)(1)(B), for the fund not to seek recovery from the participant or beneficiary). 82 However, as explained earlier in this preamble, a retiree-only HRA is not subject to the market requirements. Therefore, a retiree-only HRA need not comply with the final integration rules, including the requirement that individuals receiving the HRA enroll in individual health insurance coverage. E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations does not also offer a traditional group health plan to the same class of employees. Therefore, a plan sponsor would not be permitted to offer any employee a choice between a traditional group health plan and an individual coverage HRA. Many commenters expressed support for the prohibition against allowing a plan sponsor to offer a class of employees a choice between an individual coverage HRA and a traditional group health plan. These commenters generally stated that this prohibition is essential to prevent market segmentation and health status discrimination. They noted that, while on its face allowing a choice between the two types of coverage may seem appealing, in practice it would lead employers to encourage higher-risk employees to go into the individual market, by making plan design changes to traditional group health plans to make them less attractive to higher-risk employees. This, in turn, could have significant detrimental effects on the individual market due to the small size of the individual market compared to the size of the group market. One commenter noted that the prohibition against offering employees a choice between a traditional group health plan and an individual coverage HRA would protect employers from baseless claims of discrimination. Another commenter stated that permitting employers to offer a choice between an individual coverage HRA and a traditional group health plan could raise practical and administrative issues for employers and issuers, including in estimating participation in the traditional group health plan. A few commenters opposed the prohibition on offering employees a choice between a traditional group health plan and an individual coverage HRA, asserting that such a rule would restrict choice for employees and flexibility for employers. Some of these commenters asserted that the other conditions in the proposed rules, such as the same terms requirement and the prohibition on integration with STLDI, each described later in this preamble, were sufficient to prevent adverse selection. A few commenters acknowledged the risk of market segmentation by employers in the large group market or that offer self-insured plans, but requested that small employers generally, or small employers offering plans in the fully insured small group market, be allowed to offer their employees a choice between an individual coverage HRA and a traditional group health plan. They noted that small employers would not VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 have an incentive to send their higherrisk employees to the individual market because insured traditional group health plans in the small group market are part of a community rated single risk pool. A few commenters also noted that allowing small employers to offer employees a choice would be consistent with Executive Order 13813, which one commenter noted specifically referred to small employers. One commenter indicated that the prohibition on choice might dissuade employers from offering individual coverage HRAs to their employees. The commenter also noted that if given the choice, lower-risk employees, rather than higher-risk employees, may leave the employer’s traditional group health plan and purchase individual health insurance coverage.83 The Departments generally agree with commenters that stated that permitting employers to offer an employee a choice between an individual coverage HRA and a traditional group health plan could lead to market segmentation.84 Although some lower-risk employees may choose to enroll in individual health insurance coverage if offered a choice, many employers would have strong economic incentives to encourage lower-risk employees to retain traditional group health plan coverage and higher-risk employees to enroll in individual health insurance coverage. With respect to the suggestion that the Departments allow employers in the small group market to offer a choice to employees, the Departments acknowledge that the incentives for these employers to segment risk are substantially lower than for other employers offering experience-rated 83 One commenter requested that the prohibition against choice not apply to spouses and dependents, noting that many employers do not contribute to family premiums under group health plans. Although the Departments anticipate that employers will generally not offer dependents an independent benefit package, for the sake of clarity, and in response to this comment, the Departments note that the prohibition is intended to apply to both participants and dependents, and the final rules are revised to clarify this intent. 84 Although this condition generally is finalized as proposed, the text of the final rules is updated to include a reference to the special rule for new hires, explained later in this preamble. In general, under the special rule for new hires, a plan sponsor may continue to offer some employees in a class of employees a traditional group health plan (that is, current employees), while offering new employees in that class an individual coverage HRA, and, therefore, in that limited case, a plan sponsor may offer a traditional group health plan to some employees in a class of employees and an individual coverage HRA to other employees in the same class of employees. However, the special rule for new hires does not provide an exception to the rule that no participant may be given a choice between a traditional group health plan and an individual coverage HRA. PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 28903 coverage or self-insured plans. However, the Departments would not expect many small employers to offer this choice because the coverage in the small group market and individual market is quite similar and because, as the commenters note, small employers that purchase health insurance would not have an incentive to segment their risk pool. Although allowing small employers to offer a choice would not provide small employers much benefit, it would increase the complexity of the final rules for entities involved in implementation, such as the Exchanges. Additionally, it could cause some uncertainty for issuers, and, therefore, increased premiums, in both the individual and small group markets. Accordingly, in the final rules, the Departments decline to provide an exception for small employers to the condition that a plan sponsor may not offer an employee a choice between a traditional group health plan and an individual coverage HRA. While the Departments are finalizing the proposal to prohibit choice between an individual coverage HRA and a traditional group health plan, the Departments are generally supportive of maximizing employee choice and employer flexibility and so may revisit this issue in future rulemaking once the Departments have had the opportunity to gauge the results of the initial implementation of individual coverage HRAs. b. Definition of Traditional Group Health Plan For purposes of the condition that a plan sponsor may not offer any employee a choice between an individual coverage HRA and a traditional group health plan, under the proposed rules, the term ‘‘traditional group health plan’’ was defined as any group health plan other than: (1) An account-based group health plan, or (2) a group health plan that consists solely of excepted benefits. Several commenters supported the proposed definition, which provided that a ‘‘traditional group health plan’’ excludes a group health plan that consists solely of excepted benefits, so that a plan sponsor may offer an employee both an individual coverage HRA and a group health plan that consists solely of excepted benefits.85 85 One commenter asked that the Departments confirm that a traditional group health plan means a major medical plan and not a group health plan that consists solely of excepted benefits. The Departments confirm the definition of traditional group health plan does not include a group health plan that consists solely of excepted benefits. The E:\FR\FM\20JNR2.SGM Continued 20JNR2 28904 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations After considering these comments, the Departments finalize the definition of ‘‘traditional group health plan’’ in the proposed rules without change. Notwithstanding different QSEHRA rules,86 under the final rules, a traditional group health plan does not include a group health plan that consists solely of excepted benefits and, therefore, a plan sponsor generally may offer an employee both an individual coverage HRA and a group health plan that consists solely of excepted benefits.87 One commenter requested that the Departments clarify that the final rules would not preclude an employer that offers an individual coverage HRA from offering a separate HRA under which only premiums for excepted benefits may be reimbursed. The Departments agree that such an arrangement is not precluded by these final rules. An HRA under which only excepted benefit premiums may be reimbursed is an account-based group health plan (and, therefore, not considered a traditional group health plan). Further, the HRA under which only excepted benefit premiums may be reimbursed is a group health plan that provides only excepted benefits (and, therefore, not considered a traditional group health plan). See later in this preamble for a discussion of the interaction of an excepted benefit HRA and an individual coverage HRA, and the difference between an excepted benefit HRA and an HRA that only provides excepted benefits. jbell on DSK3GLQ082PROD with RULES2 c. Salary Reduction Arrangements The preamble to the proposed rules noted that the Departments were aware that some employers may want to allow employees to pay the portion of the premium for individual health insurance coverage that is not covered by an individual coverage HRA, if any, through a salary reduction arrangement under a cafeteria plan. Pursuant to Code section 125(f)(3), an employer generally may not provide a QHP offered through an Exchange as a benefit under its cafeteria plan.88 Therefore, an employer generally may not permit employees to make salary reduction contributions to a cafeteria plan to purchase a QHP offered through an Exchange. However, Code section 125(f)(3) does not apply to individual health insurance commenter also noted that an employer may not provide both a QSEHRA and a group health plan that consists solely of excepted benefits. 86 See Code section 9831(d)(3)(B)(ii) and IRS Notice 2017–67. 87 But see later in this preamble for a discussion of the interaction between excepted benefit HRAs and individual coverage HRAs. 88 But see Code section 125(f)(3)(B). VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 coverage that is not purchased on an Exchange. Therefore, for an employee covered by an individual coverage HRA who purchases individual health insurance coverage outside of an Exchange, the employer may permit the employee to pay the balance of the premium for the coverage through its cafeteria plan, subject to all applicable cafeteria plan guidance. Such an arrangement would not be considered to be a traditional group health plan for purposes of the final rules. Some commenters supported allowing a salary reduction arrangement under a cafeteria plan alongside an individual coverage HRA, with one commenter noting that this flexibility is essential to ensuring successful take-up of individual coverage HRAs. One commenter recommended against allowing a salary reduction arrangement alongside an individual coverage HRA unless further guidance is issued on cafeteria plans addressing nondiscrimination rules and penalties. One commenter requested that the Departments work with Congress to eliminate the prohibition, under Code section 125(f)(3), against purchasing Exchange coverage under a cafeteria plan. Under the final rules, as under the proposed rules, an employer may permit an employee covered by an individual coverage HRA who purchases individual health insurance coverage outside of an Exchange to pay the balance of the premium for the coverage through its cafeteria plan, subject to all applicable cafeteria plan guidance. This arrangement would not be considered to be a traditional group health plan for purposes of the final rules. Changes to the statutory prohibition regarding the use of cafeteria plans to purchase Exchange coverage are outside of the scope of this rulemaking. Commenters also raised various other issues related to the interaction between individual coverage HRAs and cafeteria plans under Code section 125. A few commenters expressed support for the ability to integrate a stand-alone cafeteria plan with individual health insurance coverage.89 And some commenters requested that the Departments provide answers to hypothetical scenarios involving the intersection of cafeteria plans, HSAs, and HRAs. Neither the proposed rules nor the final rules make any changes to the rules under Code section 125. Thus, 89 As noted earlier in this preamble, for purposes of the final rules, the term ‘‘HRA or other accountbased group health plan’’ does not include an employer arrangement that reimburses the cost of individual health insurance coverage through a cafeteria plan under Code section 125. PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 any issues arising under Code section 125, and any guidance requested by commenters to address those issues, are beyond the scope of this rulemaking. The Treasury Department and the IRS, however, appreciate the comments and will consider whether to address some of these issues in future guidance. 4. Same Terms Requirement a. In General To address concerns about health status discrimination leading to adverse selection in the individual market, the proposed rules generally required that a plan sponsor that offers an individual coverage HRA to a class of employees must offer the HRA on the same terms (that is, both in the same amount and otherwise on the same terms and conditions) to all employees within the class of employees.90 As part of this proposed condition, the Departments made clear that offering a more generous HRA to individuals based on an adverse health factor would violate the integration rules. Commenters generally supported the same terms requirement as a condition essential to protecting against market segmentation and recommended that it be retained in the final rules. Some commenters specifically supported the ability under the proposed rules to vary the HRA terms and amounts between different classes of employees. Because the Departments have concluded that the same terms requirement is critical to protecting against adverse selection in the individual market, the final rules retain this requirement, but with some revisions and clarifications in response to comments as explained later in this section of the preamble. One commenter stated that the same terms requirement prohibits discrimination that could occur either by offering less generous benefits to only certain employees in a class of employees or by offering more generous benefits to only certain employees in a class of employees. The commenter stated that it is critical that this prohibition against ‘‘benign’’ discrimination be retained in the final rules. The Departments agree, and this aspect of the rule is being adopted as proposed. b. Exceptions to the Same Terms Requirement The Departments recognize that premiums for individual health 90 The Departments note that if an employer chooses not to distinguish its employees based on the classes of employees permitted under the final rules and offers an individual coverage HRA to all of its employees, the same terms requirement would apply to all of the employer’s employees. E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations insurance coverage obtained by individual coverage HRA participants and their dependents may vary and, thus, some variation in amounts made available under an individual coverage HRA, even within a class of employees, may be appropriate. Therefore, the proposed rules provided that it would be permissible to increase the maximum dollar amount made available under an individual coverage HRA for participants within a class of employees as the age of the participant increases, so long as the same maximum dollar amount attributable to that increase in age was made available to all participants of the same age within the same class of employees. Commenters generally supported the provision allowing increases in individual coverage HRA amounts based on the participant’s age, as premiums in the individual market generally increase based on age. However, some commenters expressed concern that an unlimited ability to increase amounts made available under an individual coverage HRA based on age could be used to shift older, higher cost workers to the individual market. Therefore, these commenters recommended that, to avoid adverse selection, the ability to increase amounts by age be tied to actual variance in premiums for individual health insurance coverage, such as the 3:1 age rating rule in PPACA 91 or through some other reasonable relationship to the cost of individual coverage. The Departments agree that imposing an outer bound on the ability of a plan sponsor to vary the maximum amounts made available under an individual coverage HRA based on a participant’s age could further protect against adverse selection in the individual market, while not hampering the ability of a plan sponsor to provide benefits that account for increased costs for older workers in the individual market. Therefore, in response to these comments, the same terms requirement is revised under the final rules to provide that an individual coverage HRA does not fail to be provided on the same terms to a class of employees solely because the maximum dollar amount made available under the terms of the HRA increases as the age of the participant increases, so long as the maximum dollar amount made available under the terms of the HRA to the oldest participant(s) is not more than three times the maximum dollar amount made available under the terms of the HRA to the youngest participant(s). The 91 See PHS Act section 2701(a)(1)(A)(iii). VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 final rules retain the rule that the same maximum dollar amount attributable to the increase in age must be made available to all participants in a class of employees who are the same age. The Departments considered a number of different ways to design the limitation on age variation, including by incorporating the federal and state age curves, tying the variation to a specific premium for a specific policy that a participant in the class of employees could purchase, and basing the maximum dollar amount made available by the individual coverage HRA on the degree of age variation in individual market premiums in the rating area where each employee resides. However, the Departments determined that these options would be unduly complex and that imposing the 3:1 limit, which is generally based on the degree of age variation allowed in individual market premiums under PHS Act section 2701, sufficiently limits the potential for abuse.92 One commenter expressed concern that permitting, rather than requiring, increases in the maximum amount available under an individual coverage HRA based on age could invite age discrimination. Thus, the commenter argued that the final rules should require employers to vary individual coverage HRA amounts based on age to account for increases in costs for older workers. The Departments note that other federal laws and rules address age discrimination and are the more appropriate area of regulation in which to address these concerns. Accordingly, the Departments decline to require, but will permit, employers to increase individual coverage HRA amounts based on participants’ ages under the final rules. However, individual coverage HRAs may be subject to restrictions imposed under other laws, 92 Relatedly, on November 19, 2018, the Treasury Department and the IRS issued Notice 2018–88, which addressed the application of the rules under Code section 105(h) to individual coverage HRAs. HRAs generally are subject to the rules under Code section 105(h) and its related rules because they are self-insured medical reimbursement plans. However, HRAs that reimburse employees only for premiums paid to purchase health insurance policies, including individual health insurance policies, are not subject to the rules under Code section 105(h) and its related rules. See 26 CFR 1.105–11(b)(2). Notice 2018–88 described an anticipated safe harbor that would apply to individual coverage HRAs that are subject to Code section 105(h) to address the fact that under the Code section 105(h) rules, variation in employer contributions based on age is not allowed. The Treasury Department and the IRS intend to propose rules under Code section 105(h) in the near term that set forth an age variation standard that is consistent with the rule included in these final integration rules, and the proposed rules under Code section 105(h) will be subject to notice and comment. PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 28905 such as those that protect against age discrimination. One commenter requested that the Departments clarify the date as of which the age of the participant may be determined for this purpose and suggested the first day of the HRA plan year. The final rules clarify that a participant’s age, for purposes of the same terms requirement, may be determined by the plan sponsor using any reasonable method for a plan year, so long as the plan sponsor determines each participant’s age for this purpose using the same method for all participants in the class of employees for the plan year and the method is determined prior to the plan year. For example, as the commenter suggests, the plan sponsor may determine each participant’s age based on their age on the first day of the individual coverage HRA plan year. Additionally, the proposed rules included a proposal to permit the maximum dollar amount made available under an individual coverage HRA within a class of employees to increase as the number of the participant’s dependents covered under the HRA increased, so long as the same maximum dollar amount attributable to that increase in the number of dependents is made available to all participants in that class of employees with the same number of dependents covered by the HRA. Commenters generally supported this provision, as the cost of individual health insurance coverage generally increases with an increase in the number of dependents covered. Some commenters asked for clarification on the extent to which employers may increase amounts made available under an individual coverage HRA based on an increase in the number of the participant’s dependents. One commenter recommended that any permitted increase be tied to individual market premium variance in order to prevent employers from varying HRA amounts to encourage higher-risk employees to shift to the individual market. Another commenter recommended that employers be required to vary individual coverage HRA amounts based on the number of dependents covered by the HRA in order to put employees on equal footing with other individuals and allow them to purchase insurance based on their relevant circumstances. The Departments considered these comments, but have determined that providing employers flexibility as to if and how they vary HRA amounts based on family size does not raise a significant risk of adverse selection or health factor discrimination and, E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28906 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations instead, avoids unnecessary complexity. Therefore, under the final rules, it remains permissible to vary HRA amounts based on the number of a participant’s dependents covered by the individual coverage HRA as proposed. Moreover, there is no specific limit on an employer’s ability to increase HRA amounts based on the number of a participant’s dependents covered by the HRA, so long as the same maximum dollar amount attributable to that increase in the number of dependents is made available to all participants in that class of employees with the same number of dependents covered by the HRA. Commenters also suggested additional factors for which employers should be allowed to vary amounts provided under an individual coverage HRA within a class of employees, including earnings or salary, role/title, and geographic region. The Departments note that the suggestions that individual coverage HRA amounts be allowed to vary within a class of employees based on earnings, salary, or role/title raise adverse selection and health factor discrimination concerns, as these classes are more susceptible to manipulation by an employer. Accordingly, the Departments decline to adopt any of these suggestions. Regarding geographic region, the Departments acknowledge that individual health insurance costs vary based on geography, but the Departments decline to adopt this suggestion because the issue is already addressed under the final rules through the ability to classify employees based on the rating area of their primary site of employment. A few commenters recommended that the Departments consider an employer that contributes the same percentage of an employee’s individual health insurance premium (for example, 80 percent) to an individual coverage HRA to be considered to be providing the individual coverage HRA on the same terms to the employees in the class. The Departments decline to adopt this suggestion because this type of rule would add significant complexity to the same terms requirement, particularly with respect to determining how to coordinate the ability to vary based on age and family size, and would also raise adverse selection concerns, as well as more general concerns about the inherent incentives of a percentagebased standard and its effect on healthcare spending. See later in this preamble for a discussion of the same terms requirement as applied to an employer that offers both an HSA-compatible VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 individual coverage HRA and an individual coverage HRA that is not HSA compatible to the same class of employees and for a discussion of how the same terms requirement applies if an individual coverage HRA makes amounts available based on amounts remaining in another HRA by which the participant was previously covered. c. Former Employees The proposed rules generally would apply to an individual coverage HRA that includes participants who are former employees in the same way that they would apply if the HRA only provided benefits to current employees. However, the Departments recognized that eligibility for post-employment group health plan coverage, if any, varies widely and may be subject to age, service, or other conditions. To avoid undue disruption of employers’ practices relating to the provision of post-employment health coverage, the proposed rules provided that an individual coverage HRA may be treated as provided on the same terms even if the plan sponsor offers the individual coverage HRA to some, but not all, former employees within a class of employees (for example, to all former employees with a minimum tenure of employment). But, under the proposed rules, if a plan sponsor offers the individual coverage HRA to one or more former employee(s) within a class of employees, the HRA must be offered to those former employee(s) on the same terms as all other employees within the class. One commenter expressed concern that allowing employers to offer some retirees an individual coverage HRA, but not all retirees, creates the potential for health status discrimination. The Departments note, however, that many nondiscriminatory reasons may influence an employer’s decisions whether to offer retiree health coverage. For example, it is not uncommon for employers to offer retiree health coverage only to workers that have been with the company at least 5 years prior to retirement.93 Moreover, the HIPAA nondiscrimination rules (as well as other applicable federal and state laws) address discrimination based on a health factor. One commenter supported treating former employees under the same terms as all members of the class of employees. Another commenter requested confirmation that employers providing retirees and current employees with different amounts in individual coverage HRAs would satisfy 93 See PO 00000 e.g., 5 U.S.C. 8905(b). Frm 00020 Fmt 4701 Sfmt 4700 the same terms requirement and requested confirmation that contributing different amounts to former employees based on years of service would satisfy the same terms requirement. The final rules provide that former employees within a class of employees offered an individual coverage HRA need not be offered an individual coverage HRA, but if they are, the HRA must be provided to them on the same terms as other employees in that class of employees (based on the class in which the former employee was included immediately prior to separation from service). Therefore, a plan sponsor would not comply with the same terms requirement if it provided some employees in a class of employees larger or smaller HRA amounts based on years of service or status as a former employee.94 The Departments received a number of comments on retiree-only HRAs in response to the proposed rules. Although the final rules do not modify the rules for retiree-only HRAs, the Departments note that the market requirements do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year.95 Therefore, a retiree-only HRA need not satisfy the requirements of any integration test, including the same terms requirement. d. New Employees or New Dependents One commenter asked for clarification regarding the application of the same terms requirement in the case of coverage changes during the plan year, including in cases in which an employee gains a dependent. In response to this comment, in the final rules, the Departments clarify the application of the same terms requirement both for new employees and new dependents. Therefore, in the final rules, the Departments clarify that, under the same terms requirement, in the case of a participant who becomes covered by an individual coverage HRA after the first day of the plan year, the individual coverage HRA may make the full annual amount available or adopt a reasonable proration methodology. The Departments also clarify in the final rules how the same terms requirement 94 Also, eligibility conditions that are based solely on the lapse of a time period are permissible for no more than 90 days under PHS Act section 2708. See 26 CFR 54.9815–2708, 29 CFR 2590.715–2708, and 45 CFR 147.116. 95 See Code section 9831(a)(2) and ERISA section 732(a). HHS follows a similar approach for nonfederal governmental retiree-only plans and encourages states to adopt a similar approach with respect to issuers of retiree-only plans. See 75 FR 34537, 34539 (June 17, 2010). E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations applies if the individual coverage HRA varies the maximum amount available based on the number of a participant’s dependents covered by the HRA and the number of the participant’s dependents covered by the HRA either increases or decreases during the plan year. In that case, the individual coverage HRA may make available the same amount made available to participants in the class who had the same number of dependents covered by the HRA on the first day of the plan year or may adopt a reasonable proration methodology of that amount for the remainder of the plan year. The method the individual coverage HRA uses to determine amounts made available for participants who enroll during the plan year or who have changes in the number of dependents covered by the HRA during a plan year must be the same for all participants in the class of employees, and the method must be determined prior to the beginning of the plan year. 5. Classes of Employees jbell on DSK3GLQ082PROD with RULES2 a. In General The proposed and final rules require a plan sponsor that offers an individual coverage HRA to a class of employees to offer the individual coverage HRA on the same terms to each participant within the class of employees, subject to certain exceptions. Also, the proposed and final rules provide that a plan sponsor may offer individual coverage HRAs on different terms to different classes of employees, and may offer either an individual coverage HRA or a traditional group health plan to different classes of employees. However, within a class of employees, a plan sponsor generally may not offer some employees a traditional group health plan and others an individual coverage HRA 96 (or offer any employee a choice between a traditional group health plan or an individual coverage HRA). The proposed rules enumerated the classes of employees that would apply for these purposes. As discussed in more detail in this section of the preamble, the final rules make a number of changes to the list of permissible classes of employees in response to comments. Many commenters supported the general ability of a plan sponsor to offer individual coverage HRAs on different terms to different classes of employees and to offer either a traditional group health plan or an individual coverage 96 The one exception to this general rule, described later in this preamble, is the special rule for new hires. However, even under the special rule for new hires, no employee may be offered a choice between an individual coverage HRA and a traditional group health plan. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 HRA to different classes of employees. These commenters applauded the flexibility provided by this aspect of the proposed rules, emphasizing that such flexibility is critical for plan sponsors that want to offer individual coverage HRAs. However, some commenters objected to this aspect of the proposed rules, expressing concerns about the ability of plan sponsors to use the classes of employees to segment risk. These commenters suggested that a plan sponsor that wants to offer an individual coverage HRA should not be allowed to offer a traditional group health plan to any of its employees and, instead, should be required to offer the HRA, on the same terms, to all of its employees and, therefore, fully replace the traditional group health plan(s) it may have offered. One commenter requested that the Departments disallow the use of different classes of employees in applying the final rules as a transitional measure, so that plan sponsors would not be allowed to offer some classes of employees a traditional group health plan and other classes of employees an individual coverage HRA for some transitional period of time. A number of commenters, including some of those who generally supported the ability to vary benefits on a class-byclass basis, expressed concerns about the possibility of adverse selection and, therefore, recommended that additional safeguards be provided, or, at a minimum, no further flexibility be provided. The Departments considered these comments and have determined that permitting plan sponsors to offer different benefits to certain classes of employees is essential to providing the flexibility needed to achieve increased HRA usability and to maximize employee welfare. The Departments understand that employers commonly use certain job-based classifications for employee benefits and other purposes and that failing to provide flexibility to offer different benefits to different classes of employees, even for a transitional period of time, could reduce the use and availability of individual coverage HRAs. However, the Departments acknowledge the concerns regarding the potential for adverse selection and health factor discrimination and, therefore, have concluded that additional parameters in certain circumstances are needed for employers to offer different benefits to different classes of employees in order to address the potential for adverse selection and health factor discrimination. Accordingly, the final rules permit employers to apply the PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 28907 integration rules on a class-by-class basis, as was allowed under the proposed rules. However, as explained later in this section of the preamble, the final rules make a number of changes, including revisions to the list of permissible classes of employees, the addition of a minimum class size requirement that applies in certain instances, and clarifications of a number of other related issues in response to comments. b. Proposed and Final Classes The proposed rules included the following proposed classes of employees: (1) Full-time employees (using either the definition that applies for purposes of Code section 105(h) or 4980H, as determined by the plan sponsor); (2) part-time employees (using either the definition that applies for purposes of Code section 105(h) or 4980H, as determined by the plan sponsor); (3) seasonal employees (using either the definition that applies for purposes of Code section 105(h) or 4980H, as determined by the plan sponsor); (4) employees who are included in a unit of employees covered by a collective bargaining agreement (CBA) in which the plan sponsor participates (as described in 26 CFR 1.105–11(c)(2)(iii)(D)) (the CBA class of employees); (5) employees who have not satisfied a waiting period for coverage (if the waiting period complies with the waiting period rules in PHS Act section 2708 and its implementing rules) (the waiting period class); (6) employees who have not attained age 25 prior to the beginning of the plan year (as described in 26 CFR 1.105– 11(c)(2)(iii)(B)) (the under-age-25 class); (7) employees who are non-resident aliens with no U.S.-based income (as described in 26 CFR 1.105– 11(c)(2)(iii)(E)) (generally, foreign employees who work abroad) (the nonresident alien class); and (8) employees whose primary site of employment is in the same rating area, as defined in 45 CFR 147.102(b) (the rating area class). In addition, the proposed rules permitted, as additional classes of employees, groups of employees described as a combination of two or more of the enumerated classes. As explained in the preamble to the proposed rules, the Departments took a number of considerations into account in determining the proposed classes of employees. First, the proposed classes were ones that, based on the Departments’ experience, employers historically have used for employee benefit purposes other than inducing higher-risk employees to leave the plan sponsor’s traditional group health plan. E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28908 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations Second, the proposed classes of employees were not ones that could be easily manipulated in order to transfer higher-risk individuals (and perceived higher costs) from the employer’s traditional group health plan to the individual market, as it would be burdensome for employers to shift employees from one of these classes of employees to another merely for the purpose of offering different types of health benefits to employees based on a health factor. Therefore, the Departments determined that these proposed classes of employees would balance employers’ reasonable need to make distinctions among employees with respect to offering health benefits with the need to protect against adverse selection and health factor discrimination. The Departments requested comments on the proposed classes of employees, including whether additional classes of employees should be provided and whether the proposed classes of employees and any potential additional classes are sufficient to mitigate adverse selection concerns. Several commenters supported the proposed classes of employees, with some insisting that no additional classes be added because of the increased likelihood of risk pool manipulation. Several commenters expressed support for the proposed list of specific enumerated classes, as opposed to an open-ended standard, as a way to mitigate adverse selection. Some commenters objected to the proposed classes, expressing general concern that the rules would provide employers too much flexibility, which would lead to manipulation of classes and risk segmentation. Some commenters requested that specific classes be eliminated or modified. In particular, several commenters expressed concern that the under-age-25 class of employees would lead to adverse selection. These commenters stated that this class is not justified based on a bona fide relationship to employment or the need to provide employers flexibility because employers do not typically structure benefits based on whether an employee has attained age 25. Some commenters raised administrative complexity concerns in their objections to this proposed class because employees under age 25 may be eligible for coverage under their parents’ group health plans. One commenter, however, supported this class, stating that it may lead to healthier risk entering the individual market. The Departments agree with the commenters who raised concerns about the underage-25 class of employees, both as to the potential for adverse selection and the VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 fact that employers do not typically structure benefits based on this classification and, therefore, do not need the flexibility the proposed rules provided.97 Therefore, the final rules do not include the under-age-25 class of employees as a permitted class of employees. With regard to the proposed part-time employee class, several commenters supported including the class because of the additional flexibility it would provide to employers when determining whether to offer any benefits to parttime employees. One commenter highlighted that some large employers (who would not be able to provide a QSEHRA) may want to offer their parttime employees some level of taxpreferred health benefits but have no options today other than offering a traditional group health plan. Some commenters also argued that providing additional flexibility for employers to offer individual coverage HRAs to parttime employees who might otherwise not have been offered any benefits could lead to increased enrollment in individual health insurance coverage, thereby stabilizing the individual market risk pool and reducing premiums. One commenter suggested that the Departments should allow multiple gradations of part-time employees (for example, employees who work 10 to 20 hours per week, employees who work 20 to 30 hours per week, etc.). However, one commenter expressed concern that a part-time employee class could be a proxy for higher-risk employees, and could, therefore, lead to adverse selection, as the commenter asserted that many employees who work part-time do so due to health issues. The Departments agree with those commenters who asserted that a parttime employee class should be included in the final rules, as it could provide necessary flexibility to allow some employers to offer an individual coverage HRA to part-time employees who might otherwise not be offered any group health plan benefits. While the Departments do not dispute that some employees may change from full-time employee status to part-time employee status due to health issues, the Departments have determined that allowing full-time employees and parttime employees as separate classes of employees is essential for employer 97 The Departments note that the under-age-25 class of employees was included in the proposed rules because it is a class of employees that may be excluded for certain purposes under Code section 105(h) and under the QSEHRA rules. See earlier in this preamble for a discussion of the application of Code section 105(h) to individual coverage HRAs. PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 flexibility, increasing HRA usability, and maximizing employee welfare. Further, the Departments have concluded that the requirements of the final rules, including these employee classifications, are sufficiently robust to mitigate market segmentation. Therefore, the final rules include fulltime employees and part-time employees as separate permitted classes for individual coverage HRAs. However, see the discussion later in this preamble regarding the definitions of these terms and the application of a minimum class size requirement to these classes in certain circumstances. With regard to a class of employees based on a geographic area, some commenters expressed concern that basing the class on the rating area of the work site could be too granular risking increased adverse selection. Thus, the commenters asserted that a class based on geography should instead be determined at the state level. While the Departments understand and considered the concern raised by commenters, the Departments have determined, based on information regarding the significant differences in individual market premiums between rating areas within some states and significant differences in the number of individual health insurance plans available between rating areas within some states, that it would be an unreasonable limitation on employer flexibility to prohibit employers from offering different benefits based on different work-site rating areas. The Departments concluded that a rule that would prohibit employers from differentiating between these particular classes of employees for purposes of offering individual coverage HRAs would pose significant costs that might undermine the willingness of employers to offer an individual coverage HRA. Therefore, the final rules allow a class of employees to be based on the rating area of the employees’ primary work site. However, in response to concerns raised by commenters regarding the potential for adverse selection and health factor discrimination with this class of employees in particular, see the discussion later in this preamble regarding the application of a minimum class size requirement to this class in certain circumstances. With regard to the waiting period class of employees, one commenter recommended that this class of employees be limited to a 30-day waiting period maximum to provide an additional market segmentation safeguard. Another commenter specifically supported this class. The final rules include the waiting period E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 class of employees, which aligns with the waiting periods allowed under PHS Act section 2708 and its implementing rules, because this avoids unneeded complexity and burden and the Departments do not consider this class of employees to raise significant adverse selection concerns. Several commenters requested clarification regarding the CBA class of employees, which under the proposed rules was defined as ‘‘employees included in a unit of employees covered by a collective bargaining agreement in which the plan sponsor participates (as described in 26 CFR 1.105– 11(c)(2)(iii)(D)).’’ Commenters sought clarification as to whether employers may establish separate classes for employees subject to different CBAs or whether all employees subject to various CBAs entered into by the employer would be aggregated and considered one class of employees for purposes of offering individual coverage HRAs. One commenter requested that the Departments clarify whether a class of employees based on a CBA would include all the employees subject to that CBA or could be based on distinctions within the CBA. Under the final rules, employers may establish separate classes of employees for employees covered by separate CBAs. However, under the final rules, an employer is not specifically permitted to create its own classes of employees based on any distinctions relating to employees within one CBA. However, an employer is permitted to combine a CBA classification with other permitted classes of employees (for example, combining the CBA class with the fulltime employee and part-time employee classes to create full-time and part-time CBA subclasses), thereby allowing the employer to make certain further distinctions within the group of employees subject to the CBA. The Departments have revised the definition of this class of employees in the text of the rules and added an example to the text to clarify its meaning in response to comments. Further, to account for, and to avoid disruption of, the way in which multiemployer plan coverage is sometimes offered, the final rules also clarify that the CBA class may include employees covered by a CBA and employees covered by an appropriate related participation agreement.98 98 A participation agreement allows noncollectively bargained employees to participate in a multiemployer plan. Non-collectively bargained employees can only participate in a multiemployer plan if the plan specifically allows it, and a participation agreement will set forth who is eligible and the benefits for which they are eligible. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 With regard to the proposed ability to combine classes of employees more generally to create subclasses, some commenters supported the flexibility, but others expressed concern with the potential for risk segmentation. Some commenters recommended that the final rules not permit combinations of classes of employees or that, if permitted, the final rules apply certain additional safeguards, including a minimum class size requirement. Several commenters recommended not allowing combinations of classes of employees for small employers but permitting combinations of classes of employees for large employers, as long as the number of employees in a combined class satisfies a minimum. The Departments determined that it is important to provide employers with the flexibility to combine classes of employees but, as discussed later in this preamble, it is also appropriate to apply a minimum class size requirement in certain circumstances to mitigate adverse selection and health factor discrimination concerns. Therefore, the final rules continue to allow for the combination of classes of employees as proposed but, in certain circumstances, apply a minimum class size requirement. The final rules also include additional examples to illustrate the ability of plan sponsors to combine classes of employees. c. Additional Classes Some commenters recommended against adding any classes to the list of proposed permitted classes of employees, stating that the proposed classes of employees were sufficient and that additional classes of employees could lead to an increased risk of adverse selection. However, as discussed in this section of the preamble, several other commenters requested that certain additional classes of employees be added to the final rules. In the proposed rules, the Departments acknowledged that permitting plan sponsors to treat salaried and hourly employees as different classes of employees was considered, but not proposed. The Departments noted that employers might easily be able to change an employee’s status from salaried to hourly (and in certain circumstances, from hourly to salaried) with seemingly minimal economic or other consequences for either the employer or the employees. Some commenters agreed and strongly opposed adding hourly and salaried employees as classes of employees, expressing concern that classes of employees based on pay status could facilitate health PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 28909 status discrimination and be easily manipulated. However, several commenters requested that salaried and hourly employees be added as separate classes of employees. These commenters disagreed with the Departments’ assertion that employers might be able to easily change employee status from salaried to hourly and vice versa. The commenters noted that changing status from salaried to hourly in particular has substantial economic and other consequences for both employers and employees and that doing so on the basis of the health of an employee could violate ERISA section 510. One commenter noted that employers historically have provided different benefits to hourly and salaried workers and that adding these as permitted classes of employees could facilitate increased use of individual coverage HRAs for employers that might otherwise decline to offer an individual coverage HRA. The Departments considered the issues raised in these comments. The Departments have concluded that the benefits of employer flexibility, increased utilization of individual coverage HRAs, and maximizing employee welfare outweigh the potential risk of adverse selection and health factor discrimination, due to a reconsideration of the extent to which these categories could be manipulated and because of the application of a minimum class size requirement, as described later in this preamble. Therefore, the final rules include salaried and non-salaried employees as permitted classes of employees. One commenter requested that employees employed by a staffing firm for temporary placement at entities unrelated to the staffing firm (temporary workers) be treated as a separate class. The commenter stated that this rule would facilitate offering of individual coverage HRAs by staffing firms to fulltime temporary workers (while it is likely that regular full-time employees of the staffing firm would continue to receive an offer of a traditional group health plan). The commenter further stated that staffing firms historically have offered temporary workers different benefits than regular full-time employees for reasons other than to segment risk. The commenter further stated that it would be burdensome for staffing firms to shift workers between the temporary worker and regular employee classes merely to shift risk. The Departments agree that adding this class could increase the usability of HRAs for staffing firms and benefit their employees, that this class would be difficult to manipulate, and, that, E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28910 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations therefore, this class does not raise a substantial risk of adverse selection or health factor discrimination. Therefore, the final rules include as a permitted class of employees individuals who, under all the facts and circumstances, are the employees of an entity that hired the employees for temporary placement at an unrelated entity (that is, another entity that is not the common law employer of the employees and that is not treated as a single employer under Code section 414(b), (c), (m), or (o) with the entity that hired the employees for temporary placement). One commenter requested that independent contractors be permitted as a separate class of employees, and one commenter requested that the Departments allow self-employed business owners to participate in an individual coverage HRA. HRAs were established 99 as a means for employers to provide tax-favored benefits to employees, but the exclusion from federal income tax for reimbursements of medical expenses by HRAs is set forth in Code sections 105 and 106, both of which generally are restricted to employer-provided coverage to employees. Moreover, Code section 105(g) specifically provides that the exclusion under Code section 105(b) is not available to an individual who is an employee within the meaning of Code section 401(c)(1) (relating to selfemployed individuals). For these reasons, businesses that utilize the services of independent contractors cannot provide those self-employed individuals with a tax-favored individual coverage HRA nor may a selfemployed business owner be provided a tax-favored individual coverage HRA. Therefore, the final rules do not adopt the suggestion to add independent contractors, or self-employed individuals more generally, as a permitted class of employees because these individuals cannot be provided tax-favored HRAs. One commenter requested that employees eligible for Medicare and employees enrolled in Medicare be treated as two separate classes. The Departments decline to adopt this suggestion. Sections 1862(b)(1)(A), (B), and (C) of the Social Security Act (SSA) generally provide that an employer that is subject to its provisions may not take into account an employee’s (or employee spouse’s) eligibility for Medicare in the design or offering of its group health plan.100 Section 99 See IRS Notice 2002–45. applicability of the Medicare nondiscrimination rules depends on the size of the employer and the type of Medicare beneficiary. For 100 The VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 1862(b)(1)(A)(i)(II) provides that a group health plan must provide to any employee or spouse age 65 or older the same benefits, under the same conditions, that it provides to employees and spouses under age 65, regardless of whether the individual or spouse age 65 or older is entitled to Medicare. Because Medicare is also generally available to people with endstage renal disease (ESRD) regardless of their age, SSA section 1862(b)(1)(C) further provides that a group health plan may not differentiate in the benefits it provides between individuals having ESRD and other individuals on the basis of the existence of ESRD, the need for dialysis, or in any other manner (except during a 30-month coordination period). Because these SSA provisions generally prohibit an employer that is subject to them from discriminating on the basis of an employee’s (or the employee’s spouse’s) Medicare eligibility and treating Medicare employees (other than retirees) differently for benefits under the plan, the Departments decline to establish separate classes of employees for employees who are eligible for or enrolled in Medicare. However, see later in this preamble for a discussion of the conditions under which an individual coverage HRA may be integrated with Medicare. Commenters also requested a number of other classes of employees, with different commenters suggesting different classes of employees, such as classes based on status as a field worker (such as craft workers and laborers), role or job title, employee tenure, being subject to the Davis Bacon Act and Related Acts or the Service Contract Act, exempt or non-exempt status under the Fair Labor Standards Act, and religion or status as a minister. The Departments considered each of these suggestions and have determined that these suggested classes of employees raise various issues including ease of manipulation and potential for adverse selection and health factor discrimination, industry-specificity, and administrability and definitional challenges. The Departments also took into account that, in general, the more classes that are permitted, the greater the risk of adverse selection and health factor discrimination. With respect to the requested class based on employee tenure, the Departments determined that such a class could be inconsistent with working aged beneficiaries, the rules apply to employers with 20 or more employees. For disabled beneficiaries, the rules apply to employers with at least 100 employees. For ESRD beneficiaries, they rules apply to employers of any size. See 42 CFR 411.100 et seq. PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 the prohibition on waiting periods that exceed 90 days under PHS Act section 2708, in addition to raising concerns regarding ease of manipulation and potential for adverse selection and health factor discrimination. Therefore, the Departments have determined that, on balance, for these suggested additional classes, the potential risks posed outweigh the potential benefits, and the Departments decline to add these suggested classes of employees to the final rules. However, see the discussion later in this preamble regarding the special rule for new hires, which is related in part to the comments suggesting a new class based on employee tenure. d. Additional Safeguards In the preamble to the proposed rules, the Departments stated that to minimize burden and complexity, the Departments had not proposed a minimum employer size or employee class size. The Departments identified a concern that very small employers could manipulate the classes of employees, but noted that other economic incentives related to attracting and retaining talented workers would discourage employers from doing so. Accordingly, the Departments invited comments on whether employer size or employee class size should be considered in determining permissible classes of employees. With regard to employer size, some commenters stated that the risk of health factor discrimination is higher with small employers and that the final rules should prohibit small employers from using, or combining, classes of employees to make health coverage distinctions. However, other commenters asserted that the concern that small employers may discriminate based on health status is invalid, arguing that small employers are less likely to discriminate because of both the complexity required to design discriminatory programs and the minimal incentives that small employers have to remove risk from their small group market traditional group health plans that are part of a community rated single risk pool. For these reasons, one commenter requested that the final rules include less restrictive guardrails for small employers. The commenter also requested that large employers offering only an individual coverage HRA be permitted additional flexibility to structure their classes of employees because the risk of discrimination would be mitigated as the employer is not offering a traditional group health E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations plan and, therefore, would not have incentives to remove risk from its plan. With regard to minimum class size, a number of commenters requested that individual coverage HRAs only be available to classes of employees that include a minimum number of employees or are a minimum percentage of an employer’s workforce. A few commenters noted that although a minimum class size requirement would be restrictive, and perhaps inhibit the use of individual coverage HRAs, it would be necessary to prevent risk segmentation. Some commenters supported applying a minimum class size requirement in all cases and some supported applying such a requirement only when separate classes of employees are combined to make smaller subclasses of employees. Some commenters made general requests for a minimum class size requirement (for example, requests for a meaningful threshold) and others included specific suggestions, such as requiring a minimum class size of 10 percent of employees, at least 10 percent of the employer’s workforce or 100 workers, at least 20 employees, or prohibiting employers with fewer than 10 employees from being able to create classes. One commenter requested that there be no minimum class size requirement, in particular to provide flexibility to small employers. In response to these comments, the Departments have concluded that it is appropriate to apply a minimum class size requirement under the final rules in certain circumstances. The Departments sought to develop a rule that is narrowly tailored both to mitigate the risk of adverse selection and health factor discrimination while also avoiding overly burdening employers or unnecessarily hampering the use and flexibility of HRAs to maximize employee welfare. In order to balance these various considerations, the final rules include a minimum class size requirement that varies based on employer size and that applies only to certain classes of employees in certain circumstances in which the potential for adverse selection is greatest. If a class of employees is subject to the minimum class size requirement, the class must include a minimum number of employees for the individual coverage HRA to be offered to that class. The final rules explain the circumstances in which the minimum class size requirement applies, how to determine the applicable class size minimum, and how an individual coverage HRA determines if a particular class of employees satisfies the applicable class VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 size minimum. The final rules also provide a number of examples to illustrate each aspect of the minimum class size requirement. As to the circumstances in which the minimum class size requirement applies, it applies only if the plan sponsor offers a traditional group health plan to at least one other class of employees and offers an individual coverage HRA to at least one class of employees. To the extent the minimum class size requirement applies, it applies only to certain classes that are offered an individual coverage HRA. The minimum class size requirement does not apply to a class of employees offered a traditional group health plan or to a class of employees that is not offered any group health plan. Under the final rules, the minimum class size requirement generally applies to the following classes of employees offered an individual coverage HRA: (1) Salaried employees, (2) non-salaried employees, (3) full-time employees, (4) part-time employees, and (5) employees whose primary site of employment is in the same rating area (although the minimum class size requirement does not apply if the geographic area defining the class is a state or a combination of two or more entire states) (these classes are referred to collectively as the applicable classes). However, in the case of full-time employees and part-time employees, the minimum class size requirement applies only to those classes if the employees in either the part-time or full-time class are offered a traditional group health plan while the employees in the other class are offered an individual coverage HRA. The Departments considered each of the classes of employees permitted under the final rules to determine which classes, if any, present a risk of adverse selection sufficiently significant to justify the imposition of the minimum class size requirement. The Departments determined that classes composed of salaried employees, non-salaried employees, full-time employees, parttime employees, and employees whose primary site of employment is in the same rating area (except if the geographic area defining the class is a state or a combination of two or more entire states) present a substantial risk that employers could apply each of these classes in a way that targets certain higher-risk employees and, therefore, could lead to health factor discrimination and adverse selection. However, the Departments determined that the other permitted classes of employees (that is, the seasonal employee class, the CBA class, the waiting period class, the class based on PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 28911 non-resident aliens with no U.S.-based income, and the class of employees for temporary workers employed by a staffing firm) are unlikely to be manipulated by employers in a way that would lead to health factor discrimination or adverse selection. Under the final rules, the minimum class size requirement applies to a class of employees created by combining any of the applicable classes with any other class of employees, except that the minimum class size requirement does not apply to a class that is the result of any combination of an applicable class and the waiting period class. Waiting periods are most typically applied to new hires, and it is not uncommon for employers to hire new employees in small numbers, to respond to attrition and as workflow increases. Further, the Departments are of the view that combinations of classes that include the waiting period class do not raise a significant risk of manipulation that could lead to adverse selection or health factor discrimination. Therefore, taking these factors into account, the Departments have determined that applying the minimum class size requirement to a class comprised of an applicable class and a waiting period class is not warranted. Consistent with the comments received on this topic, the minimum number of employees that must be included in a class of employees subject to the minimum class size requirement (the applicable class size minimum) depends on the number of employees employed by the employer. The plan sponsor must determine the applicable class size minimum for each plan year of the individual coverage HRA. The applicable class size minimum is: (a) 10, for an employer with fewer than 100 employees; (b) a number, rounded down to a whole number, equal to 10 percent of the total number of employees, for an employer with 100 to 200 employees; and (c) 20, for an employer that has more than 200 employees. In selecting these thresholds, the Departments considered the suggestions made by commenters and sought to strike a balance between providing employers with flexibility to offer different healthcare packages as part of their compensation framework and design, and limiting employers’ ability to use the classes in ways that would create adverse selection in the individual market. The Departments agree with commenters that small employers may not have significant incentives to establish classes in a way that would result in adverse selection or health discrimination, but also are of the view that it could be easier for smaller E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28912 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations employers to manipulate the classes of employees. Further, the Departments selected thresholds for larger employers taking into account that, despite their total size, the classes of employees could also be manipulated by larger employers in ways that could lead to adverse selection and health factor discrimination. Therefore, the minimum class size requirement applies to small employers and large employers, but at lower thresholds for smaller employers than for large employers. For the purpose of applying the minimum class size requirement, an employer must determine the number of its employees based on its reasonable expectation of the number of employees it expects to employ on the first day of the plan year of the individual coverage HRA. The annual determination of whether a class of employees satisfies the applicable class size minimum is based on the number of employees in the class who are offered the individual coverage HRA as of the first day of the plan year.101 Therefore, the determination of whether a class of employees satisfies the minimum class size requirement is not based on the number of employees who enroll in the individual coverage HRA and is not affected by changes that occur during the plan year. Some commenters requested that, in addition to, or instead of, a minimum class size requirement, the Departments should add an anti-abuse rule that would give the Departments the discretion to determine whether an individual coverage HRA is offered in a manner that is intended to segment sicker workers based on all the facts and circumstances. Therefore, even if an employer followed the other rules set forth in the final rules, this additional rule would nevertheless permit the Departments to address instances of discrimination based on a health factor. The Departments decline to add a facts and circumstances test to the final rules because the Departments have concluded that the minimum class size requirement, as set forth in the final rules, adequately balances the need to prevent health factor discrimination with the need to provide employers with certainty in order to encourage expansion and use of individual coverage HRAs. Moreover, other applicable nondiscrimination laws continue to apply. Under the HIPAA nondiscrimination provisions, for example, a group health plan (including an individual coverage HRA) may not discriminate in eligibility for benefits, or in premiums or contributions, based on one or more health factors.102 In addition, for ERISA-covered plans, it is unlawful for any person to discriminate against a participant or beneficiary for the purpose of interfering with the attainment of any right to which the participant may become entitled under a health plan or ERISA.103 Further, under the SSA, an employer generally may not take into account that an individual is entitled to Medicare on the basis of age or disability, or eligible for, or entitled to Medicare on the basis of ESRD, and may not differentiate in the benefits it provides between individuals who have ESRD and other individuals covered under the plan.104 In addition, other nondiscrimination laws (such as the Americans with Disabilities Act) may also apply, and the Departments note that compliance with the final rules is not determinative of compliance with any other applicable law. A new facts and circumstances test would add significant uncertainty for employers while adding little additional protection mitigating adverse selection and health factor discrimination. 101 The Departments reiterate that under the same terms requirement, an employer offering an individual coverage HRA to any employee in a class of employees must offer the HRA, generally on the same terms and conditions, to all employees in the class. 102 Code section 9802, ERISA section 702, and PHS Act section 2705. See also 26 CFR 54.9802– 1, 29 CFR 2590.702, and 45 CFR 146.121. 103 ERISA section 510. 104 SSA section 1862(b)(1)(A), (B), and (C) and 42 CFR 411.102, 411.161, and 411.170. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 e. Former Employees Under the proposed rules, if an individual coverage HRA were offered to former employees, former employees would be considered to be in the same class of employees in which they were included immediately before separation from service. While the plan sponsor would not be required to offer the individual coverage HRA to all former employees (or to all former employees in the applicable class of employees), if it did offer the HRA to a former employee, it would have to do so on the same terms as for the other employees in that class. A few commenters requested that employers be permitted to treat former employees as a separate class of employees, stating that the rule under the proposed rules treating former employees as part of the class of employees in which they would have been included immediately prior to separation from service will impose a barrier to offering individual coverage HRAs. These commenters stated that such a new class of employees would not raise manipulation concerns because whether to terminate employment generally is an PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 independent decision made by the employee. Commenters further suggested that if a class of employees were created for former employees, the final rules should also permit subclasses within the class of former employees based on years of service. Some commenters supported the proposed treatment of former employees and commented that former employees should not be permitted as a separate class of employees under the final rules because the general age and health status of former employees would present adverse selection concerns. One commenter included a number of requests regarding retiree-only HRAs in the context of rehired employees. Notwithstanding that employers may continue to offer retiree-only HRAs that are not subject to the market requirements (and, therefore, are not subject to any integration requirements), the Departments understand the commenters’ concern regarding adverse selection and are not aware of a compelling need to treat former employees as a separate class of employees under the final rules in light of the continued allowance of retireeonly HRAs that are not subject to any integration requirements. All of the rules and eligibility criteria related to retiree-only HRAs continue to apply without change.105 Therefore, the final rules provide that a former employee is considered to be a member of the same class of employees the former employee was in immediately before separation from service, as proposed. Several commenters raised other classification and administration issues related to retirees. One commenter requested clarification that the final rules would not affect the status of former employees who participate in their employer’s traditional group health plan through COBRA. The Departments note that the impact of the final rules on any former employee participating in an employer’s traditional group health plan through COBRA continuation coverage depends on the facts and circumstances. For example, COBRA continuation coverage ends on the date the employer ceases to provide any group health plan (including successor plans). If a former employee is participating in a 105 See Code section 9831(a)(2) and ERISA section 732(a). While title XXVII of the PHS Act, as amended by PPACA, no longer contains a parallel provision at PHS Act section 2721(a), HHS has explained that it will not enforce the requirements of title XXVII of the PHS Act with respect to nonfederal governmental retiree-only plans and encourages states to adopt a similar approach with respect to retiree-only plans offered by health insurance issuers. See 75 FR 34537, 34540 (June 17, 2010). E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations traditional group health plan that is replaced by an individual coverage HRA, the former employee would have a right to elect to participate in the successor plan, the individual coverage HRA (conditioned on the payment of premiums and enrollment in individual health insurance coverage), but would generally not have a right to continue coverage in the traditional group health plan. One commenter requested that the final rules define ‘‘former employee.’’ The final rules provide that for purposes of this rule a former employee is an employee who is no longer performing services for the employer. jbell on DSK3GLQ082PROD with RULES2 f. Controlled Group Commenters requested clarification as to whether the classes of employees are identified based on the employees of the common law employer or, rather, whether the determination is made at the controlled group level (generally referring to a group of employers treated as a single employer with the common law employer under Code section 414(b), (c), (m), or (o)), such that all employees of a controlled group of employers would be combined to create the classes of employees. Some commenters recommended that the Departments confirm that the controlled group rules do not apply for this purpose, and some recommended that the controlled group rules be used to determine the classes of employees as a way to reduce the number of small classes and prevent adverse selection. After consideration of these comments, the Departments have concluded that determining the classes of employees at the common law employer level will avoid complexity for employers and that applying the minimum class size requirement (to the extent applicable), as described earlier in this preamble, at the common law employer level, is a more straightforward way of addressing the adverse selection concerns raised by some commenters. Accordingly, the final rules clarify that the classes of employees are determined based on the employees of a common law employer, rather than the employees of a controlled group of employers. g. Movement Among Classes A few commenters requested clarification regarding the application of the final rules in the situation in which an employee moves out of a class of employees that is offered an individual coverage HRA and into a different class of employees that is offered either a traditional group health plan, a different individual coverage HRA, or no coverage. As discussed earlier in this VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 preamble, the Departments note that as group health plans, HRAs generally are subject to the COBRA or other group continuation of coverage rules. However, if the change in the employee’s classification is not the result of termination of employment or reduction in hours, there generally is not a qualifying event resulting in a COBRA or other group continuation of coverage right. Even if an employee who ceases enrollment in an individual coverage HRA does not have a right to continuation of coverage, the HRA must allow the individual to submit for reimbursement substantiated medical care expenses that were incurred during the coverage period prior to the termination date of the individual coverage HRA. In this case, the individual coverage HRA may limit the period of time to submit expenses to a reasonable specified time period after termination of coverage under the individual coverage HRA during which the participant may submit those claims. Additionally, an employee who loses coverage under an individual coverage HRA may qualify for an SEP for loss of MEC to change his or her individual health insurance coverage either on or off an Exchange. One commenter asked whether an employee who changes classes of employees and loses coverage under an individual coverage HRA may convert unused amounts to another type of HRA. The Departments note that under existing rules, employers generally may provide employees enrolled in a traditional group health plan an HRA that is integrated with that traditional group health plan and in some circumstances may provide an HRA that can be integrated with TRICARE or Medicare. Nothing in the final rules or current guidance would prevent employers from basing the amount in these types of HRAs on unused amounts in an individual coverage HRA in which the individual was previously enrolled, nor are employers precluded from basing the amount of an individual coverage HRA on unused amounts in these types of HRAs in which the individual was previously enrolled. Also, if an employee moves from a class of employees offered an individual coverage HRA to a class of employees offered a different individual coverage HRA, nothing in the final rules would prevent the employer from permitting the unused amounts in the first individual coverage HRA to be considered transferred to the second. Therefore, the final rules are revised to clarify that amounts made available in an individual coverage HRA based on PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 28913 amounts remaining in another HRA under which the participant was previously covered are disregarded for purposes of determining whether the individual coverage HRA is offered on the same terms, provided that if the HRA takes these amounts into account, it does so on the same terms for all participants in the class of employees.106 Further, with regard to amounts remaining in an individual coverage HRA after the individual is no longer covered by the HRA, the HRA must allow a participant (and the participant on behalf of dependents) to submit claims to the HRA for reimbursement of substantiated expenses that were incurred during the coverage period prior to the termination of the individual’s coverage under the individual coverage HRA, even if the claim is submitted after the individual is no longer covered by the individual coverage HRA. However, the HRA may limit the period to submit expenses to a reasonable specified time period. One commenter requested guidance on situations in which employees are currently receiving treatment for health conditions when an employer switches from a traditional group health plan to an individual coverage HRA. The Departments note that a similar issue arises under existing rules when an employer switches from one group health plan to another group health plan with a different network of providers, so that providers participating under the first plan are no longer in network. The final rules do not address this issue because it is not specific to this rulemaking. To the extent an employee or dependent is switching from an insured traditional group health plan to individual health insurance coverage purchased with an individual coverage HRA, state ‘‘succeeding carrier’’ or ‘‘extension of benefit’’ laws may regulate the obligations of the prior or succeeding issuer to cover an individual’s ongoing health conditions at the time of the coverage switch. 106 However, employers may not permit unused amounts in an individual coverage HRA, or any other type of HRA, to be considered transferred to an excepted benefit HRA because amounts made available under an excepted benefit HRA are necessarily limited in order for the HRA to constitute an excepted benefit. Allowing amounts remaining in other types of HRAs to be transferred to an excepted benefit HRA could lead to significant circumvention of that limit. Also, note that under the final excepted benefit HRA rules, if the plan sponsor offers more than one HRA to the participant for the same time period, the amounts made available under all such plans are aggregated to determine whether the benefits are limited in amount, except that HRAs that reimburse only excepted benefits are not included in determining whether the benefits are limited in amount. E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28914 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations h. Definition of Full-Time Employee, Part-Time Employee, and Seasonal Employee For purposes of identifying classes of employees, the proposed rules provided that a plan sponsor may define full-time employees, part-time employees, and seasonal employees in accordance with either the applicable definitions under Code section 105(h) or those under Code section 4980H to avoid overlapping classes of employees. The proposed rules included a proposal that a plan sponsor’s choice of which statutory definitions to apply must be consistent across these three classes of employees, to the extent the plan sponsor differentiates based on these classes. A few commenters requested that only one definition for each term be permitted and requested that the final rules adopt the definitions in Code section 4980H. One commenter recommended that only the definition of full-time employee under Code section 4980H (which is based on 30 hours per week) should be permitted. This commenter asserted that use of the definition under Code section 105(h) (which is based on 35 hours per week) could lead to adverse selection, because many plans currently offer traditional group health plan coverage to employees based on the Code section 4980H definition, and use of another definition could lead to subdivision of full-time employees. A few commenters supported the proposed ability to choose either set of definitions, including the requirement to use either the definitions under Code section 4980H or those under Code section 105(h) consistently across these classes of employees. The Departments considered these comments and have determined that the final rules should adopt the definitions provided in the proposed rules. This approach provides employers with flexibility, while limiting opportunities for risk segmentation. The Departments understand that, to avoid the inclusion of amounts in income, plan sponsors of self-insured plans subject to Code section 105(h) (in particular small employers not subject to Code section 4980H) may want to design their health plans to offer a traditional group health plan and individual coverage HRAs (or individual coverage HRAs in different amounts or under different terms and conditions) to different classes of employees that are identified in a manner that complies with the requirements of Code section 105(h). The Departments also acknowledge that certain larger employers have already determined how to apply the definitions VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 under Code section 4980H to their workforces and using those same definitions for purposes of applying the integration rules may reduce burden for those employers. Therefore, the final rules include flexibility for each employer to determine which set of definitions is appropriate for its workforce, provided the employer uses the same set of definitions for classifying its full-time, part-time, and seasonal employees to the extent it uses one or more of these classes of employees. The proposed rules further provided that the HRA plan document must set forth the applicable definitions of fulltime employee, part-time employee, and seasonal employee prior to the beginning of the plan year in which the definitions will apply and that nothing would prevent an employer from changing the definitions for a subsequent plan year. Some commenters supported that provision, asserting that it minimizes the potential for adverse selection, with one requesting clarification whether it is permissible to change the definitions of the classes of employees during the plan year. One commenter stated that plan sponsors should not be allowed to change the definitions each plan year, asserting that this flexibility could allow small employers in particular to segment risk. The Departments have determined that in order to mitigate the risk of market segmentation and minimize disruption to employees with respect to a coverage period, it is important for plan sponsors to determine prior to the plan year which definitions will apply and to apply them consistently throughout the plan year. The Departments also have concluded that limiting an employer’s ability to revise the definitions it applies from one plan year to the next would be unnecessarily restrictive. Accordingly, the final rules generally retain the rules in the proposed rules. However, the final rules clarify that adjustments during the plan year to the definitions used to identify the classes of employees are not permitted. 6. Special Rule for New Hires As explained earlier in this preamble, some commenters expressed concerns about the challenges employees may experience in transitioning from a traditional group health plan to individual health insurance coverage, with some stating that the proposed rules failed to adequately take into account the differences between the coverage types and the significance of the change from the employee’s PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 perspective. The Departments are aware that the transition from coverage under a traditional group health plan to coverage under an individual coverage HRA could represent a substantial change from an employee perspective, and, as a result, employers may want to phase in individual coverage HRAs. By allowing plan sponsors to offer traditional group health plans to some classes of employees while offering other classes of employees an individual coverage HRA, the final rules provide plan sponsors with some flexibility to manage the transition to individual coverage HRAs. However, in response to comments, including those expressing concern about the transition from traditional group health plans to individual coverage HRAs and those expressing interest in being able to provide different benefits based on employee tenure, the Departments have determined that it is appropriate to provide additional flexibility to plan sponsors, in particular for employers that offer traditional group health plans that would like to continue to offer that type of coverage to current employees who are accustomed to that coverage, but offer individual coverage HRAs to newly hired employees. Therefore, notwithstanding the general rule that a plan sponsor may only offer either a traditional group health plan or an individual coverage HRA to a class of employees, the final rules provide that a plan sponsor that offers a traditional group health plan to a class of employees may prospectively offer employees in that class hired on or after a certain date in the future (the new hire date) an individual coverage HRA (the new hire subclass), while continuing to offer employees in the class hired before the new hire date a traditional group health plan (the special rule for new hires). A plan sponsor may set the new hire date prospectively for a class of employees as any date on or after January 1, 2020. A plan sponsor may set different new hire dates prospectively for separate classes of employees. Although this special rule provides additional flexibility, it is still the case that for the new hire subclass, the individual coverage HRA must be offered on the same terms to all participants within the new hire subclass, in accordance with the generally applicable rules under the same terms requirement. Further, a plan sponsor may not offer a choice between an individual coverage HRA or a traditional group health plan to any participant, whether a current employee or a newly hired employee in the new hire subclass. E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations A plan sponsor may discontinue the special rule for new hires at any time for a class of employees. In that case, the new hire subclass would no longer be treated as a separate subclass of employees, and each employee that was previously treated as part of the new hire subclass would then be treated as an employee in the class of which he or she would have otherwise belonged for purposes of the final rules. In that case, if the plan sponsor wanted to offer an individual coverage HRA, it would need to do so for all the employees in the class and generally on the same terms, as explained earlier in this preamble. It could also choose instead to offer a traditional group health plan to some or all of the employees 107 in the class or to offer no coverage. In the event a plan sponsor applies the special rule for new hires to a class of employees and later discontinues using the rule for the class of employees, the plan sponsor may apply the special rule for new hires to the class of employees again, at a later time, under the same rules as the initial application of the rule. For example, as under the basic requirements for the application of the special rule for new hires, the plan sponsor would only be allowed to apply the rule to a class to which it is offering a traditional group health plan. If a plan sponsor applies the special rule for new hires again, in accordance with the general rules under the special rule for new hires, the plan sponsor would choose a prospective new hire date. In no circumstances may the special rule for new hires be applied to a class of employees (including a new hire subclass) already being offered an individual coverage HRA, in an attempt to offer different HRA amounts or other different terms within a class of employees based on different hire dates. The minimum class size requirement described earlier in this preamble does not apply to a new hire subclass. This is because the Departments recognize that many employers hire only a few employees, or even only one employee, at a time and a subclass based on a new hire date does not present a high risk of manipulation that could lead to adverse selection. However, if a plan sponsor subdivides the new hire subclass based on a permissible class of employees subsequent to creating the new hire subclass, the minimum class size requirement applies to any class of employees created by subdividing the new hire subclass, if the minimum class size requirement otherwise applies. The 107 To the extent such an arrangement is available to active employees it may be subject to restrictions under other laws, such as the MSP provisions. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 text of the final rules includes examples to illustrate these rules. 7. Opt-Out Provision If an individual is covered by an HRA, including an individual coverage HRA, for a month, regardless of the amount of reimbursement available under the HRA, the individual is not eligible for the PTC for that month. Because in some circumstances an individual may benefit more from claiming the PTC than from having funds in an HRA available for reimbursement, the Departments’ existing rules regarding integration with non-HRA group coverage and with Medicare require a plan sponsor that offers an HRA to allow participants to opt out of and waive future reimbursements from the HRA at least annually.108 The proposed rules also included this requirement with respect to the individual coverage HRA, so that employees would be allowed the PTC, if they are otherwise eligible, if they opt out of and waive future reimbursements from the HRA and the HRA is either unaffordable or does not provide MV.109 The Departments have concluded that this condition is important as a result of the PTC consequences of HRA coverage, and, therefore, the final rules retain this condition, with some clarifications. Furthermore, consistent with the current rules for integration with a group health plan and with Medicare, the proposed rules required that upon termination of employment, either the remaining amounts in the HRA must be forfeited or the participant must be allowed to permanently opt out of and waive future reimbursements from the HRA. This requirement ensures that the HRA participant may choose whether to claim the PTC, if otherwise eligible, or to continue to participate in the HRA after the participant’s separation from service.110 Commenters generally supported these opt-out requirements as necessary to protect PTC eligibility for employees. Some commenters expressed concern that due to the complexity of the PTC affordability rules, employees are likely to have difficulty understanding 108 See 26 CFR 54.9815–2711(d)(2)(i)(E), (d)(2)(ii)(D), and (d)(5)(iv); 29 CFR 2590.715– 2711(d)(2)(i)(E), (d)(2)(ii)(D), and (d)(5)(iv); and 45 CFR 147.126(d)(2)(i)(E), (d)(2)(ii)(D), and (d)(5)(iv). 109 See later in this preamble for a discussion of the final rules regarding the circumstances in which an offer of an individual coverage HRA is affordable and provides MV for purposes of Code section 36B. 110 Note that a former employee is only rendered ineligible for the PTC if the former employee enrolls in employer-sponsored coverage; an offer of coverage (even if it is affordable and provides MV) does not preclude a former employee from claiming the PTC. See 26 CFR 1.36B–2(c)(3)(iv). PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 28915 whether or not they should opt out of an individual coverage HRA. Similarly, some commenters expressed concern that some low- and moderate-income employees may opt into the individual coverage HRA although they may have been better off opting out of the HRA and receiving the PTC, while others expressed concern that some employees may opt out of the HRA based on the misimpression that they will receive the PTC, when actually they are ineligible for the PTC. The Departments appreciate the concerns expressed regarding the burden on employees to properly determine whether the individual coverage HRA they have been offered is affordable and provides MV and to determine whether they will be better off with the HRA or, if otherwise eligible, the PTC. These concerns are the primary reason that the Departments proposed and are finalizing the requirement for individual coverage HRAs to provide a written notice to each participant. Further, the Departments will work with the FFEs and State Exchanges to ensure that their applications and other relevant materials are updated to accommodate individuals who are offered an individual coverage HRA and are applying for individual health insurance coverage with APTC. Some commenters requested clarification regarding the timing of the annual opt-out condition. One commenter asked the Departments to clarify how the annual opt-out condition applies in the case of an HRA with a non-calendar year plan year. In response, the final rules clarify that an HRA may establish timeframes for enrollment in (and opting out of) the HRA, but participants generally 111 must be provided an opportunity to opt out of the individual coverage HRA once for each plan year, which must occur in advance of, and with respect to, the plan year. That is, individual coverage HRAs must provide participants with one advance opportunity to accept, or opt out of, the individual coverage HRA for each plan year, but the individual coverage HRA may not provide participants with multiple opportunities 111 The final rules also clarify that for participants or dependents who become eligible for the individual coverage HRA on a date other than the first day of the plan year (or participants who are not required to be provided the HRA notice at least 90 days in advance of the plan year (that is, employees who become eligible less than 90 days prior to the plan year and employees of newly established employers)), the option to opt out must be provided during the HRA enrollment period established by the HRA for these individuals and then subsequently on an annual basis in advance of the plan year. E:\FR\FM\20JNR2.SGM 20JNR2 28916 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 to opt into, or out of, the individual coverage HRA over the course of the plan year, except that the final rules require HRAs to provide an opt out opportunity upon termination of employment. This is generally consistent with employees’ ability to decline traditional group health plan coverage that is not affordable or does not provide MV in order to claim the PTC, if otherwise eligible. See later in this preamble for a discussion of comments received on the proposed PTC rules and an explanation of the final PTC rules, including for additional discussion of the application of the PTC rules to an employee opting out of, or accepting, an individual coverage HRA with a non-calendar year plan year. One commenter requested clarification as to whether a former employee offered an individual coverage HRA must be provided the annual opportunity to opt out of the individual coverage HRA. The Departments clarify that the annual optout condition applies for all participants eligible to enroll in an individual coverage HRA, including former employees. Another commenter requested clarification whether an employee’s choice to opt out of an individual coverage HRA also applies to the employee’s dependents who are otherwise eligible for the individual coverage HRA. The Departments intend for the opt-out opportunity to extend to dependents, but expect that an employer would provide an individual coverage HRA to an employee’s dependent only if the employee participates in the individual coverage HRA. Therefore, the final rules clarify that if an employee opts out of an individual coverage HRA, the individual coverage HRA is considered waived for the employee’s eligible dependents as well.112 See later in this preamble for a discussion of the circumstance in which the offer of an individual coverage HRA to an employee’s dependents will render the dependents ineligible for the PTC. One commenter requested clarification as to whether, instead of permanently forfeiting an individual coverage HRA upon termination of employment, an individual coverage 112 The Departments note that this provision addresses the right of participants to opt out of the HRA generally, including for their dependents, and is not intended to preclude an HRA from allowing a participant who enrolls in the HRA from enrolling some, but not all, dependents (including new dependents added during the year). The Departments also clarify that in the event a participant gains a dependent during the year, the HRA must provide the participant the right to decline to enroll that dependent, if the participant had enrolled for the plan year. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 HRA may be suspended for a period of time, allowing the individual to receive the PTC during that period of time if otherwise eligible, and then have the HRA amounts reinstated in the individual coverage HRA years in the future. Although the current rules for integration of an HRA with other group coverage allow certain HRA amounts that would otherwise be permanently forfeited to be reinstated in the future upon a fixed date, a participant’s death, or the earlier of the two events, the final rules do not include a similar provision for individual coverage HRAs. The final rules do not include such a provision due to the Departments’ concerns about complexity and burden on employers in needing to establish procedures for substantiation of enrollment in individual health insurance coverage upon reinstatement, and on an ongoing basis, possibly many years in the future; the lack of demand for such a rule from employers; and potential complexities related to the interaction with the PTC.113 However, as explained earlier in this section of the preamble, the final rules require an individual coverage HRA to provide an annual opportunity for participants to opt out of the HRA, which may, depending on the individual coverage HRA offered, allow the participant, if otherwise eligible, to claim the PTC. 8. Substantiation of Coverage Under Individual Health Insurance Coverage a. In General The proposed rules required that individuals whose medical care expenses may be reimbursed under an individual coverage HRA must be enrolled in individual health insurance coverage. To facilitate the administration of this requirement, under the proposed rules, an individual coverage HRA would be required to implement, and comply with, reasonable procedures to verify that individuals whose medical care expenses are reimbursable by the individual coverage HRA are, or will be,114 enrolled in individual health insurance coverage during the plan year (annual coverage substantiation requirement). Commenters generally supported the annual coverage substantiation requirement, asserting that it is necessary to ensure the effectiveness of the requirement that individuals 113 See 26 CFR 54.9815–2711(d)(3), 29 CFR 2590.715–2711(d)(3), and 45 CFR 147.126(d)(3). 114 The Departments clarify that the reference to ‘‘will be’’ applies for participants who provide the substantiation in advance of when their individual coverage HRA coverage begins. PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 covered by an individual coverage HRA must be enrolled in individual health insurance coverage. The Departments agree; therefore, the final rules adopt the annual coverage substantiation requirement, with minor clarifications described in this section of the preamble.115 Some commenters asked the Departments to clarify the timeframe within which the substantiation must be provided, including requests for clarification as to whether it would be acceptable for the substantiation to occur during the individual coverage HRA enrollment period or prior to the first request for reimbursement under the individual coverage HRA, which commenters stated would be consistent with typical administrative procedures for HRAs. For individuals who seek enrollment in an individual coverage HRA for the entire HRA plan year, the Departments intend for the annual coverage substantiation requirement to provide verification of an individual’s enrollment in individual health insurance coverage for the entire HRA plan year (and, therefore, that coverage is in effect as of the first day of the HRA plan year). Accordingly, the final rules clarify that the HRA may establish the date by which the annual coverage substantiation requirement must be satisfied, but, in general, the date may be no later than the first day of the HRA plan year. Nothing in the final rules prevents an HRA from setting reasonable parameters for when the substantiation must be provided to the HRA (for example, by the end of the individual coverage HRA open enrollment period).116 115 One commenter asserted that the substantiation requirements in the proposed rules are not sufficient but the commenter appears to have understood that the annual coverage substantiation requirement is the sole substantiation requirement. The Departments note that the final rules, like the proposed rules, also require that the HRA satisfy the ongoing substantiation requirement. The Departments determined that both the annual coverage substantiation requirement and the ongoing substantiation requirement are necessary to ensure that individuals covered by an individual coverage HRA have individual health insurance coverage. Also, this commenter asserted that in the proposed rules the Departments acknowledged that employees may fail to obtain coverage, and cited to 83 FR 54445 (Oct. 29, 2018), where, in the regulatory impact analysis the Departments stated that loss of coverage could occur as a result of the integration rules ‘‘if some previously covered employees do not accept the HRA and fail to obtain their own coverage.’’ The Departments clarify that this statement related to individuals who opt out of the HRA and did not address the circumstance in which an individual with an individual coverage HRA does not have individual health insurance coverage. 116 The Departments note that in establishing the enrollment period for an individual coverage HRA, E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations However, for individuals who become eligible for the HRA during the HRA plan year, including dependents, or who otherwise are not required to be provided the HRA notice described later in this preamble 90 days prior to the plan year (that is, employees who become eligible fewer than 90 days prior to the plan year or employees of newly established employers), the HRA may establish the date by which the substantiation must be provided, but the date may be no later than the date the HRA coverage begins. These individuals may not have sufficient time to enroll in individual health insurance coverage that is effective on or before the first day of the HRA plan year. Thus, the final rules provide a timing requirement that is consistent with the annual coverage substantiation requirement to provide verification of an individual’s enrollment in individual health insurance coverage for the portion of the HRA plan year during which the individual is covered by the HRA. The final rules also clarify that, for these individuals, whether the individual is a participant or a dependent, the annual coverage substantiation requirement requires substantiation that the individual will have individual health insurance coverage for the portion of the HRA plan year during which the individual is covered by the HRA (rather than requiring substantiation of coverage for the entire plan year). The final rules also clarify that to the extent a new dependent’s coverage is effective retroactively, the HRA may establish any reasonable timeframe for the annual coverage substantiation but must require it be provided before the HRA will reimburse medical care expenses for the newly added dependent. In addition to the annual coverage substantiation requirement, the proposed rules provided that an individual coverage HRA may not reimburse a participant for any medical care expenses unless, prior to each reimbursement, the participant provides substantiation that the participant and, if applicable, any dependent(s) whose medical care expenses are requested to be reimbursed, continues to be enrolled in individual health insurance coverage for the month during which the medical care expenses were incurred (ongoing substantiation requirement). Several commenters expressed support for the ongoing substantiation requirement, as necessary to ensure the effectiveness of the requirement that individuals covered by an individual coverage HRA must be enrolled in plan sponsors should consider the timeframes for the relevant individual market enrollment periods. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 individual health insurance coverage. Several commenters, however, were concerned about what they characterized as the complexity, burdens, and liabilities associated with the ongoing substantiation requirement, in particular for smaller employers, and noted that those burdens could deter employers from adopting individual coverage HRAs. Some commenters asserted that the annual coverage substantiation requirement would be sufficient to verify enrollment in individual health insurance coverage and, therefore, ongoing substantiation would be unnecessary. The Departments note that currently, separate from the market requirements or integration rules, HRAs are subject to substantiation requirements with respect to each request for reimbursement. This is because in order to provide a benefit excludable from income for federal tax purposes, employer-provided accident or health plans, including HRAs, may only reimburse medical care expenses that have been substantiated as an expense for medical care.117 Consequently, each reimbursement for medical care expenses by an HRA may only be paid after the expense has been substantiated as being for medical care.118 Each claim for reimbursement also generally must include the employee’s certification that the expense has not otherwise been reimbursed and that the employee will not seek reimbursement for the expense from any other plan.119 The Departments have determined that requiring ongoing substantiation of an individual’s continued enrollment in individual health insurance coverage for the month in which the expense was incurred is not unduly burdensome because of these existing substantiation requirements. Further, the Departments have determined that the ongoing substantiation requirement is essential to ensure compliance with the requirement that an individual covered by an individual coverage HRA be enrolled in individual health insurance coverage and, as explained later in this section of the preamble, will impose minimal burden because it can be satisfied by collecting a written attestation from the participant on the same form used for requesting reimbursement. Thus, the final rules 117 See Code section 105(b), 26 CFR 1.105–2, and IRS Notice 2002–45. 118 See Prop. Treas. Reg. 1.125–6(d) for rules regarding reimbursement of medical care expenses through electronic methods, including some debit cards that satisfy certain requirements. 119 See IRS Notice 2006–69, 2006–31 IRB 107; Revenue Ruling 2003–43, 2003–1 CB 935; and Prop. Treas. Reg. 1.125–6(b)(3)(ii), (d)(i). PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 28917 retain the ongoing substantiation requirement.120 Commenters requested that the Departments confirm the entity to which the substantiation requirements apply. Under the final rules, the substantiation requirements (both the annual coverage substantiation requirement and the ongoing substantiation requirement) apply to the individual coverage HRA, rather than to any other entity or individual, such as an issuer or employee, because the requirements relate to compliance of the individual coverage HRA with PHS Act sections 2711 and 2713. The substantiation requirements do not impose any new requirements on issuers, although individual coverage HRAs may accept certain documentation provided by issuers in the normal course of business to verify individual health insurance coverage enrollment. b. Methods of Substantiation The proposed rules included a proposal that the reasonable procedures an individual coverage HRA may use to verify enrollment in individual health insurance coverage for purposes of the annual coverage substantiation requirement include the individual coverage HRA requiring the participant to provide either: (1) A document from a third party (for example, the issuer or Exchange) showing that the participant and any dependent(s) covered by the individual coverage HRA are, or will be, enrolled in individual health insurance coverage during the plan year (for example, an insurance card or an explanation of benefits pertaining to the plan year or relevant month, as applicable); 121 or (2) an attestation by the participant stating that the participant and any dependent(s) are, or will be, enrolled in individual health insurance coverage, the date coverage began or will begin, and the name of the provider of the coverage. For the ongoing substantiation requirement, the 120 The Departments note that the final rules clarify that the ongoing substantiation requirement applies with respect to the individual on whose behalf reimbursement is being sought. 121 The Departments are aware that in the case of an individual coverage HRA with a non-calendar year plan year, the individual may not have documentation showing an individual health insurance policy that spans the entire plan year as individual health insurance policy years are based on the calendar year. However, such an HRA may establish reasonable procedures to implement the annual coverage substantiation requirement, including documentation showing coverage for the first part of the plan year combined with an attestation that the participant intends to obtain individual health insurance coverage for the second part of the plan year or an attestation with respect to the full plan year. E:\FR\FM\20JNR2.SGM 20JNR2 28918 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 proposed rules permitted that substantiation could be in the form of a written attestation by the participant, which could be part of the form used for requesting reimbursement. Commenters generally supported that the proposed rules provided that attestation by a participant would be sufficient to satisfy both the annual coverage substantiation requirement and the ongoing substantiation requirement. However, one commenter stated that allowing attestation to be used to satisfy the annual coverage substantiation requirement is not sufficient to ensure that individuals covered by an individual coverage HRA have individual health insurance coverage. The Departments acknowledge the importance of the requirement under the final rules that individuals with an individual coverage HRA be enrolled in individual health insurance coverage and, therefore, the need for related substantiation requirements that ensure that requirement is satisfied. The Departments note that attestation is permitted to be used to satisfy similar requirements in related contexts and that the Departments generally are not aware of issues with regard to the accuracy of attestations used to satisfy those rules.122 Further, in setting out one type of attestation that is sufficient to satisfy the annual coverage substantiation requirement, the final rules state that, in addition to providing that the individual is (or will be) enrolled in individual health insurance coverage, the attestation would also provide the date coverage began or will begin and the name of the provider of the coverage. Moreover, HRAs can use other reasonable methods to satisfy the substantiation requirements and, in fact, the Departments generally expect that employees will use individual coverage HRAs to reimburse premiums for the individual health insurance coverage in which they are enrolled and, therefore, employers will be able to confirm enrollment in individual health insurance coverage by virtue of reimbursing the premiums for such coverage (or paying the premiums for such coverage directly). Taking these factors into consideration, the Departments have determined that allowing participant attestation, among other options, to satisfy the 122 See IRS Notice 2013–54, Q&A–4 (providing that attestation is sufficient to show that an individual is enrolled in group coverage, as required by the rules allowing HRA integration with a traditional group health plan) and IRS Notice 2017–67, Q&A–41 (providing that attestation is sufficient to satisfy the QSEHRA requirement that individuals provide proof that they are covered by MEC). VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 substantiation requirements strikes the appropriate balance between ensuring individuals with individual coverage HRAs are enrolled in individual health insurance coverage and minimizing burdens on employers and employees. Accordingly, the final rules retain this provision and permit substantiation by participant attestation. Some commenters requested that the final rules provide a model attestation. In response, to reduce burden on individual coverage HRAs and their participants, the Departments are providing model attestation language contemporaneously with, but separate from, the final rules. However, the Departments note that individual coverage HRAs will not be required to use the model attestation. Some commenters requested clarification as to whether other substantiation methods, in addition to collection of an attestation, would satisfy the substantiation requirements. One commenter suggested that a list of covered individuals provided by the insurance carrier should be sufficient. The Departments agree that this would generally be a type of third-party document that could be used to verify enrollment, assuming the individual coverage HRA timely receives the substantiation. However, the Departments note that the final rules do not require issuers to provide individual coverage HRAs with lists of covered individuals nor are individual coverage HRAs required to contact issuers to substantiate an individual’s enrollment in individual health insurance coverage. In addition, the final rules clarify that a document from an Exchange showing that the individual has completed the application and plan selection would be sufficient to satisfy the annual coverage substantiation requirement. This clarification is intended to address the situation in which, due to the SEP verification process, an individual is not yet enrolled in individual health insurance coverage but will be enrolled with a retroactive start date upon successful completion of the SEP verification.123 See later in this 123 The Departments note that a document from an Exchange showing that the individual has completed the application and plan selection would not be sufficient to satisfy the ongoing substantiation requirement; to satisfy that requirement the individual on whose behalf reimbursement is sought must be enrolled in individual health insurance coverage. Therefore, individual health insurance coverage must become effective, including retroactively in the case of delayed SEP verification, in which case reimbursement can then be sought for expenses incurred during the coverage period (including during the period to which the individual health insurance coverage applies retroactively, assuming PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 preamble for a discussion of SEPs, including a new SEP for individuals who newly gain access to an individual coverage HRA. One commenter requested that the final rules adopt a requirement for issuers similar to the creditable coverage certification requirement created by HIPAA, under which, as suggested by the commenter, issuers would be required to generate a letter for all individuals covered by individual health insurance coverage for each month showing payment was made and that the individual had the coverage for the month.124 The Departments decline to impose such a requirement because it would increase burden and other reasonable substantiation methods are available. One commenter suggested that the ongoing substantiation requirement should be considered satisfied so long as the employer sends a notice to employees advising them to contact the employer if they no longer are enrolled in individual health insurance coverage. The Departments decline to adopt this suggestion because this method of substantiation would be insufficient to ensure with reasonable accuracy that a participant had continued enrollment in individual health insurance coverage. Several commenters requested that individual coverage HRAs be permitted to comply with the substantiation requirements electronically, such as through debit card technology.125 Some commenters noted this would provide consistency with current rules that allow HRAs to satisfy the current requirement to substantiate that an expense is for medical care using debit cards and other electronic means.126 Nothing in the final rules would prohibit an individual coverage HRA from establishing procedures to comply with the substantiation requirements through electronic means, so long as the procedures are reasonable to verify enrollment.127 See also the discussion the individual was covered by the HRA during that time). 124 Code section 9801(e), ERISA section 701(e), and PHS Act section 2704(e). 125 A couple of commenters requested clarification that funds in an individual coverage HRA could be accessed via debit cards. The final rules do not change the methods currently allowed for facilitating reimbursements of HRA amounts, electronic or otherwise. 126 See IRS Notice 2006–69 and Revenue Ruling 2003–43, 2003–1 CB 935. 127 For purposes of the Code provisions affected by the final rules, the otherwise generally applicable substantiation and recordkeeping requirements under Code section 6001 apply, including the requirements specified in Revenue Procedure 98–25, 1998–1 CB 689, for records maintained within an Automated Data Processing system. E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 later in this preamble regarding the interaction of these rules with the safe harbor that DOL is finalizing, to clarify that individual health insurance coverage will not be treated as part of an ERISA-covered group health plan so long as certain conditions (including the prohibition on endorsement) are satisfied. c. Reliance on Documentation or Attestation The proposed rules provided that, for both the annual coverage substantiation requirement and the ongoing substantiation requirement, an individual coverage HRA may rely on the documentation or attestation provided by the participant unless the individual coverage HRA has actual knowledge that any participant or dependent covered by the individual coverage HRA is not, or will not be, enrolled in individual health insurance coverage for the plan year or the month, as applicable. Despite this provision in the proposed rules, some commenters expressed concern, and requested clarification, regarding liability of an individual coverage HRA if it relies on a participant’s misrepresentation regarding enrollment in individual health insurance coverage. In response to these comments, the final rules provide that an individual coverage HRA may rely on the documentation or attestation provided by the participant unless the HRA has actual knowledge that any participant or dependent covered by the individual coverage HRA is not, or will not be, enrolled in individual health insurance coverage for the plan year (or the applicable portion of the plan year) or the month, as applicable. Therefore, the final rules provide that an inaccurate attestation or document will not cause an individual coverage HRA to fail to be considered integrated with individual health insurance coverage unless the HRA has actual knowledge that the attestation or document is inaccurate. The Departments clarify that in the event an individual coverage HRA subsequently gains actual knowledge that the attestation or document was inaccurate, the HRA may not provide further reimbursement on behalf of the individual for expenses incurred during the period to which the inaccurate attestation relates. One commenter requested that the final rules clarify whose knowledge can be imputed to the individual coverage HRA for purposes of liability and one commenter requested clarification that vendors contracted by the HRA could rely on coverage information provided VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 by the HRA. The individual coverage HRA will be considered to have actual knowledge that a participant or dependent is not, or will not be, enrolled in individual health insurance coverage for the plan year or the month, as applicable, if the HRA, its plan sponsor, or any other entity acting in an official capacity on behalf of the HRA has such actual knowledge. One commenter suggested that the final rules apply penalties to individual participants for an inaccurate attestation. The final rules do not impose penalties on participants. Instead, the final rules, like the proposed rules, provide conditions under which an HRA will be considered integrated with individual health insurance coverage and, therefore, in compliance with PHS Act sections 2711 and 2713. Failing to properly integrate will cause an HRA to run afoul of PHS Act sections 2711 and 2713. Therefore, the responsibility to have reasonable procedures in place to ensure coverage is integrated falls on the HRA, not the participants. One commenter asked that individual coverage HRA amounts made available for a month be treated as taxable income for individuals who do not have individual health insurance coverage for the month and that the attestation requirement and required notice include a related warning. The Departments decline to adopt this suggestion. Whether an individual is enrolled in individual health insurance coverage for a month relates to whether the individual coverage HRA satisfies the conditions for integration for the month and does not affect the tax treatment of reimbursements provided to a participant under the individual coverage HRA.128 One commenter suggested that the final rules address substantiation requirements relative to a private exchange. The Departments note that the substantiation requirements set forth in the final rules apply to all individual coverage HRAs, regardless of the manner in which the individual health insurance coverage is purchased. See later in this preamble for a discussion of private exchanges and the DOL clarification regarding the application of ERISA to individual health insurance coverage purchased through an individual coverage HRA. To mitigate discrimination concerns, one commenter requested that the substantiation requirements be consistent across all classes of 128 However, see Code section 106(g) regarding the taxation of QSEHRA reimbursements if an individual fails to have MEC. PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 28919 employees. The Departments note that the substantiation requirements set forth in the final rules apply to all individual coverage HRAs, including different individual coverage HRAs offered to different classes of employees. The Departments generally expect plan sponsors to establish similar procedures to satisfy the substantiation requirements for different individual coverage HRAs they may offer. However, the Departments decline to adopt the commenter’s specific recommendation in order to allow plan sponsors the flexibility to establish reasonable procedures to satisfy the substantiation requirements, which presumably could differ across the employer’s workforce, depending on the characteristics of the workforce or for other legitimate business reasons. One commenter requested that employers offering an individual coverage HRA to employees or former employees who are either eligible for or enrolled in Medicare should be exempt from the substantiation requirement. However, as discussed in more detail later in this preamble, the final rules permit integration of an individual coverage HRA with Medicare, and the substantiation requirements apply to enrollment in Medicare in the same manner as they apply to enrollment in individual health insurance coverage. Therefore, the final rules do not adopt this suggestion. 9. Notice Requirement Because HRAs are different from traditional group health plans in many respects, in the preamble to the proposed rules, the Departments expressed a concern that individuals eligible for individual coverage HRAs might not recognize that the offer or acceptance of the individual coverage HRA may have consequences for APTC and PTC eligibility, as described elsewhere in this preamble. In order to ensure that employees who are eligible to participate in an individual coverage HRA understand the potential effect that the offer of and enrollment in the HRA might have on their ability to receive the benefit of APTC and claim the PTC, the proposed rules included a requirement that an individual coverage HRA provide written notice to eligible participants. Commenters generally supported the notice requirement, sharing the Departments’ determination that many individuals will need the information to understand the PTC consequences of the individual coverage HRA. However, a number of commenters expressed concerns about the potential for consumer confusion, notwithstanding E:\FR\FM\20JNR2.SGM 20JNR2 28920 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations the notice requirement, and some suggested ways to strengthen the notice. Other commenters expressed concern that the notice requirement could burden employers, with one noting in particular the burden of providing notices to former employees. The Departments have considered these comments and agree with the commenters that assert that the notice is necessary and appropriate for individuals offered an individual coverage HRA to understand the consequences of the offer. Although the Departments also considered the burden on employers identified by commenters, the Departments have determined that the notice requirement is essential to implementation of the final rules. Along with updates to Exchanges’ application processes, the notice, which will include information that individuals will be instructed to provide to Exchanges during the application process, is key to ensuring that APTC and PTC are properly allowed and that improper APTC payments are prevented. The notice will also aid implementation of the new individual market SEP, as explained later in this preamble. Therefore, the final rules retain this requirement, with a number of revisions made in response to comments, including that the Departments are providing model notice language, separate from, but contemporaneously with the final rules, in order to address commenters’ concerns about burden on employers. The comments received and changes made in the final rules are described in the remainder of this section of the preamble. jbell on DSK3GLQ082PROD with RULES2 a. Notice Content As proposed, the notice was required to include certain relevant information, including a description of the terms of the individual coverage HRA (including the self-only maximum dollar amount made available, which is used in the affordability determination under the proposed PTC rules); a statement of the right of the participant to opt out of and waive future reimbursement under the HRA; a description of the potential availability of the PTC if the participant opts out of and waives the HRA and the HRA is not affordable under the proposed PTC rules; a description of the PTC eligibility consequences for a participant who accepts the HRA; a statement that the participant must inform any Exchange to which they apply for APTC of certain relevant information; and a statement that the individual coverage HRA is not a QSEHRA. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 Commenters generally supported the notice content elements, and the final rules include each of the proposed notice content elements, some with clarifications. Some commenters requested that the notice be required to include additional content, as explained in this section of the preamble, and some commenters requested that the notice be as simple as possible. Some commenters requested that the notice explain the differences between an employer’s traditional group health plan and alternative health insurance products. And one commenter requested that the specific dollar amount made available be included in the notice. The Departments note that under the final rules, the notice is required to provide the amount(s) made available under the individual coverage HRA. As to the suggestion that the notice explain common differences between traditional group health plans and individual coverage HRAs and other insurance products, the Departments decline to adopt the suggestion due to concerns that it would cause confusion for participants, as participants are prohibited from being offered both a traditional group health plan and an individual coverage HRA under the final rules. The intent of the notice is to explain the individual coverage HRA that the employee is being offered to avoid consumer confusion. Adding information about other types of coverage would undermine that goal. Further, traditional group health plans differ in cost-sharing structures, network rules, and benefits covered, and any standardized language in the notice would have to be general and would not capture these elements, as standardized language about traditional group health plans would not be describing any particular plan. Moreover, the individual coverage HRA must provide a summary of benefits and coverage (SBC), which will include a description of the coverage, including cost sharing; the exceptions, reductions and limitations on coverage; and other information.129 One commenter requested that the notice be required to contain contact information for a specific person that participants can contact with questions. The Departments agree that this could be useful information for participants, without imposing significant additional burden on employers, and therefore the final rules add a requirement that the notice include contact information of an individual or a group of individuals who participants may contact with questions regarding their individual coverage HRA. For purposes of this new requirement, the plan sponsor may determine which individual or group of individuals is in the best position to answer these questions. The final rules provide that the contact information provided in the notice must, at least, include a telephone number. The final rules also newly require that the notice include a statement of availability of an SEP for employees and dependents who newly gain access to the HRA. This is in part in response to a commenter who suggested that the notice could be used to improve Exchange program integrity by making it easier for Exchanges that require preenrollment verification to use the notice to confirm enrollees’ SEP eligibility. Separate from, but contemporaneously with the final rules, HHS is providing model language that will be relevant to employees purchasing coverage through or outside an Exchange, including a State Exchange, which HRAs may use to satisfy this requirement. The final rules also clarify that, to facilitate participants’ timely enrollment in individual health insurance coverage using the new SEP described later in this preamble, the notice must also indicate the date as of which coverage under the HRA may first become effective and the date on which the HRA plan year begins and ends. The notice must also include information on when amounts will be made available (for example, monthly or annually). Commenters also requested that the notice explain the extent to which individuals enrolled in Medicare may use an individual coverage HRA. In response to these comments, and to reflect the content of the final rules, the notice content requirements have been updated to reflect that individual coverage HRAs may be integrated with Medicare and to require inclusion of a statement in that notice that Medicare beneficiaries are ineligible for the PTC, without regard to whether the individual coverage HRA the individual is offered is affordable or provides MV or whether the individual accepts the HRA. Further, the Departments note that, as under the proposed rules, while the written notice must include the information required by the final rules, it may include other information, as long as the additional content does not conflict with the required information. 129 See PHS Act section 2715(b)(3) (incorporated in Code section 9815 and ERISA section 715). See also 26 CFR 54.9815–2715, 29 CFR 2590.715–2715, and 45 CFR 147.200. b. Notice Individualization The proposed rules did not include a requirement that the notice be PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations individualized for each participant. Although the notice would have been required to include a description of the potential availability of the PTC for a participant who opts out of and waives an unaffordable individual coverage HRA, and the individual coverage HRA amount that is relevant for determining affordability, the proposed rules did not require that the HRA include in the notice a determination of whether the HRA is considered affordable for the specific participant. Some commenters agreed that the notice should not be required to be tailored to each participant. However, others stated that the notice would be insufficient if not individualized and requested that the final rules require that the notice provide information specific to each participant, including the premium for the relevant lowest cost silver plan, or, at a minimum, detailed instructions for where to find information on the lowest cost silver plan, while others requested that the notice include a completed affordability and MV calculation specific to each participant. While the Departments understand the concerns about consumer confusion, under the final rules, the notice is not required to include a determination of whether the offer of an individual coverage HRA is affordable for a particular participant. Plan sponsors are not in a position to make this determination for, or provide it to, each participant because it would require information that plan sponsors do not possess (for example, the participant’s household income). In addition, requiring a plan sponsor to determine the cost of the lowest cost silver plan that will apply for a specific participant to determine affordability under the PTC rules would be burdensome, and the information is available to the participant through other means. Specifically, by November 1, 2019, HHS will provide resources to assist individuals offered an individual coverage HRA and using the Federal HealthCare.gov platform with determining their PTC eligibility based on whether the individual coverage HRA is considered affordable, and with understanding when they must enroll in individual health insurance coverage based on their individual coverage HRA effective date, including whether they may qualify for an SEP. HHS will also begin working with State Exchanges immediately to assist with the development of resources for individuals using State Exchanges’ applications for coverage. Further, although some plan sponsors will need to determine whether the offer of the VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 individual coverage HRA is affordable for purposes of the employer shared responsibility provisions under Code section 4980H, smaller employers are not subject to Code section 4980H. Moreover, the Treasury Department and the IRS intend to issue guidance in the near term providing safe harbors or other methods intended to reduce burdens and provide more predictability regarding the application of Code section 4980H to these arrangements.130 The Departments acknowledge that it is critical that participants have the information that they need to determine the affordability of their individual coverage HRA under the PTC rules, and, accordingly, the final rules add a requirement that the notice include a statement about how the participant may find assistance for determining their individual coverage HRA affordability. The model language that the Departments are providing contemporaneously with the final rules includes language that can be used to satisfy this requirement. One commenter requested that the notice be required to be tailored for each class of employees offered the individual coverage HRA, in cases in which different classes are provided different HRA amounts, rather than allowing an employer to provide one notice for several or all classes. The final rules do not adopt this suggestion because the Departments have concluded any marginal advantages would be outweighed by the additional employer burdens of creating and distributing multiple versions of the notice. However, the Departments note that the final rules do not prohibit an employer from providing more individualized notices, such as different notices for different classes of employees, if the employer so chooses. c. Model Notice Many commenters requested that the Departments provide a model notice or model language for certain parts of the notice, such as model language to describe the consequences of opting into or out of the individual coverage HRA and language describing the related PTC consequences. One commenter suggested that the Departments provide translations of the model notice into languages other than English. In response to these requests, and published separately from the final 130 See IRS Notice 2018–88. Further, lowest cost silver plan data will be made available by HHS for employers in all states that use the Federal HealthCare.gov platform to determine whether the individual coverage HRA offer is affordable for purposes of the employer shared responsibility provisions under Code section 4980H. PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 28921 rules, the Departments are providing model language contemporaneously on certain aspects of the notice that are not employer-specific, including model language describing the PTC consequences of being offered and accepting an individual coverage HRA. In addition, HHS is providing, contemporaneously, model language that relates to all Exchanges that can be used to satisfy the SEP-related notice content requirement and model language that can be used to satisfy the requirement that the notice include a statement describing how the participant may find assistance with determining affordability. While the Departments hope it will be useful, plan sponsors are not required to use the model language. For individual coverage HRAs, including ERISA-covered plans, other disclosure requirements may require participants to be provided with a reasonable opportunity to become informed as to their rights and obligations under the individual coverage HRA.131 Those requirements are of general applicability, and the Departments decline to adopt a special requirement, or model non-English translation, here.132 d. Notice Timing and Delivery Under the proposed rules, the individual coverage HRA generally would be required to provide a written notice to each participant at least 90 days before the beginning of each plan year. The proposed rules also provided that for participants not eligible to participate at the beginning of the plan year (or not eligible when the notice is otherwise provided to plan participants), the individual coverage HRA would be required to provide the notice no later than the date on which the participant is first eligible to participate in the HRA. Some commenters supported the notice timing as proposed and others indicated that small employers will not be able to provide notices 90 days prior to the plan year because they do not make benefit decisions that far in 131 See, e.g., ERISA sections 102, 104(b), and 503 and PHS Act sections 2715 and 2719 (incorporated in Code section 9815 and ERISA section 715). See also 26 CFR 54.9815–2715 and 54.9815–2719; 29 CFR 2520.102–3, 2520.104b–1, 2560.503–1, 2590.715–2715, and 2590.715–2719; and 45 CFR 147.136 and 147.200. 132 But see 29 CFR 2520.102–2(c) (requiring that plans where either 500 participants or at least 10 percent of all participants (or for plans with fewer than 100 participants, 25 percent of participants) are literate in the same non-English language provide those literate only in a non-English language a reasonable opportunity to become informed as to their rights and obligations under the plan). E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28922 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations advance. Several commenters requested that the notice delivery coincide with the annual Exchange open enrollment period, others requested it coincide with each employer’s annual open enrollment period, and others requested that plan sponsors have the flexibility to provide the required notice at any time prior to the plan year, including upon initial enrollment in an individual coverage HRA. One commenter requested the notice be required to be provided within 60 days, instead of 90 days, prior to the start of the plan year. One commenter requested that the Departments apply the distribution requirements that apply for purposes of SBCs and the uniform glossary. One commenter also asked the Departments to clarify the notice timing requirement as applied to individual coverage HRAs that do not have a calendar year plan year. The Departments considered these comments, but have determined that, with the addition of a rule for newly established employers and certain other clarifications, the final rules should adopt the notice timing requirement as proposed, because, for a calendar year plan year, it ensures that participants who are current employees will receive the notice prior to the individual market annual open enrollment period, and for employers offering an individual coverage HRA on a non-calendar year plan year, it ensures participants who are current employees will receive the notice prior to the applicable individual market SEP. The Departments also clarify that the notice timing requirement applies in the same way to an individual coverage HRA with a calendar year plan year or with a noncalendar year plan year. The notice’s primary purpose is to provide necessary information to participants that Exchanges will need in order to accurately determine eligibility for APTC. With that purpose in mind, the Departments have determined that a shorter timing requirement, including one mirroring the requirement for the SBC, or a timing requirement tied to the employer’s open enrollment period, would not be sufficient. As previously noted, the proposed rules provided an exception to the 90 day notice requirement for participants who are not eligible to participate either at the beginning of the plan year or at the time the notice is provided at least 90 days prior to the plan year. For those participants, the proposed rules would allow the individual coverage HRA to provide the notice no later than the date on which the participants are first eligible to participate in the HRA. The final rules adopt this rule generally as VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 proposed, but clarify the language to provide that the date by which the notice must be provided is the date on which the HRA may first take effect for the participant. Further, the Departments have determined that individual coverage HRAs sponsored by employers that are first established within a short period of time prior to the first plan year of the HRA may not have an adequate amount of time to provide a notice to participants at least 90 days prior to beginning of the first plan year. Therefore, the final rules provide that in the case of an individual coverage HRA sponsored by an employer that is established less than 120 days prior to the beginning of the first plan year of the HRA, the notice may be provided no later than the date on which the HRA may first take effect for the participant, for that first plan year of the HRA. Moreover, although the final rules provide that for participants not eligible to participate in the individual coverage HRA at the beginning of the plan year (or not eligible when the notice is otherwise provided) and for participants of newly established employers, the HRA is not required to provide the notice until the date on which the HRA may first take effect for the participant, the Departments encourage HRAs to provide the notice as soon as practicable. As explained later in this preamble, individuals who newly gain access to an individual coverage HRA will have an individual market SEP that provides the chance to select an individual health insurance plan in advance of the date when the HRA may first take effect, so that individual health insurance coverage can be effective on the first date the individual is eligible to be covered by the HRA. If the notice is not provided until the day the HRA may first take effect for the participant, individuals may not be aware of the HRA offer and will not be able to enroll in individual health insurance coverage that has an effective date on the earliest effective date of their HRA coverage. However, the Departments are aware that in some circumstances it would not be reasonable to require HRAs to provide the notice well in advance of the date the HRA may first take effect for new employees. Therefore, the final rules continue to require that the notice be provided in these circumstances no later than the date on which the HRA may first take effect, but if possible, HRAs should provide the notice sooner. This will allow new employees to begin coverage in the HRA as soon as possible. With regard to delivery methods, the proposed rules provided that the notice must be a written notice but did not further address delivery or format. PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 Several commenters requested that the final rules clarify the notice delivery procedures and requirements, including allowing for electronic delivery (through email delivery, internet/intranet posting, or any other electronic means) if participants are provided the appropriate opportunity to opt out of electronic delivery. One commenter asked specifically if the notice delivery would be subject to ERISA’s delivery rules. Under the final rules, individual coverage HRAs that are subject to ERISA, and individual coverage HRAs sponsored by nonfederal governmental plan sponsors, must provide the notice in a manner reasonably calculated to ensure actual receipt of the material by plan participants covered by the HRA. Additionally, individual coverage HRAs that are subject to ERISA must provide the notice in a manner that complies with the DOL’s rules.133 For ERISA plans using electronic disclosure, the DOL has provided a safe harbor at 29 CFR 2520.104b–1(c). This safe harbor is not intended to represent the exclusive means by which the requirements of 29 CFR 2520.104b–1 may be satisfied using electronic media.134 As to individual coverage HRAs sponsored by nonfederal governmental plan sponsors, HHS is revising the final rule to provide that the notice must be provided in a manner reasonably calculated to ensure actual receipt of the material by plan participants covered by the HRA, which HHS has determined is sufficient to ensure that participants receive the required notice. Commenters also requested that the Departments confirm that the notice may be delivered along with other plan materials, including, but not limited to, annual enrollment materials or new hire benefit packages. The Departments confirm that the individual coverage HRA notice may be delivered with other plan materials, so long as it satisfies the content and timing requirements specific to the individual coverage HRA notice. e. Other Notice Requirements and Consumer Assistance Some commenters suggested that all types of HRAs (including excepted benefit HRAs and HRAs integrated with traditional group health plans) should include notice requirements so that individuals understand which type of arrangement they have and the consequences of the arrangement. The Departments acknowledge the potential for consumer confusion as a result of the 133 29 134 67 E:\FR\FM\20JNR2.SGM CFR 2520.104b–1. FR 17263, 17264 (April 9, 2002). 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations existence of various types of health coverage, including various types of HRAs. However, the Departments generally decline the suggestion to impose new notice requirements under the final rules across all types of HRAs. The Departments note that this type of consumer information notice requirement is typically only imposed in situations in which there is a specific justification for it. For example, individual coverage HRAs are unique in that specific PTC rules apply, and for QSEHRAs, which also have specific PTC rules, notices are already required under the law.135 Further, the Departments note that the proposed rules would have required the notice to include a statement that the individual coverage HRA is not a QSEHRA, and the final rules revise the statement in response to comments to clarify further that there are multiple types of HRAs and the type the participant is being offered is an individual coverage HRA (rather than a QSEHRA or any other type). Moreover, HRAs that are ERISAcovered plans must provide a summary plan description (SPD), summaries of material modifications, and summaries of material reductions in covered services or benefits.136 The SPD must be sufficiently comprehensive to apprise the plan’s participants and beneficiaries of their rights and obligations under the plan. It must also include, for example, the conditions pertaining to eligibility to receive benefits, and a description or summary of the benefits, the circumstances that may result in disqualification, ineligibility, or denial, loss, forfeiture, suspension, offset, reduction, or recovery (for example, by exercise of subrogation or reimbursement rights) of any benefits and the procedures governing claims for benefits under the plan. HRAs that are ERISA-covered plans are also required to provide the instruments under which the plan is established or operated and information relevant to a participant’s adverse benefit determination upon request.137 This information should be adequate to enable individuals to understand which type of arrangement they have and the consequences of the arrangement.138 135 Code section 9831(d)(4) and IRS Notice 2017– jbell on DSK3GLQ082PROD with RULES2 67. 136 See 29 CFR 2520.104b–2 and 29 CFR 2520.104b–3(a), (d)(3). 137 See, e.g., ERISA sections 104(b), 502(c), and 503. See also 29 CFR 2520.104b–1 and 29 CFR 2560.503–1. 138 The final excepted benefit HRA rules specifically note the ERISA disclosure obligations, and HHS intends to propose similar disclosure requirements for non-federal governmental plan excepted benefit HRAs. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 One commenter requested that the Departments clarify the interaction between the notice requirements associated with the Fair Labor Standards Act (FLSA) and the notice requirement for individual coverage HRAs. The Departments note that under FLSA section 18B, an applicable employer is required to provide notice to inform employees of coverage options, including the existence of an Exchange, and the availability of the PTC if the employer’s plan does not provide MV. This notice is provided at the time of hiring. The FLSA section 18B requirement to provide a notice to employees of coverage options applies to employers to which the FLSA applies. An employer sponsoring an individual coverage HRA that provides the required notice under the final rules must also provide a notice that satisfies the FLSA notice requirement if the FLSA applies to the employer. However, nothing in the final rules prohibits an employer from combining the notices for employees eligible for the individual coverage HRA, provided that both notice requirements are satisfied. Commenters also urged the Departments more generally to create tools and resources for employees and employers that are easily accessible to help determine PTC eligibility and to dedicate additional funding to the State Exchanges for increased administration and assistance to individuals trying to determine APTC eligibility. A few commenters suggested that more education for consumers, enrollment assisters, and agents and brokers would be necessary. The Departments acknowledge the crucial role that the Exchanges have in implementation and operationalization of individual coverage HRAs, and the Departments will work closely with the Exchanges on the implementation of the final rules. The Departments note that language will be added to the HealthCare.gov application to help consumers understand that if they are eligible for an individual coverage HRA, this offer may affect their APTC eligibility. As discussed elsewhere in this preamble, HHS also intends to provide technical assistance materials for consumers in HealthCare.gov states, as well as for enrollment assisters and agents and brokers participating in Exchanges that use HealthCare.gov, so they may help consumers understand the implications of their individual coverage HRA offer. The Departments are also continuing to consider other ways to provide outreach and assistance to stakeholders regarding individual coverage HRAs. PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 28923 10. Student Health Insurance Coverage Federal rules under PPACA define student health insurance coverage as a type of individual health insurance coverage.139 Although those rules exempt student health insurance coverage from certain provisions of PPACA and HIPAA,140 they do not exempt this coverage from PHS Act sections 2711 and 2713. Therefore, given that student health insurance coverage is a type of individual health insurance coverage, and is subject to PHS Act sections 2711 and 2713, in the preamble to the proposed rules, the Departments clarified that an HRA may be integrated with student health insurance coverage that satisfies the requirements in 45 CFR 147.145. One commenter expressed support for allowing integration of HRAs with student health insurance coverage. Another commenter requested that integration with student health insurance coverage not be permitted due to concerns that HRA plan sponsors would be required to confirm that the student health insurance coverage complies with the market requirements. The final rules permit HRA integration with student health insurance coverage because student health insurance coverage is individual health insurance coverage that is subject to PHS Act sections 2711 and 2713. In response to concerns about the difficulty of determining the compliance of individual health insurance coverage policies with the market requirements generally for all individual health insurance coverage, under the final rules, all individual health insurance coverage is treated as compliant with PHS Act sections 2711 and 2713. Therefore, plan sponsors are not required to confirm that any particular student health insurance policy (or any other individual health insurance policy) complies with PHS Act sections 2711 and 2713. Further, in the preamble to the proposed rules, the Departments noted that self-insured student health plans 139 Under this definition, student health insurance coverage must be provided pursuant to a written agreement between an institution of higher education (as defined in the Higher Education Act of 1965) and a health insurance issuer, and provided to students enrolled in that institution and their dependents, and does not make health insurance coverage available other than in connection with enrollment as a student (or as a dependent of a student) in the institution, does not condition eligibility for the health insurance coverage on any health status-related factor (as defined in 45 CFR 146.121(a)) relating to a student (or a dependent of a student), and satisfies any additional requirements that may be imposed under state law. See 45 CFR 147.145(a). 140 See 45 CFR 147.145(b). E:\FR\FM\20JNR2.SGM 20JNR2 28924 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations are not a form of individual health insurance coverage.141 Therefore, the proposed rules did not provide for HRA integration with self-insured student health plans. One commenter expressed concern that it may be difficult for employers to verify whether an individual with student health plan coverage has insured or self-insured coverage. The Departments appreciate the comment and recognize that employers and employees may not know whether a student health plan is insured or self-insured, but expect that employers will take reasonable steps to ensure compliance with the final rules. This includes making reasonable efforts to ensure that, when employees substantiate enrollment in student health coverage, they are correctly substantiating enrollment in a student health plan provided through insurance by a licensed issuer. If a student enrolled in an institution of higher education has questions about the type of student health coverage that is offered by the institution, this information should be available in the governing plan document or by contacting the plan administrator for the student health plan. The Departments also confirmed in the preamble to the proposed rules that prior guidance,142 which provided enforcement relief to institutions of higher education for certain healthcare premium reduction arrangements offered to student employees in connection with insured or self-insured student health coverage (student premium reduction arrangements) remains in effect, pending any further guidance. One commenter expressed support for keeping the current enforcement relief in effect. The Departments reiterate that the previously provided enforcement relief remains in effect for institutions of higher education, pending any future guidance, and the final rules clarify that a student employee who is offered a student premium reduction arrangement is not considered part of the class of employees of which the employee would otherwise be a part for purposes of the final integration rules. This provision applies only for plan sponsors 141 See 77 FR 16453, 16455 (March 21, 2012). FAQs About Affordable Care Act Implementation Part 33, available at https:// www.dol.gov/sites/default/files/ebsa/about-ebsa/ our-activities/resource-center/faqs/aca-part-33.pdf or https://www.cms.gov/CCIIO/Resources/FactSheets-and-FAQs/Downloads/ACA-FAQ-Set-33Final.pdf. See also IRS Notice 2016–17; DOL Technical Release 2016–1; and CMS Insurance Standards Bulletin, Application of the Market Reforms and Other Provisions of the Affordable Care Act to Student Health Coverage, February 5, 2016. jbell on DSK3GLQ082PROD with RULES2 142 See VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 that are institutions of higher education. For this purpose, a student premium reduction arrangement is defined as any program offered by an institution of higher education where the cost of insured or self-insured student health coverage is reduced for certain students through a credit, offset, reimbursement, stipend or similar arrangement.143 Therefore, the offer of that type of arrangement to student employees will not affect the compliance of an individual coverage HRA that the institution of higher education may offer to other employees. The final rules also clarify that a student employee offered a student premium reduction arrangement is not counted for purposes of determining whether the minimum class size requirement is satisfied. The text of the final rules includes examples. However, if a student employee is not offered a student premium reduction arrangement (including if, instead, the student employee is offered an individual coverage HRA), the student employee is considered to be part of the class of employees to which he or she otherwise belongs, and the student employee is counted in determining whether the minimum class size requirement is satisfied. Further, if an individual coverage HRA is offered to student employees, the final integration rules apply to such an arrangement as they would any other individual coverage HRA. 11. Integration With Certain Other Types of Coverage a. Short-Term, Limited-Duration Insurance The Departments considered whether to propose a rule to permit individual coverage HRAs to be integrated with types of non-group coverage other than individual health insurance coverage, such as STLDI.144 The Departments declined to do so in the proposed rules because STLDI is not subject to PHS Act sections 2711 and 2713 and, therefore, might not be compliant with these market requirements. However, the Departments requested comments on whether integration with STLDI should be permitted and, if so, what potential advantages and problems might arise. Most commenters strongly opposed allowing integration with STLDI, expressing concerns that it would cause significant adverse selection in the individual market, which would lead to increased premiums and increased federal spending (through increased PTCs). Some of these commenters 143 Id. 144 See 26 CFR 54.9801–2, 29 CFR 2590.701–2, and 45 CFR 144.103 for the definition of STLDI. PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 asserted that prohibiting integration with STLDI is necessary to ensure the integrity and sustainability of the individual market and that to allow integration with STLDI would run counter to, and negate, the various other provisions in the proposed rules intended to prevent adverse selection. Some commenters expressed concern that STLDI provides insufficient coverage and consumer protections, that individuals would unknowingly enroll, and that brokers would have incentives to encourage STLDI enrollment. Some commenters raised legal concerns with allowing integration of HRAs with STLDI, noting that STLDI is not subject to, or generally compliant with, PHS Act sections 2711 and 2713 and, therefore, would not be sufficient to ensure that an individual with an HRA integrated with STLDI had coverage that was compliant with these market requirements. One commenter asserted that an HRA integrated with STLDI would fail to comply with the health nondiscrimination rules under HIPAA because STLDI is allowed to discriminate based on health status. A few commenters supported allowing integration of an individual coverage HRA with STLDI, noting that STLDI is an option that could provide relief to individuals unable to afford individual health insurance coverage and, for some lower-income individuals, such as those in states that did not expand Medicaid under PPACA, may be the only affordable alternative. One commenter supported integration with STLDI as long as additional guardrails were established and another requested additional notice requirements if integration of individual coverage HRAs were to be permitted with STLDI. The Departments note that STLDI can be a useful option for certain individuals otherwise unable to afford or obtain PPACA-compliant health insurance. The final rules, however, do not allow integration with STLDI because of the concerns raised by commenters, including that the combined arrangement would not necessarily satisfy PHS Act sections 2711 and 2713 and that adverse selection could result. The Departments note that the new excepted benefit HRA finalized elsewhere in the final rules, which is not subject to PHS Act sections 2711 and 2713, generally may be used to reimburse premiums for STLDI. See later in this preamble for a discussion of the excepted benefit HRA, including a discussion of the limited circumstance in which an excepted benefit HRA may not be used to reimburse STLDI premiums. E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 b. Spousal Coverage In developing the proposed rules, the Departments considered whether to allow individual coverage HRAs to be integrated with group health plan coverage, such as a group health plan maintained by the employer of the participant’s spouse, in addition to individual health insurance coverage. Like individual health insurance coverage, group health plan coverage generally is subject to and compliant with PHS Act sections 2711 and 2713. The Departments indicated they did not propose such a rule because to do so would add significant complexity to the individual health insurance coverage integration test.145 However, the Departments requested comments, including on the demand for such a rule, and any problems such a rule may raise. Several commenters requested that integration with spousal coverage be permitted under the individual health insurance coverage integration test, with one stating that most group coverage is likely to cover all EHBs and therefore the issue of an HRA that covers all EHBs being integrated with coverage that does not cover all EHBs is unlikely to arise. One commenter suggested that the Departments allow an employee to be covered by a group health plan and also have access to an HRA that can be used to purchase individual health insurance coverage for a spouse. Other commenters requested that integration of an individual coverage HRA with spousal coverage be prohibited, expressing skepticism that employers would take advantage of this option and 145 PHS Act section 2711 applies with respect to the coverage of EHBs. Because large group market and self-insured group health plans are not required to cover EHBs, unlike individual health insurance coverage which generally is required to cover all EHBs, in the group health plan integration context, situations may arise where non-HRA group coverage with which the HRA is integrated does not cover every category of EHBs that the HRA covers. In that case, the HRA applies an annual dollar limit to a category of EHBs and the non-HRA group coverage with which it is integrated does not cure that limit by providing unlimited coverage of that category of EHBs. In the 2015 rules under PHS Act section 2711, and in subregulatory guidance that preceded the 2015 rules, the Departments addressed this issue by providing two tests. Specifically, if the non-HRA group coverage with which an HRA is integrated provides MV, the HRA will not be considered to fail to comply with PHS Act section 2711, even though the HRA might provide reimbursement of an EHB that the plan with which the HRA is integrated does not. If an HRA is integrated with non-HRA group coverage that does not provide MV, the 2015 rules limit the types of expenses that an HRA may reimburse to reimbursement of co-payments, co-insurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care that does not constitute an EHB. For additional discussion of the current rules under PHS Act section 2711, see the discussion earlier in this preamble. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 noting that the arrangement would add little value. In light of the Departments’ continued concern with the added complexity that would be required and the response from commenters, the final rules do not allow an individual coverage HRA to also be integrated with other group health plan coverage, such as spousal coverage. This is an area that the Departments may explore in future rulemaking. The Departments reiterate that the current rules under PHS Act section 2711 allow HRAs to be integrated with other non-HRA group health plan coverage, including spousal coverage, subject to certain conditions.146 However, amounts made available under such an HRA may not be used to purchase individual health insurance coverage.147 Commenters also requested clarification as to whether two spouses, each offered an individual coverage HRA from their respective employers, may use the separate individual coverage HRAs to buy a single individual health insurance policy that covers both spouses (and any dependents). Nothing in the final rules would prohibit this, if the separate individual coverage HRAs are each in compliance with the final rules. However, under the generally applicable rules for HRAs under the Code, each individual may only seek reimbursement for the portion of a medical care expense that has not already been reimbursed by some other means, including from one of the individual coverage HRAs. c. Health Care Sharing Ministries Several commenters requested that integration of HRAs with health care sharing ministries be permitted, in part to provide an alternative option that alleviates conscience issues faced by employers and employees with respect to individual health insurance coverage, and in part due to the success of health care sharing ministries in providing affordable, flexible choices. The Departments are of the view that HRAs cannot be integrated with health care sharing ministries, consistent with PHS Act sections 2711 and 2713. Under current law, health care sharing ministries are not subject to those provisions, nor are they required to comply with other market requirements that apply to individual health insurance coverage. Health care sharing ministry arrangements are also not MEC.148 Therefore, the integration of an 146 26 CFR 54.9815–2711(d)(2), 29 CFR 2590.715– 2711(d)(2), and 45 CFR 147.126(d)(2). 147 IRS Notice 2015–87, Q&A–2. 148 See Code section 5000A(d)(2)(B) and 5000A(f). PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 28925 individual coverage HRA with these arrangements would not result in a combined arrangement sufficient to satisfy PHS Act sections 2711 and 2713, which means that such a combined arrangement would not provide the protections afforded by those provisions. One commenter asserted that the proposed rules would impermissibly burden the exercise of religion for purposes of the Religious Freedom Restoration Act of 1993 (RFRA) 149 because they would not allow individual coverage HRAs to be integrated with health care sharing ministries and thus would make participation in health care sharing ministries more expensive relative to individual coverage HRAs. Specifically, the commenter asserted that the proposed rules would impermissibly burden the free exercise of religion because, by not allowing HRAs to be integrated with health care sharing ministries, the rules would extend certain tax advantages to individual coverage HRAs that are not extended to participants in health care sharing ministries. However, although the RFRA provides a claim to persons whose religious exercise is substantially burdened by government, the Supreme Court has held that ‘‘a generally applicable tax [that] merely decreases the amount of money [an individual or entity] has to spend on its religious activities’’ does not impose a substantial burden on the exercise of religion.150 Consequently, the final rules do not allow individual coverage HRAs to be integrated with health care sharing ministries. d. Multiple Employer Welfare Arrangements (Including Association Health Plans) One commenter requested that integration of HRAs be permitted with association health plans (AHPs) 151 and another commenter opposed allowing integration with AHPs, because coverage offered by an AHP is not required to cover all EHBs, to the extent 149 42 U.S.C. 2000bb(b). Swaggart Ministries v. Bd. of Equalization of California, 493 U.S. 378, 391 (1990). 151 On June 21, 2018, DOL published a final rule establishing a new test as an alternative to that described in prior DOL sub-regulatory guidance for determining who can sponsor an ERISA-covered AHP as an ‘‘employer.’’ See 83 FR 28912 (June 21, 2018). The AHP rule was intended to expand access to affordable, high-quality healthcare options, particularly for employees of small employers and some self-employed individuals. On March 28, 2019, in State of New York v. United States Department of Labor, the United States District Court for the District of Columbia vacated most of the DOL rule. On April 26, 2019, the Department of Justice filed a notice of appeal. 150 Jimmy E:\FR\FM\20JNR2.SGM 20JNR2 28926 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations the coverage is offered through a large group market or self-insured group health plan. AHPs are a type of Multiple Employer Welfare Arrangement (MEWA) that are group health plans. The Departments current, final regulations at 26 CFR 54.9815– 2711(d)(2), 29 CFR 2590.715–2711(d)(2), and 45 CFR 147.126(d)(2) set forth criteria for HRAs to be integrated with other group health plan coverage (including MEWAs). e. TRICARE The Departments note that, under the final rules, individual coverage HRAs may not be integrated with TRICARE.152 However, for the sake of clarity, the Departments note that nothing in the final rules prevents an employer from offering an individual coverage HRA to an individual covered by TRICARE, subject to the provisions of the final rules, including that if an individual coverage HRA is offered to an employee in a class of employees, the HRA must generally be offered on the same terms to all the employees in the class. Further, nothing in the final rules prevents an individual covered by TRICARE from enrolling in an individual coverage HRA, if offered, subject to the conditions in the final rules, including that all individuals covered by an individual coverage HRA must be enrolled in either individual health insurance coverage or Medicare.153 Consequently, an individual covered by TRICARE who is offered an individual coverage HRA will be enrolled in TRICARE and must also be enrolled in an individual health insurance policy (or Medicare, if applicable) in order to be enrolled in the individual coverage HRA. The individual may not enroll in the individual coverage HRA and only TRICARE without enrolling in an individual health insurance policy (or Medicare). Further, as explained later in this preamble, HRAs may reimburse medical care expenses and the HRA plan sponsor determines which medical care expenses a particular HRA may reimburse, consistent with the discussion later in this preamble. It may be the case that an HRA will be available to pay both the premiums and cost-sharing for individual health 152 See chapter 55 of title 10, United States Code. Notice 2015–17, Q&A–3, provides that an arrangement under which an employer reimburses certain medical care expenses for employees covered by TRICARE may be considered integrated with a traditional group health plan offered by the employer (even though the employee is not enrolled in the traditional group health plan), subject to certain conditions. The final rules do not affect this guidance provided under Notice 2015–17. jbell on DSK3GLQ082PROD with RULES2 153 IRS VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 insurance coverage as well as any medical care expenses related to TRICARE, subject to the terms of the HRA. 12. Expenses Eligible for Reimbursement by an Individual Coverage HRA A number of commenters requested clarification of the expenses that may be reimbursed under an individual coverage HRA, such as whether expenses for premiums for excepted benefit coverage, cost sharing under excepted benefit coverage, and cost sharing under individual health insurance coverage may be reimbursed. One commenter recommended that the final rules require individual coverage HRAs to provide reimbursement for cost sharing in addition to premiums, and another asked for clarification that an individual coverage HRA is not required to be used to reimburse premiums for individual health insurance coverage, so long as the individual coverage HRA otherwise satisfies the requirements under the final rules. An HRA may provide for reimbursement of expenses for medical care, as defined under Code section 213(d). Consistent with the current rules that apply to HRAs generally, under the final rules, a plan sponsor has discretion to specify which medical care expenses are eligible for reimbursement from an individual coverage HRA it establishes. A plan sponsor may allow an HRA to reimburse all medical care expenses, may limit an HRA to allow reimbursements only for premiums, may limit an HRA to allow reimbursements only for non-premium medical care expenses (such as cost sharing), or may decide which particular medical care expenses will be reimbursable and which will not be reimbursable. However, in the latter case, the designation of the reimbursable expenses must not violate other rules applicable to group health plans, such as the HIPAA nondiscrimination rules or the MSP provisions. The final rules do not require that an individual coverage HRA be used (or be allowed to be used) for reimbursement of premiums for individual health insurance coverage (or Medicare). However, as detailed earlier in this preamble, the final rules require that individuals covered by an individual coverage HRA be enrolled in individual health insurance coverage (or Medicare). Thus, the Departments generally anticipate that employers will allow individual coverage HRAs to reimburse premiums for such coverage. Some commenters requested that the Departments confirm that certain PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 excepted benefits, including standalone dental coverage, hospital indemnity or other fixed indemnity coverage, and coverage for a specific disease or illness, provide medical care within the meaning of Code section 213(d) and, therefore, that expenses for these types of coverage are reimbursable by an individual coverage HRA. Some commenters requested that expenses paid with regard to direct primary care arrangements be recognized as expenses for medical care under Code section 213(d). In addition, one commenter requested clarification of whether payments for participation in health care sharing ministries qualify as medical care expenses under Code section 213(d). An HRA, including an individual coverage HRA, generally may reimburse expenses for medical care, as defined under Code section 213(d), of an employee and certain members of the employee’s family. Under Code section 213(d), medical care expenses generally include amounts paid (1) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure of function of the body; (2) for transportation primarily for and essential to medical care; (3) for certain qualified long-term care services; and (4) for insurance covering medical care. Neither the proposed rules nor the final rules make any changes to the rules under Code section 213. Thus, any issues arising under Code section 213, and any guidance requested by commenters to address those issues, are beyond the scope of this rulemaking. The Treasury Department and the IRS, however, appreciate the comments and plan to address some of these issues in future rulemaking or guidance. 13. Interaction of Individual Coverage HRAs and HSAs Commenters raised various issues related to the interaction between individual coverage HRAs and HSAs. Section 1201 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Public Law 108–173, added section 223 to the Code to allow eligible individuals to establish HSAs. Among the requirements for an individual to qualify as an eligible individual under Code section 223(c)(1) is that the individual must be covered under a high deductible health plan (HDHP) and have no disqualifying health coverage. If an individual fails to satisfy the requirements to be an eligible individual, contributions to an HSA are disallowed. Several commenters asked that the Treasury Department and the IRS clarify E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations whether an individual covered by an individual coverage HRA may contribute to an HSA. Some commenters specifically asked the Treasury Department and the IRS to address the application of prior guidance under the Code, which provides that certain types of HRAs do not render an individual ineligible to contribute to an HSA. Several commenters expressed support for HSAs and emphasized the importance of allowing individuals who have individual coverage HRAs to contribute to HSAs. In Revenue Ruling 2004–45,154 the Treasury Department and the IRS clarified that an otherwise eligible individual (that is, an individual with coverage under an HDHP and no other disqualifying coverage) remains an eligible individual for purposes of making contributions to an HSA for periods during which the individual is covered by, among other things, a limited-purpose HRA, a post-deductible HRA, or combinations of these arrangements.155 Subsequently, Q&A–1 of IRS Notice 2008–59 156 stated that a limited-purpose HRA that is also available to pay premiums for health coverage does not disqualify an otherwise eligible individual from contributing to an HSA, provided the individual does not use the HRA to, or otherwise, obtain coverage that is not HSA-compatible. This prior guidance applies to all HRAs, including individual coverage HRAs. Therefore, for example, an individual coverage HRA that solely makes available reimbursements of individual health insurance coverage premiums does not disqualify an otherwise eligible individual covered under an HDHP and no other disqualifying coverage from making contributions to an HSA. However, an individual coverage HRA that is not limited in accordance with the relevant guidance under the Code would not be HSA-compatible (for example, an HRA that can reimburse first dollar cost sharing). One commenter asked whether employers are allowed, or required, to Ruling 2004–45, 2004–1 IRB 971. Revenue Ruling 2004–45, which defines a limited-purpose HRA as an HRA that pays or reimburses benefits for ‘‘permitted insurance’’ (for a specific disease or illness or that provides a fixed amount per day (or other period) of hospitalization) or ‘‘permitted coverage’’ (for example, vision or dental coverage), but not for long-term care services. In addition, the limited-purpose HRA may pay or reimburse preventive care benefits. The ruling also defines a post-deductible HRA as an HRA that does not pay or reimburse any medical expense incurred before the minimum annual deductible under Code section 223(c)(2)(A)(i) is satisfied. 156 IRS Notice 2008–59, 2008–29 IRB 123. offer both an HSA-compatible individual coverage HRA and an individual coverage HRA that is not HSA compatible to a class of employees. The Departments recognize that some employees offered an individual coverage HRA may choose individual health insurance coverage that is an HDHP and other employees may choose non-HDHP individual health insurance coverage that is not HSA compatible. While some employers may offer all employees in a class of employees an HSA-compatible individual coverage HRA, some employers may want to offer employees in a class of employees a choice between an HSA-compatible individual coverage HRA and an individual coverage HRA that is not HSA compatible. In response to this comment, the final rules clarify that an employer that offers employees in a class of employees a choice between an HSA-compatible individual coverage HRA and an individual coverage HRA that is not HSA compatible does not fail to satisfy the same terms requirement provided both types of individual coverage HRAs are offered to all employees in the class on the same terms.157 The final rules have been revised to reflect this rule. With respect to the post-deductible feature of certain HSA-compatible HRAs, one commenter suggested that the final rules provide that employees may self-administer the post-deductible restriction by tracking medical expenses incurred during the year and refraining from submitting medical expenses to the post-deductible HRA until the minimum deductible is satisfied. The Treasury Department and the IRS decline to adopt this approach because it would be inconsistent with the rules for the administration of HDHPs.158 If a plan sponsor chooses to offer an HSAcompatible individual coverage HRA that reimburses medical care expenses after the minimum deductible under Code section 223(c)(2)(A)(i) is satisfied, it is the employer’s responsibility to track medical care expenses incurred during the year and ensure that the individual coverage HRA does not reimburse medical care expenses (other 154 Revenue jbell on DSK3GLQ082PROD with RULES2 155 See VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 157 The Departments note that under the opt out requirement, described later in this preamble, each participant must be given the chance to opt out of (or into) an individual coverage HRA once, and only once, with respect to a plan year and to the extent a participant is offered a choice between an HSA-compatible HRA and a non-HSA-compatible HRA, the participant will opt into either one or the other, for the plan year (or for the portion of the plan year during which the participant is covered by the HRA). (Note that participants are also generally given the chance to waive the HRA upon termination of employment). 158 See Revenue Ruling 2004–45. PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 28927 than premiums or expenses allowed as limited purpose) incurred prior to the satisfaction of the minimum deductible.159 The commenter further requested clarification as to whether unused amounts in an individual coverage HRA at the end of the plan year may be transferred to the employee’s HSA. The Treasury Department and the IRS note that amounts available under an HRA, whether an individual coverage HRA or another type of HRA, may not be funded by salary reduction amounts. Moreover, the amounts are available only to reimburse Code section 213(d) medical care expenses and may not be cashed out.160 However, amounts in an HSA may be withdrawn for non-medical purposes, subject to inclusion in income and an additional tax.161 In addition, Congress previously provided for onetime distributions from HRAs to HSAs, in certain circumstances, subject to the annual HSA contribution limits, but this special rule was only made available on a temporary basis, and the rule sunset at the end of 2011.162 Therefore, allowing unused amounts in an individual coverage HRA to be transferred to an HSA would be inconsistent with the relevant provisions of the Code and is not permitted. Finally, some commenters requested that direct primary care arrangements not be treated as a health plan or coverage under Code section 223, so that an individual may have a direct primary care arrangement without becoming ineligible for HSA contributions. Similar to the discussion of Code section 213 in the preceding section of this preamble, neither the proposed rules nor the final rules make any changes to the rules under Code section 223. Thus, any issues arising under Code section 223, and any guidance requested by commenters to address those issues, are beyond the scope of this rulemaking. 159 Another commenter inquired about the interaction of individual coverage HRAs and HSAs and the rules for cafeteria plans under Code section 125. These issues are outside the scope of this rulemaking, and the Treasury Department and the IRS are continuing to consider whether future guidance is needed. 160 See IRS Notice 2002–45. 161 See Code section 223(f). Notwithstanding that HSA amounts may be withdrawn for non-medical purposes, subject to inclusion in income and additional tax, Code section 106(d) provides that in the case of amounts contributed by an employer to the HSA of an eligible individual, those amounts are treated as employer-provided coverage for medical care expenses under an accident or health plan to the extent the amounts do not exceed the annual limits on contributions to an HSA. 162 See Code section 106(e). E:\FR\FM\20JNR2.SGM 20JNR2 28928 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations 14. Interaction of Individual Coverage HRAs and Medicare Commenters raised various issues related to the interaction between individual coverage HRAs and Medicare. The comments focused on the interaction with the Medicare antiduplication provision under SSA section 1882(d)(3)(A)(i)(I) and the MSP provisions under SSA section 1862(b). In response to these comments, the final rules have been revised to provide that an individual coverage HRA may be integrated with either individual health insurance coverage or Medicare Part A and B or Part C. Also, the Departments clarify that an individual coverage HRA may be used to reimburse premiums for Medicare and Medicare supplemental health insurance (Medigap), as well as other medical care expenses, as discussed in more detail in this section of the preamble. jbell on DSK3GLQ082PROD with RULES2 a. Background Comments regarding the interaction between individual coverage HRAs and Medicare addressed a number of federal laws and rules governing the relationship between group health plans and the Medicare program. This section of the preamble briefly summarizes these laws to provide context for comments received on the proposed rules and the provisions of the final rules related to integration of an individual coverage HRA with Medicare. Under SSA section 1882(d)(3)(A)(i)(I), it is unlawful for any person to issue or sell to an individual entitled to benefits under Medicare Part A or enrolled in Medicare Part B (including an individual electing a Medicare Part C plan) an individual health insurance policy with the knowledge that the policy duplicates 163 health benefits to which the individual is otherwise entitled under Medicare or Medicaid.164 Persons who violate SSA section 1882(d)(3)(A)(i)(I) are subject to criminal fines and imprisonment, as well as civil monetary penalties.165 The MSP provisions in SSA section 1862(b) make Medicare the secondary payer to certain other health plans and 163 If benefits under an individual health insurance policy are payable without regard to other health benefit coverage of such individual, the policy is not considered to ‘‘duplicate’’ any health benefits to which the individual is otherwise entitled under Medicare or Medicaid, and therefore, the statutory prohibition on the sale of such coverage does not apply. See SSA section 1882(d)(3)(A)(iv). 164 Group health plans, including HRAs, are generally exempt from this Medicare antiduplication provision. See SSA section 1882(d)(3)(C). 165 SSA section 1882(d)(3)(A)(ii). VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 coverage, including group health plans. These provisions protect the Medicare trust funds by ensuring that Medicare does not pay for items and services that certain health insurance or coverage is primarily responsible for paying. In general, the MSP provisions describe when Medicare is secondary in relation to other health plans or coverage and prohibit Medicare from making payment for an item or service if payment has been made, or can reasonably be expected to be made, by a primary plan when certain conditions are satisfied.166 SSA section 1862(b) and 42 CFR 411.20 et seq. provide, in part, that Medicare is the secondary payer, under specified conditions, for services covered under any of the following: • Group health plans of employers that employ at least 20 employees and that cover Medicare beneficiaries age 65 or older who are covered under the plan by virtue of the individual’s current employment status 167 with an employer or the current employment status of a spouse of any age.168 • Group health plans (without regard to the number of individuals employed and irrespective of current employment status) that cover individuals who have ESRD. Except as provided in 42 CFR 411.163, group health plans are always primary payers throughout the first 30 months of ESRD-based Medicare eligibility or entitlement.169 • Large group health plans, as defined by Code section 5000(b)(2) without regard to Code section 5000(d) (that is, plans of employers that employ at least 100 employees), that cover Medicare beneficiaries who are under age 65, entitled to Medicare on the basis of disability, and covered under the plan by virtue of the individual’s or a family member’s current employment status with an employer.170 Generally, under SSA section 1862(b)(1)(A), (B), and (C), a group health plan may not take into account that individuals are entitled to Medicare on the basis of age or disability, or that individuals are eligible for or entitled to Medicare on the basis of ESRD, in the design or offering of the plan. The provisions at SSA section 1862(b)(1)(A), (B), and (C) (including subsections 166 See CMS Publication #100–05, Medicare Secondary Payer Manual, available at https:// www.cms.gov/Regulations-and-Guidance/ Guidance/Manuals/internet-Only-Manuals-IOMsItems/CMS019017.html?DLPage=1&DLEntries=10& DLSort=0&DLSortDir=ascending. 167 An individual has current employment status if the individual is actively working as an employee or is otherwise described in 42 CFR 411.104. 168 SSA section 1862(b)(1)(A), 42 CFR 411.20(a)(1)(ii), and 42 CFR 411.100(a)(1)(i). 169 SSA section 1862(b)(1)(C). 170 SSA section 1862(b)(1)(B). PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 (b)(1)(A)(i)(II) and (b)(1)(C)(ii)) are collectively referred to as the Medicare nondiscrimination provisions. Examples of actions that constitute taking into account Medicare entitlement are listed in 42 CFR 411.108. SSA section 1862(b)(1)(A)(i)(II) and (ii) provides that group health plans of employers of 20 or more employees must provide to any employee or spouse age 65 or older the same benefits, under the same conditions, that the plan provides to those individuals under age 65 (equal benefit rule). For example, a group health plan of an employer with 20 or more employees may not provide lesser benefits to individuals age 65 or over, or charge higher premiums for individuals age 65 or over, because these actions would take into account employees’ entitlement to Medicare on the basis of age and would provide different benefits based on whether an employee is under or over age 65. This requirement applies regardless of whether the individual or spouse age 65 or older is entitled to Medicare. SSA section 1862(b)(1)(C)(ii) provides that group health plans may not differentiate in the benefits they provide between individuals who have ESRD and other individuals covered under the plan on the basis of the existence of ESRD, the need for renal dialysis, or in any other manner. Actions that constitute ‘‘differentiating’’ are listed in 42 CFR 411.161(b). SSA section 1862(b)(3)(C) and 42 CFR 411.103 provide that it is unlawful for an employer or other entity (for example, an issuer) to offer any financial or other benefits as incentives for an individual entitled to Medicare not to enroll in, or to terminate enrollment in, a group health plan that is, or would be, primary to Medicare. For example, employers may not offer benefits to Medicare beneficiaries that are available only as alternatives to the employer’s primary group health plan (for example, prescription drug benefits) unless the beneficiary has primary coverage other than Medicare (for example, primary plan coverage through his or her spouse’s employer). b. Integration of Individual Coverage HRAs With Medicare Several commenters requested clarification generally about how employees who are enrolled in Medicare may use amounts in an individual coverage HRA. Some commenters explained that because of the Medicare anti-duplication provision applicable to individual health insurance coverage, employees who are Medicare beneficiaries may not be able to purchase individual health insurance E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations coverage and, therefore, would be unable to enroll in an individual coverage HRA. One commenter suggested that issuers should have to make their individual health insurance policies available to employees eligible for or enrolled in Medicare, if they are offered an individual coverage HRA. Some commenters sought clarification about the relationship between the Medicare anti-duplication provision and the Medicare nondiscrimination provisions as they relate to individual coverage HRAs. Specifically, some commenters asked HHS to clarify that the inability of employees who are Medicare beneficiaries to obtain individual health insurance coverage due to the Medicare anti-duplication provision will not cause the individual coverage HRA or its plan sponsor to violate rules prohibiting discrimination based on Medicare status, age, disability, or other factors. One commenter suggested that employers that otherwise comply with the proposed rules should not be precluded from offering an individual coverage HRA because a class of employees includes a Medicare beneficiary who cannot obtain individual health insurance coverage. Another commenter asked whether employers would be required to offer Medicare-eligible employees the same HRA contribution as non-Medicare-eligible employees in the same class even though Medicare beneficiaries may not be able to purchase individual health insurance coverage. In response to these comments, HHS notes that there is no exception to the Medicare anti-duplication provision under SSA section 1882(d)(3)(A)(i)(I) for individual health insurance coverage purchased with an HRA. Therefore, neither the proposed rules nor the final rules make any changes related to the application of the Medicare antiduplication provision. Thus, the statutory prohibition against selling an individual health insurance policy to a Medicare beneficiary with knowledge that the policy duplicates benefits under Medicare continues to apply, regardless of whether the individual is offered an individual coverage HRA. However, the Departments have considered commenters’ concerns about individual coverage HRAs and the potential effects of the Medicare anti-duplication provision, as well as those related to the interaction of the MSP provisions, and have determined that revisions to the final rules are warranted. HHS recognizes that, for an individual coverage HRA, it is necessary to address how the Medicare anti-duplication provision interacts with the rules under VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 SSA section 1862(b)(1) that generally provide that group health plans may not take into account entitlement to Medicare and must provide to any employee or spouse age 65 or older the same benefits, under the same conditions, that the group health plan provides to individuals under age 65. If an employer offers an individual coverage HRA, some employees who are Medicare beneficiaries may not be able to obtain individual health insurance coverage due to the anti-duplication provision at SSA section 1882(d)(3)(A)(i)(I). This might cause such employees to be unable to enroll in the individual coverage HRA, effectively treating them differently in violation of the SSA’s equal benefit rule. To address these comments, the final rules permit an individual coverage HRA to be integrated with either individual health insurance coverage or Medicare for a participant or dependent who is enrolled in Medicare Part A and B or Part C (and the HRA will be deemed to comply with PHS Act sections 2711 and 2713), if certain conditions are satisfied. Under the final rules, an individual coverage HRA may be integrated with Medicare regardless of whether the HRA is subject to the MSP provisions, because the Medicare anti-duplication provision applies without regard to whether the HRA plan sponsor is subject to the MSP provisions.171 The Departments are adopting this approach due to the challenges presented by the intersection of the requirements that apply to individual coverage HRAs, the MSP requirements applicable to group health plans, and the Medicare anti-duplication provision applicable to individual health insurance coverage. The Departments have determined that it is appropriate to permit an individual coverage HRA to integrate with Medicare coverage, and therefore, be considered compliant with PHS Act sections 2711 and 2713, because individuals enrolled in Medicare Part A and B or Part C have the comprehensive benefit packages established by Congress, generally with no annual dollar limits and with coverage of preventive services without cost sharing.172 An individual coverage HRA that helps pay premiums for, or 171 For group health plans not subject to the MSP provisions, the existing integration rules permit integration with Medicare Part B and D if certain conditions are satisfied, including that the employer offer traditional group health plan coverage to its non-Medicare employees. See 26 CFR 54.9815–2711(d)(5), 29 CFR 2590.715– 2711(d)(5), and 45 CFR 147.126(d)(5). 172 See, e.g., SSA sections 1861 and 1833, as added by PPACA sections 4103 and 4104. PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 28929 supplements, the Medicare benefit package established by Congress will not be considered by the Departments to fail to satisfy PHS Act sections 2711 and 2713. Further, the Departments determined in the 2015 rules under PHS Act 2711 that allowing Medicare Part B and D reimbursement arrangements to be integrated with Medicare was sufficient to constitute compliance with PHS Act sections 2711 and 2713 in the circumstances described in that guidance, as discussed earlier in this preamble. The final integration rules generally apply in the same manner to Medicare coverage as they apply to individual health insurance coverage. Thus, under the final rules, an individual coverage HRA must require individuals whose medical care expenses may be reimbursed under the HRA to be enrolled in either individual health insurance coverage or Medicare Part A and B or Part C for each month such individuals are covered by the HRA. The individual coverage HRA also must implement, and comply with, reasonable procedures to substantiate enrollment in either individual health insurance coverage or Medicare Part A and B or Part C for the HRA plan year (or for the portion of the plan year the individual is covered by the individual coverage HRA) and with each new request for reimbursement of an incurred medical care expense. The Departments clarify that the final rules do not require that a participant and his or her dependents all have the same type of coverage (that is, either individual health insurance coverage or Medicare). Therefore, an individual coverage HRA may be integrated with Medicare for some individuals in a family or household and with individual health insurance coverage for others in the same family or household. In addition, under the final rules, an individual coverage HRA must be offered on the same terms to all employees within a class of employees, regardless of Medicare eligibility or entitlement, including that the individual coverage HRA must make the same amount available to all employees in the class, subject to the exceptions provided in the final rules under the same terms requirement.173 Moreover, 173 The Departments note that although there is an exception to the same terms requirement that allows a plan sponsor to offer both an HSAcompatible individual coverage HRA and an individual coverage HRA that is not HSA compatible, Code section 223(b)(7) provides that an individual ceases to be an eligible individual for HSA purposes starting with the month he or she is entitled to benefits under Medicare. IRS Notice 2004–50, 2004–33 IRB 196, Q&A–2, clarifies that E:\FR\FM\20JNR2.SGM Continued 20JNR2 28930 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations no employee may be offered a choice between an individual coverage HRA and a traditional group health plan, including an employee enrolled in or eligible for Medicare. The individual coverage HRA must also allow participants, whether or not covered by Medicare, to opt-out of and waive future reimbursements from the individual coverage HRA annually and upon termination of employment. Finally, the individual coverage HRA must provide the notice required by the final rules to all individuals eligible for the HRA, including those for whom the HRA would be integrated with Medicare. Relatedly, in the final rules, the Departments clarify the notice content requirements to reflect that an individual coverage HRA may be integrated with Medicare and to include a statement regarding PTC eligibility for Medicare beneficiaries.174 The final rules also clarify that some of the notice content elements relate only to individual health insurance coverage and not to Medicare. jbell on DSK3GLQ082PROD with RULES2 c. Reimbursement of Expenses Under Individual Coverage HRAs for Medicare Beneficiaries One commenter requested clarification that offering an individual coverage HRA to Medicare-eligible employees will not be considered an improper financial incentive for those individuals to select Medicare as their primary payer. The commenter also suggested that employees be able to use amounts in an individual coverage HRA to pay for medical care expenses not covered by Medicare, such as dental, vision, and other out-of-pocket expenses, including Medicare Part D premiums, as well as premiums for Medigap, without it being viewed as offering an improper incentive. For group health plans subject to the MSP provisions, offering an HRA to reimburse Medicare premiums is impermissible if it provides a financial incentive for Medicare beneficiaries to decline enrollment in the employer’s group health plan and make Medicare the primary payer. Under the final rules, the employer would not be offering Medicare beneficiaries a financial incentive as an inducement to decline mere eligibility for Medicare does not make an individual ineligible to contribute to an HSA. Rather, the term ‘‘entitled to benefits under Medicare,’’ for purposes of an HSA, means both eligibility for, and enrollment in, Medicare. 174 Although individuals enrolled in Medicare may not be able to purchase individual health insurance coverage for themselves through the Exchange, individuals who do so are not eligible for the PTC for their Exchange coverage in any event. See Code section 36B(c)(2)(B) and 26 CFR 1.36B– 2(a)(2). VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 group health plan coverage. Rather, the individual coverage HRA would be the group health plan coverage offered to a class of employees that includes Medicare beneficiaries. Under these circumstances, unless the employer could offer an individual coverage HRA that may be integrated with Medicare, the employer would risk running afoul of the equal benefit rule under SSA section 1862(b)(1)(A)(i). This is because employees who are Medicare beneficiaries who are unable to purchase individual health insurance coverage would be ineligible for the employer’s group health plan (that is, the individual coverage HRA) as a result of the Medicare anti-duplication provision. HHS recognizes that in other circumstances, offering an HRA to reimburse Medicare premiums might be viewed as impermissible because it would have the effect of making Medicare the primary payer in relation to a group health plan.175 Nevertheless, for purposes of the final rules, HHS has concluded that employers need the flexibility to offer individual coverage HRAs that may be integrated with Medicare, and that may provide for reimbursement of Medicare premiums. This flexibility does not violate the prohibition against financial incentives under SSA section 1862(b)(3)(C). Where a group health plan is an individual coverage HRA that can be used to pay Medicare premiums or other medical care expenses,176 there is no incentive for a Medicare beneficiary to decline or terminate enrollment under the group health plan (that is, the individual coverage HRA). Thus, there is no violation of the SSA’s financial incentive prohibition. Therefore, under the final rules, an individual coverage HRA that is integrated with Medicare may reimburse premiums for Medicare Part A, B, C, or D, as well as premiums for Medigap policies. The individual coverage HRA 175 Under IRS Notice 2015–17, an arrangement under which an employer reimburses (or pays directly) Medicare Part B or D premiums may be considered integrated with the group health plan coverage offered to the employee by the employer although the employee is not enrolled in that group coverage and is instead enrolled in Medicare, subject to certain conditions. IRS Notice 2015–17 also states that to the extent such an arrangement is available to active employees, it may be subject to restrictions under other laws, such as the Medicare secondary payer provisions. For clarity, the Departments confirm that reimbursement of Medicare Part B and D premiums under IRS Notice 2015–17 is permitted only for such arrangements not subject to the MSP provisions. 176 However, as discussed later in this section of the preamble, an individual coverage HRA may not, under its terms, limit reimbursement only to expenses not covered by Medicare. PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 may also reimburse other medical care expenses as defined under Code section 213(d) (subject to the exception discussed later in this section of the preamble regarding taking Medicare entitlement into account). Thus, an individual coverage HRA will not be considered to provide unequal benefits to participants who are eligible for Medicare because those participants will be able to receive the same benefits under the HRA regardless of whether they are able to purchase individual health insurance coverage.177 However, as explained earlier in this preamble, the plan sponsor generally has discretion to specify which medical care expenses (premiums, cost sharing, or otherwise) are eligible for reimbursement under the terms of an individual coverage HRA, as long as the HRA offers the same benefits, on the same terms and conditions, to a class of employees, subject to the exceptions under the same terms requirement in the final rules. In addition, as discussed earlier in this preamble, the designation of the reimbursable expenses must not violate other rules applicable to group health plans, such as the HIPAA nondiscrimination rules or the MSP provisions. To ensure that an individual coverage HRA that is subject to the MSP provisions does not violate those rules, an individual coverage HRA may not, under its terms, limit reimbursement only to expenses not covered by Medicare, as HHS has determined this could amount to a group health plan taking into account entitlement to Medicare in violation of the MSP provisions. However, an individual coverage HRA may limit reimbursement to only premiums or non-premium medical care expenses (such as cost sharing), or may decide which particular medical care expenses will be reimbursable and which will not be reimbursable under the terms of the HRA. d. Other Medicare Issues Some commenters sought assurance that a health insurance issuer providing individual health insurance coverage purchased with an individual coverage HRA would not be required to comply with MSP reporting requirements or pay for benefits primary to Medicare where MSP provisions might apply to the 177 The fact that a participant or dependent in a class of employees may not be able to enroll in individual health insurance coverage or Medicare due to the operation of federal law does not mean the individual coverage HRA that is offered to that class of employees violates the same terms requirement under the final rules or the equal benefit rule under the SSA. E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 individual’s HRA. These commenters recommended clarifying that an HRA plan sponsor’s failure to satisfy the conditions of the ERISA safe harbor described later in this preamble will have no effect on the MSP status of the individual health insurance coverage. HHS notes that individual health insurance coverage is not subject to the MSP provisions, including the reporting, nondiscrimination, and ‘‘primary plan’’ requirements described earlier in this section of the preamble.178 Nothing in the final rules changes the application of the MSP provisions. This is true even where individual health insurance coverage is integrated with an HRA as allowed under the final rules.179 However, an individual coverage HRA will generally pay primary to Medicare, consistent with the MSP provisions applicable to group health plans. HHS intends to issue further guidance clarifying the primary versus secondary payer responsibility of individual coverage HRAs for plan sponsors subject to the MSP provisions. One commenter requested guidance about the MSP reporting requirements that apply to individual coverage HRAs. Section 111 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA), Public Law 110–173, established mandatory reporting requirements with respect to Medicare beneficiaries who have coverage under group health plan arrangements, as well as for Medicare beneficiaries who receive settlements, judgments, awards, or other payment from liability insurance (including self-insurance), nofault insurance, or workers’ compensation.180 The purpose of this reporting is to ensure that Medicare correctly pays for covered services provided to Medicare beneficiaries consistent with Medicare payment rules. HRAs (including individual coverage HRAs) are group health plans and, therefore, generally trigger the MMSEA section 111 reporting requirements.181 HHS will provide 178 See SSA section 1862(b)(1) and (2) (MSP rules apply only to certain group health plans). 179 The term ‘‘group health plan’’ for purposes of the MSP provisions is not defined by reference to ERISA; therefore, this section of the preamble does not address the application of the ERISA safe harbor described later in this preamble. 180 See also SSA section 1862(b)(7) and (8). 181 For information about mandatory MMSEA section 111 reporting for group health plans, see https://www.cms.gov/Medicare/Coordination-ofBenefits-and-Recovery/Mandatory-InsurerReporting-For-Group-Health-Plans/Overview.html and https://www.cms.gov/Medicare/Coordinationof-Benefits-and-Recovery/Mandatory-InsurerReporting-For-Group-Health-Plans/GHP-TrainingMaterial/Downloads/Health-ReimbursementArrangement-HRA.pdf. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 future guidance regarding MMSEA section 111 reporting requirements and individual coverage HRAs. HHS notes that entities that currently do not offer a group health plan and therefore do not have reporting obligations may be required to report if they elect to offer individual coverage HRAs, similar to if they elected to offer other group health plan coverage. 15. Other Integration Issues Some comments were received regarding dollar limits on individual coverage HRAs. One commenter supported that the proposed rules did not impose any specific dollar limit on the amount that an employer may contribute to an individual coverage HRA. The commenter noted that this is a welcome difference from QSEHRAs, to which a statutory dollar limit applies, and stated that this flexibility will help encourage employers to offer individual coverage HRAs. One commenter requested that the Departments place a limit on contributions to an individual coverage HRA to prevent adverse selection. A few commenters asked that the Departments require employers to make certain minimum amounts available under an individual coverage HRA to approximate the amount the employer generally would contribute to a traditional group health plan as a way to maintain availability and generosity of coverage. In previous guidance on HRAs, including on integration of HRAs with other coverage, the Departments provided no minimum or maximum contribution amount. Similarly, the Departments decline to impose a minimum or maximum contribution amount on individual coverage HRAs under the final rules, in order to provide employers with flexibility and because the Departments have imposed other conditions to address the potential for adverse selection. However, the Treasury Department and the IRS note that employers subject to the employer shared responsibility provisions under Code section 4980H may want to make sufficient amounts available to employees in order to avoid a potential employer shared responsibility payment. The Treasury Department and the IRS intend to propose separate rules regarding the interaction of individual coverage HRAs and Code section 4980H that will be available for public comment. Some commenters addressed which employers should be permitted to offer an individual coverage HRA. One commenter applauded the proposed rules for allowing employers of all sizes to offer an individual coverage HRA. PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 28931 One commenter requested that the Departments only permit individual coverage HRAs to be offered by small employers, because, the commenter asserted, small employers have less incentive to segment risk and are less likely to create classes of employees leading to adverse selection. One commenter asked that the Departments only permit large employers to offer an individual coverage HRA, asserting that small employers would be able to manipulate the rules to create small classes and segment risk. Another commenter requested that only employers that do not currently offer coverage be allowed to offer an individual coverage HRA. The Departments considered these suggestions and determined that limiting the ability of one or more categories of employers to offer an individual coverage HRA in these ways would unnecessarily restrict the rules and could decrease the usability of individual coverage HRAs and harm employee welfare without a compelling reason for these limitations. Therefore, under the final rules, any employer may offer an individual coverage HRA, subject to compliance with the conditions in the final rules. However, the Departments note that the final rules include a minimum class size requirement which applies in certain instances, to address the issue identified regarding the ability to create small classes and segment risk. One commenter urged HHS to allow for wellness program demonstration projects in the individual market under PHS Act section 2705(l) because the commenter asserted wellness programs are a popular aspect of traditional employer coverage. Because this comment is outside the scope of this rulemaking, it is not addressed in the final rules. However, HHS appreciates the comment and may consider addressing this issue in future guidance. Several commenters emphasized the importance of strong enforcement of the conditions in the final rules and requested that the Departments issue guidance detailing how the Departments would enforce the final rules. DOL has enforcement jurisdiction over private sector employer-sponsored group health plans, and HHS has enforcement jurisdiction over public sector group health plans, such as those sponsored by state and local governments. Individual coverage HRAs are group health plans, and DOL and HHS will monitor individual coverage HRAs’ compliance with applicable requirements, consistent with the general approach to enforcement with respect to other group health plans. The E:\FR\FM\20JNR2.SGM 20JNR2 28932 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations Departments believe that it is unnecessary to include specific enforcement guidance for individual coverage HRAs in the final rules. The Departments may provide additional guidance if the Departments become aware of arrangements that are inconsistent with the final rules. One commenter requested that employers be permitted to pay issuers directly for individual health insurance coverage in which individual coverage HRA participants are enrolled. The Departments note that existing guidance for health plans generally allows employers to pay health insurance premiums to issuers directly,182 so this is already permitted. Also, see the discussion later in this preamble regarding a safe harbor for determining whether an individual health insurance policy purchased with funds from an individual coverage HRA will be treated as part of an ERISA-covered employee welfare benefit plan. One commenter requested that the Departments clarify that a plan sponsor may make amounts in an individual coverage HRA available either monthly or annually at the beginning of the plan year. The Departments clarify that the final rules do not change existing rules for HRAs, which do not require the entire annual amount to be available at the beginning of the year and would allow the HRA to only make amounts available pro rata over the 12 months of the year.183 However, the Departments note that the amounts made available under an individual coverage HRA, including when they will be made available, must be described in the notice that is required under the final rules.184 The Departments also note that within a class of employees, the terms and conditions of an individual coverage HRA generally must be the same, including the timing of how amounts are made available. One commenter requested that the Departments interpret ‘‘employer’’ to include non-employer plan sponsors such as boards of trustees for multiemployer plans. The final rules allow plan sponsors to offer an individual coverage HRA, and plan sponsors include, but are not limited to, employers and could include a board of trustees for a multiemployer plan. jbell on DSK3GLQ082PROD with RULES2 182 See Revenue Ruling 61–146, 1961–2 CB 25. IRS Notice 2002–45. 184 Also see the discussion later in the preamble regarding the final PTC rules, under which amounts newly made available for an HRA plan year must be determinable within a reasonable time before the beginning of the plan year in order to be considered in determining affordability of the offer of the individual coverage HRA. 183 See VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 Various commenters requested additional reporting requirements or other types of mandatory data collection regarding individual coverage HRAs. The Departments have not identified a compelling need for this information that would justify the significant additional burden this would place on each employer offering this type of coverage. Accordingly, the final rules do not adopt these suggestions. However, to the extent an individual coverage HRA is otherwise subject to reporting requirements under other rules, including PPACA, the Code, the SSA, or ERISA, the final rules do not affect the application of those reporting requirements.185 One commenter requested additional time to comment on the proposal. The Administrative Procedure Act grants Executive Agencies discretion to set the timeframe during which public comments will be received and considered. Interested stakeholders were given 60 days from the publication of the proposed rules to submit comments for consideration. Many comments were received and considered by the Departments. This solicitation for public comments allowed the Departments to gather sufficient information from interested stakeholders. The Departments, therefore, declined to extend the timeframe to comment on the proposed rules. One commenter requested that the final rules consider enrollment in an individual coverage HRA as other group coverage for purposes of determining whether employers satisfy minimum participation thresholds for guaranteed availability. In the large group market, issuers may not apply minimum participation rules to deny guaranteed availability of coverage. In the small group market, issuers may apply minimum participation rules, as allowed under applicable state law. However, failure to satisfy an issuer’s minimum participation rules may not be used to deny guaranteed availability of coverage between November 15 and December 15 of each year. The Departments clarify that in both the large and small group markets, issuers may apply minimum participation rules, pursuant to applicable state law, as an exception to guaranteed renewability of coverage requirements.186 State law may determine which individuals to include in the minimum participation 185 See e.g., ERISA sections 101, 103, and 104 and PHS Act section 2715 (incorporated in Code section 9815 and ERISA section 715). 186 See 78 FR 13406, 13416 (Feb. 27, 2013). PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 calculation, including whether issuers are allowed to include individuals who have other coverage within the total number of eligible individuals and which types of coverage may be counted as other coverage.187 Neither the proposed rules nor the final rules make changes to these existing, separate requirements. One commenter requested that the Departments provide information about how an employer would transition from offering a QSEHRA to offering an individual coverage HRA. The Departments note that IRS Notice 2017– 67 provides guidance on the requirements for providing a QSEHRA. The guidance in Notice 2017–67 remains unaffected by the final rules. Additional QSEHRA guidance generally is outside of the scope of these final rules, and to the extent an employer wants to transition from offering a QSEHRA to offering an individual coverage HRA, the individual coverage HRA must comply with the requirements set forth in the final rules. One commenter asked the Departments to clarify that individual coverage HRA participants may contribute to a health FSA even if their employer does not offer traditional group health plan coverage. The Departments note that employers generally may provide excepted benefits (other than an excepted benefit HRA 188) to employees in a class offered an individual coverage HRA. In addition, the Departments clarify that the individual coverage HRA would qualify as ‘‘other group health plan coverage not limited to excepted benefits’’ under the requirements for the health FSA to qualify as an excepted benefit.189 Thus, nothing in the final rules prohibits employees in a class of employees offered an individual coverage HRA from participating in a health FSA through salary reduction in a cafeteria plan. Other comments not responsive to the provisions and topics addressed by the proposed rules, or otherwise beyond the 187 See Health Care Financing Administration Insurance Standards Bulletin 00–05, Guaranteed Availability Under Title XXVII of the Public Health Service Act—Applicability of Group Participation Rules (Nov. 2000), available at https:// www.cms.gov/CCIIO/Resources/Files/Downloads/ hipaa_00_05_508.pdf. However, for purposes of participation in a Federally-facilitated Small Business Health Options Program (FF–SHOP), see the methodology for calculating a minimum participation rate specified in 45 CFR 155.706(b)(10)(i). 188 See later in this preamble for a discussion of the interaction of individual coverage HRAs and excepted benefit HRAs. 189 26 CFR 54.9831–1(c)(3)(v)(A), 29 CFR 2590.732(c)(3)(v)(A), and 45 CFR 146.145(b)(3)(v)(A). E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations scope of the proposed and final rules, are not summarized or addressed. jbell on DSK3GLQ082PROD with RULES2 16. Revisions to Current PHS Act Section 2711 Rules Regarding Integration With Other Group Health Plan Coverage and Medicare The 2015 rules under PHS Act section 2711 provide methods for integrating HRAs with coverage under another group health plan, and, in certain circumstances, with Medicare Part B and D. The proposed rules did not include a proposal to substantively change the current group health plan or Medicare integration tests under the existing PHS Act section 2711 rules. However, the proposed rules included minor proposed revisions to those rules, including changing the term ‘‘accountbased plan’’ to ‘‘account-based group health plan’’ and moving defined terms to a definitions section. The proposed rules also proposed to amend the rules under PHS Act section 2711 to reflect that HRAs may be integrated with individual health insurance coverage subject to the requirements of 26 CFR 54.9802–4, 29 CFR 2590.702–2, and 45 CFR 146.123. The final rules adopt these changes as proposed, except that the final rules have been updated to reflect that individual coverage HRAs may be integrated with Medicare, for purposes of compliance with PHS Act sections 2711 and 2713, if certain conditions are satisfied.190 In addition, the proposed rules included a proposal to update the definition of EHBs set forth in paragraph (c) of the rules under PHS Act section 2711, which applies for a group health plan or health insurance issuer not required to cover EHBs. The update in the proposed rules reflected the revision to the EHB-benchmark plan selection process that was promulgated in the HHS Notice of Benefit and Payment Parameters for 2019 Final Rule (2019 Payment Notice) and that applies for plan years beginning on or after January 1, 2020.191 The 2019 Payment Notice revisions provide states with additional choices with respect to the selection of benefits and promote affordable coverage through offering states additional flexibility in their selection of an EHB-benchmark plan for plan years beginning on or after January 1, 2020. The state’s existing EHB190 The Departments further note that, unless the final rules conflict with the subregulatory guidance that has been issued under PHS Act section 2711, that guidance remains in effect. 191 See 83 FR 16930 (April 17, 2018). The definition of EHB that applies under the PHS Act section 2711 rules for plan years beginning before January 1, 2020 is not substantively changed by the final rules. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 benchmark plan will continue to apply for any year for which a state does not select a new EHB-benchmark plan from the available EHB-benchmark plan selection options finalized in the 2019 Payment Notice.192 The Departments are finalizing as proposed the update to the definition of EHB under the PHS Act section 2711 rules. One commenter expressed concern with the change made by HHS to the definition of EHB in the 2019 Payment Notice and requested that the Departments decline to update the rules under PHS Act section 2711 to reflect the revised EHB definition. The Departments clarify that PHS Act section 2711 defines EHB by reference to PPACA section 1302(b), under which HHS has the authority to define EHB. The update to the definition of EHB in the PHS Act section 2711 rules is a technical update made to avoid applying an out-of-date definition and is the result of the change HHS finalized in the 2019 Payment Notice. Issues regarding EHBs more generally, as well as the specific changes made in the 2019 Payment Notice, are outside of the scope of this rulemaking. B. Excepted Benefit HRAs 1. In General As the Departments noted in the preamble to the proposed rules, there may be scenarios in which an employer wants to offer an HRA that might not be integrated with individual health insurance coverage, non-HRA group coverage, Medicare, or TRICARE. For example, some employers may want to offer an HRA without regard to whether their employees have other coverage at all, or without regard to whether their employees have coverage that is subject to and satisfies the market requirements. Therefore, the proposed rules utilized the Departments’ discretion under Code section 9832(c)(2)(C), ERISA section 733(c)(2)(C), and PHS Act section 2791(c)(2)(C), and included an amendment to the prior rules that would recognize certain limited HRAs as excepted benefits (excepted benefit HRAs), if specific conditions were satisfied.193 As explained earlier in this preamble, the Departments have the authority and discretion to specify in rules additional limited excepted benefits that are similar to the limited benefits specified 192 For more information on the revised EHB standard, refer to the preamble to the 2019 Payment Notice (83 FR 16930, 17007 (April 17, 2018)). 193 The proposed rules, and the final rules, do not apply to health FSAs. For a health FSA to qualify as an excepted benefit, the rules at 26 CFR 54.9831– 1(c)(3)(v), 29 CFR 2590.732(c)(3)(v), and 45 CFR 146.145(b)(3)(v) continue to apply. PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 28933 in the statutes and that either are insured under a separate policy, certificate, or contract of insurance, or are otherwise not an integral part of a plan. The proposed rules included a proposal for an excepted benefit HRA that is consistent with both this statutory framework and the Departments’ objective of expanding the availability and usability of HRAs to maximize employee welfare. Specifically, the proposed rules provided that, to be recognized as an excepted benefit, the HRA: (1) Must not be an integral part of the plan, (2) must provide benefits that are limited in amount, (3) cannot provide reimbursement for premiums for certain health insurance coverage, and (4) must be made available under the same terms to all similarly situated individuals. A number of commenters generally expressed support for the proposed excepted benefit HRA rule as a way to expand the availability and use of HRAs. Some of the commenters who supported the proposed excepted benefit HRA rule opposed allowing the purchase of STLDI. Also, a number of commenters opposed the proposed excepted benefit HRA rule, expressing concerns that the excepted benefit HRA could incentivize individuals to obtain STLDI, cause adverse selection in the small group and individual market risk pools, and increase complexity and the potential for confusion. The Departments considered these comments and agree that the excepted benefit HRA is a way to expand the availability and use of HRAs, thereby providing increased options for healthcare coverage to employers and employees. Therefore, the final rules recognize certain HRAs as limited excepted benefits, with some changes from the proposed rule, which are intended to address concerns raised by commenters regarding the potential for adverse selection and confusion. A few commenters questioned the Departments’ legal authority for establishing the excepted benefit HRA, with one requesting that the proposed excepted benefit HRA rules be withdrawn. These commenters stated that the excepted benefit HRA is not similar to the other limited excepted benefits because it does not provide insurance that is limited in scope for a particular medical condition. The Departments disagree. As stated earlier in this section of the preamble, Code section 9832(c)(2)(C), ERISA section 733(c)(2)(C), and PHS Act section 2791(c)(2)(C) authorize the Secretaries of the Treasury, Labor, and HHS to issue rules establishing other, similar limited benefits as excepted benefits. Similar to E:\FR\FM\20JNR2.SGM 20JNR2 28934 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 the exercise of authority with respect to certain health FSAs, limited wraparound coverage,194 and employee assistance programs, the Departments utilized this authority to propose rules to permit HRAs as limited excepted benefits, if certain conditions are satisfied. The Departments have determined that the conditions that apply to excepted benefit HRAs under the final rules result in such an arrangement being sufficiently limited and sufficiently similar to other limited excepted benefits. The Departments are now adopting these final rules on excepted benefit HRAs, subject to clarifications, described later in this section of the preamble. As a general matter, some commenters expressed confusion and asked for clarification regarding the difference, if any, between the proposed excepted benefit HRA and an HRA that only reimburses expenses for excepted benefits. In IRS Notice 2015–87, Q&A– 5, the Treasury Department and the IRS explained that an HRA or employer payment plan that, by its terms, reimburses (including paying directly for) premiums for individual health insurance coverage solely to the extent that the individual health insurance coverage covers excepted benefits would not fail to satisfy the market requirements because those requirements do not apply to a group health plan that is designed to provide only excepted benefits, either through reimbursement of premiums or cost sharing (referred to in this preamble as an HRA that provides only excepted benefits). Excepted benefit HRAs, on the other hand, can provide reimbursement for costs incurred related to coverage that is not limited to excepted benefits (for example, cost sharing for individual health insurance coverage). Several commenters asked the Departments to confirm that an HRA that provides only excepted benefits is not subject to the conditions that apply to an excepted benefit HRA. One commenter was concerned that if an HRA that provides only excepted benefits must satisfy the 194 The Departments note that limited wraparound coverage was permitted as an excepted benefit under a temporary pilot program. Specifically, limited wraparound coverage could be offered as excepted benefits if it was first offered no earlier than January 1, 2016, and no later than December 31, 2018, and would end no later than on the later of: (1) The date that is 3 years after the date limited wraparound coverage is first offered, or (2) the date on which the last collective bargaining agreement relating to the plan terminates after the date limited wraparound coverage is first offered (determined without regard to any extension agreed to after the date limited wraparound coverage is first offered). See 26 CFR 54.9831–1(c)(3)(vii)(F), 29 CFR 2590.732(c)(3)(vii)(F), and 45 CFR 146.145(b)(3)(vii)(F). VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 conditions that apply to an excepted benefit HRA, the proposed rules would inadvertently reduce employers’ ability to fund excepted benefits. The final rules establish a new excepted benefit HRA under Code section 9832(c)(2)(C), ERISA section 733(c)(2)(C), and PHS Act section 2791(c)(2)(C), which can be used to reimburse certain medical care expenses incurred with respect to coverage that is not limited to other types of excepted benefits. If a plan sponsor offers an HRA that only provides reimbursement for other types of excepted benefits (for example, limited-scope vision and limited-scope dental benefits), that arrangement is, itself, already an excepted benefit and need not satisfy the criteria of the final excepted benefit HRA rules. Instead, the final rules provide that an additional type of HRA, specifically, one that reimburses benefits not limited to other types of excepted benefits, can also qualify as an excepted benefit.195 Excepted benefit HRAs may reimburse medical care expenses, such as cost sharing for individual health insurance coverage or group health plan coverage that would not otherwise qualify as excepted benefits, if the conditions of the final rules are satisfied. 2. Otherwise Not an Integral Part of the Plan Among other things, to be a limited excepted benefit under Code section 9831(c)(1), ERISA section 732(c)(1), and PHS Act section 2722(c)(1), benefits must: (1) Be provided under a separate policy, certificate, or contract of insurance; or (2) otherwise not be an integral part of the plan.196 HRAs are self-insured group health plans and, therefore, are not insurance coverage that can be provided under a separate policy, certificate, or contract of insurance. Accordingly, to satisfy the statutory requirement to be a limited excepted benefit, among other things, an HRA must not be an integral part of the plan. To satisfy this condition, the proposed rules specified that other group health plan coverage (other than an account-based group health plan or coverage consisting solely of excepted benefits) must be made available by the same plan sponsor for the plan year to the participants offered the excepted benefit HRA. Only individuals eligible to participate in the traditional group 195 That is, the excepted benefit HRA may reimburse expenses for excepted benefits, as well as other types of medical expenses that do not qualify as excepted benefits. 196 Code section 9831(c)(1), ERISA section 732(c)(1), and PHS Act section 2722(c)(1). PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 health plan would be eligible to participate in the excepted benefit HRA. However, while the plan sponsor would be required to make an offer of a traditional group health plan, HRA participants (and their dependents) would not be required to enroll in the traditional group health plan for the HRA to be an excepted benefit HRA. In the preamble to the proposed rules, the Departments noted that this provision is similar to the requirement that applies under the limited excepted benefits rules for health FSAs at 26 CFR 54.9831–1(c)(3)(v), 29 CFR 2590.732(c)(3)(v), and 45 CFR 146.145(b)(3)(v). Commenters generally supported this requirement and suggested that it be retained in the final rules. Some commenters suggested that the Departments should go further and permit employers to offer an excepted benefit HRA only to individuals who are actually enrolled in a traditional group health plan.197 These commenters argued that without such a requirement, healthy employees would decline their employer’s traditional group health plan and only participate in the excepted benefit HRA. These commenters speculated this might lead to a less stable small group market risk pool and higher premiums for employees who remain in the traditional group health plan. One commenter was concerned that if some employers offer traditional group health plans that are exorbitantly expensive, many employees would decline to enroll and rely on their excepted benefit HRA as their only source of coverage. One commenter disagreed with the Departments’ assertion that the requirement to offer a traditional group health plan satisfies the requirement that limited excepted benefits not be an integral part of the plan. Another commenter stated that individuals could be without comprehensive coverage if they do not enroll in the employer’s traditional 197 One commenter opposed the requirement that traditional group health plan coverage be made available to the participants offered the excepted benefit HRA, but the comment was based on the misunderstanding that the proposed conditions that apply to the excepted benefit HRA apply to an HRA that provides only excepted benefits. The commenter was concerned that an employer that did not previously offer a traditional group health plan, but did previously offer an HRA that provides only excepted benefits, might discontinue offering that HRA if the final rules were to apply to the HRA that provides only excepted benefits. As explained earlier in this preamble, the final rules do not apply to HRAs that provide only excepted benefits. Therefore, if an employer offers an HRA that provides only excepted benefits, such an arrangement would not be subject to the requirements of the final rules, including the requirement that the plan sponsor must offer a traditional group health plan. E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 group health plan and rely instead on an excepted benefit HRA, or a combination of the excepted benefit HRA and other excepted benefits, without understanding the limited nature of excepted benefits. The commenter also represented that there is a long history of unscrupulous promoters cobbling together different types of excepted benefits and fraudulently marketing them as major medical insurance, leaving thousands of participants and beneficiaries with unpaid claims. One commenter urged the Departments to add a requirement that employers offering an excepted benefit HRA must maintain their traditional group health plan at an equivalent level of coverage, actuarial value, and premium affordability relative to the coverage offered prior to offering the excepted benefit HRA. The final rules do not adopt a requirement that excepted benefit HRAs be limited to employees who are enrolled in the employer’s traditional group health plan or impose a maintenance of effort requirement. First, the condition that employees must be offered (but not necessarily enrolled) in the employer’s traditional group health plan is similar to that for excepted benefits health FSAs, pursuant to the same statutory authority.198 Second, limiting eligibility to employees enrolled in their employer’s traditional group health plan would make employees covered under other primary coverage, such as a spouse’s plan, ineligible for the excepted benefit HRA. Applying such a restrictive requirement would unduly limit some employees’ access to excepted benefit HRAs and reduce their welfare if they choose a different primary health coverage option to best meet their needs.199 Third, other factors will likely prevent most employees from relying on an excepted benefit HRA as their primary form of coverage. For example, the dollar limit imposed on excepted benefit HRAs (discussed later in this preamble) will likely make it apparent that an excepted benefit HRA does not provide adequate financial protection against unexpected health costs, even for the healthiest individuals. Moreover, as discussed later in this preamble, in general, excepted benefit HRAs must provide 198 See 26 CFR 54.9831–1(c)(3)(v), 29 CFR 2590.732(c)(3)(v), and 45 CFR 146.145(b)(3)(v). See also 62 FR 67688 (Dec. 29, 1997). 199 In the context of other HRA integration rules, the Departments have recognized and supported employee choice to enroll in primary coverage other than the employer’s group health plan (such as a spouse’s plan or Medicare), without these types of limitations. See, e.g., 26 CFR 54.9815–2711(d)(2) and (d)(5), 29 CFR 2590.715–2711(d)(2) and (d)(5), and 45 CFR 147.126(d)(2) and (d)(5). VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 notice of the dollar limits and other limitations on coverage under the plan. Finally, as to the concern that employers will offer traditional group health plans that are very expensive, thereby encouraging employees to enroll only in the excepted benefit HRA, the employer shared responsibility provisions of Code section 4980H (for ALEs), and employers’ desire to offer affordable health coverage as a means to attract and retain talented workers, are strong incentives for employers to offer affordable, quality health coverage. 3. Limited in Amount Under the Code, ERISA and the PHS Act, limited excepted benefits may include limited scope vision or dental benefits, benefits for long-term care, nursing home care, home healthcare, or community-based care, or any combination thereof and may include ‘‘such other similar, limited benefits as are specified in regulations’’ by the Departments.200 Thus, in creating the excepted benefit HRA, the Departments had to determine what type of HRA would be sufficiently limited to qualify as a limited excepted benefit. The Departments have applied limiting principles consistently in prior rulemakings under which discretion was exercised to establish additional types of limited excepted benefits.201 For example, a health FSA is an excepted benefit only if the arrangement is structured so that the maximum benefit payable to any participant in the class for a year does not exceed two times the participant’s salary reduction election under the arrangement for the year (or, if greater, $500 plus the amount of the participant’s salary reduction election).202 Additionally, limited wraparound coverage is a limited excepted benefit only if it is limited in amount, such that the cost of coverage per employee (and any covered dependents) under the limited wraparound coverage does not exceed the greater of the maximum permitted annual salary reduction contribution toward a health FSA or 15 percent of the cost of coverage under the primary plan. The Departments recognize that limited excepted benefits that are not limited in scope by benefit type (such as limited-scope dental or limited-scope vision benefits) must be limited in amount to constitute the type of ancillary benefit contemplated by the 200 Code section 9832(c)(2)(C), ERISA section 733(c)(2)(C), and PHS Act section 2791(c)(2)(C). 201 See the discussion in the preamble to the proposed rules at 83 FR 54420, 54437 (Oct. 29, 2018). 202 26 CFR 54.9831–1(c)(3)(v), 29 CFR 2590.732(c)(3)(v), and 45 CFR 146.145(b)(3)(v). PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 28935 statutes within the meaning of a ‘‘similar, limited benefit’’ under Code section 9832(c)(2), ERISA section 733(c)(2), and PHS Act section 2791(c)(2).203 Accordingly, the Departments proposed that amounts newly made available for a plan year in an excepted benefit HRA may not exceed $1,800, indexed for inflation for plan years beginning after December 31, 2020. For this purpose, inflation was defined in the proposed rules by reference to the Chained Consumer Price Index for All Urban Consumers, unadjusted (C–CPI– U), published by DOL. Also, the Departments stated that the adjusted limit for plan years beginning in a particular calendar year would be published early in the fall of the prior calendar year. a. Dollar Limit on the Amount That May Be Made Newly Available During a Plan Year Many commenters supported the proposed dollar limit as a reasonable mid-point of the different limits that would result in applying various methodologies. Several noted it was sufficient because excepted benefits are meant to provide ancillary coverage, and the proposed amount is comparable to the cost of other excepted benefits, such as stand-alone dental and vision plans. One commenter noted that $1,800 would be a generous level of reimbursement for excepted benefits, but only a modest support to participants and beneficiaries seeking reimbursement for COBRA premiums. Another commenter asserted that it was a reasonable middle ground relative to the various alternatives that the Departments considered and discussed in the preamble to the proposed rules.204 A few commenters supported the proposed dollar limit due to their opposition to allowing excepted benefit HRAs to provide reimbursement for STLDI premiums, arguing that if the limit were any higher some participants could be more likely to rely on STLDI 203 See also 80 FR 13995, 13997 (March 18, 2015). Departments stated in the preamble to the proposed rules that a range of options were considered, such as a limit that would mirror the cap on employer contributions for excepted benefit health FSAs, a fixed percentage of the cost of coverage under the plan sponsor’s primary group health plan, and the cost of coverage under the second lowest cost silver plan in various markets. However, consistent with the principle of promoting HRA usability and availability, rather than proposing a complex test for the limit on amounts newly made available in the excepted benefit HRA, the Departments proposed a maximum of $1,800 because it approximated the midpoint amount yielded by the various methodologies considered. 83 FR 54420, 54437 (Oct. 29, 2018). 204 The E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28936 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations as their primary form of coverage. In expressing their support for the proposed dollar limit, a number of commenters stated that the limit should not be any higher, due to adverse selection concerns and concerns about disincentivizing comprehensive coverage. Other commenters requested that excepted benefit HRAs not be subject to any dollar limit because a limit would restrict participants’ ability to choose the types of treatment or coverage that is best suited to their needs. Some commenters argued that the proposed dollar limit should be higher. Some of these commenters favored a higher limit for excepted benefit HRAs based on age and number of dependents to reflect that participants who are older or have dependents are likely to have higher healthcare costs. Some commenters suggested specific higher limits that, in their view, would be appropriate, such as the maximum annual permitted benefit for QSEHRAs, the maximum out-of-pocket limit for HDHPs, the annual salary reduction contribution limit for health FSAs, the greater of 15 percent of the cost of coverage under the employer’s primary group health plan or the health FSA salary reduction contribution limit (which is the threshold for limited wraparound coverage), 205 or 15 percent of the cost of coverage under the employer’s primary group health plan (which is the threshold for certain supplemental excepted benefits). 206 The commenters asserted that the limit should be increased for various reasons, including to enable employees to pay for premiums and cost sharing for excepted benefit policies, to approximate the limits allowed for limited wraparound coverage, to reduce administrative complexity for plan sponsors by aligning the limit with a limit that already exists, to help employees bypass insurance and pay directly for medical care, and to enable employees to pay for more expensive STLDI plans that may, in some cases, provide comprehensive, high-quality coverage. Some commenters noted that setting the limit as a percentage of the cost of the employer’s primary group health plan could partially account for regional differences for healthcare services. One commenter stated that a dollar limit is not sufficient to cause the excepted benefit HRA to be a limited excepted benefit and also stated that the proposed dollar limit was too high, with the result that the excepted benefit HRA is not a limited excepted benefit because the dollar limit is significantly more than the premium value of the other limited excepted benefits; therefore, according to the commenter, the excepted benefit HRA is not similar to other limited excepted benefits. The final rules do not remove or change the dollar limit for the excepted benefit HRA. The Departments agree that significantly increasing the dollar limit could encourage certain participants to rely solely on benefits reimbursed through the excepted benefit HRA and could lead to adverse selection. Also, as stated earlier in this preamble, if a benefit that is generally not otherwise limited in scope is too large, it would not constitute a ‘‘similar, limited benefit’’ under Code section 9832(c)(2), ERISA section 733(c)(2), and PHS Act section 2791(c)(2). These governing statutes require that these benefits be limited, which the Departments interpret to require a strict dollar limit because the excepted benefit HRA is not restricted to reimbursing specific, limited types of medical expenses.207 Further, the Departments are cognizant that an excepted benefit HRA, like all excepted benefits, does not render an individual ineligible for the PTC and, therefore, a higher dollar limit on the excepted benefit HRA could result in individuals being eligible for both subsidized coverage through the Exchanges and a higher employer provided HRA benefit, which would increase the cost to the federal government. To the extent commenters advocated for a higher dollar limit in order to allow HRAs to be used to purchase excepted benefits, HRAs that provide only excepted benefits may be an alternative option because those HRAs are not subject to the excepted benefit HRA rules, including the dollar limit. In determining the appropriate dollar limit for excepted benefit HRAs, the Departments considered other, similar limited excepted benefits. The Departments agree with commenters’ assertions that the proposed limit was 205 See 26 CFR 54.9831–1(c)(3)(vii)(B), 29 CFR 2590.732(c)(3)(vii)(B), and 45 CFR 146.145(b)(3)(vii)(B). 206 See EBSA Field Assistance Bulletin No. 2007– 04 (available at https://www.dol.gov/agencies/ebsa/ employers-and-advisers/guidance/field-assistancebulletins/2007–04); CMS Insurance Standards Bulletin 08–01 (available at https://www.cms.gov/ CCIIO/Resources/Files/Downloads/hipaa_08_01_ 508.pdf); and IRS Notice 2008–23. 207 The Departments note, however, that an excepted benefit HRA is also limited, to some extent, in scope of reimbursable expenses in that it may not reimburse premiums for individual health insurance coverage (other than excepted benefits); group health coverage (other than COBRA or other continuation coverage or excepted benefits); Medicare Part A, B, C, or D; and under certain circumstances, it cannot reimburse STLDI premiums. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 reasonable and rational, especially considering the relatively low cost of excepted benefits coverage, such as dental or vision coverage. While limited wraparound coverage and similar supplemental coverage may have higher overall dollar limits, they are also limited in additional ways. Limited wraparound coverage must provide meaningful benefits beyond coverage of cost sharing (such as coverage for expanded in-network medical clinics or providers, or provide benefits that are not EHBs and that are not covered by the eligible health insurance) and, in general, may only be offered to part-time employees and retirees (and their dependents), and only if the employer makes certain offers of coverage to fulltime employees.208 Further, similar supplemental coverage is restricted to coverage ‘‘specifically designed to fill gaps in the primary coverage.’’ 209 On the other hand, employee salary reduction contributions to health FSAs, which will vary by employee and cannot exceed $2,700 (adjusted for inflation), cannot be used to pay premiums, and generally may not be rolled over from year to year, except for a limited runout period or limited amount.210 Excepted benefit HRAs are not subject to all the limitations that apply to these other limited excepted benefits; thus, a lower dollar amount is appropriate for excepted benefit HRAs. Additionally, although the Departments recognize that healthcare expenses may be higher for participants who are older or have dependents, adopting a higher limit to account for a combination of factors like age and family size could allow an excepted benefit HRA to be too large and to resemble major medical coverage. Moreover, these factors were already considered and accounted for in developing the $1,800 limit. Accordingly, the final rules adopt, without change, the proposed maximum that can be newly made available for a plan year of $1,800. b. Indexing for Inflation Many commenters supported the proposed rule’s approach to indexing for inflation the amount that may be made newly available to participants during a plan year, though some suggested alternative methods of indexing may be more appropriate. 208 See 26 CFR 54.9831–1(c)(3)(vii)(A) and (D), 29 CFR 2590.732(c)(3)(vii)(A) and (D), and 45 CFR 146.145(b)(3)(vii)(A) and (D). See also 80 FR 13995, 13997 (March 18, 2015). 209 See 26 CFR 54.9831–1(c)(5)(i)(C), 29 CFR 2590.732(c)(5)(i)(C), and 45 CFR 146.145(b)(5)(i)(C). 210 IRS Notice 2005–42, 2005–1 CB 1204 and IRS Notice 2013–71, 2013–47 IRB 532. E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations Several commenters suggested that the chained CPI–U does not accurately reflect the increases in the cost of medical care over time because healthcare prices consistently increase at a greater rate than prices in the economy as a whole. Several commenters suggested that the appropriate measure of inflation would be the Consumer Price Index overall medical care component because it focuses on consumers’ out-of-pocket medical expenses, while another suggested unchained CPI–U. Another commenter, however, suggested that the measure selected in the proposed rules would be the most appropriate measure, as other types of excepted benefits, such as limited-scope dental, limited-scope vision, and fixed indemnity plans, do not typically have cost trends (that is, inflation) similar to products that provide comprehensive medical care. One commenter expressed support for the proposed adjustment because it is consistent with the adjustment of various other amounts under the Code. The final excepted benefit HRA rules index the annual dollar limit of $1,800 to inflation for plan years beginning after December 31, 2020, and define inflation by reference to the C–CPI–U, as was proposed. This index strikes a reasonable balance among a number of factors, including balancing the decreasing real value of a static excepted benefit HRA annual maximum contribution amount and the ability of an employer to maintain a meaningful, yet limited, excepted benefit HRA that can carry over unused amounts and accumulate to higher account balances over time. Also, C–CPI–U is used to index most other amounts under the Code with which employers are familiar, such as the annual limit on employee salary reduction contributions to health FSAs, annual HSA contributions amounts, and annual HDHP minimum deductible amounts and maximum HDHP out-of-pocket amounts.211 Therefore, this inflation adjustment should be familiar to plan sponsors. Using the same indexing method is less likely to result in confusion and will make implementation and compliance easier. One commenter urged that the annual amount should be announced at the same time that other account-based plan limits, such as the limits for HSAs and HSA-eligible HDHPs, are announced, as employers and plan administrators need to know these amounts in advance to set their benefit levels and communicate them to employees. The Departments agree that it is essential that the annual 211 See Code sections 125(i) and 223(g). VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 adjustment be made available sufficiently in advance of the upcoming plan year to allow plan sponsors to make benefit determinations. Therefore, the Departments are revising the final rules to provide that the C–CPI–U for any calendar year is the average of the C–CPI–U as of the close of the 12 month period ending on March 31 of that calendar year and that the Treasury Department and the IRS will publish the adjusted amount for plan years beginning in any calendar year no later than June 1 of the preceding calendar year, which is the same timing rule that applies for HSAs and HSA-eligible HDHPs. c. Roll-Overs and Aggregation Rules The proposed rules provided that if a participant or beneficiary in an excepted benefit HRA does not use all of the amounts made available for a plan year, and the excepted benefit HRA allows for these amounts to be carried over to later plan years, then these carryover amounts would be disregarded for purposes of determining whether the $1,800 limit is exceeded.212 One commenter specifically expressed support for this aspect of the proposed rules, and this feature is retained in the final rules. In addition, the proposed rules provided that if the plan sponsor provides more than one HRA to a participant for the same time period, the amounts made available under all such plans would be aggregated to determine whether the $1,800 limit has been exceeded. One commenter opposed this aspect of the rule. However, the Departments retain this provision in the final rules in order to avoid circumvention of the $1,800 limit, which provides the statutory basis for recognizing this type of HRA as a limited excepted benefit. However, the final rules clarify that the aggregation rules do not take into account amounts made available under HRAs that reimburse only excepted benefits (including premiums for individual health insurance coverage that consists solely of excepted benefits). An HRA that reimburses only excepted benefits is exempt from the provisions of the final rules, including those provisions that apply to individual coverage HRAs and excepted benefit HRAs. 212 Transfers, however, from other HRAs are not permitted. See the discussion earlier in this preamble. PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 28937 4. Prohibition on Reimbursement of Premiums for Certain Types of Coverage a. In General To be an excepted benefit HRA, the proposed rules provided that the HRA could not reimburse premiums for Medicare Part B or D, individual health insurance coverage, or coverage under a group health plan (other than COBRA or other group continuation coverage), except that the HRA could reimburse premiums for individual health insurance coverage or group health plan coverage that consists solely of excepted benefits. An excepted benefit HRA would be permitted to reimburse any other medical care expenses, including STLDI premiums. Commenters generally supported the proposed requirement that an excepted benefit HRA would not be permitted to reimburse premiums for individual health insurance coverage (other than for such coverage consisting solely of excepted benefits). These commenters contended that to allow reimbursement of individual health insurance coverage premiums would undermine the basis for recognizing the HRAs as limited excepted benefits, and would enhance employers’ ability to move their higherrisk employees into the individual market. The Departments agree that maintaining the prohibition on the use of the excepted benefit HRA for individual health insurance coverage premiums is one way in which the HRA is limited, in order to qualify as a limited excepted benefit, and that the prohibition mitigates the risk that excepted benefit HRAs could cause adverse selection in the individual market. In addition, the Departments have concluded that the prohibition on the reimbursement of premiums for group health plan coverage (other than COBRA or other continuation coverage and excepted benefits) and individual health insurance coverage (other than excepted benefits), is appropriate because other final rules that are part of this rulemaking permit individual coverage HRAs and other rules allow HRAs to be integrated with non-HRA group health plan. Further, current guidance allows HRAs to reimburse premiums for Medicare Part B and D in certain circumstances and under the final rules, individual coverage HRAs that are integrated with Medicare may be allowed to reimburse premiums for Medicare Part A, B, C, or D. Therefore, an employer that wants to provide an HRA that reimburses premiums for individual health insurance coverage, Medicare Part A, B, C or D, or group health plan coverage, may do so under E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28938 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations the applicable integration rules. Accordingly, the final rules retain the proposed prohibition on reimbursing premiums for individual health insurance coverage (other than for such coverage consisting solely of excepted benefits) and group health insurance coverage (other than for such coverage consisting solely of excepted benefits and COBRA or other continuation coverage). Moreover, because the excepted benefit HRA generally is not intended to reimburse premiums that may be reimbursed under the individual coverage HRA, the final rules also provide that the excepted benefit HRA may not reimburse premiums for Medicare Part A or C, in addition to Medicare Part B and D, as provided for in the proposed rules. This approach ensures that, similar to other limited excepted benefits, excepted benefit HRAs provide limited benefits different from those typically provided by a traditional group health plan. Some commenters requested clarification regarding the medical care expenses an excepted benefit HRA may reimburse. In particular, a few commenters requested that the Departments clarify that an excepted benefit HRA can reimburse individuals for cost sharing under individual health insurance coverage or group health plans, although excepted benefit HRAs may not be used to reimburse premiums for that coverage. Some commenters inquired whether an employer could place limits on the medical care expenses it allows to be reimbursed by the excepted benefit HRA, in addition to those limits imposed by the excepted benefit HRA rules. In particular, a few commenters asked whether an employer could choose not to provide any reimbursement of certain premiums or medical care expenses otherwise allowed under Code section 213(d). In general, an HRA may provide for reimbursement for medical care expenses. Consistent with the current rules that apply to HRAs generally, a plan sponsor has discretion to specify which medical care expenses are eligible for reimbursement from an excepted benefit HRA it establishes, in addition to the limits under the excepted benefit HRA rules. For example, a plan sponsor may permit an excepted benefit HRA to reimburse all medical care expenses not otherwise disallowed by the excepted benefit HRA rules, it may permit reimbursements for non-premium medical care expenses only (such as cost sharing), or it may otherwise decide which particular medical care expenses will be reimbursable and which will not be reimbursable. An excepted benefit HRA VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 may allow for reimbursement of cost sharing under individual health insurance coverage or group health insurance coverage, although the excepted benefit HRA may not reimburse the premiums for that coverage. Further, a plan sponsor generally may, but need not, allow reimbursement of STLDI premiums or cost sharing under the excepted benefit HRA. Also, see later in this section of the preamble for a discussion of the special circumstance in which excepted benefit HRAs may not be used to reimburse STLDI premiums. Several commenters inquired whether an excepted benefit HRA could reimburse expenses related to participation in a health care sharing ministry or a direct primary care arrangement. One commenter asked whether reimbursement could be provided for categories of excepted benefits other than ‘‘limited excepted benefits,’’ such as those in which benefits for medical care are secondary or incidental (for example, travel insurance). This commenter expressed concern that there could be potential conflicts under rules regarding taxable fringe benefits under the Code. Some commenters requested clarification more generally regarding whether an excepted benefit HRA may only reimburse excepted benefits that pay health benefits or all excepted benefits, with some advocating that excepted benefit HRAs be allowed to reimburse all expenses for all excepted benefits and some advocating that the excepted benefit HRA only be allowed to reimburse expenses for excepted benefits that are medical care. The Departments clarify that an HRA, including an excepted benefit HRA, generally may reimburse medical care expenses of an employee and certain of the employee’s family members (subject to the prohibition on the reimbursement of certain premiums that apply for excepted benefit HRAs).213 Neither the proposed nor the final rules make any changes to the rules under Code section 213. Thus, any issues arising under Code section 213, and any guidance requested by commenters to address those issues, are beyond the scope of this rulemaking. The Treasury Department and the IRS, however, 213 See Notice 2002–45 which states ‘‘[a]n HRA does not qualify for the exclusion under [Code section] 105(b) if any person has the right to receive cash or any other taxable or non-taxable benefit under the arrangement other than the reimbursement of medical care expenses. If any person has such a right under an arrangement currently or for any future year, all distributions to all persons made from the arrangement in the current tax year are included in gross income, even amounts paid to reimburse medical care expenses.’’ PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 appreciate the comments and anticipate addressing some of these issues in future rulemaking or guidance. One commenter stated that excepted benefit HRAs should not be permitted to reimburse COBRA premiums because COBRA generally is more expensive than other coverage options and the Departments should not incentivize individuals to elect COBRA when more affordable coverage options may be available. Another commenter opposed allowing reimbursement for COBRA premiums because COBRA generally provides comprehensive coverage and, to the extent an HRA can be used to reimburse such coverage, it should not be considered to be providing limited benefits within the meaning of the statutes. The Departments decline to prohibit reimbursement for COBRA premiums under excepted benefit HRAs in the final rules. Excepted benefit HRA participants or beneficiaries may choose to elect COBRA or other group continuation coverage, even if other more affordable coverage options are available. For example, they may want to ensure they are still able to see their preferred doctors or maintain coverage for certain prescription drugs. Furthermore, nothing in the final rules requires an employer to make an excepted benefit HRA available for the reimbursement of COBRA (or other group continuation coverage) premiums. The Departments also do not agree that an HRA that provides reimbursement for COBRA (or other group continuation coverage) premiums would not be providing limited benefits, consistent with Code section 9832(c)(2)(C), ERISA section 733(c)(2)(C), and PHS Act section 2791(c)(2)(C). As explained earlier in this preamble, the restriction on annual contributions to the excepted benefit HRA ensures this HRA is limited. b. Reimbursement of STLDI Premiums Many commenters requested that excepted benefit HRAs not be permitted to provide reimbursement of STLDI premiums. These commenters expressed concern that some participants may use excepted benefit HRA funds to purchase STLDI policies without understanding that STLDI might not provide comprehensive coverage and is not subject to the same federal consumer protections that apply to PPACAcompliant coverage. Some commenters expressed concerns that individuals with STLDI could be exposed to serious financial risk and others expressed concerns about specific benefits or conditions not generally covered by STLDI. One commenter represented that E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations in some states, individuals with an excepted benefit HRA and STLDI coverage would not satisfy state law requirements to maintain comprehensive coverage and would, therefore, incur state income tax penalties. A few commenters stated that they believed that permitting reimbursement for STLDI premiums would mean that the excepted benefit HRA would not be providing a limited benefit because STLDI policies typically cover at least some of the same benefits as individual health insurance coverage and because Congress exempted STLDI from the market requirements by distinguishing it from individual health insurance coverage rather than making it an excepted benefit. Other commenters were concerned that this rule would incentivize small employers to offer an excepted benefit HRA to purchase STLDI, instead of a QSEHRA to purchase individual health insurance coverage. Several commenters also claimed that permitting excepted benefit HRAs to reimburse STLDI premiums would lead to market segmentation, potentially negatively affecting the small group market. These commenters argued that healthier, lower-cost individuals who do not have preexisting conditions and who believe they do not need comprehensive benefits would enroll in STLDI, rather than in more comprehensive group or individual coverage. In the opinion of these commenters, this scenario is more likely to occur in the fully-insured small group market, where premiums do not vary based on an individual employer’s claims experience.214 In contrast, large employers whose plans are experiencerated, or employers that offer selfinsured plans, likely would not offer an excepted benefit HRA that could be used to reimburse STLDI premiums because, according to these commenters, healthy employees foregoing coverage under the employer’s traditional group health plan could result in direct negative financial consequences on the cost of maintaining that plan; thus, the employer would have strong incentives not to offer an excepted benefit HRA that could be used to purchase STLDI. One commenter noted that the benefit of allowing HRAs to be used for STLDI is outweighed by the risks to the individual and small group markets. Other commenters supported making STLDI more available generally to 214 See PHS Act section 2701 and PPACA section 1312(c). See also 45 CFR 147.102 and 45 CFR 156.80. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 consumers, citing choice and flexibility, as well as affordability. The final rules generally do not prohibit reimbursement of STLDI premiums by excepted benefit HRAs. Employees at small firms are increasingly turning down an offer of health coverage.215 Low-wage workers at small firms are especially likely to turn down such coverage when offered, particularly as a given premium is a larger share of income for a low-wage employee.216 Thus, low-wage workers at smaller firms who are turning down the employer offer of coverage are potentially likely to benefit from permitting the excepted benefit HRA to reimburse STLDI premiums. To the extent that people who would use the excepted benefit HRA to purchase STLDI would otherwise have been uninsured and, therefore, would not have been part of the small group single risk pool, the small group market is unaffected by the introduction of an excepted benefit HRA that may be used to purchase STLDI. Moreover, the impact of any adverse selection is likely to be small because the small group market is much larger than the STLDI market. Thus, any potential expansion of the number of healthier-than-average STLDI enrollees will have a smaller proportional impact on expected claims in the small group market. While the final rules do not prohibit reimbursement of STLDI premiums by excepted benefit HRAs, the final rules include a special rule in response to commenters’ concerns about the potential for adverse selection in the small group markets, as discussed later in this preamble.217 Further, because individuals offered an excepted benefit HRA must be offered a traditional group health plan, individuals with an excepted benefit HRA who are considering STLDI will likely be deciding between STLDI and the traditional group health plan, rather than individual health insurance coverage, premiums for which may not 215 In 1999, 17 percent of workers eligible for employer coverage at small firms (those with 3 to 199 workers) turned down the offer of employer coverage. By 2011, this share had climbed to 22 percent, and in 2018 it was 27 percent. See Kaiser Family Foundation, ‘‘Employer Health Benefits 2018 Annual Survey,’’ Figure 3.1, available at https://files.kff.org/attachment/Report-EmployerHealth-Benefits-Annual-Survey-2018. 216 Id. 217 To the extent an excepted benefit HRA reimburses premiums for STLDI, the insurance, which is not individual health insurance coverage, will not be eligible for the safe harbor under 29 CFR 2510.3–1(l). Accordingly, to the extent offered in connection with a group health plan, the benefits could be subject to those provisions of ERISA that apply to excepted benefits (for example, ERISA parts 1, 4, and 5). PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 28939 be reimbursed by an excepted benefit HRA. Therefore, adverse selection in the individual market is mitigated. STLDI may not be suitable coverage for all individuals in all circumstances and in many instances it might not provide coverage that is as comprehensive as individual health insurance coverage. However, STLDI can be a viable health insurance option for many people in many circumstances. Also, no individual is required to enroll in STLDI; rather, it is simply an additional (and in some circumstances, more affordable), option that may be available to them. With respect to concerns that some excepted benefit HRA participants may not understand the limited nature of STLDI, a notice is required to be prominently displayed in STLDI contracts and enrollment application materials advising consumers of the differences between STLDI and other health insurance coverage. Among other things, the notice must state that the coverage: (1) Is not required to comply with certain federal market requirements for health insurance; (2) may exclude or limit coverage for preexisting conditions; (3) may not include coverage for hospitalization, emergency services, maternity care, preventive care, prescription drugs, and mental health and substance use disorder services; and (4) may have lifetime or annual dollar limits on health benefits.218 The Departments disagree with commenters’ assertions that permitting excepted benefit HRAs to reimburse STLDI would not be providing limited excepted benefits because STLDI is not an excepted benefit and often covers some of the same benefits as individual health insurance coverage. Nothing in these final rules would designate STLDI as a limited excepted benefit. Rather, it is the HRAs that must satisfy certain conditions to be recognized as limited excepted benefits, and the HRAs must be limited as to amount and are substantially limited as to the types of premiums they may reimburse. Further, STLDI coverage often provides much more limited benefits than coverage that is subject to the market requirements. Taking all of this into account, the Departments have determined that excepted benefit HRAs are sufficiently limited to constitute a limited excepted benefit, notwithstanding that employers may generally elect to permit HRA reimbursement of STLDI premiums. One commenter noted that the excepted benefit HRA rules do not preempt state regulation of STLDI and 218 See 26 CFR 54.9801–2, 29 CFR 2590.701–2, and 45 CFR 144.103. E:\FR\FM\20JNR2.SGM 20JNR2 28940 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 so do not inhibit a state from prohibiting the sale of STLDI. The Departments agree with the commenter that nothing in the final rules affects state regulation of STLDI. 5. Uniform Availability To prevent an excepted benefit HRA from intentionally or unintentionally, directly or indirectly, steering participants or dependents with adverse health factors away from the sponsor’s traditional group health plan, the proposed rules provided that an excepted benefit HRA must be made available under the same terms to all similarly situated individuals, regardless of any health factor.219 The Departments proposed and are finalizing this condition to prevent discrimination based on health status and to preclude opportunities for an employer to offer a more generous excepted benefit HRA to individuals with an adverse health factor, such as an illness or a disability, as an incentive not to enroll in the plan sponsor’s traditional group health plan.220 Consistent with the approach outlined in the proposed rules, under the final rules, an excepted benefit HRA may not, for example, be offered only to employees who have cancer or fail a physical examination, just as the excepted benefit HRA may not be offered only to employees who are cancer-free or who pass a physical examination. Similarly, an employer may not make greater amounts available in an excepted benefit HRA for employees who have cancer or who fail a physical examination, just as an employer may not make greater amounts available in an excepted benefit HRA for employees who are cancer-free or who pass a physical examination. Commenters generally supported this requirement and asserted that it is necessary to prevent discrimination based on health status. Two commenters sought confirmation that an excepted benefit HRA would not violate the uniform availability requirement if it were made available to only certain individuals, such as pre-Medicare eligible retirees who decline coverage under the former employer’s traditional group health plan and purchase coverage through the individual market, so long as those eligibility conditions are not based on a health factor. In the Departments’ view, a plan design that permits enrollment in an excepted benefit HRA only if coverage is declined 219 See Code section 9802(a)(1), ERISA section 702(a)(1) and PHS Act 2705(a)(1). See also 26 CFR 54.9802–1(a)(1) and (d), 29 CFR 2590.702(a)(1) and (d), and 45 CFR 146.121(a)(1) and (d). 220 See 83 FR 54420, 54438 (Oct. 29, 2018). VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 under the traditional group health plan is inconsistent with the uniform availability requirement and with the basic premise that an excepted benefit HRA must be ancillary to the employer’s traditional group health plan. HHS further notes that structuring the offering or design of a group health plan based on pre-Medicare status would generally run afoul of the Medicare nondiscrimination provisions described earlier in this preamble.221 Therefore, an employer may not condition enrollment in an excepted benefit HRA on declining to enroll in the traditional group health plan. As noted earlier in this preamble, Code section 9831(a) and ERISA section 732(a) generally provide that chapter 100 of the Code and part 7 of ERISA, respectively, do not apply to plans, including HRAs, with fewer than two participants who are current employees on the first day of the plan year (including retiree-only plans that cover fewer than two participants who are current employees).222 Therefore, a retiree-only HRA is not subject to the market requirements and would not need to qualify as an excepted benefit in order to avoid the application of PHS Act sections 2711 and 2713. However, a retiree-only HRA that does not qualify as an excepted benefit would qualify as MEC,223 and, therefore, a retiree who accepted such an HRA could not claim the PTC.224 One commenter suggested that the Departments should issue additional guidance and resources about the definition of similarly situated individuals to ensure that this requirement is properly implemented. In response to these comments, the final rules define similarly situated individuals by reference to the definition found in the HIPAA nondiscrimination rules, as was proposed.225 Those rules generally provide that group health plans may, 221 SSA sections 1862(b)(1)(A)(i)(I), (b)(1)(B)(i), and (b)(1)(C)(i). 222 While title XXVII of the PHS Act, as amended by PPACA, no longer contains a parallel provision at PHS Act section 2721(a), HHS has explained that it will not enforce the requirements of title XXVII of the PHS Act with respect to nonfederal governmental retiree-only plans and generally encourages states to adopt a similar approach with respect to retiree-only plans offered by issuers. See 75 FR 34538, 34540 (June 17, 2010). 223 26 CFR 1.5000A–2(c). 224 26 CFR 1.36B–2(c)(3). Note that a former employee is only rendered ineligible for the PTC if the former employee enrolls in employer-sponsored coverage; an offer of coverage (even if it is affordable and provides MV) does not preclude a former employee from claiming the PTC. See 26 CFR 1.36B–2(c)(3)(iv). 225 See 26 CFR 54.9802–1(d), 29 CFR 2590.702(d), and 45 CFR 146.121(d). PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 subject to an anti-abuse provision for discrimination directed at individuals, treat groups of participants as distinct groups if the distinction is based on a bona fide employment-based classification consistent with the employer’s usual business practice. Whether an employment-based classification is bona fide is determined based on all the relevant facts and circumstances, including whether the employer uses the classification for purposes independent of qualification for health coverage (such as, determining eligibility for other employee benefits or determining other terms of employment). Examples in the HIPAA nondiscrimination rules of classifications that may be bona fide, based on all the relevant facts and circumstances, include full-time versus part-time status, different geographic location, membership in a collective bargaining unit, date of hire, current employee versus former employee status, and different occupations. Under the anti-abuse provision, however, a distinction between groups of individuals is not permitted if the creation or modification of an employment or coverage classification is directed at individual participants or beneficiaries based on any health factor of the participants or beneficiaries. In addition, a plan may, subject to certain anti-abuse provisions for discrimination directed at individuals, treat beneficiaries as distinct groups based on the bona fide employment-based classification of the participant through whom the beneficiary is receiving coverage; the relationship to the participant; marital status; with respect to children of a participant, age or student status; and other factors if the factor is not a health factor. Finally, the HIPAA nondiscrimination rules generally allow group health plans to treat participants and beneficiaries as distinct groups. Additional guidance on similarly situated individuals is available on DOL’s website.226 The final rules define similarly situated individuals by reference to the definition in the HIPAA 226 See Compliance Assistance Guide—Health Benefits Coverage Under Federal Law, available at https://www.dol.gov/sites/default/files/ebsa/aboutebsa/our-activities/resource-center/publications/ compliance-assistance-guide.pdf; Self-Compliance Tool for Part 7 of ERISA: Health Care-Related Provisions, available at https://www.dol.gov/sites/ default/files/ebsa/about-ebsa/our-activities/ resource-center/publications/complianceassistance-guide-appendix-a.pdf; and FAQs on HIPAA Portability and Nondiscrimination Requirements for Employers and Advisers, available at https://www.dol.gov/sites/default/files/ ebsa/about-ebsa/our-activities/resource-center/faqs/ hipaa-compliance.pdf. E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations nondiscrimination rules, which are also designed to prevent discrimination in group health plans based on health status. These standards are already familiar to stakeholders and therefore use of the existing definition will reduce complexity and the potential burden of having to use a different definition. jbell on DSK3GLQ082PROD with RULES2 6. Coordination With HSAs Commenters asked for clarification regarding the circumstances in which participation in an excepted benefit HRA might preclude an individual from being eligible for an HSA. These commenters expressed concern that, because HSA eligibility is restricted if an individual has certain other types of health coverage, a loss of HSA eligibility could occur for some individuals enrolled in excepted benefit HRAs. As explained earlier in this preamble, among the requirements for an individual to qualify as an eligible individual under Code section 223(c)(1) for purposes of HSA eligibility is that the individual must be covered under an HDHP and have no disqualifying health coverage. If an individual fails to satisfy the requirements to be an eligible individual, then contributions to an HSA are disallowed. The Treasury Department and the IRS have provided some guidance on the interaction between HRAs and the requirements of Code section 223 in Revenue Ruling 2004–45 and IRS Notice 2008–59. More specifically, as explained earlier in this preamble, in Revenue Ruling 2004–45, the Treasury Department and the IRS clarified that an otherwise eligible individual (that is, an individual with coverage under an HDHP and no disqualifying coverage) remains an eligible individual for purposes of making contributions to an HSA for periods during which the individual is covered by a limited-purpose HRA, a post-deductible HRA, or combinations of these arrangements. Subsequently, Q&A–1 of IRS Notice 2008–59 stated that a limited-purpose HRA that is also available to pay premiums for health coverage does not disqualify an eligible individual from contributing to an HSA, provided the individual does not use the HRA to, or otherwise, obtain coverage that is not HSA-compatible. This prior guidance applies to all HRAs, including excepted benefit HRAs.227 Therefore, for example, an 227 To be an eligible individual under Code section 223(c)(1), an individual may not be covered by a health plan that is not an HDHP, except for certain coverage which is disregarded, as enumerated in Code section 223(c)(1)(B). Code section 223(c)(1)(B) does not disregard all excepted benefits, and an excepted benefit HRA is not disregarded coverage. Therefore, an excepted VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 individual covered by an excepted benefit HRA that is available to pay premiums for STLDI is an eligible individual for purposes of making contributions to an HSA, assuming the HRA is used to purchase STLDI that qualifies as an HDHP (and so, for example, the STLDI does not pay benefits prior to satisfying the minimum required deductible),228 and the individual has no disqualifying coverage. 7. Notice Requirements Several commenters suggested that the Departments impose certain notice requirements for excepted benefit HRAs in the final rules. Commenters stated that the required notice should be similar to the notice required for individual coverage HRAs, or should, at a minimum, inform participants and beneficiaries of the annual dollar limit for benefits under the excepted benefit HRA, other terms and conditions of the excepted benefit HRA, and participants’ and beneficiaries’ rights under the excepted benefit HRA. However, the Departments note that for private-sector, employment-based plans, other long-standing notice requirements under Part 1 of ERISA already apply. ERISA-covered plans, including excepted benefit HRAs, must provide an SPD, summaries of material modifications, and summaries of material reductions in covered services or benefits.229 Under ERISA sections 102 and 104 and their implementing regulations, an excepted benefit HRA’s SPD must include, for example, the conditions pertaining to eligibility to receive benefits; a description or summary of the benefits; the circumstances that may result in disqualification, ineligibility, or denial, loss, forfeiture, suspension, offset, reduction, or recovery (for example, by exercise of subrogation or reimbursement rights) of any benefits; and the procedures governing claims for benefits under the excepted benefit HRA. Excepted benefit HRAs that are ERISA-covered plans are subject to additional disclosure requirements to provide instruments under which the excepted benefit HRA is established or operated and information relevant to a benefit HRA must be HSA-compatible under the relevant Code section 223 guidance in order to allow an otherwise eligible individual to remain an eligible individual under Code section 223. 228 See Code section 223(c)(2). See also Notice 2008–59, Q&A–14, which provides that to be an HDHP a plan must provide significant benefits, and if a plan only provides benefits for hospitalization or in-patient care, the plan would not qualify as an HDHP. 229 See ERISA sections 102 and 104. See also 29 CFR 2520.104b–2 and 2520.104b–3(a) and (d)(3). PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 28941 participant’s adverse benefit determination upon request.230 Under these disclosure provisions, excepted benefit HRAs that are ERISAcovered plans should generally provide information on eligibility to receive benefits, annual or lifetime caps or other limits on benefits under the plan, and a description or summary of the benefits. Accordingly, for excepted benefit HRAs that are subject to ERISA, the final rules include a cross reference to existing ERISA notice provisions in order to ensure that excepted benefit HRA plan sponsors are aware of their obligations under those provisions. However, the final rules do not include any additional notice requirements for ERISA-covered plans. In response to commenters’ concerns, HHS intends to propose in future rulemaking a notice requirement with respect to non-federal governmental plan excepted benefit HRAs. HHS anticipates proposing that a non-federal governmental plan excepted benefit HRA would be required to provide a notice that states conditions pertaining to eligibility to receive benefits, annual or lifetime caps or other limits on benefits under the excepted benefit HRA, and a description of, or summary of, the benefits consistent with the requirements of 29 CFR 2520.102–3(j)(2) and (3). HHS anticipates that, under the proposal, this notice would be required to be provided in a time and manner consistent with the requirements of 29 CFR 2520.104b–2(a). 8. Special Rule To Address the Potential Impact on the Small Group Market of the Reimbursement of STLDI Premiums Through Excepted Benefit HRAs As discussed earlier in this preamble, the final rules include a special rule in response to comments regarding the potential for adverse selection in the small group market if small, insured employers also sponsor excepted benefit HRAs that reimburse STLDI premiums. Specifically, the final rules provide that the Departments may restrict excepted benefit HRAs from reimbursing STLDI premiums, for certain employers in a state, if five criteria are satisfied. First, the restriction applies only to excepted benefit HRAs offered by small employers, as defined in PHS Act section 2791(e)(4), to respond to concerns by commenters about adverse selection in the small group market. Second, the restriction applies only in situations in which the other group health plan coverage offered by the 230 See, e.g., ERISA sections 104(b), 502(c), and 503. See also 29 CFR 2520.104b–1 and 2560.503– 1. E:\FR\FM\20JNR2.SGM 20JNR2 28942 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 small employer is either fully-insured or partially-insured. This focus on insured coverage again is designed to narrowly address the potential for adverse selection by small, insured employers that was identified by commenters. Third, the restriction applies only if the Secretary of HHS makes a finding, in consultation with the Secretaries of Labor and the Treasury, that the reimbursement of premiums for STLDI by excepted benefit HRAs in a state has caused significant harm to the small group market in the state that is the principal place of business of the small employer. Fourth, this finding may be made only after submission of a written recommendation by the applicable state regulatory authority of such state, in the form and manner specified by HHS. The written recommendation must include evidence that the reimbursement of STLDI premiums by excepted benefit HRAs established by insured or partially-insured small employers in the state has caused significant harm to the state’s small group market, including on small group market premiums. The evidence may include the State Insurance Commissioner’s documented overall assessment of the small group market in the state. It may also include representations made by small group market issuers that an increase in the purchase of STLDI coverage by employees of small employers has caused issuers to increase premiums for small group market insurance, due to the issuers’ reasonable belief about adverse selection. HHS will evaluate each recommendation on a case-by-case basis. Factors that HHS may consider in determining whether significant harm had occurred include, but are not limited to, the impact on issuers’ presence in the small group market, whether there has been more than a de minimis increase in premiums in the small group market, enrollment declines in the small group market related to individuals purchasing STLDI, and changes to the health of the small group market risk pool. Finally, the restriction (or discontinuance of the restriction) must be imposed by publication of a notice by the Secretary of HHS in the Federal Register and will be effective prospectively only, and with a reasonable time for plan sponsors to comply. 9. Other Comments on Excepted Benefit HRAs and Comments Outside the Scope of This Rulemaking Some commenters raised issues that relate to types of excepted benefits other than excepted benefit HRAs. For VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 example, several commenters requested that the Departments extend the pilot program for limited wraparound coverage.231 One commenter requested that the Departments amend the criteria for health FSAs to incorporate the excepted benefit HRA, instead of adding a new excepted benefit HRA, to avoid the appearance of too many limited excepted benefits. Other commenters requested that the Departments address questions regarding fixed indemnity and hospital indemnity insurance. However, the proposed excepted benefit rules were limited to establishing criteria for certain HRAs to qualify as excepted benefits and, therefore, those comments are outside the scope of this rulemaking. Notwithstanding that fact, the Departments do not intend to extend the pilot program for limited wraparound coverage, due to minimal take up and overlap with various other benefit options, including the new excepted benefit HRA, which, like the limited wraparound coverage excepted benefit, can be used for cost sharing under and expenses for services not covered by individual health insurance coverage, while not causing covered individuals to be ineligible for the PTC. One commenter suggested that the excepted benefit HRA should only be allowed to be offered by an employer that has not previously offered health coverage, which the commenter appears to have suggested due to a concern about employers offering an excepted benefit HRA instead of comprehensive coverage. The Departments decline to limit excepted benefit HRAs in this way as the excepted benefit HRA is intended to provide flexibility and additional healthcare options to all employers and their employees. However, to the extent the commenter is concerned about plan sponsors no longer offering traditional group health plans, the Departments reiterate that in order to offer the excepted benefit HRA, a plan sponsor must also offer those eligible for the HRA a traditional group health plan. Some commenters expressed confusion regarding the interaction of the excepted benefit HRA and the employer shared responsibility provisions under Code section 4980H. The Departments note for the sake of clarity, as explained earlier in this preamble, that coverage that consists solely of excepted benefits is not MEC.232 Therefore, the offer of an excepted benefit by an employer is not considered to be an offer of MEC under an eligible employer-sponsored plan for 231 See 26 CFR 54.9831–1(c)(3)(vii), 29 CFR 2590.732(c)(3)(vii), and 45 CFR 146.145(b)(3)(vii). 232 See Code section 5000A(f)(3). PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 purposes of Code section 4980H. Although an employer will not avoid potential liability for a payment under Code section 4980H by virtue of an offer of an excepted benefit, including an excepted benefit HRA, the traditional group health plan that is required to be offered in order to offer the excepted benefit HRA would constitute an offer of MEC under an eligible employersponsored plan.233 One commenter inquired whether an individual enrolled in an excepted benefit HRA would have a special enrollment right in the employer’s traditional group health plan if the individual had enrolled in STLDI and then coverage under the STLDI was rescinded because the individual became sick. The Departments clarify that under the special enrollment rules for group health plans, in general, an employee or dependent is eligible for special enrollment if they are otherwise eligible for the benefit package; when coverage under the plan was previously offered, the employee had group health plan or health insurance coverage; and then the employee loses eligibility for other coverage.234 STLDI is health insurance coverage and, therefore, loss of eligibility for STLDI will create a special enrollment opportunity to enroll in a group health plan, if the employee otherwise satisfies the special enrollment opportunity requirements. However, under the special enrollment rules for individual market coverage, loss of eligibility for STLDI will not trigger an SEP in the individual market.235 Other comments not responsive to the provisions and topics addressed by the proposed rules, or otherwise beyond the scope of the proposed and final rules, are not addressed. C. Interaction Between Individual Coverage HRAs and Excepted Benefit HRAs Under the final rules, as under the proposed rules, a plan sponsor is permitted to offer an individual coverage HRA to a class of employees so long as it does not also offer a traditional group health plan to the same class of employees, subject to 233 See Code section 4980H(a)(1) and (b)(1). See also 26 CFR 54.4980H–1(a)(14). 234 See Code section 9801(f), ERISA section 701(f), and PHS Act section 2704(f). See also 26 CFR 54.9801–6(a)(2)(i) and (3)(i), 29 CFR 2590.701– 6(a)(2)(i) and (3)(i), and 45 CFR 146.117(a)(2)(i) and (3)(i). 235 See 45 CFR 155.420(d)(1)(i), which provides an SEP in the individual market only for loss of coverage that constitutes MEC. See also 45 CFR 147.104(b)(2) and 83 FR 38212, 38225 (Aug. 3, 2018) (stating that STLDI ‘‘. . . is not individual health insurance coverage, nor is it MEC.’’). E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations additional applicable conditions discussed elsewhere in this preamble. However, a plan sponsor may only offer an excepted benefit HRA if traditional group health plan coverage is also made available to the employees who are eligible to participate in the excepted benefit HRA. Thus, a plan sponsor cannot offer both an individual coverage HRA and an excepted benefit HRA to any employee.236 III. Overview of Final Rules Regarding the Premium Tax Credit—Department of the Treasury and the IRS jbell on DSK3GLQ082PROD with RULES2 A. In General Consistent with the objectives in Executive Order 13813 to expand the use of HRAs, the proposed rules included an amendment to the rules under Code section 36B to provide guidance for individuals who are offered or covered by an individual coverage HRA and who otherwise may be eligible for the PTC. As explained earlier in this preamble, an employee who is offered coverage under an eligible employer-sponsored plan, and an individual who may enroll in the coverage because of a relationship to the employee (a related individual), are not eligible for a PTC for any month the eligible employer-sponsored plan is affordable and provides MV.237 Further, an employee or related individual who enrolls in an eligible employersponsored plan for a month is ineligible for a PTC for that month regardless of whether the coverage is affordable or provides MV.238 Because an HRA is a self-insured group health plan, under existing rules, an individual who is covered by an individual coverage HRA is ineligible for the PTC.239 However, guidance was needed regarding the PTC eligibility of an individual who is offered, but opts out of, an individual coverage HRA, and, therefore, the Treasury Department and the IRS issued the proposed PTC rules. Consistent with the rule for traditional group health plans under 236 The Departments note that an employer may not provide a QSEHRA to any employee if it offers any employee a group health plan. Accordingly, an employer may not provide a QSEHRA to any employee if it offers any employee an individual coverage HRA (which is a group health plan) or an excepted benefit HRA (which is a group health plan and which requires an offer of a traditional group health plan). See Code section 9831(d)(3)(B)(ii). 237 Code section 36B and 26 CFR 1.36B–2(c)(3)(i). 238 26 CFR 1.36B–2(c)(3)(vii)(A). 239 See the discussion earlier in this preamble of the related requirement under the final integration rules that plan sponsors provide participants with an annual opportunity to opt-out of and waive future reimbursements under an individual coverage HRA. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 Code section 36B and the existing rules thereunder, the proposed rules provided that an employee and a related individual offered an individual coverage HRA (a related HRA individual) would not be eligible for a PTC for any month the individual coverage HRA is affordable. Relatedly, the proposed rules provided that an affordable individual coverage HRA would be deemed to provide MV. Therefore, under the proposed rules, if an employee and a related HRA individual are offered an individual coverage HRA that is affordable, the employee and related HRA individual are ineligible for a PTC even if the employee opts out of the individual coverage HRA. However, an employee and a related HRA individual offered an individual coverage HRA that is not affordable will be eligible for the PTC (assuming they are otherwise eligible) if the employee opts out of the individual coverage HRA. Commenters generally acknowledged that guidance was needed, and some commenters agreed with the proposed rules relating to the effect of an individual coverage HRA offer on an individual’s PTC eligibility. However, a number of commenters expressed concern that the proposed rules would adversely affect lower-paid employees and their ability to obtain adequate subsidies for their healthcare coverage. The commenters pointed out that the PTC generally is more valuable than the individual coverage HRA would be for lower-paid employees. These commenters suggested that the individual coverage HRA would subsidize the cost of coverage for higher paid employees while making coverage more expensive, and likely out of reach, for the lower-paid employees who would have been eligible for a PTC but for the offer of an individual coverage HRA. Some commenters expressed a concern that the complexity of the rules would make it difficult for employees to make optimal decisions about their coverage and whether to opt out of the individual coverage HRA, with some noting a concern that employees may mistakenly opt out of an affordable individual coverage HRA because they believe that the opt-out preserves their PTC eligibility, only to find out that they have lost both PTC eligibility and the right to reimbursements under the individual coverage HRA. Some commenters expressed concern that employers might inadvertently offer an individual coverage HRA that leaves employees worse off than they would have been had the employer not offered the HRA, whether or not the employees PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 28943 opt out of the arrangement. The Departments note that this concern, however, is mitigated by the fact that employers seek to maximize overall employee welfare in order to recruit and retain talented workers. To address these concerns, some commenters suggested that employees who are otherwise eligible for the PTC should be allowed both the PTC and the individual coverage HRA offered to them by their employers. Other commenters suggested a rule to allow employees to choose between an individual coverage HRA and the PTC. Under this suggested rule, an employee would be able to opt out of the individual coverage HRA and receive the PTC in situations in which the PTC would provide a more generous subsidy than the individual coverage HRA. Employees would have this choice regardless of whether the individual coverage HRA was affordable or provided MV. The final rules retain the rule as proposed that an employee and a related HRA individual are not eligible for a PTC for any month the employee is offered an individual coverage HRA that is affordable, even if the employee opts out of the arrangement. An individual coverage HRA is an eligible employersponsored plan for purposes of Code section 36B. Code section 36B(c)(2)(B) and 26 CFR 1.36B–2(a)(2) provide that an employee and a related individual who are offered coverage under an eligible employer-sponsored plan are not eligible for a PTC for any month that the eligible employer-sponsored coverage is affordable and provides MV. Under these provisions, an individual generally is ineligible for a PTC for a month in which the individual had an opportunity to enroll in affordable, MV employer-sponsored coverage, regardless of whether the individual actually chose to enroll. Therefore, Code section 36B and the applicable rules do not allow individuals to choose between an offer of employer-sponsored coverage that is affordable and that provides MV or Exchange coverage with a PTC. Furthermore, many of the concerns raised by commenters also apply to traditional group health plans; for example, lower-income individuals may be better off with the PTC than a traditional group health plan. Thus, consistent with the rules for traditional group health plans, the final rules retain the rule that a PTC is not allowed for any month in which the individual coverage HRA is affordable. As to the suggestion by commenters that individuals should be allowed to both enroll in the individual coverage HRA and claim the PTC if otherwise E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28944 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations eligible, this is precluded by Code section 36B(c)(2)(C)(iii). Under that Code section, and as noted earlier in this preamble, an individual who is covered for one or more months by a group health plan, including an individual coverage HRA, is ineligible for the PTC for his or her Exchange coverage for those months. Therefore, the final PTC rules do not adopt this suggestion. The Treasury Department and the IRS agree with commenters that some lowerpaid employees may be adversely affected by an employer’s offer of an individual coverage HRA because the PTC, if available, could provide a larger subsidy for the employee’s Exchange coverage as compared to the individual coverage HRA. However, this dynamic already exists under current rules, as an individual may be required to pay a greater portion of his or her household income for a traditional group health plan than the individual would, in the absence of an offer of employersponsored coverage, have to pay for Exchange coverage with a PTC. Under Code section 36B(b)(3)(A) and current PTC rules, an individual’s contribution amount for 2019 Exchange coverage may be as little as 2.08 percent of household income for an individual who claims the PTC whereas the same individual may have to pay up to 9.86 percent of household income for coverage offered by the individual’s employer and still be considered to have an affordable offer and therefore ineligible for the PTC. Nevertheless, an employee in this situation is not permitted to forego the employer coverage and choose the Exchange coverage with a PTC to take advantage of the smaller contribution amount. Under the final rules, the same treatment applies to offers of an individual coverage HRA: That is, individuals are not allowed to forego an individual coverage HRA that is affordable (and thus deemed to provide MV) and instead choose the Exchange coverage with a PTC. The Departments also appreciate the concerns expressed by commenters regarding the burden on employees to properly determine whether the HRA they have been offered is affordable and provides MV and whether they should opt out of the individual coverage HRA. These concerns are the primary reason that the Departments proposed to require employers that offer individual coverage HRAs to provide a written notice to each participant. The final rules strengthen the notice requirement and the Departments are providing model notice language regarding the PTC, separate from, but VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 contemporaneous with, the final rules. Further, the Departments will work closely with the State Exchanges to ensure that Exchanges’ applications and other relevant materials are updated to assist individuals with an individual coverage HRA offer who are applying for, or considering applying for, individual health insurance coverage, in determining whether they are eligible for APTC. Lastly, the Treasury Department and the IRS note that under the final rules, an individual coverage HRA may be integrated with Medicare, if certain conditions are satisfied. Individuals who are enrolled in Medicare for one or more months during the calendar year are not eligible for the PTC for their Exchange coverage for those months.240 Therefore, the final PTC rules regarding when an offer of an individual coverage HRA is considered affordable are not relevant for individuals enrolled in Medicare. Those individuals are ineligible for the PTC without regard to whether they are offered or covered by an individual coverage HRA.241 B. Use of Lowest Cost Silver Plan To Determine Affordability of an Individual Coverage HRA The proposed rules provided that an individual coverage HRA is affordable for an employee and a related HRA individual for a month if the employee’s required HRA contribution does not exceed 1⁄12 of the product of the employee’s household income and the required contribution percentage (defined in 26 CFR 1.36B–2(c)(3)(v)(C)). The proposed rules defined an employee’s required HRA contribution as the excess of: (1) The monthly premium for the lowest cost silver plan for self-only coverage available to the employee through the Exchange for the rating area in which the employee 240 See Code section 36B(c)(2)(B) and 26 CFR 1.36B–2(a)(2). An individual generally is eligible for Medicare if the individual meets the criteria for coverage under the program as of the first day of the first full month the individual may receive benefits under the program. See 26 CFR 1.36B– 2(c)(2)(i). However, an individual who meets the criteria for eligibility for Medicare must complete the requirements necessary to receive benefits. See 26 CFR 1.36B–2(c)(2)(ii). An individual who fails by the last day of the third full calendar month following the event that establishes eligibility for Medicare to complete the requirements to obtain that coverage is treated as eligible for Medicare as of the first day of the fourth calendar month following the event that establishes eligibility. Id. 241 The Treasury Department and the IRS are considering whether clarification is needed regarding how to determine whether an offer of an individual coverage HRA to an employee enrolled in Medicare is considered affordable and to provide MV for purposes of Code section 4980H. The Treasury Department and the IRS anticipate addressing that issue in guidance in the near term. PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 resides; over (2) the monthly self-only HRA amount provided by the employee’s employer.242 The monthly self-only HRA amount was proposed to be the self-only HRA amount newly made available to the employee under the individual coverage HRA for the plan year, divided by the number of months in the plan year the individual coverage HRA is available to the employee. In the preamble to the proposed rules, the Treasury Department and the IRS explained that the lowest cost silver plan was chosen because, in the individual market, the lowest cost silver plan is the lowest cost Exchange plan for which the plan’s share of the total allowed costs of benefits provided under the plan is certain to be at least 60 percent of such costs, as required by Code section 36B(c)(2)(C)(ii) for a plan to provide MV. In selecting the lowest cost plan for which it is certain that the plan’s share of the total allowed costs of benefits provided under the plan will be at least 60 percent of such costs, the proposed rules sought to most closely approximate the PTC eligibility rules that apply to offers of eligible-employer sponsored coverage that is not an HRA.243 The proposed rules also provided that an individual coverage HRA that is affordable is treated as providing MV, because the plan used to determine affordability will always provide MV and so an employee who is offered an affordable individual coverage HRA has the ability to purchase affordable coverage that provides MV. In the preamble to the proposed rules, the Treasury Department and the IRS requested comments on whether the lowest cost silver plan is the appropriate metal-level plan to use to determine affordability of an individual coverage HRA for PTC eligibility purposes. A number of commenters advocated for retaining the proposed rule’s use of the lowest cost silver plan as the 242 If the employer offers an HRA that provides for a single dollar amount regardless of whether an employee has self-only or other-than-self-only coverage, the monthly maximum amount available to the employee is used to determine affordability. The monthly maximum amount was proposed to be the maximum amount available to the employee divided by the number of months in the plan year the individual coverage HRA is available to the employee. 243 With regard to an offer of eligible employersponsored coverage that is not an HRA, an individual is eligible for the PTC for his or her Exchange coverage only if the employee’s required contribution, which is the portion of the annual premium that would be paid for the lowest cost self-only MV coverage offered by the employer to the employee, exceeds a certain percentage of the employee’s household income. See Code section 36B(c)(2)(C). E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 appropriate plan to determine affordability and MV of an individual coverage HRA for PTC eligibility. These commenters stated that although the lowest cost silver plan generally would have an actuarial value that is higher than is required to provide MV under a traditional group health plan, a bronzelevel plan would not always be sufficient to provide MV.244 Therefore, the commenters found the use of the lowest cost silver plan to be a reasonable approximation of the PTC eligibility rules that apply to offers of traditional group health plans. Some commenters suggested using a gold-level plan to determine affordability, contending that the coverage benefits provided by a goldlevel plan more closely resemble the coverage benefits under a traditional group health plan. According to these commenters, using a gold-level plan for the affordability determination would ensure that an employee who is offered an individual coverage HRA would not pay more for health coverage that provides fewer benefits than the employee would have paid for under either a traditional group health plan or Exchange coverage with a PTC. Other commenters suggested that a bronze-level plan should be used for determining affordability of an individual coverage HRA, arguing that a bronze-level plan is comparable to coverage under a traditional group health plan which provides MV because a bronze-level plan generally has an actuarial value of 60 percent. According to these commenters, using a silver-level plan to determine affordability and MV for PTC eligibility would provide employees (and related HRA individuals) with greater coverage benefits than required under traditional group health plans. A plurality of the commenters on the issue of the appropriate affordability plan suggested that the second lowest cost silver plan (SLCSP) should be used to determine the affordability of an individual coverage HRA. These commenters generally pointed to administrative ease and the affordability rules for QSEHRAs as the reasons for modifying the proposed rule. Under Code section 36B, a taxpayer who is eligible for the PTC computes his or her PTC amount using the premiums for the SLCSP available to the taxpayer. Therefore, the commenters asserted that 244 In the individual market, a bronze plan may have an actuarial value of 56 percent, which would not ensure the plan’s share of the total allowed costs of benefits provided under the plan is at least 60 percent of such costs, as required by Code section 36B(c)(2)(C)(ii) for a plan to provide MV. See 45 CFR 156.140. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 information concerning the premiums for a taxpayer’s applicable SLCSP is already readily available to taxpayers and providing this information to taxpayers for their individual coverage HRA affordability determinations would not require additional Exchange resources. In addition, in light of the fact that the SLCSP is already used for certain PTC purposes, the commenters expressed concern that using premiums for the lowest cost silver plan instead of the SLCSP could lead to confusion and miscalculations. Commenters also noted that the premiums for the SLCSP are used to determine affordability for QSEHRAs. Some commenters expressed concern that using the lowest cost silver plan for affordability would result in three different affordability calculations depending on whether an employee was offered a traditional group health plan, a QSEHRA, or an individual coverage HRA. However, some commenters opposed the use of the SLCSP, contending that the higher premiums for a SLCSP, which may not always provide greater benefits than the lowest cost silver plan, do not warrant modifying the proposed rule’s use of the lowest cost silver plan to determine affordability of an individual coverage HRA. After consideration of the comments, the final rules adopt as proposed the use of the lowest cost silver plan for selfonly coverage available through the Exchange in the rating area in which the employee resides to determine whether an individual coverage HRA is affordable. As explained in the preamble to the proposed rules, using the lowest cost silver plan to determine the affordability of an individual coverage HRA is consistent with, and most closely approximates, the rules that apply to an offer of a traditional group health plan, under which an offer is affordable if the employee’s required contribution for the lowest cost, selfonly MV coverage offered by the employer to the employee does not exceed a specified percentage of the employee’s household income. Further, using the lowest cost silver plan, which will not have an actuarial value lower than 66 percent, to determine affordability of an individual coverage HRA ensures that the plan used to determine affordability will always provide MV. As a result, a determination that an individual coverage HRA is affordable, using this standard, is sufficient to ensure that an employee who is offered an affordable individual coverage HRA has the ability to purchase affordable coverage that provides MV. Therefore, the Treasury PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 28945 Department and the IRS are also adopting as proposed the rule that an individual coverage HRA that is affordable is treated as providing MV. The final rules result in consistent treatment for purposes of Code section 36B for employees offered an individual coverage HRA and employees offered a traditional group health plan. In both instances, the employees may be allowed the PTC if they decline the offer and the coverage is either unaffordable or does not provide MV. Further, in both instances, the employee’s required contribution is based on the amount the employee must pay for self-only coverage that provides MV because under the final rules affordability is determined based on the lowest cost silver plan offered in the Exchange for the rating area in which the employee resides (which, by definition, will always provide MV). If the amount the employee must pay is more than the product of the required contribution percentage and the employee’s household income, the employee may be allowed the PTC. As such, the final rules are consistent with the affordability and MV rules that apply to offers of traditional group health plans. Although commenters suggested using a bronze-level or gold-level plan for the affordability determination, the final rules do not adopt either of those suggestions. Using a bronze-level plan could result in individuals being determined ineligible for the PTC based on the cost of a plan that does not provide MV under Code section 36B(c)(2)(C)(ii) (because a bronze plan may have an actuarial value as low as 56 percent). While use of a gold-level plan (which generally has an actuarial value no lower than 76 percent) would ensure that the plan used to determine affordability provides MV, it would be inconsistent with, and require the use of, a plan with a higher actuarial value than in the rules that apply for a traditional group health plan. The final rules do not adopt the suggestion that the SLCSP plan be used for the affordability determination. The Treasury Department and the IRS acknowledge that the SLCSP applies for other PTC purposes, including calculation of the PTC amount and the determination of affordability of a QSEHRA. However, affordability for a traditional group health plan is based on the amount an employee would pay for a plan for which the share of the total allowed costs of benefits provided under the plan is at least 60 percent of such costs and the lowest cost silver plan, not the SLCSP, is the plan that most closely approximates that rule and provides consistency with these same E:\FR\FM\20JNR2.SGM 20JNR2 28946 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 rules as applied to traditional group health plans under Code section 36B. Consequently, the final rules provide a rule that is comparable to the affordability and MV rules that apply for traditional group health plans. As to the concerns expressed by commenters regarding the potential for confusion for individuals due to the different health coverage arrangements that exist and the different PTC eligibility rules that apply, see earlier in this preamble for a discussion of the steps the Departments are taking to address those concerns, including providing a model notice that will explain the PTC consequences of an individual coverage HRA. C. Other Issues Under the PTC Rules The proposed rules provided that the affordability of an individual coverage HRA for a related HRA individual would be based on the cost of self-only, not family, coverage available to the employee through the Exchange for the rating area in which the employee resides. One commenter stated that affordability of an individual coverage HRA should be based on the cost of Exchange coverage for all members of the employee’s family offered the individual coverage HRA, not just the self-only cost. The final rules do not adopt this suggestion. Under 26 CFR 1.36B–2(c)(3)(v)(A)(2), an eligible employer-sponsored plan is affordable for a related individual if the portion of the annual premium the employee must pay for self-only coverage does not exceed a percentage of the employee’s household income. Similarly, under Code section 36B(c)(4), the affordability of a QSEHRA for a spouse or dependent of an employee is based on the cost of self-only Exchange coverage to the employee. Consequently, the final rules are consistent with the existing rules for other types of employer coverage in providing that affordability of an individual coverage HRA for employees and related HRA individuals is based on the cost of self-only coverage. One commenter stated that because of the likelihood of confusion in the early years on the part of taxpayers whose employers offer individual coverage HRAs, the IRS should waive the requirement that taxpayers increase their tax liability for excess APTC (the excess of a taxpayer’s APTC over his or her allowed PTC) resulting from an offer of an affordable individual coverage HRA. Under Code section 36B(f)(2), a taxpayer must increase his or her tax liability for a taxable year by the excess of the APTC paid on the taxpayer’s behalf over the PTC the taxpayer is allowed for the year, subject to a VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 limitation for taxpayers with household income less than 400 percent of the applicable federal poverty line for the taxpayer’s family size. The Treasury Department and the IRS do not have the authority to suspend this statutory rule. Thus, the final rules do not adopt this suggestion. The Departments understand, however, that there is potential for taxpayer confusion about individual coverage HRAs and have taken measures to ensure that taxpayers are aware of the PTC implications of accepting or opting out of an individual coverage HRA. In particular, as described earlier in this preamble, the final integration rules require that an individual coverage HRA provide eligible participants with a written notice setting forth certain information about the individual coverage HRA, including the potential availability of PTC if they opt out of the HRA and the PTC eligibility consequences if they accept the HRA. Individuals applying for Exchange coverage will provide information about the individual coverage HRA they have been offered to the Exchange during the application process, which will help prevent the improper payment of APTC. A few commenters raised issues regarding the application of the PTC rules to individual coverage HRAs that are negotiated pursuant to a CBA, with the commenters asking for special rules to account for the fact that CBAs are often negotiated over multiple years, including that the affordability status that is determined as of the effective date of a CBA should apply for all years covered by the CBA. The final rules do not adopt the suggestion that special rules should apply to employees covered by CBAs. The existing rules under Code section 36B do not include special rules for determining the affordability of traditional group health plans for employees covered by CBAs. In addition, such special rules would likely result in undue complexities for Exchanges and others. Thus, employees covered by CBAs must determine affordability consistent with the rules that apply to individuals not covered by such agreements. A number of comments were received expressing concerns about the effective date for the final rules generally, but many with a specific focus on issues related to implementing the final PTC rules by 2020. These comments are addressed later in this preamble. Also, commenters expressed concern about the availability of resources for verifying eligibility for APTC for individuals who are offered an individual coverage HRA. While Exchanges are required to verify certain PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 eligibility requirements that affect Exchange enrollees’ APTC eligibility with electronic data sources, commenters stated that electronic data sources are not available to allow State Exchanges to verify APTC eligibility based on an offer of an individual coverage HRA. Commenters urged the Departments to dedicate additional funding to the State Exchanges for electronic verification of information about individual coverage HRA offers that consumers will be required to provide to Exchanges. In response to these comments, the Departments note that Congress generally appropriates funding for the federal government. The Departments do not generally have the authority to determine additional uses of funds beyond those established by Congress, including with respect to additional funding for State Exchanges. One commenter asked that the Treasury Department and the IRS confirm which premium applies in determining the affordability of an individual coverage HRA if more than one premium is available for the lowest cost silver plan, for example, because there is one rate for tobacco users and one rate for non-tobacco users. Existing rules at 26 CFR 1.36B–3(e) provide that, in determining a taxpayer’s SLCSP premium, a monthly premium may not include any adjustments for tobacco use. Consequently, in response to the commenter, the final rules provide that if there is a silver-level plan that has one rate for tobacco users and one rate for non-tobacco users, the rate for nontobacco users will apply to determine affordability of the individual coverage HRA. In addition, in the context of a traditional group health plan, existing rules at 26 CFR 1.36B–2(c)(3)(v)(A)(4) provide that nondiscriminatory wellness program incentives 245 that affect premiums are treated as earned in determining an employee’s required contribution for purposes of affordability to the extent the incentives relate exclusively to tobacco use. The rules further provide that wellness program incentives that do not relate to tobacco use or that include a component unrelated to tobacco use are treated as not earned for this purpose. Consequently, the Treasury Department and the IRS are clarifying in these final rules that similar rules apply for purposes of determining the affordability of an individual coverage HRA. Thus, if a wellness program incentive is allowed in the individual 245 For this purpose, the term ‘‘wellness program incentive’’ has the same meaning as the term ‘‘reward’’ in 26 CFR 54.9802–1(f)(1)(i). E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 market, the lowest cost silver plan premium will be determined without regard to any premium discount or rebate under that program unless the wellness program incentive relates exclusively to tobacco use. The final rules also address a situation in which the silver-level QHP used to determine a taxpayer’s lowest cost silver plan at enrollment later terminates or closes to enrollment during the plan year. Specifically, the final rules provide that, in such a case, the silver-level QHP that is used to determine a taxpayer’s lowest cost silver plan will not cease to be the taxpayer’s lowest cost silver plan solely because the plan later terminates or closes to enrollment. However, a taxpayer’s lowest cost silver plan used to determine affordability could change during the tax year under other circumstances, such as if the taxpayer moves into a different rating area. With respect to which HRA amounts are taken into account in determining affordability, the proposed rules provided that only amounts that are newly made available and that are determinable within a reasonable period of time before the beginning of the plan year of the HRA are considered. The proposed rules further provided that amounts made available from a prior plan year that carry over to the current plan year are not taken into account. The final rules retain these provisions and also provide that, similarly, amounts made available under an HRA to account for amounts remaining in a different HRA the employer previously provided to the employee and under which the employee is no longer covered are not taken into account for purposes of determining affordability. This clarification is generally intended to address the situation in which an employee moves between classes of employees and, as a result, moves between different HRAs, as discussed earlier in this preamble. One commenter asked the Treasury Department and the IRS to clarify the application of the PTC rules to an employee opting out of, or accepting, an individual coverage HRA with a noncalendar year plan year.246 As noted 246 An employee who opts out of a non-calendar year individual coverage HRA, like an employee who opts out of a non-calendar year traditional group health plan, may qualify for an individual market SEP based on the employee’s enrollment in a non-calendar year plan that is ending, regardless of whether he or she has the option to renew, per 45 CFR 155.420(d)(1)(ii). The employee may, therefore, choose to change his or her individual health insurance plan, though his or her plan options may be restricted based on 45 CFR 155.420(a)(4)(iii). Regardless of whether an employee changes his or her plan, an employee VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 earlier in this preamble, the final integration rules clarify that individual coverage HRAs must provide participants with one advance opportunity to opt into, or out of, the individual coverage HRA for each plan year, but generally may not provide participants multiple opportunities to opt into, or out of, the individual coverage HRA over the course of the plan year. In addition, the final PTC rules provide specific rules to determine affordability of an individual coverage HRA for each employment period that is less than a full calendar year or for the portions of the plan year of an individual coverage HRA that fall in different taxable years of a taxpayer. Although affordability of an individual coverage HRA and thus eligibility for PTC generally are determined on a monthly basis, the opt-out rules and the part-year affordability rules work in conjunction with the employee safe harbor to provide a taxpayer with an affordability determination that generally will apply for the entire plan year of the individual coverage HRA, barring any change in circumstance of the taxpayer. For example, if a taxpayer opts out of an individual coverage HRA that begins on July 1, 2020, and an Exchange determines that the HRA is unaffordable and the taxpayer is eligible for APTC, the employee safe harbor in the final rules provides that the HRA generally will be treated as unaffordable for the entire plan year of the HRA (from July 1, 2020–June 30, 2021). If the taxpayer decides to forego both APTC and the individual coverage HRA and pay the enrollment premium out-ofpocket, the taxpayer still may claim PTC on a tax return for the months the individual coverage HRA was unaffordable if the taxpayer otherwise is eligible for PTC.247 D. Employer Shared Responsibility Provisions Under Code Section 4980H As part of implementing the objectives of Executive Order 13813, the who is enrolled in Exchange coverage and opts out of an HRA when permitted to do so may apply to the Exchange for a redetermination of APTC eligibility. 247 The proposed rules also clarified how the generally applicable employer-sponsored coverage PTC eligibility rules apply to individual coverage HRAs. The Treasury Department and the IRS are finalizing those rules as proposed. Further, existing guidance addresses when amounts newly made available under an HRA count toward the affordability or MV of another group health plan offered by the same employer. See 26 CFR 1.36B– 2(c)(3)(v)(A)(5) and 26 CFR 1.36B–6(c)(4). See also IRS Notice 2015–87, Q&A–7. As under the proposed rules, the final rules do not make substantive revisions to those rules but do make clarifying updates to 26 CFR 1.36B–2(c)(3)(v)(A)(5), mainly to incorporate a reference to more recent guidance. PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 28947 Treasury Department and the IRS are considering how Code section 4980H applies to an employer offering an individual coverage HRA. Only ALEs are subject to Code section 4980H.248 For an employer that is an ALE, the employer may owe a payment for a month under Code section 4980H(a) or Code section 4980H(b) or neither. In general, an ALE will owe a payment under Code section 4980H(a) if it fails to offer an eligible employersponsored plan to at least 95 percent of its full-time employees and their dependents and at least one full-time employee is allowed the PTC for the month.249 An ALE that offers an eligible employer-sponsored plan to at least 95 percent of its full-time employees and their dependents (and therefore is not liable for a payment under Code section 4980H(a)) may be liable for a payment under Code section 4980H(b) if at least one full-time employee is allowed the PTC, which may occur if the eligible employer-sponsored plan offered is not affordable or does not provide MV, or if the employee was not offered coverage. On November 19, 2018, the Treasury Department and the IRS released Notice 2018–88 which addressed the application of Code section 4980H to ALEs offering individual coverage HRAs. In order to provide clarity to stakeholders, Notice 2018–88 explained how Code section 4980H would apply to an ALE that offers an individual coverage HRA, described potential additional affordability safe harbors, requested comments, and provided examples. The Treasury Department and the IRS intend to propose rules under Code section 4980H on the issues addressed in Notice 2018–88, taking into account the comments received. To the extent comments were received on the proposed integration rules specific to the application of Code section 4980H to employers offering individual coverage HRAs, those comments will be addressed in the preamble to the proposed rules under Code section 4980H. 248 The explanation of Code section 4980H provided here is a summary. For a complete explanation of the rules, including for definitions of terms used in this summary, see 26 CFR 54.4980H–1, et seq. (79 FR 8544 (Feb. 12, 2014)). 249 Note that if an ALE offered coverage to all but five of its full-time employees (and their dependents), and five is greater than 5 percent of the employer’s full-time employees, the employer will not owe an employer shared responsibility payment under Code section 4980H(a). See 26 CFR 54.4980H–4(a). E:\FR\FM\20JNR2.SGM 20JNR2 28948 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations IV. Overview of the Final Rules Regarding Individual Health Insurance Coverage and ERISA Plan Status jbell on DSK3GLQ082PROD with RULES2 A. In General The proposed rules included an amendment to DOL rules defining the ERISA terms ‘‘employee welfare benefit plan,’’ ‘‘welfare plan,’’ and, derivatively ‘‘group health plan,’’ so that these terms would not include individual health insurance coverage, the premiums of which are reimbursed by an HRA and certain other arrangements, under certain conditions. As explained in the preamble to the proposed rules, the objective in proposing this clarification was to provide clarity and assurance to employees; employers, employee organizations, and other plan sponsors; health insurance issuers; state insurance regulators; and other stakeholders. Specifically, the objective was to provide assurance that the insurance policies sold as individual health insurance coverage (that is, policies generally subject to comprehensive federal and state individual market rules for minimum and uniform coverage, standardized rating requirements, guaranteed availability, and guaranteed renewability) would not be treated as part of an HRA or certain other arrangements for purposes of ERISA if certain conditions were satisfied.250 Specifically, DOL proposed an amendment to 29 CFR 2510.3–1 on the definition of ‘‘employee welfare benefit plan’’ in ERISA section 3(1).251 This proposed amendment would apply to individual health insurance coverage purchased through individual coverage HRAs. It would also apply to individual health insurance coverage purchased through certain other arrangements that reimburse participants for the purchase of individual health insurance coverage that are not subject to the market requirements (including QSEHRAs and HRAs that have fewer than two participants who are current employees on the first day of the plan year). Further, this proposed amendment would apply to an arrangement under which an employer allows employees to pay the portion of the premium for off250 83 FR 54420, 54440 (Oct. 29, 2018). For examples of other circumstances under which DOL has determined an arrangement is not a plan within the meaning of ERISA, see 29 CFR 2510.3–1(j), 29 CFR 2510.3–2(f), and 29 CFR 2509.99–1. See also DOL Field Assistance Bulletins No. 2004–01 and No. 2006–02. 251 In light of the fact that ‘‘group health plan’’ is defined derivatively in ERISA section 733(a)(1), in relevant part, as an ‘‘employee welfare benefit plan to the extent that the plan provides medical care . . . directly or through insurance, reimbursement, or otherwise[,]’’ DOL has concluded that a separate rule relating to the definition of group health plan is not required. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 Exchange individual health insurance coverage that is not covered by the HRA with which the coverage is integrated by using a salary reduction arrangement under a cafeteria plan (supplemental salary reduction arrangement).252 ERISA section 3(1) broadly defines ERISA-covered welfare plans to include ‘‘any plan, fund, or program’’ that is ‘‘established or maintained by an employer or employee organization’’ for the provision of health benefits ‘‘through the purchase of insurance or otherwise.’’ At the same time, however, provisions in the PHS Act generally treat individual health insurance and group health insurance as mutually exclusive categories.253 If individual health insurance coverage were considered to be a group health plan or part of a group health plan, the individual health insurance coverage typically would violate some of the group market requirements (for example, the single risk pool requirement for the small group market; the rating rules for the small group market; or the separate medical loss ratio requirements for large group insurance coverage, which is lower than that for individual or small group insurance).254 As explained in the preamble to the proposed rules, treatment of such individual health insurance coverage as subject to both individual market and group market requirements thus would likely result in conflicting requirements, uncertainty and confusion which could inhibit or, in some instances, even preclude, the ability to integrate HRAs with individual health insurance coverage as contemplated by other provisions in the proposed rules.255 Accordingly, DOL concluded that the ERISA status of this type of individual health insurance 252 While the proposed rule under 29 CFR 2510.3–1(l) included in the term ‘‘supplemental salary reduction arrangement’’ cafeteria plan salary reduction arrangements paying premium amounts not covered by a QSEHRA, these final rules do not. See Code section 9831(d)(3)(B)(ii) and IRS Notice 2017–67, Q&A–55 (employer may allow employee to pay the excess of a health insurance premium over the amount paid by the QSEHRA with an aftertax payroll deduction (in contrast to a pre-tax salary reduction)). 253 See ERISA section 733(b)(4) and PHS Act sections 2791(b)(4), (5), and (e)(1). See also 26 CFR 54.9801–2, 29 CFR 2590.701–2, and 45 CFR 144.103. 254 See PPACA section 1312 (which defines each issuer’s enrollees in the individual market to be members of a single risk pool, and each issuer’s enrollees in the small group market to be members of a separate single risk pool, unless a state has opted to merge the risk pools), PHS Act section 2701 (which sets forth maximum age rating ratios in the individual and small group markets), and PHS Act section 2718 (which sets forth medical loss ratio requirements that differ based on market). 255 83 FR 54420, 54441 (Oct. 29, 2018). PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 coverage should be clarified. Under the proposed rules, the individual health insurance coverage that is paid for by the HRA 256 is not covered by ERISA Title I if all of the conditions of the safe harbor are satisfied. The conditions in the safe harbor incorporate criteria wellrecognized under similar ERISA safe harbor rules and under case law, where similar arrangements are considered to be exempt from ERISA Title I. Under the proposed rules, the status under ERISA of an HRA, QSEHRA, or supplemental salary reduction arrangement would remain unaffected. Rather, the proposed rules clarified that individual health insurance coverage selected by the employee in the individual market and reimbursed by such a plan is not part of a group health plan, is not health insurance coverage offered in connection with a group health plan, and is not a part of any employee welfare benefit plan for purposes of ERISA Title I, provided all the following conditions are satisfied: 1. The purchase of any individual health insurance coverage is completely voluntary for employees.257 2. The employer, employee organization, or other plan sponsor does not select or endorse any particular issuer or insurance coverage. 3. Reimbursement for non-group health insurance premiums is limited solely to individual health insurance coverage. 4. The employer, employee organization, or other plan sponsor receives no consideration in the form of cash or otherwise in connection with the employee’s selection or renewal of any individual health insurance coverage.258 256 For simplicity and readability, the discussion in this section IV of the preamble generally refers simply to HRAs, although it is intended to also capture other account-based group health plans, QSEHRAs and supplemental salary reduction arrangements. If the term HRA is intended to refer only to HRAs in this section IV, it will be clear from context. Moreover, the title of paragraph (l) of the DOL final rule is amended to refer to a ‘‘Safe harbor for health reimbursement arrangements (HRAs) and certain other arrangements that reimburse individual health insurance coverage,’’ to better reflect the regulatory text that follows. 257 The fact that a plan sponsor requires the coverage to be purchased as a condition for participation in an HRA or supplemental salary reduction arrangement does not make the purchase involuntary. This issue should not arise in the context of a QSEHRA because in that case, although individuals must be enrolled in MEC, employers may not require employees to enroll in individual health insurance coverage. 258 The limitation on employers, employee organizations, and other plan sponsors receiving consideration from an issuer or person affiliated with an issuer in connection with any participant’s purchase or renewal of individual health insurance coverage was not intended to change any ERISA requirements governing the circumstances under E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations 5. Each plan participant is notified annually that the individual health insurance coverage is not subject to ERISA. Current rules issued by the Departments define ‘‘group health insurance coverage’’ as health insurance coverage offered in connection with a group health plan.259 The proposed rules included an amendment to clarify that—subject to certain conditions— individual health insurance coverage is not group health insurance coverage (or ‘‘health insurance offered in connection with a group health plan’’). This amendment was intended to ensure consistency and avoid any potential conflicting interpretations regarding individual health insurance coverage. Accordingly, if the conditions in 29 CFR 2510.3–1(1) were satisfied, the individual health insurance coverage would not be ‘‘health insurance coverage offered in connection with a group health plan’’ for purposes of ERISA, the PHS Act, the Code, and PPACA, even though the premiums are reimbursed by an HRA.260 After consideration of the comments, the conditions set forth in the proposed amendment to 29 CFR 2510.3–1, and the proposed amendment to the Departments’ rules defining ‘‘group health insurance coverage,’’ are being finalized without significant change, but with minor clarifications in response to comments. jbell on DSK3GLQ082PROD with RULES2 B. Safe Harbor The preamble to the proposed rules referred to the proposed amendment as a clarification. Some commenters asked DOL to clarify whether the conditions established in the proposed amendment would be considered a safe harbor, or absolute requirements for plan sponsors. These commenters asserted that it was unclear and expressed concern about the potential unintended consequences of non-compliance and confusion if all individual health insurance coverage reimbursed under an arrangement that did not satisfy the proposed criteria of the rule was treated as being subject to ERISA. Examples highlighted by commenters include how requirements under other federal laws such as HIPAA, the Paul Wellstone and Pete which plans, including HRAs, may reimburse employers, employee organizations and other plan sponsors for certain expenses associated with administration of the plan. 259 26 CFR 54.9801–2, 29 CFR 2590.701–2, and 45 CFR 144.103. 260 Note that the clarification with respect to the meaning of group health insurance coverage is not relevant for QSEHRAs because QSEHRAs generally are not group health plans. See Code section 9831(d)(1), ERISA section 733(a)(1), and PHS Act section 2791(a)(1). VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 Domenici Mental Health Parity and Addiction Equity Act of 2008, and PPACA would apply to the coverage (including the single risk pool requirement, the rating rules for the small group market, or the medical loss ratio requirements, as well as the PPACA section 9010 health insurance fee), whether health insurance issuers could be considered plan fiduciaries, and whether participants could bring legal actions against health insurance issuers under ERISA’s private right of action provisions. They also stated that factors outside of a plan sponsor’s control could result in the employer not satisfying the conditions of the rules. As one example, a commenter suggested that an insurance broker could endorse an insurance product in the context of a private exchange without the employer’s knowledge, possibly resulting in a failure to satisfy the condition that the plan sponsor not select or endorse any particular issuer or insurance coverage.261 These commenters suggested that flexibility would be appropriate to account for plan sponsors that make reasonable, good faith efforts to comply with the conditions in the proposed amendment but make de minimis errors. As noted earlier in this section of the preamble, DOL has set forth several safe harbors in other rules and guidance under which DOL has determined an arrangement is not a plan within the meaning of ERISA.262 These safe harbors are intended to clearly define circumstances in which a workplace arrangement falls outside of the scope of a plan under ERISA without necessarily specifying all the circumstances under which a workplace arrangement could avoid ERISA plan status. Here, too, DOL intended the proposed rules to constitute a safe harbor, as reflected in language in the proposed amendment providing that an ERISA plan ‘‘shall not include’’ individual health insurance coverage. The final rules make clear that the rule is a safe harbor. The conditions of the various regulatory safe harbors noted earlier in this preamble are highly sensitive to the particular type of plan at issue, and the particular legal and factual context associated with that type of plan. Accordingly, DOL cautions that the 261 DOL notes that ‘‘private exchange’’ is a term that was not specifically defined in any public comments and is similarly undefined in this preamble. It is generally meant to refer to a tool or web-based platform that facilitates individuals’ enrollment in the coverage of their choice. The term does not include any entity that meets the definition of an ‘‘Exchange’’ in 45 CFR 155.20. 262 See 29 CFR 2510.3–1(j), 29 CFR 2510.3–2(f), and 29 CFR 2509.99–1. See also DOL Field Assistance Bulletins No. 2004–01 and No. 2006–02. PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 28949 particular conditions of the safe harbor provided here are not directly relevant to other types of plan arrangements, such as retirement plans, life insurance plans, or disability plans. In particular, the employer’s funding of a benefit arrangement, in most circumstances, is sufficient to preclude the grant of a safe harbor. In the particular context of the individual health insurance policies at issue here, however, DOL has concluded that employer funding is not disqualifying based on its conclusion that Congress generally intended that individual and group health insurance coverage be regulated as mutually exclusive categories. In this unique context, DOL has concluded that employer funding, by itself, is an insufficient basis for treating the individual health insurance policy, as opposed to the HRA, as part of an ERISA-covered plan. C. An Employer, Employee Organization, or Other Plan Sponsor May Not Select or Endorse Any Particular Issuer or Insurance Coverage Paragraph (l)(2) of the proposed amendment required that the employer, employee organization, or other plan sponsor may not select or endorse any particular issuer or insurance coverage. The proposed rules clarified that an HRA plan sponsor would not be considered to have endorsed a particular issuer or insurance coverage if, for example, the plan sponsor offered general contact information regarding availability of health insurance in a state (such as providing information regarding HealthCare.gov or contact information for a state insurance commissioner’s office) or providing general health insurance educational information (such as the uniform glossary of health coverage and medical terms available at: https://www.dol.gov/ sites/default/files/ebsa/laws-andregulations/laws/affordable-care-act/ for-employers-and-advisers/sbcuniform-glossary-of-coverage-andmedical-terms-final.pdf). Some commenters asked DOL to provide additional guidance on what types of activities would or would not constitute endorsement. These commenters stated that it would be important to provide HRA plan sponsors with flexibility to permit them to help employees shop for coverage, especially because many might be unfamiliar with the processes associated with obtaining health insurance in the individual market. Several commenters asked whether there would be circumstances in which a plan sponsor could connect participants or beneficiaries with an insurance agent or E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28950 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations broker without running afoul of the prohibition on endorsement. A few commenters asked whether, or under what circumstances, an HRA could be offered in connection with a private exchange where participants could make a selection from a set of coverage options. One commenter stated that without an ability to use a private exchange model, most employers will be reluctant to offer an individual coverage HRA over a traditional group health plan, thereby undermining the purpose of the proposed rules to expand use and availability of HRAs. One commenter stated that DOL should incentivize the use of private exchanges that would provide price and quality transparency as well as navigational support for plan participants shopping for individual health insurance coverage, and possibly even require that private exchanges offer QHPs. Another commenter urged DOL to ensure that private exchanges could not be used in a manner that harms the risk pools or that is anti-competitive and promotes one issuer over another. This commenter suggested that the final rules specify that an employer cannot use an individual coverage HRA in conjunction with a plan purchased through a private exchange unless the private exchange is designed in such a way as not to constitute selection or endorsement by the employer. A plan sponsor may provide assistance to participants and beneficiaries in shopping for individual health insurance coverage without being considered to endorse any particular coverage if that assistance is unbiased, neutral, uniformly available, and does not steer participants and beneficiaries towards a particular health insurance issuer or coverage. For example, an HRA plan sponsor could accommodate requests from insurance brokers to speak with employees or distribute informational materials at their worksite, so long as such accommodations are granted on an equal basis and also without any preference for brokers that represent a particular firm or have a relationship with a certain health insurance issuer. DOL agrees with commenters that the use of private exchanges may be a helpful tool in shopping for coverage. However, DOL declines to adopt suggestions regarding adding incentives or requirements with respect to transparency standards, navigational support, or offering QHPs because any such rules are beyond the scope of this rulemaking. Moreover, a private exchange may be designed in a way that satisfies the conditions of 29 CFR 2510.3–1(l), in VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 which case individual health insurance coverage purchased through the private exchange would not be considered group health plan coverage. Alternatively, a private exchange could be designed in a way that limits employees’ choice of issuer, or promotes certain issuers or coverage options over others. In that case, coverage offered through the private exchange would not satisfy the prohibition on endorsement in the safe harbor. The final rules provide a new option for employers to offer individual coverage HRAs together with private exchanges that work with all individual market insurance issuers in a neutral and unbiased fashion, and maintain the individual insurance nature of the individual health insurance coverage. For example, under the final rules, an employer could maintain (or contract with) a tool or web-based platform that displays information about all coverage options in a state and facilitates enrollment. However, to be eligible for the safe harbor, the platform would be required to present all available coverage options in a way that is entirely neutral. The platform could not be designed or operated in a way that limits users’ ability to select a coverage option that would otherwise be available to them or that promotes one option over another (for example, with ‘‘recommended’’ or ‘‘starred’’ listings), or the prohibition on endorsement would not be satisfied. However, an otherwise neutral platform that allows users to select certain criteria (such as a platform that allows participants to search for an HDHP or plans that contained specific providers in their network) and search for coverage options that fulfilled these criteria would not be considered to be an endorsement by the employer of any particular coverage, and would not violate this requirement of the final rule. D. Reimbursement for Non-Group Health Insurance Premiums Must Be Limited Solely to Individual Health Insurance Coverage Paragraph (l)(3) of the proposed amendment would require that reimbursement for non-group health insurance premiums must be limited solely to individual health insurance coverage, as defined in 29 CFR 2590.701–2.263 DOL included this 263 While the HRA’s reimbursement of non-group health insurance premiums is limited solely to individual health insurance coverage that does not consist solely of excepted benefits, the HRA may reimburse Medicare premiums for Medicare beneficiaries as permitted under 29 CFR 2590.702– 2 without causing the reimbursement of individual PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 condition in order to limit the application of the proposed safe harbor to determining whether insurance policies sold as individual health insurance coverage would be treated as part of an employee welfare benefit plan subject to ERISA. Several commenters asked DOL to clarify whether arrangements that provide reimbursement for individual health insurance coverage that consists solely of excepted benefits (for example, standalone limited-scope dental benefits) could be considered to satisfy the proposed safe harbor. For the reasons explained earlier in this section of the preamble, in DOL’s view, the proposed safe harbor was a necessary clarification for the types of individual health insurance coverage that might be reimbursed by an individual coverage HRA or QSEHRA. However, coverage that is sold in the individual market that provides only excepted benefits is not subject to the market requirements and does not present the same concerns about incompatible individual and group market regulatory regimes. Thus, the proposed safe harbor was not intended to address excepted benefit policies sold in the individual market. The final rules include additional language to make this clearer. In the preamble to the proposed rules, DOL also invited comments regarding which forms of payment are appropriately treated as ‘‘reimbursement’’ to participants for this purpose. DOL asked whether, for example, ‘‘reimbursement’’ should be interpreted to include direct payments, individual or aggregate, by the employer, employee organization, or other plan sponsor to the insurance company. Commenters generally favored an expansive interpretation of the types of payments that should be treated as reimbursements. These commenters argued that permitting employers to pay health insurance issuers directly would promote administrative simplicity, and would enable plan sponsors to substantiate that participants and beneficiaries are enrolled in individual health insurance coverage, as the final integration rules require. Some commenters asserted that ‘‘reimbursement’’ should be interpreted in a manner consistent with current industry practices for account-based plans, which permit the transfer of employer funds to debit cards that can be used to pay for certain qualified medical expenses. One commenter also stated that it should not matter whether health insurance coverage premiums for other individuals to fall outside the safe harbor. E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations employer funds paid from an HRA go directly to a participant or a health insurance issuer because the economic substance of the transaction is the same—that is, the funds are being used to discharge an employee’s premium payment obligations. DOL agrees with these commenters and, under the final rules, ‘‘reimbursement’’ may include employee-initiated payments made through use of financial instruments, such as pre-paid debit cards, as well as direct payments, individual or aggregate, by the employer, employee organization, or other plan sponsor to the health insurance issuer.264 However, DOL cautions that plan sponsors should take care to ensure that payment practices do not violate the prohibition on endorsements by effectively limiting participants’ and beneficiaries’ ability to select certain coverage options or favoring certain issuers or coverage options. For example, if a plan sponsor were to establish procedures for sending direct payments to health insurance issuers, but those procedures excluded certain health insurance issuers, or placed additional burdens on HRA participants if they chose health insurance coverage offered by some health insurance issuers, rather than others, the procedure would be considered an endorsement, and the criteria of the safe harbor would not be satisfied. E. The Employer, Employee Organization, or Other Plan Sponsor Receives No Consideration in Connection With the Employee’s Selection or Renewal of Any Individual Health Insurance Coverage Paragraph (l)(4) of the proposed amendment would require that an employer, employee organization, or other plan sponsor receive no consideration in the form of cash or otherwise in connection with the employee’s selection or renewal of any individual health insurance coverage. Commenters requested more specific guidance on how a plan may comply with this condition. As stated in the preamble to the proposed rules, this limitation in the DOL safe harbor rule for HRAs was focused on employers, employee organizations, and other plan sponsors jbell on DSK3GLQ082PROD with RULES2 264 Any direct payment should include an affirmative act by the employee requesting that the employer or plan administrator make the payment, as part of the enrollment process or otherwise. For example, as part of the insurance enrollment process, the employee might direct the employer or plan administrator to begin making monthly premium payments for so long as the employee remains enrolled in the individual health insurance coverage and remains eligible for HRA benefits. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 receiving consideration, including from an issuer or person affiliated with an issuer in connection with any participant’s purchase or renewal of individual health insurance coverage. The preamble to the proposed rules also explained that the provision was not intended to change any ERISA requirements governing the circumstances under which ERISA plans, including HRAs, may reimburse employers, employee organizations and other plan sponsors for certain expenses associated with administration of the plan.265 The requirement in the DOL final rule is different from the ‘‘no compensation’’ criteria established in the safe harbor rules regarding certain group or grouptype insurance programs established at 29 CFR 2510.3–1(j)(4) and individual retirement accounts (IRAs) established at 29 CFR 2510.3–2(d)(iv). In the case of those rules, there is no ERISA plan, and the rules limit permissible compensation that an employer can receive, including from third parties, to reasonable compensation, excluding any profit, for administrative services actually rendered in connection with forwarding employee contributions to the insurer or IRA provider through payroll deductions or dues checkoffs. In the context of the DOL final rule, the HRA is generally an ERISA-covered plan and the issue is the extent to which the plan sponsor of the HRA could receive payments from the HRA or third parties. As noted above, the preamble to the proposed rules explained that the rule was not intended to change any ERISA requirements governing the circumstances under which ERISA plans, including HRAs, may reimburse employers, employee organizations and other plan sponsors for expenses associated with administration of a plan. Thus, in the case of plan assets being used for HRA related payments, reimbursement could not be made for expenses associated with settlor functions and activities.266 The fiduciary prohibitions in ERISA section 406(a) and 406(b) also would apply in such cases, so that any reimbursements would need to be permissible under ERISA section 408(b)(2) and 29 CFR 2550.408b–2(e). Subparagraph (e)(3) of those rules states: ‘‘If a fiduciary provides services to a plan without the receipt of compensation or other consideration (other than reimbursement of direct expenses properly and actually incurred in the performance of such services within the meaning of 2550.408c–2(b)(3)), the 265 83 FR 54420, 54442 (Oct. 29, 2018). DOL Advisory Opinion 2001–01A. 266 See PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 28951 provision of such services does not, in and of itself, constitute an act described in section 406(b) of the Act.’’ ERISA section 408(c) and 29 CFR 2550.408c–2 place additional restrictions on compensation for services in the case of a fiduciary who is already receiving fulltime pay from an employer or employee organization sponsoring the plan. However, in the case of an unfunded HRA, with payments from the HRA made solely out of an employer’s general assets, there would not be any plan assets; thus, there could be no payments to the employer from plan assets. Moreover, in the case of such an unfunded HRA, it seems extremely unlikely that an employer would apply debits to the notional employee accounts that are part of the HRA to ‘‘reimburse’’ itself from the HRA for expenses associated with sponsoring the HRA. Finally, in DOL’s view, receipt of compensation from third parties to cover the cost of operating the HRA would be prohibited payments in connection with the employee’s selection or renewal of any individual health insurance coverage, and, therefore, not permissible under paragraph (l)(4) of the final rules. Accordingly, such receipt of compensation would not be permissible under paragraph (l)(4) of the final rules. F. Each Plan Participant Must Be Notified Annually That the Individual Health Insurance Coverage Is Not Subject to ERISA Paragraph (l)(5) of the proposed amendment included a requirement that plans provide an annual notice to participants stating that individual health insurance coverage funded through an HRA is not subject to the requirements of ERISA. For an individual coverage HRA, the notice must satisfy the requirements set forth in the final integration rules at 29 CFR 2590.702–2(c)(6), discussed earlier in this preamble. For a QSEHRA or an HRA that is not subject to 29 CFR 2590.702–2(c)(6) (such as a retiree-only HRA), the proposal set forth model language to satisfy the condition.267 The preamble to the proposed rules also explained that a supplemental salary reduction arrangement need not provide the required notice; instead, the notice 267 As stated in the preamble to the proposed rules, in DOL’s view, the SPD for the HRA, QSEHRA, or other ERISA plan would fail to satisfy the style, format, and content requirements in 29 CFR 2520.102–3 unless it contained a discussion of the status of the HRA or QSEHRA and the individual health insurance coverage under ERISA sufficient to apprise the HRA or QSEHRA plan participants and beneficiaries of their rights and obligations under the plan and ERISA Title I. 83 FR 54420 at 54441 (Oct. 29, 2018). E:\FR\FM\20JNR2.SGM 20JNR2 28952 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations could be provided by the HRA that the salary reduction arrangement supplements.268 DOL invited comment on whether it would be helpful to issue additional rules or guidance addressing the application of ERISA reporting and disclosure requirements to HRAs integrated with such non-ERISA individual health insurance coverage (for example, SPD content and Form 5500 annual reporting requirements). Commenters requested that DOL confirm that HRAs are subject to the reporting and disclosure requirements of ERISA, such as the SBC or (for plans of applicable size) the Form 5500 Annual Report. These commenters said that reporting and disclosure should be revised to allow state regulators and Exchanges to gather necessary information about the use of HRAs. One commenter also urged DOL to ensure that these requirements did not discourage employers from offering individual coverage HRAs to their employees by preserving, for example, any exemptions from filing reports for small businesses, or allowing the filing of simpler reports, such as the Form 5500–SF. Another commenter urged DOL to review the current required information, notices and disclosures that plan sponsors must convey to plan participants and beneficiaries and to simplify, combine or eliminate unnecessary or redundant material. After considering the comments and feedback received from stakeholders, DOL has determined that adding additional new, potentially redundant 269 disclosure requirements beyond the scope of the proposed rules is not necessary. For example, individual coverage HRAs are group health plans and must, therefore, provide participants with an SBC.270 ERISA also contains comprehensive reporting requirements that apply to group health plans, such as HRAs,271 and DOL has determined that adding or changing those reporting requirements with respect to HRAs is not necessary at this time. In certain situations, DOL has provided for exemptions or reporting exemptions and simplified disclosure requirements.272 Provided they satisfy 268 83 FR 54420, 54441 (Oct. 29, 2018). e.g., 29 CFR 2520.104b–2 and 2520.104b– 3(a) and (d)(3). 270 See PHS Act section 2715. See also 26 CFR 54.9815–2715, 29 CFR 2590.715–2715, and 45 CFR 147.200. 271 See e.g., ERISA sections 101, 103, and 104; and PHS Act section 2715A (incorporated in Code section 9815 and ERISA section 715). 272 See ERISA sections 104(a)(3) and PHS Act section 2715 (incorporated in Code section 9815 and ERISA section 715). See also 26 CFR 54.9815– 2715(a)(1)(iii); 29 CFR 2520.104–20, 2520.104–44, jbell on DSK3GLQ082PROD with RULES2 269 See VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 the requirements under applicable DOL rules, HRAs and their administrators remain eligible for this relief. G. Comments Outside the Scope Some commenters raised issues relating to the separate safe harbor for certain group or group-type insurance programs at 29 CFR 2510.3–1(j).273 Several commenters asked DOL to clarify whether other types of coverage, such as health care sharing ministries, might be considered part of an employee welfare benefit plan subject to ERISA if they were paid for through an HRA, QSEHRA, or supplemental salary reduction arrangement. The safe harbor is intended to provide assurance to stakeholders that insurance policies sold as individual health insurance coverage, and that are generally subject to comprehensive federal (and state) individual market rules, would not be treated as part of an employee welfare benefit plan subject to ERISA so long as the conditions of the safe harbor are satisfied. DOL has concluded that the safe harbor is appropriate because of the significant differences in legal requirements that would apply to health insurance coverage based on whether it is considered individual health insurance or group coverage. However, the safe harbor was not intended to address all circumstances in which health insurance coverage may be treated as part of an employee welfare benefit plan subject to ERISA. DOL may provide additional clarification in the future regarding other types of coverage.274 V. Overview of Final Rules Regarding Individual Market Special Enrollment Periods—Department of Health and Human Services A. In General With the ability to integrate HRAs with individual health insurance coverage, many employees may need access to individual health insurance coverage, or may want to change to other individual health insurance and 2590.715–2715(a)(1)(iii); and 45 CFR 147.200(a)(1)(iii). 273 This safe harbor does not relate to HRAs, QSEHRAs, or other arrangements that constitute an employee welfare plan that provides reimbursement for premiums for individual health insurance coverage because it is limited to arrangements without employer contributions. 274 As noted earlier in this preamble, an HRA generally may reimburse expenses for medical care, as defined under Code section 213(d), of an employee and certain of the employee’s family members. Neither the proposed rules nor the final rules make any changes to the rules under Code section 213. Thus, any issues arising under Code section 213, and any guidance requested by commenters to address those issues, are beyond the scope of this rulemaking. PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 coverage in order to maximize the use of their individual coverage HRA. Therefore, HHS proposed a new SEP to allow employees and their dependents to enroll in individual health insurance coverage, or to change from one individual health insurance plan to another, outside of the individual market annual open enrollment period if they gain access to an individual coverage HRA. In addition, because employees and dependents with a QSEHRA generally must be enrolled in MEC,275 and one category of MEC is individual health insurance coverage, the proposed rules also applied the new SEP to individuals who are provided QSEHRAs.276 Because the proposed rules allowed for HRAs to be integrated with individual health insurance coverage both on- and offExchange (and because individuals with QSEHRAs may enroll in individual health insurance coverage on- or offExchange), the proposed rules included this new SEP in the limited open enrollment periods available offExchange, in accordance with current rules at 45 CFR 147.104(b)(2).277 After considering the comments, HHS is adopting the proposed SEP parameters in these final rules, with some changes and clarifications in response to comments, as explained in more detail later in this section of the preamble. 1. SEP Triggering Event and Availability The proposed rules included a new paragraph 45 CFR 155.420(d)(14) that would establish an SEP for when an employee or his or her dependent(s) gains access to and enrolls in an individual coverage HRA or is provided a QSEHRA, so that he or she may enroll in or change his or her enrollment in individual health insurance coverage. The proposed rules also offered the existing option for advanced availability to those enrolling through the new SEP. That is, per 45 CFR 155.420(c)(2), qualifying individuals would have the option to apply for coverage and select 275 Generally, payments from a QSEHRA to reimburse an eligible employee’s medical care expenses are not includible in the employee’s gross income if the employee has coverage that provides MEC as defined in Code section 5000A(f), which includes individual health insurance coverage. 276 This preamble refers to a QSEHRA being ‘‘provided’’ as opposed to being ‘‘offered’’ because employees and dependents cannot opt out of a QSEHRA. 277 The Departments note that the new SEP would not apply to individuals who gain access to an excepted benefit HRA, as those individuals are not required to be enrolled in individual health insurance coverage, and those HRAs are generally prohibited from reimbursing premiums for individual health insurance coverage. E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations a plan within 60 days before or after their SEP triggering event. Many commenters supported providing an SEP to allow individuals who newly gain access to an individual coverage HRA or who are newly provided a QSEHRA to enroll in or change their health insurance coverage. One commenter asked for clarification that individuals who are already enrolled in individual health insurance coverage would be eligible for the SEP if they newly gain access to an individual coverage HRA. The final rules clarify that employees and dependents may qualify for the new SEP regardless of whether they are currently enrolled in individual health insurance coverage, in order to allow all individuals who newly gain access to an individual coverage HRA or who are newly provided a QSEHRA the flexibility to take this into account when choosing an individual health insurance plan for themselves, and, if applicable, for their families. Additionally, the final rules include changes to the SEP triggering event at 45 CFR 155.420(d)(14) to reflect that employees and their dependents who had access to, but who were not enrolled in, an employer’s individual coverage HRA during all or at the end of the preceding plan year may use the new SEP if they may newly enroll in an individual coverage HRA at the beginning of the subsequent HRA plan year. Similarly, employees and their dependents who at one time had an individual coverage HRA or a QSEHRA, but then had another type of health coverage (including but not limited to a different individual coverage HRA or a different QSEHRA), and are again newly offered an individual coverage HRA or newly provided a QSEHRA from the same employer (for example, because they moved from one class of employees to another, or because they were rehired by a former employer), may qualify for this SEP, as they may need an opportunity to enroll in individual health insurance coverage, regardless of whether they were previously offered or enrolled in an individual coverage HRA or previously provided a QSEHRA by the same employer. In many cases like these, employees also will be eligible for an SEP due to a loss of MEC in accordance with 45 CFR 155.420(d)(1)—for example, due to a loss of coverage sponsored by a previous employer or other coverage that they may have had during that time, such as coverage from a spouse’s employer. However, some employees and dependents may not be eligible for another SEP, such as those who did not previously have other coverage, or who VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 previously chose to enroll in coverage that was not MEC, such as STLDI. The final rules, therefore, provide that the SEP at 45 CFR 155.420(d)(14) is available when a qualified individual, enrollee, or dependent newly gains access to an individual coverage HRA or is newly provided a QSEHRA, regardless of whether they were previously offered or enrolled in an individual coverage HRA or previously provided a QSEHRA, so long as the individual is not covered by the HRA or QSEHRA on the day immediately prior to the triggering event (that is, for an individual coverage HRA, the first day on which coverage under the individual coverage HRA can become effective or for a QSEHRA, the first day on which coverage under the QSEHRA is effective). In other words, the new SEP will be available to individuals who have not previously been offered an individual coverage HRA or provided a QSEHRA, as well as those who had access to the individual coverage HRA or were provided a QSEHRA during a prior plan year(s) or earlier during the current plan year, but are not currently covered by the individual coverage HRA or the QSEHRA. In order to clarify the specific date on which the coverage effective date and availability are based, as discussed later in this preamble, the final rules specify that the SEP triggering event at 45 CFR 155.420(d)(14) is the first day on which coverage for the individual under the individual coverage HRA can take effect or the first day on which coverage for the individual under the QSEHRA takes effect, as applicable. The Departments anticipate that the first day on which an individual coverage HRA can become effective or the date on which a QSEHRA is effective will generally be the first day of the plan year. In either case, the triggering event is the first day of the plan year. However, an individual coverage HRA may offer more than one effective date option to accommodate an individual who, under the final integration rules, is not required to be sent the notice setting forth the terms of the HRA at least 90 days before the beginning of the individual coverage HRA plan year, as required by 26 CFR 54.9802–4(c)(6), 29 CFR 2590.702– 2(c)(6), and 45 CFR 146.123(c)(6) (for example, an individual who is newly hired and therefore newly offered the individual coverage HRA in the middle of the plan year).278 For individuals 278 Because employees may not enroll in an individual coverage HRA if they are not enrolled in individual health insurance coverage, the Departments anticipate that some employers may want to provide employees who are not eligible to participate in the individual coverage HRA at least PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 28953 who are newly hired or who otherwise newly gain access to an individual coverage HRA during the plan year, the triggering event is the first day on which the individual coverage HRA can take effect for those who enroll in individual health insurance coverage that itself takes effect no later than that date.279 This is the case even for the individuals or dependents who do not actually enroll in the individual coverage HRA until a later date. For example, assume an employer hires a new employee on June 15 and offers an individual coverage HRA to the employee that may take effect on either (1) July 1, if the employee is enrolled in individual health insurance coverage that takes effect no later than that date; or (2) August 1, if the employee enrolls in individual health insurance coverage that will take effect no later than that date. In this case, the employee’s triggering event is July 1 because that is the first day on which coverage under the individual coverage HRA can take effect. Several commenters supported applying the advanced availability rules at 45 CFR 155.420(c)(2) to the proposed new SEP in order to allow qualified individuals, enrollees, and dependents to enroll in or change to a different individual health insurance plan in advance of when their individual coverage HRA or QSEHRA would begin. As discussed earlier in this preamble in response to comments on the final integration rules, many commenters supported the requirement that individuals covered by an individual coverage HRA must be enrolled in individual health insurance coverage and that the HRA must implement reasonable procedures to substantiate that participants and dependents will be enrolled in individual health insurance coverage for the plan year, or for the portion of the plan year during which the individual is covered by the HRA, as applicable. Several commenters noted the importance that individuals be enrolled in individual health insurance coverage by the time that their individual coverage HRA takes effect to ensure that they have health 90 days prior to the start of the HRA plan year with flexibility regarding the start date of their individual coverage HRA, so that the employees have sufficient time to enroll in individual health insurance coverage after receiving the notice. 279 For individuals who are newly hired or who otherwise become newly eligible for a QSEHRA, the triggering event is the first day on which coverage under the QSEHRA is effective. However, a QSEHRA may not reimburse any incurred medical care expense until the participant substantiates that he or she (and the individuals whose expenses are being reimbursed) has MEC for the month during which the expense was incurred. E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28954 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations insurance coverage that complies with PHS Act sections 2711 and 2713 at all times during which they are covered by the individual coverage HRA. In order to avoid effectively forfeiting their HRA because they are not enrolled in individual health insurance coverage on the day that their individual coverage HRA can take effect, employees and dependents generally will need to make an individual health insurance plan selection before that date. The final SEP rules include several changes in response to these comments. First, the proposed rules stated that the SEP applies to an individual who ‘‘gains access to and enrolls in’’ an individual coverage HRA or QSEHRA. The final SEP rules remove the phrase ‘‘and enrolls in’’ to clarify that currently being covered by the individual coverage HRA or QSEHRA is not necessary to trigger the SEP. This change is intended to better align with the requirement that participants and any dependents must be enrolled in individual health insurance coverage that will take effect no later than the date their individual coverage HRA takes effect, by ensuring that individuals will be able to enroll in individual health insurance coverage using the new SEP prior to the first day that their individual coverage HRA may take effect. The final SEP rules also include changes to the advanced availability rules to ensure that, whenever possible, employees and their dependents are enrolled in individual health insurance coverage (which is generally a requirement for those with an individual coverage HRA and an option for satisfying the requirement to enroll in MEC for those with a QSEHRA) by the time coverage under their individual coverage HRA may take effect or that their QSEHRA takes effect. Specifically, the final rules include a new paragraph at 45 CFR 155.420(c)(3) to provide that a qualified individual, enrollee, or his or her dependent who is described in paragraph (d)(14) has 60 days before the triggering event to select a QHP, unless the HRA or QSEHRA was not required to provide the notice setting forth its terms to such qualified individual or enrollee at least 90 days before the first day of the plan year, as specified in 26 CFR 54.9802–4(c)(6), 29 CFR 2590.702– 2(c)(6) and 45 CFR 146.123(c)(6) or Code section 9831(d)(4), as applicable, and therefore the qualified individual, enrollee, or his or her dependent(s) may not have received sufficient advance notice of eligibility for the individual coverage HRA or QSEHRA to enroll in individual health insurance coverage that takes effect by the time their individual coverage HRA may take VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 effect or their QSEHRA takes effect, in which case the qualified individual, enrollee, or his or her dependent(s) has 60 days before or after the triggering event to select a QHP. In other words, qualified individuals and enrollees to whom employers must send a notice setting forth the terms of the individual coverage HRA at least 90 days before the first day of the individual coverage HRA plan year, and, if applicable, their dependents, must enroll in individual health insurance coverage within 60 days before the date the individual coverage HRA may take effect, which would be the first day of the individual coverage plan year. Similarly, employees, and, if applicable, their dependents, who will be provided a QSEHRA, and whose employer is required to send them a written notice at least 90 days before the beginning of the plan year, have 60 days prior to the first day of the QSEHRA plan year to enroll in individual health insurance coverage. This change will help ensure that the individual coverage HRA can comply with the annual coverage substantiation requirement by the time that an individual’s or family member’s individual coverage HRA takes effect, or that the QSEHRA satisfies the requirement that individuals who are provided the QSEHRA and who intend to satisfy their requirement to have MEC by enrolling in individual health insurance coverage have MEC. It will also reduce gaps in coverage by helping ensure that individuals and dependents who will be eligible for an individual coverage HRA and are notified at least 90 days before the beginning of the individual coverage HRA plan year are covered by individual health insurance coverage for the full HRA plan year and do not inadvertently forfeit their HRA. In contrast, because individual coverage HRAs and QSEHRAs must only provide notice by the day that an individual coverage HRA may take effect or that a QSEHRA takes effect for employees who newly become eligible for an individual coverage HRA or are newly provided a QSEHRA less than 90 days prior to the beginning of the individual coverage HRA or QSEHRA plan year (or during the plan year), these employees are unlikely to receive this notice as far in advance of their SEP triggering event. Therefore, these employees may need time after their triggering event to select an individual health insurance plan for themselves, and, if applicable, for their dependent(s). To accommodate these employees and their dependents, the final SEP rules provide them with up to 60 days before or after their triggering PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 event to enroll in individual health insurance coverage. Under this rule combined with the coverage effective date rules discussed in the next section of this preamble, newly hired employees and their dependents may enroll in individual health insurance coverage that does not take effect until up to 3 months after the earliest date that their individual coverage HRA may take effect, or up to 3 months after the date coverage begins under their QSEHRA.280 For example, an employee who starts work on July 25, and whose individual coverage HRA may take effect on August 1 (or whose QSEHRA does take effect on August 1), will have until September 30—60 days following the triggering event date—to enroll in an individual health insurance plan. If the employee enrolls on September 30, then his or her individual health insurance coverage will take effect on October 1.281 The Departments encourage employers to work with employees who do not receive substantial advance notice of their individual coverage HRA to help them understand the latest date by which they must enroll themselves, and, if applicable, their dependents, in individual health insurance coverage to avoid effectively forfeiting their individual coverage HRA. 2. Coverage Effective Dates The proposed rules added a new paragraph at 45 CFR 155.420(b)(2)(vi) to 280 The Departments note that nothing in the final SEP rules eliminates the requirement that individual coverage HRAs comply with the final integration rules. Individual coverage HRAs must be designed in accordance with all the applicable rules, including the final integration rules and the final SEP rules. 281 Additionally, partial year individual coverage HRA or QSEHRA coverage may occur due to employees gaining new dependents during the plan year. 45 CFR 155.420(c)(1) provides qualified individuals who gain a new dependent due to the birth or adoption of a child, or due to a child support or other court order, and therefore qualify for the SEP at 45 CFR 155.420(d)(2)(i), with 60 days to enroll their new dependent in individual health insurance coverage. As provided at 45 CFR 155.420(b)(2)(i), this coverage takes effect retroactively to the child’s date of birth or adoption, or the date of the child support or other court order, or, at the option of the Exchange, the qualified individual may request that it take effect prospectively. To the extent the HIPAA special enrollment rules or other rules require group health plans to make such coverage available under such circumstances, either retroactively or prospectively, employers should ensure that employees understand how much time they have to enroll their new dependent in their individual coverage HRA, especially if they will have less than the 60 days post-SEP triggering event that they have to enroll their new dependent in individual health insurance coverage. See Code section 9801(f) and 26 CFR 54.9801–6; ERISA section 701(f) and 29 CFR 2590.701–6; and PHS Act section 2704(f) and 45 CFR 146.117. The Departments note that QSEHRAs are not subject to the HIPAA special enrollment rules. See Code section 9831(d)(1). E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 provide that if plan selection is made before the day of the triggering event, then the coverage effective date is either the first day of the first month following the SEP triggering event, or, if the triggering event is on the first day of a month, the date of the triggering event. Under the proposed rules, if plan selection is made on or after the day of the triggering event, coverage would take effect the first day of the month following the date of plan selection. For example, under the proposed rules, if an individual newly gains access to an individual coverage HRA or is provided a QSEHRA for a plan year starting April 1 and enters April 1 in their application for individual health insurance coverage as their HRA or QSEHRA effective date, then so long as the individual selects an individual health insurance plan before April 1, the effective date of their new individual health insurance coverage will be April 1. Several commenters supported providing a coverage effective date of the first day of the first month following the individual’s plan selection and SEP triggering event. One commenter agreed that a first-of-the-month effective date was appropriate, but also stated that this may require issuers to allow an additional premium payment during an employee’s first month of employment.282 The final rules include coverage effective dates for this SEP as proposed, with some edits to incorporate the changes at 45 CFR 155.420(d)(14) and for clarity. Additionally, with regard to timing of premium payments for individual health insurance coverage, HHS notes that in other contexts individual market plans on- and offExchange regularly receive enrollment information within the same timeframe that will apply for the new SEP’s coverage effective date rules. For example, under current rules, if a qualified individual or dependent is going to lose MEC on March 31 and enrolls in coverage during March, his or her coverage effective date is April 1. Therefore, issuers that already participate in the individual health insurance market will be accustomed to setting premium payment deadlines for enrollees in this situation. 282 Under 45 CFR 155.400(e)(1)(ii), if an individual has a coverage effective date of April 1, for example, then the issuer could set a premium payment deadline as early as April 1, but may, instead, adopt a policy setting a later due date (either 30 days after the enrollment transaction was received, or 30 days after the policy start date, whichever is later). Therefore, the new enrollee might have a similar deadline for his or her initial payment that he or she has for his or her subsequent payment. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 3. Special Enrollment Period Verification Several commenters expressed support for verifying SEP eligibility for employees newly enrolling in individual health insurance coverage based on the new SEP, and one commenter requested additional guidance on how the verification would be administered. HHS confirms that Exchanges that use the Federal HealthCare.gov platform will require these individuals to submit documentation to confirm their SEP eligibility prior to effectuating their enrollment in individual health insurance coverage through the Exchange. More information on the process for submitting documents to verify SEP eligibility is available on HealthCare.gov, and HHS will provide additional guidance on how the FFEs and State Exchanges on the Federal platform will confirm eligibility for the new SEP. B. Individuals Re-Enrolling in Individual Coverage HRA or Being Provided a QSEHRA From the Prior Plan Year The proposed rules requested comments on whether an employee who is enrolled in an individual coverage HRA or provided a QSEHRA should be eligible for the SEP at 45 CFR 155.420(d)(14) annually, at the beginning of each new plan year of the individual coverage HRA or QSEHRA, particularly if the new plan year is not aligned with the calendar year. The proposed rules noted that such annual availability would allow employees to change to new individual health insurance coverage in response to updated information about their individual coverage HRA or QSEHRA for each of their plan years, even if their individual coverage HRA or QSEHRA plan year is not based on a calendar year cycle. HHS notes that employees and dependents enrolled in an individual coverage HRA or provided a QSEHRA that has a calendar year plan year would have this option; that is, they would be able to change their individual health insurance plan in response to updated information about their individual coverage HRA or QSEHRA during the individual market open enrollment period. Some commenters supported providing the new SEP annually for employees and dependents enrolled in an individual coverage HRA or provided a QSEHRA and whose individual coverage HRA or QSEHRA has a noncalendar year plan year, in order to allow employees to enroll in or change PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 28955 to a new plan in response to updated information about their individual coverage HRA or QSEHRA each plan year. Several commenters emphasized the importance of providing employees and their dependents with the opportunity to re-evaluate their individual health insurance coverage options at the same time that their individual coverage HRA or QSEHRA is likely to change, with one commenter suggesting that employers should not be permitted to make changes to their individual coverage HRA unless employees may also make changes to their individual health insurance coverage during the calendar year. Another commenter suggested that providing the new SEP annually would offer convenience for employees and employers who choose to begin their individual coverage HRA plan year on a date other than January 1. However, some commenters opposed providing the new SEP on an annual basis due to concerns that allowing consumers to regularly change plans during the calendar year would harm the individual market risk pool. One commenter generally opposed providing the new SEP annually, but specified that if HHS chooses to do so, it should only be available to employees and dependents whose employer changes their individual coverage HRA contribution in excess of a certain amount, such as $100, and that this change be verified to prevent employees who do not qualify for the SEP from accessing it for reasons related to a health condition. To ensure that the SEP would not be available on an annual basis, one commenter suggested offering the SEP only after an employee becomes eligible for an individual coverage HRA following a period of at least 60 days during which they were not eligible for an HRA from the same employer. Other commenters opposed offering the new SEP annually based on concerns that employees who changed individual health insurance coverage during the calendar year would be harmed because their deductibles and other accumulators would reset twice per year: Once after the calendar year individual coverage open enrollment period, and then again after their SEP. One commenter suggested that this could negate the potential advantage to the employee of changing plans to take advantage of an update to their individual coverage HRA or QSEHRA. Several commenters suggested that to mitigate this challenge, employers should provide individual coverage HRAs on a calendar-year basis to align updates that they make to their individual coverage HRA with the E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28956 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations individual market open enrollment period, with one commenter recommending that the Departments require employers to do so. One commenter suggested that the final rules should permit employers to begin offering individual coverage HRAs at any time during the calendar year, and the Departments could then require these employers to transition to offering individual coverage HRAs based on a calendar plan year within a reasonable period of time, such as 5 years. HHS determined that employees who are enrolled in an individual coverage HRA or who are provided a QSEHRA should have the option to re-evaluate their individual health insurance coverage options for each new individual coverage HRA or QSEHRA plan year, regardless of whether the HRA or QSEHRA is offered or provided (as applicable) on a calendar plan year basis. However, the final rules provide that the new SEP will not be available on an annual basis at the beginning of a new individual coverage HRA or QSEHRA plan year to individuals who are already enrolled in an individual coverage HRA or who are already provided a QSEHRA. This is because employees offered an individual coverage HRA or provided a QSEHRA with a calendar year plan year may reevaluate their individual health insurance coverage options and change their individual health insurance plan, if they wish to do so, during the annual individual market open enrollment period. Further, individuals with an individual coverage HRA or QSEHRA with a non-calendar year plan year will have an opportunity through an existing SEP to re-evaluate their coverage options. More specifically, because HRAs are group health plans, employees enrolled in an individual coverage HRA with a non-calendar year plan year may qualify for an SEP on an annual basis pursuant to existing rules at 45 CFR 155.420(d)(1)(ii) (the non-calendar year plan year SEP). This SEP applies to qualified individuals and dependents enrolled in a group health plan or an individual health insurance plan with a non-calendar year plan year, even if the qualified individual or his or her dependent has the option to renew the coverage. In addition, while Cures Act section 18001(c) provides that the term ‘‘group health plan’’ generally does not include a QSEHRA,283 HHS will treat a QSEHRA with a non-calendar year plan year as a group health plan for the 283 A QSEHRA continues to be treated as a group health plan under the PHS Act for purpose of Part C Title XI of the Social Security Act. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 limited purpose of the non-calendar year plan year SEP, and intends to codify this interpretation in future rulemaking. For the non-calendar year plan year SEP, the triggering event is the last day of the plan year. HHS has determined that the availability of the non-calendar year plan year SEP achieves an appropriate balance between providing employers with flexibility to offer an individual coverage HRA or provide a QSEHRA on a 12-month cycle that meets their needs and allowing employees and their dependents the flexibility to re-assess their individual health insurance coverage options at the same time that the terms of their individual coverage HRA or QSEHRA may change. Additionally, per 45 CFR 155.420(a)(4), the non-calendar year plan year SEP is subject to plan category limitations for Exchange enrollees, which HHS has determined will mitigate commenters’ concerns about the potential risks to individual market stability that providing employees with the flexibility to choose a different plan annually, outside of the annual individual market open enrollment period, could pose. Employers that want to ensure their employees have the ability to change to a different individual health insurance policy each individual coverage HRA or QSEHRA plan year without being subject to plan category limitations, and consider potential changes to their individual coverage HRA or to their QSEHRA at the same time that their costs for individual health insurance coverage may also change, can align their individual coverage HRA or QSEHRA plan year with the calendar year. HHS will incorporate messaging into the HealthCare.gov application for Exchange individual health insurance coverage and other technical assistance materials to help employees understand that changing individual health insurance coverage during the calendar year will reset their deductibles and other accumulators. HHS encourages State Exchanges to adopt similar messaging. C. Plan Category Limitations To allow employees and their dependents the flexibility to adequately respond to newly gaining access to an individual coverage HRA or newly being provided a QSEHRA, the proposed rules included an amendment to 45 CFR 155.420(a)(4)(iii) to exclude Exchange enrollees who would qualify for the new SEP from plan category limitations.284 Therefore, under the 284 45 CFR 155.420(a)(4) does not apply to SEPs in the individual market off-Exchange. PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 proposed rules, individuals eligible for the new SEP who are currently enrolled in individual health insurance coverage on an Exchange would be able to select any available Exchange plan without regard to the metal level of their current coverage. Several commenters expressed support for the proposal to exempt the new SEP from plan category limitations, noting the importance of providing access to individual health insurance coverage or flexibility to change their current individual health insurance plan to employees and dependents who qualify for this new SEP. HHS agrees with commenters about the importance of providing access to individual health insurance coverage or flexibility to change their current individual health insurance plan to employees and dependents who qualify for the new SEP, and is, therefore, finalizing the amendment to 45 CFR 155.420(a)(4)(iii) to exempt individuals eligible for the new SEP from plan category limitations. However, see the discussion earlier in this section of the preamble regarding the application of plan category limitations to individuals to whom the non-calendar year plan year SEP applies. VI. Applicability Dates The proposed integration rules and proposed excepted benefit HRA rules, as well as the proposed DOL clarification and the proposed clarification by the Departments regarding the meaning of ‘‘group health insurance coverage,’’ were proposed to apply to group health plans and health insurance issuers for plan years beginning on or after January 1, 2020. The proposed PTC rules were proposed to apply for taxable years beginning on or after January 1, 2020, and the proposed SEP rules were proposed to apply January 1, 2020. The proposed rules also provided that taxpayers and others could not rely on the proposed rules. The Departments solicited comments on the proposed applicability date. Some commenters requested that the Departments either provide an earlier applicability date or maintain the proposed general applicability date of January 2020. Some urged finalization by the end of the first quarter of 2019 to account for the 2020 rate setting schedule and to allow for implementation by 2020. Many commenters expressed concern that issuers, state insurance regulators, the Exchanges, and employers would not be prepared for implementation of the final rules by 2020 and requested various applicability date delays, including a 2021 applicability date, an E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations applicability date of 12 or 18 months following finalization of the rule, and an indefinite delay to allow further time to study the market. These commenters focused on the significance of the changes made by the proposed rules and the anticipated complexity of implementation. Several State Exchanges submitted comments urging the Departments to delay the applicability date for several plan years or until further support for states is available. These commenters stated that it would be very difficult, and in some instances impossible, to implement the system changes required by the proposed integration, PTC, and SEP rules for the 2020 plan year. One commenter suggested that individual coverage HRAs be implemented on a small scale for only certain employers and employees or only for a very limited time period, such as 2 years. Another commenter requested that the Departments postpone finalization of the integration rules until the Departments develop a federally-hosted electronic data source to verify individual coverage HRA offer information required to determine APTC eligibility. The Departments considered the comments and the concerns raised by various State Exchanges, issuers, employers and other stakeholders related to the ability of the Exchanges to fully implement changes related to the final rules in time for open enrollment for the 2020 plan year. In particular, the Departments acknowledge the crucial role that the Exchanges have in implementation and operationalization of the final rules, and the Departments will work closely with the Exchanges on implementation. The Departments recognize that Exchanges may be unable to fully implement changes related to the final rules in time for open enrollment for the 2020 plan year. However, prior to full implementation, the Departments will work with the Exchanges on their strategies to provide information to consumers about affordability of individual coverage HRAs and eligibility for APTC, including how employees can access individual health insurance coverage through the Exchanges and determine whether they should use APTC. Ongoing technical assistance will be provided related to the development of Exchanges’ tools and functionality to support employers and employees with understanding HRA affordability determinations and their impact on APTC eligibility, as well as the SEP for those with an offer of an individual coverage HRA. HHS has already VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 discussed with State Exchanges what changes would likely be necessary if the rule were finalized as proposed to assist with planning, as well as what kind of assistance would be most helpful during implementation. Specific assistance could include sharing technical and educational documentation from FFE implementation that can be leveraged to support State Exchange efforts. In addition, the Departments will provide assistance to Exchanges in developing information and tools that could be provided to employers and employees to help ensure smooth implementation before the full system changes are complete. This could include State Exchanges providing employees with information on how they can calculate HRA affordability and the impact on APTC in the absence of system changes that can make those calculations for the employee. The Departments have also considered that many individuals covered by an individual coverage HRA will prefer to select off-Exchange individual health insurance plans because salary reductions through a cafeteria plan may be used to pay premiums for off-Exchange coverage, if the employer so allows, and may not be used to pay premiums for Exchange coverage. To the extent a significant proportion of employees with individual coverage HRAs purchase individual health insurance coverage off the Exchange, concerns about burden on the Exchanges, and concerns regarding the effects of timely operationalization of the PTC rules, are mitigated. The Departments have also worked to release the final rules as early in 2019 as possible, in recognition of the implementation timing issues raised. With regard to the concerns expressed about the interaction of the release of the final rules with rate filing for 2020, the Departments note that the proposed rules were published in October 2018, to provide sufficient notice of the Departments’ proposals in advance of the 2020 plan year. While these final rules adopt some changes in response to comments, they are substantially similar to the proposed rules. Even though the proposed rules provided that taxpayers and others may not rely on the proposed rules, the Departments understand that issuers began considering the potential impact of the rules on rates well in advance of the final rules. Further, issuers generally will have an opportunity to make changes in response to the final rules before the rate filing deadlines for the 2020 plan year. The Departments also note, and considered, that plan sponsors may PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 28957 choose if and when to offer an individual coverage HRA (or an excepted benefit HRA) and may do so any time on or after the applicability date. The Departments intend to provide the guidance necessary for plan sponsors to offer individual coverage HRAs and excepted benefit HRAs for the 2020 plan year, but the Departments also expect that plan sponsors will take the time they need to evaluate the final rules and to take advantage of these new coverage options if and when is best for their workforce. The Departments have also considered that Executive Order 13813, issued in October 2017, set forth HRA expansion as an Administration priority ‘‘in the near term,’’ in order to provide Americans with more options for financing their healthcare. Taking all of these considerations into account, the Departments have determined that it is appropriate to finalize the applicability date, as proposed. Relatedly, one commenter requested that a ‘‘no inference’’ standard be the benchmark for reliance prior to 2020 with regard to individual coverage HRAs, which the Departments understand to be a request that the Departments not take enforcement against HRAs that failed to comply with the market requirements prior to 2020, under the rules and guidance in effect prior to 2020. The Departments see no basis to provide such a rule and, therefore, the final rules do not include a ‘‘no inference’’ standard for reliance prior to the applicability date. Finally, HHS clarifies that, while the new SEP generally provides advanced availability to allow eligible individuals to enroll in individual health insurance coverage up to 60 days prior to the first day of coverage under their HRA, employees who are offered an individual coverage HRA with a plan year that begins early in 2020 will not have the full 60 day advanced availability period to select individual health insurance coverage using an SEP because the new SEP rules take effect on January 1, 2020. Therefore, plan sponsors offering an individual coverage HRA with a plan year that begins on January 1, 2020 should help eligible employees understand that they must enroll in individual health insurance coverage during the open enrollment period, November 1, 2019 through December 15, 2019, for individual health insurance coverage that takes effect on January 1, 2020. E:\FR\FM\20JNR2.SGM 20JNR2 28958 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations VII. Economic Impact and Paperwork Burden jbell on DSK3GLQ082PROD with RULES2 A. Summary The final rules remove the current prohibition on integrating HRAs with individual health insurance coverage, if certain conditions are satisfied. The final rules also set forth conditions under which certain HRAs will be recognized as limited excepted benefits. In addition, the Treasury Department and the IRS are finalizing rules regarding PTC eligibility for individuals offered an individual coverage HRA. Further, DOL is finalizing a safe-harbor clarification to provide assurance that the individual health insurance coverage the premiums of which are reimbursed by an HRA, a QSEHRA or a supplemental salary reduction arrangement does not become part of an ERISA plan, if certain safe harbor conditions are satisfied, and the Departments are finalizing a related clarification to the definition of group health insurance coverage. Finally, HHS is finalizing rules to provide an SEP in the individual market for individuals who newly gain access to an individual coverage HRA or who are newly provided a QSEHRA. The Departments have examined the effects of the final rules as required by Executive Order 13563 (76 FR 3821, January 21, 2011, Improving Regulation and Regulatory Review); Executive Order 12866 (58 FR 51735, October 4, 1993, Regulatory Planning and Review); the Regulatory Flexibility Act (September 19, 1980, Pub. L. 96–354); section 1102(b) of the Social Security Act (42 U.S.C. 1102(b)); section 202 of the Unfunded Mandates Reform Act of 1995 (March 22, 1995, Pub. L. 104–4); Executive Order 13132 (64 FR 43255, August 10, 1999, Federalism); the Congressional Review Act (5 U.S.C. 804(2)); and Executive Order 13771 (82 FR 9339, February 3, 2017, Reducing Regulation and Controlling Regulatory Costs). B. Executive Orders 12866 and 13563 Executive Order 12866 directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 is supplemental to and reaffirms the principles, structures, and definitions governing regulatory review as established in Executive Order 12866. Section 3(f) of Executive Order 12866 defines a ‘‘significant regulatory action’’ VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 as an action that is likely to result in a rule: (1) Having an annual effect on the economy of $100 million or more in any one year, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local or tribal governments or communities (also referred to as ‘‘economically significant’’); (2) creating a serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive Order. A regulatory impact analysis must be prepared for major rules with economically significant effects (for example, $100 million or more in any one year), and a ‘‘significant’’ regulatory action is subject to review by the Office of Management and Budget (OMB). The Departments anticipate that this regulatory action is likely to have economic impacts of $100 million or more in at least one year, and thus meets the definition of a ‘‘significant rule’’ under Executive Order 12866. Therefore, the Departments have provided an assessment of the potential costs, benefits, and transfers associated with the final rules. In accordance with the provisions of Executive Order 12866, the final rules were reviewed by OMB. 1. Need for Regulatory Action This regulatory action is taken, in part, in light of Executive Order 13813 directing the Departments to consider proposing regulations or revising guidance to expand the flexibility and use of HRAs. In addition, this regulatory action is taken because, since the time that the Departments previously prohibited integration with individual health insurance coverage by regulation, the Departments have observed that many employers, especially small employers, continue to struggle to offer health insurance coverage to their employees. There has been a continued decline in the percentage of small firms offering health coverage 285 as well as a 285 Between 2010 and 2018, there has been a significant decline in the number of small firms offering coverage. For firms with 3 to 9 workers, the decline has been from 59 percent to 47 percent, for firms with 10 to 24 workers, the decline has been from 76 percent to 64 percent, and for firms with 25 to 49 workers, the decline has been from 92 percent to 71 percent. See Kaiser Family Foundation, ‘‘Employer Health Benefits 2018 PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 decline in the percentage of workers at small firms receiving health insurance coverage from their employer.286 Moreover, 80 percent of firms that offer coverage only provide a single option,287 and economic research demonstrates that there is a significant benefit of additional choice for employees.288 Further, this regulatory action is being taken at this time because the Departments have had additional time to consider whether, and what type of, conditions would be sufficient to mitigate the risk of adverse selection and health factor discrimination that might otherwise result from allowing HRAs to be integrated with individual health insurance coverage, and the Departments expect that the conditions adopted in the final rules will significantly mitigate the risk of adverse selection. The final rules are intended to increase the usability of HRAs to provide more Americans, including employees who work at small businesses, with more healthcare options and to increase overall coverage. These changes will facilitate the development and operation of a healthcare system that provides highquality care at affordable prices for the American people by increasing consumer choice for employees and promoting competition in healthcare markets by providing additional options for employers and employees. The Departments are of the view that the benefits of the final rules will substantially outweigh the costs of the rules. The final rules will increase flexibility and choices of health coverage options for employers and employees. The use of individual coverage HRAs could potentially reduce healthcare spending, particularly less efficient spending,289 and ultimately Annual Survey’’, Figure 2.2, at https://files.kff.org/ attachment/Report-Employer-Health-BenefitsAnnual-Survey-2018. 286 Between 2010 and 2018, there has been a significant decline in the number of workers covered by their firm’s health benefits. For firms with 3 to 24 workers, the decline has been from 44 percent to 30 percent and for firms with 25 to 49 workers, the decline has been from 59 percent to 44 percent. Id., Figure 3.9. 287 Id., Figure 4.1 288 An analysis of choices made in the large group market found that offering multiple plan choices (at large group prices) was as valuable to the median consumer as a 13 percent premium reduction. See Dafny, Leemore, Kate Ho and Mauricio Varela, ‘‘Let Them Have Choice: Gains from Shifting Away from Employer-Sponsored Health Insurance and Toward an Individual Exchange,’’ American Economic Journal: Economic Policy, 2013, 5(1):32–58. 289 By less efficient healthcare spending, the Departments generally mean spending that is of low value from the consumer’s perspective, relative to the cost. The cost includes out-of-pocket spending E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations result in increased taxable wages for workers currently in firms that offer traditional group health plans. The final rules are also expected to increase the number of low- and moderate-wage workers (and their family members) with health insurance coverage. 2. Summary of Impacts of Individual Coverage HRAs The expected benefits, costs and transfers of the final rules are 28959 summarized in Table 1 and discussed in detail later in this section of the preamble. TABLE 1—ACCOUNTING TABLE Benefits: Qualitative: • Gain of health insurance and potentially improved financial or health outcomes for some employees who are newly offered or newly accept benefits. • Increased choice and flexibility for employees and employers around compensation arrangements, potentially resulting in more efficient use of healthcare and more efficient labor markets (including higher taxable wages). • Decreased administrative costs for some employers who no longer offer traditional group health plans for some, or all, employees. Costs: Qualitative: • Loss of health insurance and potentially poorer financial or health outcomes for some individuals who experience premium increases. • Less comprehensive coverage and fewer health benefits for some individuals with individual health insurance coverage as compared to traditional group health plan coverage. • Increased administrative costs for employers, employees, and government agencies to learn about and/or use a new health benefits option. Transfers Estimate (billion) Annualized Monetized ($/year) ........................................................................ (Net tax revenue loss) ..................................................................................... Year dollar $4.5 4.9 2020 2020 Discount rate (percent) 7 3 Period covered 2020–2029 2020–2029 Quantitative: 290 • Reduced tax revenue as a result of new individual coverage HRAs offered by employers previously offering no health benefits, less reduced PTC from employees in such firms.. • Increase in average individual market premiums of about 1 percent and resulting increase in PTC.. • Small decrease in per capita Medicare premiums and increase in net Medicare outlays.. Qualitative: • Increased out-of-pocket costs for some employees who move from traditional group health plans to individual health insurance coverage and decreased costs for other employees who move from traditional group health plans to individual health insurance coverage (i.e., transfers from reduced within-firm cross-subsidization).. • Reduced tax revenue as a result of new excepted benefit HRA.. In all cases, the counterfactual baseline for analysis is current law. That is, the analysis assumes as the baseline statutes enacted and regulations that are final as of date of issuance of the final rules. Benefits jbell on DSK3GLQ082PROD with RULES2 Gain of health insurance coverage. Some individuals could experience a gain in health insurance coverage, greater financial security and potentially improved health outcomes, if employees such as copayments and deductibles plus amounts paid by the health plan. 290 The monetized estimates are of the net tax revenue loss, including reduced income and payroll tax revenue from employees who would receive individual coverage HRAs and would not otherwise have a tax exclusion for a traditional group health plan, reduced PTC from individuals who would VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 are newly offered and accept individual coverage HRAs. As explained in greater detail in the Transfers section later in this section of the preamble, the Departments estimate that, on net, the number of insured persons will increase by about 800,000 by 2029, due to the final rules. Most of these newly insured individuals are expected to be low- and moderate-income workers in firms that currently do not offer a traditional group health plan. Some commenters agreed that the allowance of individual coverage HRAs creates new options for small employers who have otherwise been unable to offer health insurance coverage. Some commenters mentioned that some segments of their workforce might particularly benefit. One commenter suggested that large employers might newly provide individual coverage HRAs to part-time or seasonal/ temporary workers while maintaining receive individual coverage HRAs and would otherwise receive PTC, and increased PTC due to the increase in Exchange premiums; plus the increased Medicare outlays net of increased total premiums paid. As noted in the text later in this section of the preamble, the quantitative estimates are subject to considerable uncertainty. For example, the rule could cause tax revenue to increase if the adoption of individual coverage HRAs leads to reduced healthcare spending and higher taxable wages. Or the rule could result in larger premium increases in the individual market, or in premium decreases, if the rule results in more substantial changes in the health of the individual market risk pool. PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28960 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations traditional benefits for their full-time employees. Increased choice and flexibility for employees and employers. As a result of the final rules, employees will be able to purchase insurance with a tax subsidy by use of an individual coverage HRA, without being locked into a specific plan or selection of plans chosen by their employer. As explained later in this section of the preamble, a relatively small number of employees could have fewer choices of plans in the individual market than the number of group health plan choices previously provided by their employer, and some might be unable to find a new individual health insurance plan that covers their preferred healthcare providers. However, small firms are more likely to offer individual coverage HRAs than large firms and small firms that offer a traditional group health plan typically offer a single option. Therefore, employees at the vast majority of firms are likely to have more options through an individual coverage HRA than through a traditional group plan. The expansion of enrollment in the individual market due to the final rules could also induce additional insurers to provide individual market coverage. The Departments are of the view that on net, the final rules will significantly increase choice and flexibility for employees. Employers also will benefit from having another choice of a tax-preferred health benefit to offer their employees, giving them another tool to attract and retain workers. Current compensation arrangements can result in less efficient labor markets and inefficient healthcare spending. Employees within a firm (or employees within certain classes of employees within a firm) are generally offered the same set of health benefits. As a result, some employees receive a greater share of compensation in the form of benefits than they would prefer, while others receive less. An individual coverage HRA will allow employees to choose coverage that better suits their preferences, allowing those who want a less comprehensive plan to select one and pay less, while allowing those who want a more comprehensive plan to pay more. In addition, some employers offer plans with a wide choice of providers, reflecting the diverse preferences and healthcare needs of their employees. While a broader network contains certain benefits, it also weakens the ability of employers and issuers to negotiate lower provider prices or otherwise manage employee care. In contrast, in the individual market insurers have an incentive to keep VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 premiums low relative to the SLCSP, which is used to determine the PTC. Hence, insurers are more likely to have a narrower choice of providers in order to negotiate lower prices. By expanding the ability of consumers to choose coverage that fits their preferences, the final rules will reduce these inefficiencies in labor markets and healthcare spending. Some employees who will be offered individual coverage HRAs under the final rules might choose plans with lower premiums and higher deductibles and copayments (all of which could potentially be paid out of the HRA) and narrower provider networks than they would choose if offered a traditional group health plan. Employees facing higher cost sharing could become more cost-conscious consumers of healthcare. Narrower provider networks could strengthen the ability of purchasers (through their insurers) to negotiate lower provider prices. Both effects could lead to reduced healthcare spending, which could in turn lead to reductions in amounts made available under individual coverage HRAs and corresponding increases in taxable wages. However, these benefits are uncertain and would take some time to occur.291 Moreover, the provision of a new health benefit that can be used to pay cost-sharing as well as premiums and that is available to employees who were previously uninsured or enrolled in unsubsidized coverage would be expected to increase, rather than decrease, healthcare utilization by some consumers. Individual coverage HRAs provide flexibility for small employers in particular that might have little expertise or skill in choosing traditional group health plans or in administering coverage effectively for employees. However, some small employers can already obtain lower-cost coverage in the small group market or through AHPs than they could otherwise provide on 291 The individual coverage HRA provides an income and payroll tax exclusion that is available only to workers and, unlike the PTC, benefits workers at all income levels, including workers with incomes in excess of 400 percent of the federal poverty level. Thus, it is possible that the final rules could encourage individuals to join the labor force or to work more hours or seek higher-paying employment, generating further economic benefits. In addition, the final rules could increase labor force mobility (i.e., encourage workers to move more freely to employers where their productivity is highest), because workers enrolled in individual health insurance coverage could find it easier to retain their coverage when they change jobs. However, these effects are highly uncertain, are likely to be relatively small, and might take some time to occur. Labor supply changes are not reflected in the revenue estimates provided in the transfers section later in this section of the preamble. PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 their own. Small employers that are not ALEs can also forego offering health benefits and allow their employees to obtain individual health insurance coverage, often with PTC subsidization, without liability under Code section 4980H. Qualified small employers can also pursue establishment of QSEHRAs. Thus, small employers whose employees have particularly high healthcare costs or small employers that have little skill or interest in administering health benefits might use these other options to control costs even in the absence of the final rules. If so, the increased efficiency gain from providing an additional incentive for small employers to drop traditional group health plans in favor of individual coverage HRAs could be modest. Some commenters agreed that the proposed rules would enable employers to offer more affordable health coverage alternatives to employees. Some commenters expressed general support for allowing employers to move to a defined contribution approach for health insurance coverage. The Departments agree that a defined contribution approach is more flexible for employers because it is easier for employers to plan for the future. Furthermore a defined contribution approach reduces the risk that an employer’s healthcare costs increase due to factors outside an employer’s control. Reduced administrative costs for some employers. Employers that offer an individual coverage HRA rather than a traditional group health plan could experience reduced administrative costs. For example, such employers will no longer need to choose health insurance plans or self-insured health benefits for their employees and manage those plans. Some of these costs will be borne by HRA recipients. However, overall costs may be lower, particularly for small employers and their employees, as loading fees (that is, premiums in excess of expected insurance claims) appear to be quite high for small firms that provide traditional group coverage.292 292 One study using data for 1997 through 2001 finds that firms with 50 or fewer employees face loading fees of 42 percent of premiums, whereas firms with more than 10,000 employees pay loading fees of just 4 percent. The authors note that these estimates are roughly consistent with the findings of earlier research. The authors caution that the introduction of Exchanges and medical loss ratio requirements provided for under PPACA should reduce loading fees for small firms, but conclude that loading factors for small firms might still be quite high. See Karaca-Mandic, Pinar, Jean M. Abraham and Charles E. Phelps, ‘‘How Do Health Insurance Fees Vary by Group Size? Implications E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations Some commenters stated that the proposed rules would be simpler to administer than traditional group health plans, thereby reducing administrative cost for employers. One commenter noted that while the costs of administering an individual coverage HRA could be lower than the cost of administering a traditional group health plan, the difference is not likely to be large. The Departments are of the view that it is possible that there will be modest reductions in administrative costs for employers who offer an individual coverage HRA rather than a traditional group health plan. Costs jbell on DSK3GLQ082PROD with RULES2 Loss of health insurance coverage. The Departments recognize that some individuals could experience a loss in health insurance coverage and that some of these people might experience worse financial or health outcomes as a result of the final rules.293 Loss of coverage could occur if employers drop traditional group health plans and if some previously covered employees do not accept the individual coverage HRA and fail to obtain their own coverage. Loss of coverage also could occur if the addition of new enrollees to the individual market causes premiums to rise, resulting in dropping of coverage by current individual market enrollees. Finally, loss of coverage could occur if employees who are currently purchasing coverage in the Exchange with the PTC become ineligible for the PTC by an offer of (or coverage under) an individual coverage HRA and experience increases in out-of-pocket premiums. In addition, while most employers that currently offer traditional group health plans offer only one type of plan, some employers offer more choices.294 for Healthcare Reform,’’ International Journal of Health Care Finance and Economics (2011) 11: 181–207. 293 The Departments note however that increased insurance coverage does not necessarily result in better physical health. For example, Baicker et al. found that increased Medicaid coverage in Oregon ‘‘generated no significant improvements in measured physical health outcomes in the first two years, but it did increase use of health care services, raise rates of diabetes detection and management, lower rates of depression, and reduce financial strain.’’ See Baicker, K., S. Taubman, H. Allen, M. Bernstein, J. Gruber, J. Newhouse, E. Schneider, B. Wright, A. Zaslavsky, and A. Finkelstein. 2013. ‘‘The Oregon Experiment: Effects of Medicaid on Clinical Outcomes.’’ New England Journal of Medicine 368: 1713–22. https://www.nejm.org/doi/ full/10.1056/NEJMsa1212321; and survey of the literature in Chapter 6 of Economic Report of the President, February 2018, https:// www.whitehouse.gov/wp-content/uploads/2018/02/ ERP_2018_Final-FINAL.pdf. 294 Among firms that offer traditional group coverage, an estimated 81 percent of firms with 3 VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 As a result, a relatively small number of employees could have fewer choices of plans in the individual market than the number of group health plan choices previously provided by their employer, and some might be unable to find new individual health insurance coverage that covers their preferred healthcare providers. The Departments requested comments on this finding and the extent to which the proposed rules could reduce employee choice or cause some individuals to become uninsured. Some commenters stated that the proposed rules would lead to adverse selection, increased premiums and overall destabilization of the individual market, causing some to become uninsured. (Adverse selection and resulting premium increases are discussed in greater detail in the Transfers section of this preamble.) Several commenters expressed concern that the offer of an individual coverage HRA could eliminate consumers’ eligibility for the PTC, increasing the cost of coverage. Some commenters suggested that some of these consumers would become uninsured. One commenter noted that this problem would be magnified for families, since affordability is determined by comparing the HRA employer contribution amount to the cost of a selfonly plan, rather than to a family plan. Several commenters suggested that increased administrative costs and confusion would cause some employees who are offered an individual coverage HRA to fail to enroll and become uninsured. The Departments acknowledge these concerns, but, as discussed later in this section of the preamble, estimate that the number of individuals with insurance coverage will be increased, rather than decreased, by adoption of the final rules. One reason for this is that the individual coverage HRA contribution that is offered will render an individual ineligible for the PTC only if it is of a sufficient size to make the offer affordable for the employee (and, in the case of ALEs, employers must make amounts available under an individual coverage HRA sufficient for the offer to be considered affordable in order to avoid liability under Code section 4980H). Thus, even if employees do transition from receiving PTC to receiving an offer of an individual coverage HRA, they are not necessarily to 199 employees offer only one type of plan, whereas 42 percent larger firms offer one plan, 45 percent offer two and 13 percent offer three or more plans. See Kaiser Family Foundation Employer Health Benefits 2018 Annual Survey, Figure 4.1, at https://files.kff.org/attachment/Report-EmployerHealth-Benefits-Annual-Survey-2018. PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 28961 expected to become uninsured. In addition, the final rules require employers to notify employees of the effect of individual coverage HRA offers and enrollment on PTC eligibility and require employees to substantiate enrollment in individual health insurance coverage in order to receive reimbursement from an individual coverage HRA, reducing the likelihood that confusion will lead to loss of insurance coverage. Less comprehensive coverage, fewer benefits. Some commenters suggested that some individuals with individual coverage HRAs, and, therefore, individual health insurance coverage, could experience a reduction in the comprehensiveness or affordability of healthcare benefits. For example, commenters noted that an employee might not be able to afford a policy with as high an actuarial value as their current traditional group health plan, or might be limited to narrower networks of providers in the individual market. Another commenter noted that patients may newly have limited choices, particularly among physician specialty care providers. Another commenter said that some employees could have fewer choices of plans in the individual market than the number of group health plan choices previously provided by their employer, or might be unable to find new individual health insurance coverage that covers their preferred healthcare providers. Another commenter stated that the proposed rules would result in poorer financial and health outcomes. The Departments recognize that some individuals who choose health plans with less comprehensive benefits or higher out-of-pocket payments could experience adverse health or financial outcomes. However, this is unlikely because an individual coverage HRA must be integrated with individual health insurance coverage, which generally is required to provide coverage of all essential health benefits and at least 60 percent actuarial value (subject to a de minimis variation). Moreover, to the extent that commenters’ assertions about narrower networks and higher cost sharing in the individual market are accurate, the Departments note that higher cost sharing and narrower networks could also be beneficial in that they encourage consumers to be more cost-conscious, reducing unnecessary and potentially counterproductive health care utilization, and thereby reducing premiums. Such premium decreases could, in turn, lead to increased wages across employees in a firm. For example, an employee might currently E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28962 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations have access to only one 80 percent actuarial value traditional group health plan with a relatively broad network, but under an individual coverage HRA will have access to a choice of plans, with actuarial values generally ranging from 60 to 80 percent or higher. If he or she chooses a 60 or 70 percent actuarial value plan, he or she will have a greater incentive to be cost-conscious and will likely spend less on healthcare, leaving more resources for other forms of consumption or saving. Increased administrative costs. In the impact analysis of the proposed rules, the Departments noted that the proposed rules could increase some administrative costs for employers, employees, and government entities. Under the final rules, all employers will have a new health benefits option about which to learn. Employers who offer individual coverage HRAs but did not offer employer-sponsored health benefits before will face increased costs of administering a health benefit. In addition, all employers that offer individual coverage HRAs will be required to establish reasonable procedures to substantiate that individuals covered by the HRA are enrolled in individual health insurance coverage or Medicare; to provide a notice to all employees who are eligible for the HRA explaining the PTC eligibility consequences of the HRA offer and acceptance and other information; and to comply with various other generally applicable group health plan requirements, such as maintaining a plan document and complying with various reporting requirements. Employers offering individual coverage HRAs will need to establish systems to reimburse premiums and employee outof-pocket medical care expenses, or hire third-party administrators to do so. In addition, to the extent an employer is subject to Code section 4980H, the employer will need to learn about the final PTC regulations and any other related guidance under Code section 4980H that the Treasury Department and the IRS may issue. As noted earlier in this preamble, administrative costs associated with individual coverage HRAs could be lower than costs for traditional group health plans for some employers. The Departments expect that third-party administrators and other benefit experts will work to minimize these costs for employers. Because offering an individual coverage HRA is voluntary, ultimately, employers that offer this benefit will do so only because they experience a net benefit from doing so. As to increased administrative burden and costs for employees, employees VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 who previously enrolled in a traditional group health plan and who now receive an individual coverage HRA will need to shop for and choose their own insurance and learn new procedures for accessing their HRA benefits. In addition, employees who receive an individual coverage HRA will need to substantiate enrollment in individual health insurance coverage once per plan year and in connection with each request for reimbursement. Further, Exchange enrollees might experience increased compliance burdens, to the extent that they must become familiar with the circumstances in which an offer of an individual coverage HRA precludes them from claiming the PTC. For employees who previously did not receive an offer of a traditional group health plan, this may require learning some of the PTC eligibility rules, and for employees who previously received an offer of a traditional group health plan, this may require learning new or different rules for PTC eligibility. Specifically, an employee who is offered a traditional group health plan is not eligible to claim the PTC for his or her Exchange coverage unless the premium of the lowest cost employer plan providing MV for self-only coverage less the employer contribution for self-only coverage exceeds 9.5 percent (indexed for inflation after 2014) of the employee’s household income (assuming the employee meets various other PTC eligibility requirements). In contrast, under the final PTC rules, an employee who is offered an individual coverage HRA will not be eligible to claim the PTC for his or her Exchange coverage unless the premium of the lowest cost silver plan for self-only coverage offered by the Exchange for the rating area in which the employee resides less the individual coverage HRA contribution amount exceeds 9.5 percent (indexed for inflation after 2014) of the employee’s household income (assuming the employee meets various other PTC eligibility requirements). However, the Departments note that the final rules will require HRA plan sponsors to furnish a notice to participants providing some of the information necessary for an individual to determine if the offer of the HRA could render them ineligible for the PTC. In addition, if an enrollee in Exchange coverage is eligible for the PTC, the amount of the PTC is based, in part, on the premium for the SLCSP for the coverage unit offered in the Exchange for the rating area in which the employee resides. As noted earlier, the final PTC rules use the premium for the PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 self-only lowest cost silver plan available to an employee in the Exchange for the rating area in which they reside solely for purposes of determining their individual coverage HRA affordability and the resulting impact on PTC eligibility. Therefore, Exchange enrollees may need to understand which silver level plan premium applies to them for APTC eligibility purposes and which silver level plan premium applies to their PTC calculation. Similarly, the FFEs and State Exchanges will incur one-time costs to incorporate the SEP and the PTC eligibility rules for individuals with an individual coverage HRA offer into their instructions for enrollees and Exchange employees, as well as in application system logic and automated calculations. HHS estimates that onetime costs to account for individual coverage HRAs for the FFEs will be approximately $3.9 million. HHS further estimates that the FFE call center, eligibility support contractors verifying SEP and application data, and other customer support functions will incur additional annual costs of approximately $56 million in 2020 to $243 million by 2022 to serve the expanded Exchange population. Assuming that State Exchanges will incur costs similar to the FFEs, total one-time costs incurred by the 12 State Exchanges will be approximately $46.8 million. Total additional ongoing costs incurred by the call centers, eligibility support contractors verifying SEP and application data, and other customer support functions for the 12 State Exchanges will be approximately $20 million in 2020 to $85 million by 2022. Under the final rules, the IRS also will need to add information regarding employees offered individual coverage HRAs to instructions for IRS forms for taxpayers, employee training materials, and calculation programs. In response to the Departments’ request for comments on the extent to which employer administrative costs would be increased or decreased by the rule, some commenters stated that complying with the individual coverage HRA rules would be burdensome. Several commenters expressed particular concern about the ongoing substantiation requirement. Some commenters noted that the proposed rules would create consumer confusion. Another commenter noted that recent cutbacks in funding for outreach and assistance in the individual market could exacerbate the confusion. One commenter stated that most Americans need a large amount of professional support when making E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations sound health insurance purchasing decisions and they also need a degree of help to manage their medical claims and coverage during the plan year, particularly in the face of any complex medical issue. The Departments requested comments on the implementation and ongoing costs to State Exchanges of individual coverage HRAs, and several stakeholders expressed concerns about these increased administrative costs. Although commenters did not quantify the costs, one State Exchange said it estimates a significant expense given the scope and complexity of the proposal. Costs identified include administering a new SEP; making IT changes involving new definitions and explanation texts; user testing; adding a table for the lowest cost silver plan; delaying implementation of other functions; administering appeals; and adding additional staffing for administration, training and oversight such as for increased call center activity and increased complexity. Another Exchange noted the need to update Exchange eligibility software to account for new forms for HRAs, new rules affecting PTC eligibility and new SEPs. Several states requested that the effective date of the final rules be delayed until State Exchanges have had sufficient time to implement the new requirements. As noted earlier in this preamble, the Departments have included in the final rules some provisions to mitigate these concerns and associated costs. For example, to ensure that employees who are eligible to receive an individual coverage HRA understand the potential effect on PTC eligibility, employers must provide a written notice to eligible participants. To mitigate burden on employers, the Departments are providing model language contemporaneously on certain aspects of the notice, including model language describing the PTC consequences. In addition, ongoing technical assistance will be provided to State Exchanges related to system development activities that will support employers and employees with HRA affordability determinations and the impact on APTC eligibility, as well as the SEP for those with an offer of an individual coverage HRA. HHS has already discussed with State Exchanges what changes would likely be necessary if the rule were finalized as proposed to assist with planning, as well as what kind of assistance would be most helpful during implementation. Specific assistance could include sharing technical and educational documentation from FFE implementation that can be leveraged to VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 support State Exchange efforts. This assistance could help State Exchanges implement changes related to the individual coverage HRA more quickly and with less overall cost. The Departments will also provide assistance to Exchanges in developing information and tools that could be provided to employers and employees to help ensure smooth implementation before the full system changes are complete. This could include State Exchanges providing employees with information on how they can calculate HRA affordability and the impact on APTC in the absence of system changes that can make those calculations for the employee. Transfers The Treasury Department performed microsimulation modeling to evaluate the coverage changes and transfers that are likely to be induced by the final rules. The Treasury Department’s model of health insurance coverage assumes that workers are paid the marginal product of their labor. Employers are assumed to be indifferent between paying wages and paying compensation in the form of benefits (as both expenses are deductible in computing employers’ taxable incomes). The model therefore assumes that total compensation paid by a given firm is fixed, and the employer allocates this compensation between wages and benefits based on the aggregated preferences of their employees. As a result, employees bear the full cost of employer-sponsored health coverage (net of the value of any tax exclusion), in the form of reduced wages and the employee share of premiums.295 The Treasury Department’s model assumes that employees’ preferences regarding the type of health coverage (or no coverage) are determined by their expected healthcare expenses and the after-tax cost of employer-sponsored insurance, Exchange coverage with the PTC, or Exchange or other individual health insurance coverage integrated with an individual coverage HRA, and the quality of different types of coverage 295 Note that the wage reduction for an employee who is offered a health benefit may be greater or less than the expected cost of coverage for that particular employee. Because employees are generally paid the same regardless of age, health status, family size or acceptance of benefits, the model assumes that each employee bears the same share of the cost of the firm’s coverage. The model allows for some limited variation of the wage reduction by wage class and educational status. All costs and benefits of coverage are taken into account and assumed to accrue to employees, including all income and employer and employee payroll tax exclusions and the avoidance of the employer shared responsibility payment under Code section 4980H by firms that offer coverage. PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 28963 (including actuarial value).296 The tax preference for the individual coverage HRA is the same as that for a traditional group health plan, and this estimate assumes that employers will contribute the same amount towards an individual coverage HRA as they would contribute for a traditional group health plan.297 Therefore, an employee will prefer an individual coverage HRA to a traditional group health plan if the price of individual health insurance coverage is lower than the price of traditional group health plan coverage, as long as the value of the higher quality of the traditional group health plan coverage (if any) does not outweigh the lower cost of individual health insurance coverage. The cost of individual health insurance coverage for an employee could be lower than the cost of the firm’s traditional group health plan if the individual health insurance coverage is less generous, if the individual health insurance coverage risk pool is healthier than the firm’s risk pool, or if the cost of individual health insurance coverage to a particular employee is lower than the cost of the firm’s coverage (because, for example, the employee is younger than the average-age worker in the firm).298 296 Expected healthcare expenses by type of coverage, age, family size and other characteristics are estimated using the Medical Expenditure Panel Survey—Household Component (MEPS–HC). These predictions are then statistically matched to the Treasury Department tax data. The MEPS–HC is conducted by the United States Census Bureau for the Agency for Healthcare Research and Quality (AHRQ), Department of Health and Human Services. 297 It is possible that employers that switch from offering traditional group health plans to offering individual coverage HRAs will contribute less to individual coverage HRAs than they pay for group coverage, and increase taxable wages by a corresponding amount. This could happen because there is greater transparency around health care costs with an individual coverage HRA than with a traditional group health plan, and greater awareness of the cost will likely lower worker demand for health insurance benefits relative to wages. On the other hand, it is not clear why an employer that (based on the incomes and preferences of its workforce) wants to substitute contributions to health benefits for wages would not do so today, in the absence of the availability of individual coverage HRAs, particularly because the final rules generally require that individual coverage HRAs be offered on the same terms to all employees in a class of employees, as described earlier in this preamble. 298 The Treasury Department model assumes that both the employee and employer shares of premiums for traditional group health plan coverage are fully tax exempt. In modeling the choice between an individual coverage HRA and traditional group health plan coverage, the Treasury Department assumes that the total amount currently paid for traditional group health plan coverage will continue to be tax preferred. If this amount exceeds the individual health insurance coverage premium, the excess is assumed to be used for copayments and deductibles. However, the Treasury Department E:\FR\FM\20JNR2.SGM Continued 20JNR2 28964 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 When evaluating the choice between an individual coverage HRA and the PTC for Exchange coverage, the available coverage is assumed to be the same but the tax preferences are different. Hence, an employee will prefer the individual coverage HRA if the value of the income and payroll tax exclusion (including both the employee and employer portion of payroll tax) is greater than the value of the PTC. In modeling this decision, the Departments assume that premiums paid by the employee are tax preferred through the reimbursement of premiums from the individual coverage HRA, with any additional premiums (up to the amount that would have been paid under a traditional group health plan) paid through a salary reduction arrangement.299 In the Treasury Department’s model, employees are aggregated into firms, based on tax data.300 The expected health expenses of employees in the firm determine the cost of employersponsored insurance for the firm.301 Employees effectively vote for their preferred coverage, and each employer’s offered benefit is determined by the preferences of the majority of employees. Employees then decide whether to accept any offered coverage, and the resulting enrollment in traditional or individual health insurance coverage determines the risk pools and therefore premiums for both employer coverage and individual does not increase the amount that is tax preferred in the case where the individual health insurance coverage premium exceeds the traditional group health plan premium. 299 The assumption that coverage subsidized by the PTC is the same as coverage subsidized by an individual coverage HRA may be incorrect to the extent that coverage on an Exchange differs from off-Exchange individual health insurance coverage. In addition, the assumption that the full premium for an employee with or without an individual coverage HRA is tax preferred may be incorrect if the employer does not offer a salary reduction arrangement, if the employee does not elect the salary reduction, or if the employee chooses onExchange rather than off-Exchange coverage. Salary reduction arrangements may not be used to pay premiums for Exchange coverage. 300 A crucial component of the model is the use of Form W–2, Wage and Tax Statement, filed by employers to report wages and other benefits of employees. Forms W–2 with the same employer identification number are grouped together to represent the employees of the firm. 301 Some small firms—generally those with sicker than average employees—are able to purchase community rated coverage in the small group market at lower cost than they could obtain by selfinsuring or would pay if they had to purchase coverage in the underwritten large-group market. Firm coverage costs are over-estimated in the Treasury Department’s model for these firms. As a result, the Treasury Department model likely overestimates the extent to which small firms will adopt individual coverage HRAs instead of traditional group health plan coverage and the premium increase from this rule. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 health insurance coverage. The Treasury Department’s model, thus, predicts enrollment and premiums in each type of coverage. Transitions from traditional group health plans to individual coverage HRAs. Based on microsimulation modeling, the Departments expect that the final rules will cause some participants (and their dependents) to move from traditional group health plans to individual coverage HRAs. As previously noted, the estimates assume that for this group of firms and employees, employer contributions to individual coverage HRAs are the same as contributions to traditional group health plans would have been, and the estimates assume that tax-preferred salary reductions for individual health insurance coverage are the same as salary reductions for traditional group health plan coverage. Thus, by modeling construction there is no change in income or payroll tax revenues for this group of firms and employees (other than the changes in the PTC discussed later in this preamble). The Departments solicited comments on these assumptions, and comments received are summarized further below. While the tax preference is assumed to be unchanged for this group, after-tax out-of-pocket costs could increase for some employees (whose premiums or cost sharing are higher in the individual market than in a traditional group health plan) and decrease for others. A small number of employees who are currently offered a traditional group health plan nonetheless obtain individual health insurance coverage and the PTC, because the traditional group health plan is unaffordable to them or does not provide MV. Some of these employees would no longer be eligible for the PTC for their Exchange coverage when the employer switches from a traditional group health plan to an individual coverage HRA because the HRA is determined to be affordable under the final PTC rules.302 In addition, some employees who are offered individual coverage HRAs would not accept them, and would be newly able to obtain the PTC because the offer of the HRA would be considered to be unaffordable under the final PTC rules, even though the traditional group health plan they were previously offered is affordable under current rules.303 302 As noted later in this section of the preamble, however, the Departments’ estimates assume that individuals with incomes below 200 percent of the federal poverty level are not newly ineligible for the PTC by individual coverage HRA offers. 303 The number of persons newly eligible for the PTC is expected to be very small. Under the PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 Transitions from no employersponsored health benefit to individual coverage HRAs. The Departments expect some employees to be offered individual coverage HRAs when they previously received no offer of an employersponsored health plan. As a result, taxable wages will fall and non-taxable wages will rise, reducing income tax and payroll tax revenues. Under this circumstance, some Exchange enrollees who previously claimed the PTC will be precluded from claiming the PTC as a result of the offer or acceptance of the HRA, reducing PTC transfers. As explained further below, the Departments assume that PTC spending is reduced only among Exchange enrollees with incomes greater than 200 percent of the federal poverty level. Transitions from traditional group health plans to individual coverage HRAs integrated with Medicare. Currently, there are about 2.5 million people for whom employer coverage is the primary payer and Medicare is secondary. Earlier in this preamble, the Departments clarify that plan sponsors may allow amounts made available under an individual coverage HRA to be used to pay for Medicare and Medigap premiums, as well as other medical care expenses.304 Once premiums (and deductibles for medical care expenses) are paid by the individual coverage HRA, there would be few funds available to pay for medical care expenses. Hence, Medicare would effectively become the primary payer in the vast majority of cases. The total costs to the Medicare Part A program will increase because Medicare Part A will effectively become the primary payer. Because enrollment in Medicare Part A and B or Part C 305 is a requirement to be covered by an individual coverage HRA that is integrated with Medicare and because employees offered an individual coverage HRA will not have access to a traditional group health plan through their employer, the vast majority of employees are expected to enroll in Medicare Part B (and many in Part D). assumption that employers contribute the same amount towards an individual coverage HRA as they would for traditional group health plan coverage, employees would become newly eligible for the PTC (if otherwise eligible) only if the lowest cost silver plan premium for self-only individual health insurance coverage is greater than the total cost of the lowest cost MV plan offered by the employer (including the employee and employer share of premiums). 304 Note, however, that an individual coverage HRA may not, under its terms, limit reimbursement only to expenses not covered by Medicare. 305 Currently, very few working aged Medicare enrollees have enrolled in Medicare Part C and these estimates are based on the assumption that this is not likely to change. E:\FR\FM\20JNR2.SGM 20JNR2 28965 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations Per enrollee premiums for Medicare Part B and D will be slightly lower due to the improved health of the Medicare risk pool; however, net costs to the Medicare program will increase due to increased enrollment and because premiums for Medicare Part B will not fully offset the costs of the program.306 Summary of estimated transfers and coverage changes. The Departments estimate that once employers fully adjust to the final rules, roughly 800,000 firms will offer individual coverage HRAs. The Departments further estimate that it will take employers and employees about five years to fully adjust to the final rules, with about 10 percent of take-up occurring in 2020 and the full effect realized in 2024 and beyond. This would result in an estimated 1.1 million individuals receiving an individual coverage HRA in 2020, growing to 11.4 million in 2029. Conversely, the number of individuals in traditional group health plan coverage will fall by an estimated 0.6 million (0.4 percent) in 2020 and 6.9 million (4.5 percent) in 2029. Similarly, the number of individuals in individual health insurance coverage without an individual coverage HRA will fall by an estimated 0.4 million (2.4 percent) in 2020 and 3.8 million (24.8 percent) in 2029. The number of uninsured persons will fall by an estimated 0.1 million (0.1 percent) in 2020 and 0.8 million (1.4 percent) in 2029.307 See Table 2 for details. The modeling suggests that employees in firms that would switch from offering traditional group health plan coverage to offering an individual coverage HRA would have, on average, slightly higher expected healthcare expenses than employees in other firms and current individual market enrollees. As a result, premiums in the individual market would be expected to increase by about 1 percent as a result of the final rules, throughout the 2020–2029 period examined. The Treasury Department model is nationally representative and does not necessarily reflect the expected experience for every market. The premium increase could be larger in some markets if some adverse selection results, and premiums could fall in other markets. Furthermore, some employers might take longer to adopt the individual coverage HRA, preferring to wait to see how premiums change; and, this delay in adoption might be more likely in markets that are currently in worse condition. Such differing behavior adds uncertainty to the estimates. Income and payroll tax revenue is expected to fall by about $500 million in fiscal year 2020 and $15.5 billion in 2029, as firms newly offer tax-preferred health benefits in the form of individual coverage HRAs. At the same time, total PTC (including the refundable and nonrefundable portion of the credit) is expected to fall by about $300 million in 2020 and by about $6.2 billion in 2029. In total, the final rules are estimated to reduce tax revenue by about $200 million in fiscal year 2020, $9.3 billion in fiscal year 2029, and $51.2 billion over the 10-year period through fiscal year 2029.308 The Departments assume that about 1 percent of the 2.5 million individuals for whom employer coverage is the primary payer and Medicare is the secondary payer will enroll in an individual coverage HRA integrated with Medicare by the end of the projection period. As a result, the final integration rules are estimated to increase costs to the Medicare trust funds by less than $50 million in 2020, $0.3 billion in 2029, and $1.9 billion over the ten-year period through fiscal year 2029. The impacts for Medicare Part B and D reflect the net impact to the federal government after the payment of premiums. TABLE 2—ESTIMATED EFFECTS OF INDIVIDUAL COVERAGE HRAS ON INSURANCE COVERAGE AND TAX REVENUES, 2020–2029 Calendar year 2020 Change in Coverage [Millions]: a Individual health insurance coverage with HRA ....................................................... Traditional group health plan .................... Individual health insurance coverage without HRA ................................................. Uninsured .................................................. Fiscal year 2021 2022 2023 2024 2025 2026 2027 2028 2029 1.1 ¥0.6 2.7 ¥1.7 5.3 ¥3.3 8.1 ¥5.0 10.9 ¥6.7 11.0 ¥6.8 11.2 ¥6.8 11.4 ¥6.8 11.4 ¥6.9 11.4 ¥6.9 ¥0.4 ¥0.1 ¥0.9 ¥0.2 ¥1.8 ¥0.3 ¥2.7 ¥0.5 ¥3.6 ¥0.6 ¥3.6 ¥0.7 ¥3.7 ¥0.7 ¥3.8 ¥0.7 ¥3.8 ¥0.7 ¥3.8 ¥0.8 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Change in Revenue [Billions]: Premium Tax Credit Reduction ................ Other Income and Payroll Tax Reduction Net Revenue Reduction ............................ Medicare Part A b ...................................... Medicare Part B ........................................ Medicare Part D ........................................ 0.3 0.5 0.2 0.0 0.0 0.0 0.8 1.7 1.0 0.0 0.0 0.0 1.8 3.8 1.9 0.0 0.0 0.0 3.0 6.4 3.4 0.1 0.1 0.0 4.4 9.4 5.0 0.1 0.1 0.0 4.7 10.9 6.2 0.1 0.1 0.1 5.4 12.6 7.2 0.1 0.1 0.1 5.7 13.9 8.3 0.1 0.1 0.1 6.0 14.7 8.8 0.1 0.1 0.1 6.2 15.5 9.3 0.1 0.1 0.1 Total Medicare Outlay Cost c ............. Total Cost d ........................................ 0.0 0.2 0.0 1.0 0.1 2.0 0.2 3.6 0.2 5.2 0.2 6.4 0.3 7.5 0.3 8.5 0.3 9.1 0.3 9.6 jbell on DSK3GLQ082PROD with RULES2 Notes: a. Millions of covered lives, annualized. b. 0 = less than $50 million. c. Note that the sum of estimated impacts for Medicare Part A, B and D may not equal net Medicare Outlay Cost due to rounding. d. May not add to sum, due to rounding. 306 Employees who are entitled to Medicare on the basis of age generally tend to have lower healthcare costs than the average Medicare beneficiary, improving the overall health of the Medicare risk pool. 307 These estimates are annualized counts (e.g., two persons with six months of coverage each count VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 as one covered person), and reflect only coverage for persons under age 65. For more information about the Treasury Department’s baseline estimates, see ‘‘Treasury’s Baseline Estimates of Health Coverage, Fiscal Year 2019 Budget Exercise’’ June 2018, available at https://www.treasury.gov/ resource-center/tax-policy/tax-analysis/Documents/ PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 Treasury%27s-Baseline-Estimates-of-HealthCoverage-FY-2019.pdf. 308 These revenue estimates do not account for the possibility that the final rules could lead to increased taxable wages. E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28966 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations At least one commenter stated that the negative effects of the proposed rules, particularly the increase in the individual market premiums and the attendant fiscal costs, are likely to outweigh the benefits to employers and their employees. As noted earlier in the preamble, the increase in individual market premiums is a modest 1 percent. While the net fiscal cost in 2025 is $6.2 billion, this includes the cost of new coverage for 0.7 million individuals. In addition, as discussed earlier, the integrated coverage HRA provides employers and employees with an additional option for providing health benefits, a benefit that the Departments have not quantified. Therefore, the Departments have concluded that the benefits of allowing integration of individual coverage with HRAs substantially outweigh the costs. The Departments acknowledge that the extent to which firms will offer individual coverage HRAs and the results on individual market risk pools and premiums, federal tax revenues, and private costs and benefits are highly uncertain. The Departments invited comments on the modeling assumptions and proposed estimates of the proposed rules and assumptions. Several commenters stated that the Departments’ analysis failed to take account of variation in individual market risk across geographic areas. The Departments’ acknowledge that the quantitative estimates are derived from a nationally representative model, largely because the MEPS–HC is a nationally representative survey. The Departments do not know of any readily available data on the distribution of health claims at the firm level for specific rating areas or states. If the health risk in the individual market relative to that of employer risk pools varies across geographic areas, a nationally based model will understate the extent to which employees might transition to individual markets with healthier risk pools and overstate movement into less healthy individual markets. This would understate potential premium increases in some markets and overstate them or understate premium decreases in others. To examine this possibility, the Departments estimated the correlation between individual market premiums and traditional group coverage premiums in all rating areas across the country.309 The Departments found that 309 Specifically, the Departments extracted premiums reported on the population of Forms W– 2, and estimated per person annual premiums from this information using coverage data from Forms 1095–B and C. See https://www.treasury.gov/ resource-center/tax-policy/tax-analysis/Documents/ VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 premiums in the two markets are positively correlated, and that the correlation is statistically significant. In other words, where premiums for individual health insurance coverage are higher, premiums in the traditional employer market also tend to be higher. The Departments also do not find any evidence that, to date, employers have substantially dropped coverage or disproportionately dropped coverage and sent less healthy employees to individual markets with healthier risk pools. Even if the difference between individual market health risk and group market health risk currently varies across location, there is no clear reason why that variation would not persist when the individual coverage HRA is available. As a result of these observations, the Departments conclude that there is little indication that the individual coverage HRA will be disproportionately used in areas with healthier individual market risk pools. Moreover, it is not evident that adverse selection into the individual market would be much more likely in these lower cost areas, or that those risk pools would not be able to absorb additional enrollees from the group market. One commenter suggested that the Treasury Department model does not adequately account for variation in expected claims risk across employers, because it does not explicitly account for the tendency of sicker workers to work alongside otherwise sicker workers, and for healthy workers to work alongside other healthy workers. The Treasury Department model imputes the expected health care expenses of families from MEPS–HC data, controlling for type of coverage, age, gender, family size and type, employment status, education, race, health status, geographic characteristics and other characteristics. The Treasury Treasury%27s-Baseline-Estimates-of-HealthCoverage-FY-2019.pdf for a description of this estimation process. The Departments then compared this to SLCSP premiums. The Departments specifically compared single plan premiums for firms including any 30-year old covered employee to SLCSP premiums for a 30 year old, and did the same for firms including any 50year old covered employee and SLCSP premiums for a 50 year old in the same rating area. In both cases the Departments estimated that traditional group coverage premiums increase by about 20 cents for every dollar increase in individual market premiums (p<01). The commenter provided some evidence of geographic variation in health claims in the individual market relative to claims in the small group insured market. This analysis is of limited use, because most employees who are expected to be offered an individual coverage HRA are in the large group market. The Treasury Department data for this sensitivity analysis includes premiums in firms of all sizes, but is heavily weighted to firms filing more than 250 Forms W–2, as these employers are required to report premium information. PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 Department constructed firms using Form W–2 and other tax data. The Treasury Department then matched the MEPS–HC health expenses of families to families in the tax data (and thereby to employees within firms), by income, family size and type, age, gender and other variables common to the MEPS– HC and tax data sets. The model should reflect the clustering of sicker or healthier workers within firms if such clustering is correlated with the characteristics used in the health expense imputation and matching of MEPS–HC and tax data. In addition to conducting a survey of households’ health expenditures (the MEPS–HC), the U.S. Census Bureau conducts a survey of employers regarding their health insurance costs (the Medical Expenditure Panel Survey—Insurance Component, or MEPS–IC.) To evaluate whether the distribution of imputed healthcare costs within and across firms in the Treasury Department model is in fact reasonable, the Departments obtained MEPS–IC premiums for single and family plans at each percentile of the premium distribution, and compared these to premiums in the Treasury Department model. The Departments found that the distributions looked very similar. That is, the imputed premiums appear similar to those reported in the MEPS– IC, for both lower and higher cost firms. Therefore, the Departments conclude that there is no evidence to suggest that the Treasury Department model does not reflect clustering by health status or any other important determinants of health risk and premiums. As explained earlier in this section of the preamble, the Departments explicitly assume that persons with incomes below 200 percent of the federal poverty level who are enrolled in subsidized individual health insurance coverage in the baseline do not move to an individual coverage HRA or to uninsured status as a result of the final rules. The Departments also assume that employees with incomes above 400 percent of the federal poverty level who are currently enrolled in a traditional group health plan do not become uninsured as a result of his or her employer switching to an individual coverage HRA, even if individual health insurance coverage premiums are substantially higher than the cost of their traditional group health plan coverage. These assumptions are consistent with allowing the individual coverage HRA offer to vary across employees in certain cases, and are intended to provide estimates that reasonably reflect expected employer E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations and employee behavior. The Departments acknowledge that imposition of these assumptions reduces both the amount of estimated PTC savings and the amount of estimated individual coverage HRA revenue costs. In addition, by imposing this restriction, the analysis does not reflect the extent to which lower-income employees would face higher insurance costs if an individual coverage HRA offer renders them ineligible for the PTC. One commenter suggested that the Departments explicitly model coverage choices for individuals with incomes below 200 percent or above 400 percent of the federal poverty level. Other commenters expressed concern that low-income workers likely would face higher coverage costs (and perhaps takeup less coverage and face worse financial or health outcomes) because they will lose eligibility for PTC. One commenter suggested that the individual coverage HRA rules could only benefit families with incomes in excess of 400 percent of the federal poverty level. However this commenter did not take into account the decline in PTC as income rises as well as the tax benefit of employer-provided individual coverage HRAs. In order to consider these concerns more fully, the Departments performed additional analysis to evaluate the potential effect of the individual coverage HRA on receipt of PTC and changes in tax liability across income classes, under the Departments’ preferred assumption that persons with low incomes do not lose PTC and an alternative scenario where the Departments do not impose this assumption. Under the Departments’ preferred set of assumptions, the individual coverage HRA reduces tax revenues by a total of $6.2 billion in calendar year 2025, consisting of $10.9 billion in reduced income and payroll taxes partly offset by $4.7 billion in reduced PTC (including both the refundable and nonrefundable portions of the credit). In comparison, the individual coverage HRA increases tax revenues $1.1 billion among taxpayers who are enrolled in individual health insurance coverage in the Exchange in the baseline. Over 0.9 million families with incomes between 200 and 400 percent of the federal poverty level pay $2.1 billion more in taxes (that is, on net the loss in PTC exceeds the value of income and payroll tax exclusions received for the individual coverage HRA), or an average of nearly $2,300. However, they are not expected to become uninsured, because while the tax preference for the HRA is less than the PTC, the after-tax cost of VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 coverage is less than the expected cost of healthcare. About 0.4 million families with incomes over 400 percent of the poverty level pay nearly $1.1 billion less in taxes, with an average tax cut of nearly $2,900. Note that these estimates include only the effects on families with individuals currently enrolled in individual health insurance coverage in the Exchange, and do not reflect the tax decreases experienced by newly insured persons, or by persons currently enrolled in individual health insurance coverage outside of the Exchange. In addition, the estimates for families with incomes below 400 percent of the federal poverty level are net changes, and include gains for families for whom the tax exclusion value of the individual coverage HRA exceeds the PTC offset by losses for families for whom the PTC exceeds the value of tax exclusion gained. Under an alternative assumption where persons with incomes below 200 percent of the federal poverty level also lose PTC if their employer offers an affordable individual coverage HRA, about 0.9 million additional families would pay an additional $3.5 billion in taxes (in the form of lost PTC that is not offset by the value of income and payroll taxes received for individual coverage HRA), with an average tax increase of nearly $4,000. These families are not projected to become uninsured. The 10-year cost of the final rules would fall from an estimated $51.2 billion to $23.7 billion. However, as noted earlier, the Departments do not expect such large tax increases among lower-income families to occur. Rather, the Departments expect employees who currently receive substantial amounts of PTC but are in firms where employees overall are better off with an individual coverage HRA will seek out employers that do not offer an individual coverage HRA or traditional group health plan, or that employers will reduce individual coverage HRA offers or decide not to offer an individual coverage HRA, so as not to render all or certain classes of employees ineligible for the PTC. This may be particularly true for firms that do not offer a traditional group health plan in the baseline. In addition, the Departments performed an alternative analysis of the number of persons with incomes in excess of 400 percent of the federal poverty level who are predicted to become uninsured if employers do not vary contributions to individual coverage HRAs by age and employees do not switch employers to avoid an increase in health insurance costs. (In other words, in this scenario the Departments relax their assumption that PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 28967 no higher income persons become uninsured as a result of moving from traditional group health plan coverage to being offered an individual coverage HRA.) In this alternative simulation, about 1 percent of persons in families with incomes above 400 percent of the federal poverty level with traditional group health plan coverage under the baseline become uninsured (or nearly 900,000 individuals). However, as noted earlier in this section of the preamble, the Departments do not expect such transitions to occur. Under this alternative simulation, older individuals are more likely to become uninsured, in large part because the Treasury Department’s model fails to account for the variation in individual coverage HRA contributions by age as permitted under the final rules. Under the final rules, we expect that employers will vary individual coverage HRA offers so as not to completely unwind the crosssubsidies of older employees by younger employees and avoid markedly increasing older employees’ coverage costs. In the event that coverage costs for particular employees substantially increase, those employees are expected to seek employment at firms that continue to offer traditional group health plan coverage. Several commenters stated that employers would likely provide the same amount of individual coverage HRA contributions to all employees in a class of employees, without age variation. As a result, older workers could face higher coverage costs and younger workers could face lower costs when they move from traditional group health plan coverage to an age-rated individual health insurance plan. However, varying HRA amounts based on age is allowed under the final rules, subject to certain limits, and other commenters suggested that employers would utilize this option, thereby maintaining existing cross-subsidies of older workers, which clearly has economic utility to firms, to some extent. Several commenters suggested that the Departments’ estimates of individual coverage HRA take-up are overstated, because the estimates do not account for increased hassle costs of enrolling in individual health insurance coverage, compared to the cost of enrolling in a traditional group health plan. The Departments acknowledge earlier in this section of the preamble that some individuals will face higher administrative costs associated with choosing individual health insurance plans and enrolling in coverage. This could result in fewer employers offering individual coverage HRAs and fewer E:\FR\FM\20JNR2.SGM 20JNR2 28968 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 employees enrolling in individual health insurance coverage integrated with an HRA. However, commenters did not attempt to quantify such costs. Because the magnitude of these costs (in total and relative to the cost of enrolling in a traditional group health plan) is uncertain, the Departments are unable to quantify the likely effect on individual coverage HRA take-up. The Departments particularly emphasize that these estimates assume that every employee in a firm would be offered either an individual coverage HRA or a traditional group health plan (but not both and not a choice between the two), or no employer health benefit. The estimates further assume that a firm offering an individual coverage HRA would offer the same benefit to each employee in the firm, and would not vary the contribution by location, age, or other permitted factors other than selfonly versus non-self-only benefits.310 In other words, the estimates assume that the final rules will be effective in preventing firms from dividing their employees by health status or other factors in a way that would allow firms to capture greater tax subsidies or increase individual market premiums or the PTC. In estimating the impact of the final rules on individual coverage HRA participation and transfers, including individual market premium increases, it 310 The Departments imposed two constraints on the microsimulation that could be consistent with allowing the individual coverage HRA offer to vary across classes of employees within a firm. First, the Departments assume that persons with incomes below 200 percent of the federal poverty level who are enrolled in subsidized individual health insurance coverage in the baseline do not move to an individual coverage HRA or to uninsured status as a result of the final rules. This is consistent with assuming that employers with low-wage workers currently receiving Medicaid or the PTC do not begin to offer individual coverage HRAs large enough to render such employees ineligible for the PTC or from receiving public coverage. This constraint is also consistent with the assumption that employees who would experience a substantial subsidy loss will move to other jobs that allow them to retain their current coverage. This assumption reduces the amount of PTC savings generated by the final rules, and also reduces the tax revenue cost of providing individual coverage HRAs to such employees. Second, the Departments assume that employees with incomes above 400 percent of the federal poverty level who are enrolled in a traditional group health plan do not become uninsured as a result of the final rules, even if individual health insurance plan premiums are substantially higher than the cost of their traditional group health plan coverage. This is consistent with assuming that employers will provide larger individual coverage HRAs to older employees or to employees in higher-cost markets than they will provide to other employees in their firms, in order to ensure affordable coverage. It is also consistent with assuming that employees will move to other firms, if they face large premium or cost-sharing increases when their employers switch from traditional group health plan coverage to individual coverage HRAs. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 is important to take into account the relative sizes of the employer market and the individual health insurance market and the relative health risk of individuals that are likely to transition from group to individual market coverage. Because the number of individuals in traditional group health plans is large relative to the number of individuals in individual health insurance coverage, relatively small changes in employer offers of coverage can result in large changes in individual market premiums.311 The Departments invited comments on the extent to which firms with healthy or less healthy risk pools would utilize individual coverage HRAs. The Departments specifically sought comments on the extent to which employers would offer different benefits to different classes of employees, including the rating area class and combinations of the classes, and the resulting effect on individual market premiums. Many commenters responded, generally emphasizing the importance of a stable individual health insurance market and the need to maintain and, if possible, strengthen conditions to prevent adverse selection as a result of the individual coverage HRA. Many commenters noted that, because the employer group market is very large relative to the individual market, even a relatively minor shift of higher-cost individuals from traditional group health plans to the individual market would markedly increase individual market premiums. In a similar vein, one commenter noted that the individual market in their state is too small to absorb the high health costs from the few employers who have high enough health costs to make the individual coverage HRA strategy economically attractive. Commenters also noted that healthcare costs are distributed very unevenly, and that, as a result, moving a small number of the highest-cost employees to the individual market can have a large impact on premiums. Several commenters provided their own scenarios showing that if employers are able to send a relatively small number of high-cost individuals to the individual market it could result in a very large increase in premiums in the individual market. Under one example, if 1 percent to 4 percent of the employer market with various above-averagefractions of higher-cost employees migrates to the individual market, 311 The Treasury Department projects that over 150 million persons under age 65 will be enrolled in employer-sponsored group health plans in 2020, compared to about 15 million in the individual market. PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 premiums have the potential to increase 3 percent to 83 percent. In an example presented by another commenter, if as few as 5 percent of the persistent top spenders in the large group market move to individual market coverage, the average individual market claim would increase by 15 percent. Under a third example discussed by a third commenter, if 10 percent of employers designed individual coverage HRAs to shift the sickest individuals into the individual market, premiums would increase by 17.3 percent. If however 100 percent of employers engage in shifting their sickest employees, premiums would increase by 93.1 percent in the individual market. The Departments note that these scenarios do not take into account the conditions in the proposed or final rules intended to prevent adverse selection. As such they help to illustrate why the Departments proposed, and are finalizing, conditions designed to prevent adverse selection. These examples are not inconsistent with the illustrative scenario presented by the Departments in the preamble to the proposed rules. Many commenters said it was important that the final rules not give employees a choice between a traditional group health plan and an individual coverage HRA in order to prevent adverse selection in the individual market, as was prohibited under the proposed rules. One commenter gave specifics noting that it is the employer that is empowered with deciding which health benefits to offer. Thus, according to the commenter, it is not likely that employers would offer both an individual coverage HRA and a traditional group health plan if the employer anticipated that such a choice would increase claims cost in its traditional group health plan. The commenter noted that without the condition in the proposed and final rules prohibiting plan sponsors from offering employees a choice between a traditional group health plan and an individual coverage HRA, there would be market segmentation caused by incenting high-cost individuals to enroll in individual market coverage as well as potential adverse selection based on difference in benefits, cost-sharing levels, and networks. Many commenters said that it is important that the final rules retain the condition that individuals be required to obtain individual health insurance coverage in order to be covered by an individual coverage HRA. One commenter suggested that, otherwise, healthy individuals might opt out of the individual market (comprehensive coverage) and use the individual E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations coverage HRA to cover out-of-pocket spending or for noncompliant coverage, potentially increasing adverse selection in the individual market. Relatedly, many commenters supported the prohibition on integration of an HRA with STLDI. If enrollees were given a choice of individual health insurance coverage or STLDI, in conjunction with an individual coverage HRA, commenters explained that healthy employees would be more likely to purchase the less expensive STLDI plans, creating adverse selection for the individual market. Commenters generally supported the condition that individual coverage HRAs be offered on the same terms to an entire class of employees and that the classes to which a plan sponsor may offer HRAs on different terms be limited to the classes enumerated in the proposed rules and any combinations of those classes. One commenter noted that the same terms requirement and the enumerated classes reduce the ability of employers to target high-cost workers by targeting particular worker classes. The commenter explained that allowing employers to define classes more narrowly would increase the opportunity for employers to target high-cost workers, thereby increasing the adverse selection risk in the individual market. Some commenters recommended that the number of permitted classes not be expanded in general to avoid increasing the risk of adverse selection in the individual market. One commenter noted that the proposed permitted classes of employees could be combined to offer employers opportunities to segment highly specific subsets of employees, including the more costly populations, resulting in higher premiums in the individual market. Several other commenters expressed concerns that the proposed integration conditions would not be adequate to protect against additional risk segmentation. Another commenter suggested that premiums in the individual market could rise because the proposed rules create uncertainty, causing insurers to include an additional risk factor when setting premiums. Further, the commenter urged that the proposed rules be withdrawn as they would be detrimental to consumers and health insurance markets in that particular state. One state with an approved PPACA section 1332 state innovation waiver authorizing a re-insurance program asserted that the proposed rules could dismantle the market stability that has been achieved through state based mechanisms and that states VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 with re-insurance programs will unintentionally subsidize employer health plans due to the influx of people with high claims. After consideration of these comments and related economic literature,312 the Departments concluded that the conditions contained in the proposed rules intended to mitigate the risk of adverse selection (including the prohibition on offering an employee a choice between an individual coverage HRA or a traditional plan, the same terms requirement, the requirement that individuals with individual coverage HRAs be enrolled in individual health insurance coverage, and the prohibition on integration with STLDI) are necessary and, as retained in the final rules, support the Departments’ finding that the effect of the rule on individual market premiums will be modest. Several commenters suggested that additional rules should be adopted to prevent adverse selection. For example, one commenter stated that employers should be forbidden from using health status of any individual or class of employees as a factor when differentiating between classes of employees. Another encouraged strong federal oversight to ensure employer compliance with the conditions. Yet another commenter recommended the Departments use a facts and circumstances test to determine whether individual coverage HRAs are targeted to high cost employees, in addition to requiring compliance with the conditions in the final rules. The Departments decline to add a facts and circumstances test to the final rules. DOL has enforcement jurisdiction 312 Although adverse selection has been observed in many instances, relatively recent empirical research suggests that any harm from adverse selection could, in some circumstances, be modest. Most of the literature is related to choices between plans within a firm or other contexts that are not directly analogous to an employer’s choice between offering a traditional group plan or an individual coverage HRA, and as a result the applicability of the research is somewhat unclear. Therefore the Departments are including in the final rule provisions specifically intended to mitigate against adverse selection while at the same time giving employers an important new way to provide health benefits. See e.g., Einav, Liran, Amy Finkelstein, and Jonathan Levin, ‘‘Beyond Testing: Empirical Models of Insurance Markets,’’ Annual Review of Economics, 2010, 2: 311–326; Einav, Liran, Amy Finkelstein, and Mark Cullen, ‘‘Estimating Welfare in Insurance Markets Using Variation in Prices,’’ Quarterly Journal of Economics, 2010, 125 (3): 877– 921; Bundorf, M. Kate, Jonathan Levin, and Neale Mahoney, ‘‘Pricing and Welfare in Health Plan Choice,’’ American Economic Review, 2012, 102 (7): 3214–3248; and Cardon, James H. and Igal Hendel, ‘‘Asymmetric Information in Health Insurance: Evidence from the National Medical Expenditure Survey.’’ RAND Journal of Economics, 2001, 32 (3): 408–427. PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 28969 over private sector employer-sponsored group health plans, and HHS has enforcement jurisdiction over public sector group health plans, such as those sponsored by state and local governments. Individual coverage HRAs are group health plans, and DOL and HHS will monitor individual coverage HRAs’ compliance with applicable requirements, consistent with the general approach to enforcement with respect to other group health plans. The Departments are of the view that it is unnecessary to include specific enforcement guidance for individual coverage HRAs in the final rules. However the Departments may provide additional guidance if the Departments become aware of arrangements that are inconsistent with the conditions of the final rules. One commenter noted that the lack of a limit on the maximum individual coverage HRA amount could result in more employers with older or sicker employee populations providing very large individual coverage HRAs and sending those high-cost individuals to the individual market. This commenter suggested limiting individual coverage HRA contributions to a maximum amount. Another commenter pointed out that an employer could provide an individual coverage HRA that covered both the premiums and cost-sharing expenses up to the maximum out-ofpocket limit ($7,900 in 2019) for an expensive employee and still reduce health costs. This commenter supported the same terms requirement and other rules preventing benign discrimination to shield against market segmentation. In previous guidance on HRAs, including on integration of HRAs with other coverage, the Departments provided no minimum or maximum contribution amount. Similarly, the Departments decline to impose a minimum or maximum contribution amount on individual coverage HRAs under the final rules, in order to provide employers with flexibility and because the Departments have imposed other conditions to address the potential for adverse selection. Commenters also recommended that the conditions to prevent adverse selection in the proposed rules be strengthened by applying the integration conditions to the aggregated controlled group of employers rather than to the common-law employer. The Departments have concluded that applying the classes of employees at the common law employer level will avoid complexity for employers and that applying a minimum class size requirement in certain circumstances, at the common law employer level, is a E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28970 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations more straightforward way of addressing the adverse selection concerns raised by some commenters. Therefore, the Departments are not adopting the suggestion. One commenter suggested the final rules should not allow using rating area as a separate class of employees because it presents risk for health factor discrimination, allowing employers to isolate an employee or a few employees with costly medical expenses who happen to work at the same primary site. While the Departments appreciate and considered the concern raised by commenters, the Departments have determined, based on information regarding the significant differences in individual market premiums between rating areas within some states and significant differences in the number of individual health insurance plans available between rating areas within some states, that it would be an unreasonable limitation on employer flexibility, and, thus, employee welfare, to prohibit employers from offering different benefits based on different work site rating areas. One commenter argued that the allowable variation in individual coverage HRA contributions by employee age and number of dependents would need to be parallel to the variation in premiums by age and family size in the individual market to avoid the risk that employers target large contributions to high-cost employees. Another commenter pointed out that employers’ ability to vary individual coverage HRA amounts by age should not be limitless, but should be subject to sound actuarial guardrails, such as the 3 to 1 PPACA age band between the youngest and oldest employees. The Departments agree. In the final rules, employers are permitted to vary contributions based on the age of the participant as long as the contribution for the oldest participant is within a 3 to 1 ratio of the contribution for the youngest participant. Further, the same maximum dollar amount attributable to the increase in age must be made available to all participants of the same age in the same class of employees. Some commenters recommended removing as a permitted class of employees the class based on employees who have not yet attained 25 years of age because this would enable employers to offer individual coverage HRAs to older employees while keeping young, generally healthier employees in a traditional group health plan, increasing adverse selection risk for the individual market. In addition, commenters noted that there is no clear VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 need for this class of employees as employers do not typically vary current coverage offering for employees over and under age 25. After consideration of these comments, the Departments are omitting this class in the final rules. Several commenters suggested a minimum class size requirement so that employers cannot combine classes in a way that less healthy employees can be isolated into separate classes from healthy employees. According to these commenters, each classification should be required to include a certain minimum number and/or percentage of employees. The Departments agree and sought to develop a rule that is narrowly tailored to mitigate the risk of adverse selection, especially when combining classes, and to avoid overly burdening employers or unnecessarily hampering the increased use and flexibility of individual coverage HRAs. In order to balance these considerations, the final rules include a minimum class size requirement that varies based on employer size and that applies only to certain classes of employees in certain circumstances in which the potential for health factor discrimination is greatest. In general, the minimum is equal to 10 employees for an employer with fewer than 100 employees; equal to 10 percent of the total number of employees (rounded down to a whole number), for an employer with 100 to 200 employees; and equal to 20 employees for an employer that has more than 200 employees. See earlier in this preamble and the final rules for more detail. Multiple commenters noted that large employers and self-insured employers with a greater share of less-healthy employees could be more likely to offer individual coverage HRAs than employers with healthier employees. The resulting adverse selection could worsen the individual market risk pool and increase premiums. The Departments acknowledge that the integration conditions generally do not address this potential problem. This effect has been included in the modeling and hence is reflected in the overall results. As discussed earlier in this preamble, this effect along with other effects of the final rules result in a premium increase of only about 1 percent, indicating a very small effect on the individual market risk pool. Other commenters thought individual coverage HRAs could reduce adverse selection in the individual market. Some commenters noted that the proposed rules would result in many employees moving to the individual market, thereby expanding the market and stabilizing premiums. One commenter argued that although some PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 employers may have a higher-risk group of employees, in general, working employees are lower-risk than individuals in the individual market. Other commenters stated that employers may not necessarily be incentivized to segment their risk, that is, they may be interested in offering individual coverage HRAs for reasons unrelated to risk. Another commenter argued that commonly purchased stop-loss coverage mitigates the incentive to move individuals to the individual market; that HIPAA generally prohibits group health plans and health insurance issuers in the group market from discriminating against individuals based on health factors; that the requirement that to provide MV employer plans provide ‘‘substantial coverage’’ of inpatient hospital services and physician services makes it hard for employers to incentivize high cost individuals to move to the individual market by providing limited benefits; and that the proposed rules’ same terms requirement and the restriction on integration of individual coverage HRAs with STLDI all work together to eliminate the opportunities for employers to encourage higher-risk employees to obtain coverage in the individual market. One commenter noted that the Departments struck an important balance between providing additional alternatives for employers while curtailing the opportunity for some employers to selectively segment risk and shift their highest-cost employees to the already fragile individual market. The Departments agree that the final rules, with the integration conditions, strike the right balance and have the potential to strengthen the individual market. Several commenters further recommended that the Departments add as a permitted class to the final rules, salaried and hourly employees, so that employers may be permitted to make different offers of coverage, to salaried and non-salaried workers. Commenters in support of allowing salaried and hourly workers as permitted classes of employees explained that this would provide additional flexibility for employers without increasing the risk of adverse selection. Reasons for this conclusion included: The classification is used for a variety of purposes and reclassifying employees may violate the FLSA, ERISA and other laws that prohibit employers from reclassifying workers solely for the purposes of interfering with health benefits. One commenter stated that under such a rule employers would have more potential for risk selection than in the permitted E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations classes under the proposed rules. After consideration of these comments, the Departments are allowing employees who are paid on a salaried basis and non-salaried employees (such as hourly employees) as permitted classes of employees in the final rule, subject to the minimum class size requirement. The Departments also recognized that transition from coverage under a traditional group health plan to coverage under an individual coverage HRA could represent a substantial change from an employee perspective, and as a result employers may find it difficult to transition to individual coverage HRAs. Because new hires are unlikely to increase adverse selection in the individual market and, if added to the individual market, would likely lower average risk, the Departments have added flexibility for employers by allowing employers to continue to offer traditional group health plans to current employees while offering individual coverage HRAs to newly hired employees. Recognizing that the new hire subclass will start small as employees are hired after the employerspecified hiring date for a class of individuals, the new hire subclass is not subject to the minimum class size requirement. However, if an employer later chooses to further subdivide a new hire subclass, each subdivision would be subject to any minimum class size requirements that otherwise would apply. Several commenters suggested that the Departments delay implementation of the final rules until further analysis, particularly regarding risk segmentation, could be conducted. However, commenters offered few concrete suggestions to inform additional analysis. While the Departments acknowledge that the exact effects of the final rules are subject to uncertainty, the Departments conclude that the benefits of the rules will outweigh any costs, and that the benefits of promulgating the rules without further delay will outweigh the benefits of additional analysis. As recommended by a number of comments, the Departments will continue to closely monitor premiums and the stability of the individual market. The Departments also emphasize that these estimates assume that employers would contribute the same amount to individual coverage HRAs as they would to traditional group health plans and that employees would elect the same amount of salary reduction to pay for individual health plans and cost sharing as they would if they were enrolled in a traditional group health plan. But, as noted above, some VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 employees who would be offered individual coverage HRAs under the proposed rules would choose plans with lower premiums and higher deductibles and copayments and narrower provider networks than they would choose if offered a traditional group health plan. However, some workers would probably choose more expansive coverage than what they were offered in a traditional group health plan, and a key benefit of this rule is that it expands workers’ ability to choose coverage that best suits their preferences. Those workers who choose plans with higher cost sharing and narrower provider networks and become more cost-conscious consumers of healthcare will likely reduce healthcare costs and insurance premiums, eventually reducing average HRA amounts and salary reductions. The Departments requested comments on the assumption that employer and employee tax-preferred spending on healthcare would be the same for individual coverage HRAs as for traditional group health plans. One commenter questioned the Departments’ basis for this assumption. Based on conversations with employers of all sizes and industries, the commenter concluded that it appears likely that a good portion of employers would contribute substantially less to individual coverage HRAs than what they are currently contributing to traditional group health plans. The commenter suggested that this would be particularly true for certain classes of employees, and that this may result in some employees and dependents becoming uninsured. Several commenters expressed concern that employers would contribute less to individual coverage HRAs than they currently contribute to their traditional group health plans, with the result that coverage would be less affordable for employees. One commenter suggested that employers offering an individual coverage HRA be required to provide a minimum amount to ensure that the HRAs are adequate for the purchase of individual health insurance coverage. As discussed above, the Departments decline to adopt this suggestion. In general, workers bear the cost of employer contributions to health benefits in the form of reductions in wages and non-health benefits. The current tax system subsidizes health benefits, and it is not clear that minimum employer contributions would improve employee welfare. Other commenters suggested that employers should be required to vary the amount of the individual coverage HRA by age, geographic region, and/or family size, as PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 28971 these factors result in variations in premiums for individual health insurance coverage. The Departments are not adopting this suggestion. The Departments recognize that the cost of individual health insurance coverage will vary across employees, and because the intent of the rule is to expand rather than restrict employer choices regarding how to provide coverage, the final rules allow (but do not require) employers to take these factors into account in certain circumstances and subject to certain conditions. After consideration of these comments, the Departments acknowledge that introduction of the individual coverage HRA could lead employers to provide lower health benefits and higher taxable wages than they would if they provided a traditional group plan. However, because the extent to which employers will do so is uncertain, this effect is not accounted for in the Departments’ quantitative estimates of transfers (that is, the fiscal cost) arising from the rules. Moreover, the Departments are of the view that employers will design employee compensation packages to the benefit of employees since employers aim to attract and maintain talent. In addition, the estimates assume that the entire individual coverage HRA balance is spent on healthcare premiums and cost sharing each year. However, the Departments are of the view that many employers would allow employees to carry unspent individual coverage HRA balances over from year to year, and that some employers would allow employees to continue to spend accumulated individual coverage HRA funds even after separating from their employer. Moreover, individual coverage HRA benefits are generally subject to COBRA protections, such that, for example, some employees could elect to use accumulated funds for up to 18 months after separation from service. The ability to carry over benefits from year to year could further encourage employees to curtail healthcare spending, particularly less efficient spending. This effect could be modest for several reasons. First, unlike HSA balances, which can be withdrawn for non-health purposes subject to tax but without penalty after age 65 and with a 20 percent penalty before age 65, individual coverage HRAs may only be used to reimburse expenses for medical care. In addition, unlike HSAs, individual coverage HRAs are not the property of the employee and employers may limit the amount that can be carried over from year-to-year or accessed by the employee after separation, subject to applicable COBRA E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28972 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations or other continuation of coverage requirements. These estimates further assume that all individual health insurance coverage integrated with an HRA would be treated as subject to and compliant with PHS Act sections 2711 and 2713. The proposed rules prohibit an individual coverage HRA from being integrated with STLDI and excepted benefits, which are not subject to or generally compliant with PHS Act sections 2711 and 2713. Grandfathered coverage in the individual market is not subject to the annual dollar prohibition in PHS Act section 2711 or to the preventive services requirements in PHS Act section 2713. However, the proposed rules provided that employees nor employers were required to confirm that individual health insurance coverage integrated with an HRA is not grandfathered coverage, as requiring such confirmation would be administratively burdensome and the Departments expected that the number of employees who might use an individual coverage HRA to buy such coverage would be extremely small, because individuals can only renew and cannot newly enroll in grandfathered individual health insurance coverage. Commenters generally agreed that the vast majority of individual health insurance coverage is compliant with PHS Act sections 2711 and 2713. As noted earlier in the preamble, many commenters emphasized the importance of requiring individual coverage HRAs to be integrated with individual health insurance coverage, and not with STLDI, in order to ensure the health and stability of the individual market risk pool. The Departments considered these comments and are finalizing the requirement that individuals covered by an individual coverage HRA must be enrolled in individual health insurance coverage, as proposed. Further, under the final rules, an individual coverage HRA may not be integrated with STLDI. In summary, the Departments recognize that allowing HRAs to be integrated with individual health insurance coverage creates the potential for some adverse selection and increased premiums in the individual health insurance market. To prevent that occurrence, the Departments are retaining in the final rules the key conditions intended to prevent adverse selection and health factor discrimination. In addition, the Departments are strengthening the conditions intended to prevent of adverse selection, including by adding a minimum class size requirement that applies to certain classes of employees in certain circumstances and removing VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 as a permitted class of employees the class of employees under age 25, which had the potential to increase adverse selection. The addition of the special rule for new hires could also improve the health of the overall individual market risk pool. While the Departments have also made changes in the final rules in order to provide employers with additional flexibility, such as adding as new permitted classes of employees non-salaried and salaried employees as well as staffing firm temporary employees (as well as adopting the special rule for new hires), the Departments have done so in a way that is narrowly tailored to avoid creating the risk of adverse selection. Therefore, after consideration of these changes and public comments, the Departments are finalizing the economic modeling of the individual coverage HRA without changing the key assumptions. In light of the Departments’ quantitative estimates and qualitative analysis, the Departments conclude that the benefits of the individual coverage HRA outweigh the costs. In particular, the Departments estimate that the final rules will increase the number of individuals with health insurance and have only a small effect on individual market premiums. The final rules will significantly increase flexibility and choices of health coverage for employers and employees. As a result, employers will benefit from having another choice of a tax-preferred health benefit to offer their employees, potentially enabling them to attract and retain workers. In addition, the increased use of HRAs could potentially reduce healthcare spending and ultimately result in increased taxable wages. 3. Impact of Excepted Benefit HRA The final rules also provide for recognition of a new limited excepted benefit HRA under which amounts newly made available for each plan year are limited to $1,800 (indexed for inflation for plan years beginning after December 31, 2020). Among other conditions, to offer the excepted benefit HRA, the employer must offer the employee a group health plan that is not limited to excepted benefits and that is not an HRA or other account-based group health plan, but the employee would not need to enroll in this group health plan. The benefit would be funded by the employer, and in the Treasury Department’s modeling, this means that it would be paid for by all employees in the firm through an overall reduction in wages. The benefit could be used to pay for any medical expense, other than premiums for individual health insurance coverage, PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 group health plan coverage (other than COBRA or other continuation coverage), or Medicare Part B or D. The excepted benefit HRA could be used to pay premiums for coverage that consists solely of excepted benefits and for other premiums, such as premiums for STLDI (subject to the exception described later in this section of the preamble). Due to the availability of other tax preferences for health benefits, including the tax exclusion for employer-sponsored benefits, salary reductions for group and off-Exchange individual health insurance coverage premiums when integrated with an individual coverage HRA, health FSAs, and non-excepted benefit HRAs, the Departments are of the view that this new excepted benefit would be adopted by a small number of firms. However, it could provide flexibility for firms that want to provide a tax preference to employees that choose STLDI instead of the employer’s traditional group health plan. Several commenters noted that the excepted benefit HRA could adversely impact the small employer group market as employers in the small group market would be more likely to offer an excepted benefit HRA that reimburses STLDI premiums (because these employers are less likely to be directly affected by the risk shifting due to the fact that the small group market is community rated) and healthier employees would be more likely to opt out of the traditional small employer group plan and use the excepted benefit to pay for health coverage out of pocket or purchase STLDI. Several commenters also expressed concern about the negative impact on the individual market, as the excepted benefit HRA could draw some enrollees away to STLDI plans. One commenter expressed concern that sicker employees within a firm, who could not obtain STLDI, would bear greater costs. As explained earlier in this preamble, the Departments do not believe that allowing the excepted benefit HRA to be used to purchase STLDI creates a significant risk pooling concern. However, to mitigate potential adverse selection affecting the small group market, the final rules provide that the Departments may restrict excepted benefit HRAs from being able to reimburse STLDI premiums for certain employers in a state, if certain criteria are satisfied. Several commenters opposed the new excepted benefit HRA because it would allow employers to provide a smaller health benefit. One commenter expressed particular concern that lowwage employers would be particularly E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations attracted to this option, to the detriment of employees. The Departments conclude that this is not an important risk or concern. First, employees must have the option to receive a traditional group health plan instead of the excepted benefit HRA, and ERISAcovered employers must provide a notice of the dollar limits and other limitations of the excepted benefit HRA. In addition, the costs of coverage are borne all or in part by employees, in the form of reduced wages, and any reduction in costly health benefits is expected to be offset by increased wages. Third, employees who decline an employer’s offer of a traditional group health plan may obtain coverage through a spouse or the individual market, and this coverage may also be subsidized through a tax exclusion or PTC. Therefore, the availability of this new tax-preferred benefit is expected to benefit employees, not harm them. Several commenters expressed concern that adding another type of excepted benefit and another type of HRA would create confusion among employers and employees, potentially resulting in costly mistakes. Some commenters expressed concern that the excepted benefit HRA would increase uninsurance among employees who forego coverage or use the benefit to purchase STLDI (which need not provide comprehensive benefits), thus putting employees at risk or poor financial or health outcomes. Other commenters supported the provision of the excepted benefit HRA as proposed, including one who expressed support for providing employers with the greatest possible flexibility to provide health benefits on a tax preferred basis. The Departments agree that the excepted benefit HRA will provide additional flexibility for employers, and for employees who want to pay for their health care costs in ways other than enrolling in their employeroffered traditional group health plan. The Departments continue to expect that due to the availability of other tax preferences for health benefits, including larger tax preferences for employer-provided benefits and the PTC for individual health insurance coverage, that adoption of the excepted benefit HRA is likely to be modest, such that the risk of introducing adverse selection into other markets is low. The Departments conclude that the benefits of this additional choice and flexibility provided by this new tax preferred excepted benefit outweigh the likely costs. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 C. Regulatory Alternatives In developing the final rules, the Departments considered various alternative approaches. Retaining prohibition on integration of HRAs with individual health insurance coverage. The Departments considered retaining the existing prohibition on integration of HRAs with individual health insurance coverage, in particular in light of commenters who raised concerns that allowing HRAs to be integrated with individual health insurance coverage could lead to adverse selection and health factor discrimination in the individual market. However, the Departments determined that the adverse selection concerns that gave rise to the prohibition, and which some commenters raised, can be adequately addressed by including appropriate mitigating conditions in the final rules. Moreover, the alternative approach of continuing to prohibit the integration of HRAs with individual health insurance coverage would foreclose the benefits that the Departments expect to result from allowing individual coverage HRAs, including increased flexibility and choices of health coverage options for employers and employees; possibly reduced healthcare spending and increased taxable wages for workers currently in firms that offer traditional group health plans; and increased numbers of low- and moderate-wage workers (and their family members) with health insurance coverage. Integration conditions to prevent against adverse selection. The proposed rules contained a number of conditions intended to mitigate the risk of adverse selection, including that an employer may not offer any employee a choice between a traditional group health plan and an individual coverage HRA and that, if an employer offers an individual coverage HRA, it must do so on the same terms and conditions for all the employees in the class of employees subject to certain exceptions. The Departments considered a number of alternatives related to these conditions in developing the final rules. As to the prohibition on choice between an individual coverage HRA and a traditional group health plan, the Departments considered the alternative of allowing all employers, or, employers that would qualify to participate in the small group market, to offer employees a choice between an individual coverage HRA and a traditional group health plan. However, the Departments determined that retaining this condition as proposed is important to prevent against adverse selection and PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 28973 commenters generally agreed. The Departments did consider that the incentives for employers in the small group market to segment risk are lower than for other employers offering experience-rated coverage or selfinsured plans. However, the Departments would not expect many small employers to offer this choice because the coverage in the small group market and individual market is quite similar and because small employers that purchase health insurance would not have an incentive to segment their risk pool. Although allowing small employers to offer a choice would not provide small employers much benefit, it would increase the complexity of the final rules for entities involved in implementation, such as the Exchanges, and could cause uncertainty for issuers. Accordingly, the Departments decline to provide an exception for small employers to the condition that a plan sponsor may not offer an employee a choice between a traditional group health plan and an individual coverage HRA. However, the Departments are generally supportive of maximizing employee choice and employer flexibility and so may revisit this issue in future rulemaking once the Departments have had the opportunity to gauge the results of the initial implementation of individual coverage HRAs. With respect to the proposed condition that an employer must offer an individual coverage HRA on the same terms to all employees within a class of employees, the Departments considered whether to allow individual coverage HRAs to increase amounts based on age, without any related parameters, as proposed, or, as an alternative, whether to place an outer limit on the ability to age vary, as some commenters suggested the Departments should do to protect against adverse selection. Upon consideration of these comments, the Departments determined that imposing a limit on the ability to increase HRA amounts based on age is justified in order to protect against adverse selection. In designing that limitation on age variation, the Departments considered a number of alternatives, including incorporating the federal and state age curves and tying the variation to a specific premium for a specific policy that a participant in the class of employees could purchase. However, the Departments determined that these options would be unduly complex and that imposing the 3 to 1 limit on the variation of HRA amounts within a class based on age, which is generally based on the degree of age E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28974 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations variation allowed in individual market premiums under PHS Act section 2701, sufficiently limits the potential for abuse. The proposed rules provided that plan sponsors may apply the integration conditions on a class-by-class basis such that an employer may offer an individual coverage HRA to a class of employees while offering a traditional group health plan to another class of employees or may offer different individual coverage HRAs, with different terms, to different classes of employees. The Departments considered whether to retain the ability of employers to offer or vary individual coverage HRAs for different classes of employees or whether employers should be required to offer all employees an individual coverage HRA if any employee is offered an individual coverage HRA. Although some commenters raised concerns that the classes of employees could be manipulated leading to health factor discrimination and adverse selection, the Departments decided to finalize the ability to offer and vary individual coverage HRAs on a class-by-class basis because this aspect of the rule provides employers with the flexibility needed to achieve increased HRA usability and to maximize employee welfare, which is a sentiment expressed by a number of commenters. However, the Departments acknowledge the concern regarding the potential for adverse selection and health factor discrimination and, therefore, have concluded that additional safeguards are needed in certain circumstances, as described later in this section of the preamble. Under the proposed rules, the Departments enumerated eight permitted classes of employees and also allowed employers to combine the classes of employees. In the process of finalizing the rules, the Departments considered, as an alternative, whether to provide classes of employees based on a more general standard (like the one that applies under the HIPAA nondiscrimination rules, with a broader employment-based classification standard) or whether to finalize generally as proposed, such that the final rules would list the specific permitted classes. The Departments determined that a broad and openended standard would not be sufficient to mitigate the risk of adverse selection and therefore under the final rules, the Departments enumerate the permitted classes. The Departments considered a number of alternatives with regard to which classes of employees should be permitted under the final rules. The VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 proposed rules contained, as a permitted class of employees, employees who had not attained age 25. The Departments considered whether to retain this class in the final rules or whether to remove this from the list of permitted classes, in response to commenters who asserted that this class could lead to adverse selection and does not reflect the categories employers typically use to offer benefits. In response to these comments, the Departments determined that the final rules should not include the under-age25 class of employees in the list of permitted classes. Further, under the proposed rules, the Departments did not include salaried employees and hourly employees as permitted classes of employees. In finalizing the rules, the Departments considered whether to add hourly and salaried employees as permitted classes or whether to finalize the rule as proposed. In proposing the rules, the Departments had noted that they did not include these classes in the list of permitted classes due to a concern that employers might easily be able to change an employee’s status from salaried to hourly (and in certain circumstances, from hourly to salaried), which could lead to adverse selection. Commenters asserted that contrary to the Departments’ concerns these classes are not easy to manipulate and that hourly and salaried employees should be added as permitted classes, in order to increase the use of individual coverage HRAs. The Departments have concluded that the benefits of employer flexibility, increased utilization of individual coverage HRAs, and maximizing employee welfare outweigh the potential risk of adverse selection and health factor discrimination, due to a reconsideration of the extent to which these categories could be manipulated and because of the application of a minimum class size requirement, discussed later in this section of the preamble. Therefore, the Departments add employees paid on a salary basis and non-salaried employees (such as hourly employees) to the list of permitted classes in the final rules. The Departments also considered, in response to comments, whether to add as a class of employees temporary workers employed by staffing firms. The Departments determined that adding this class could increase the usability of HRAs for staffing firms and benefit their employees. The Departments also determined that this class would be difficult to manipulate, and that, therefore, this class does not raise a substantial risk of adverse selection or health factor discrimination. PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 Accordingly, the Departments add temporary workers employed by staffing firms to the classes of employees permitted under the final rules. The Departments also considered whether or not to add other classes to the list of permitted classes, as suggested by commenters, including classes based on status as a field worker (such as craft workers and laborers), role or job title, employee tenure, being subject to the Davis Bacon Act and Related Acts or the Service Contract Act, exempt or non-exempt status under the Fair Labor Standards Act, and religion or status as a minister. The Departments considered each of these suggestions and determined that these suggested classes of employees should not be permitted as they raise various issues, including ease of manipulation and potential for adverse selection and health factor discrimination, industryspecificity, and administrability and definitional challenges. Additional integration safeguards. The Departments considered a number of alternative regulatory approaches to address the concern, acknowledged by the Departments and expressed by a number of commenters, that there is a potential for certain of the permitted classes of employees to be manipulated in way that could lead to adverse selection and health factor discrimination. The Departments considered not adopting additional safeguards, in order to minimize burden and complexity and based on the possibility that other economic incentives related to attracting and retaining talented workers would discourage employers from using the classes to segment risk. However, the Departments have concluded that it is appropriate to apply a minimum class size requirement under the final rules in certain circumstances. The Departments sought to develop a rule that is narrowly tailored both to mitigate the risk of adverse selection and health factor discrimination while also avoiding overly burdening employers or unnecessarily hampering the use and flexibility of HRAs to maximize employee welfare. The Departments considered a number of alternatives in designing the minimum class size requirement. The Departments considered whether to apply the minimum class size requirement to all permitted classes of employees or only to the classes of employees that raise more significant concerns about manipulation. The Departments determined that the minimum class size requirement should apply to only certain of the classes, referred to as the applicable classes (that E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations is, full-time employees, part-time employees, salaried employees, nonsalaried employees, and, in general, employees whose primary site of employment is in a rating area). The Departments also determined that the minimum class size requirement should apply if any of these applicable classes are combined with any other class, except if the combined class is the result of one of the applicable classes and the class of employees in a waiting period, because the Departments determined that that combined classis not easily manipulable. Similarly, although a class of employees based on worksites in a rating area is an applicable class for purposes of the minimum class size requirement, a class of employees based on an entire state or a combination of two or more entire states is not subject to the minimum class size requirement, because in that case, weighing concerns about manipulability against the intent to provide employers with flexibility and choice, the Departments determined the application of the minimum class size requirement was not warranted. If a class of employees is subject to the minimum class size requirement, the class must include a minimum number of employees for the individual coverage HRA to be offered to that class. As to the number of employees a class must contain to satisfy the minimum class size requirement, the Departments considered a number of alternatives including whether to provide one number for all employers or base the threshold on employer size. The Departments also considered providing a set number or a number calculated as a percentage of the employer’s employees. The Departments determined that this safeguard should be narrowly tailored, so as to prevent against adverse selection without unduly restricting employer flexibility. Therefore, under the final rules, the applicable minimum class size varies based on the size of the employer for smaller employers (that is, those with under 200 employees) and for employers with 200 or more employees, the applicable class size minimum is set at 20. In response to comments, the Departments also considered whether, in addition to, or instead of, a minimum class size requirement, the final rules should contain an anti-abuse rule that would give the Departments the discretion to determine whether an individual coverage HRA is offered in a manner that is intended to segment sicker workers based on all the facts and circumstances. Therefore, even if an employer followed the other rules set forth in the final rules, this additional VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 rule would nevertheless permit the Departments to address instances of discrimination based on a health factor. The Departments decline to add a facts and circumstances test to the final rules, because the Departments have concluded that the minimum class size requirement adequately balances the need to prevent health factor discrimination with the need to provide employers with certainty in order to encourage expansion and use of individual coverage HRAs. Moreover, other applicable nondiscrimination laws continue to apply. A new facts and circumstances test would add significant uncertainty for employers while adding little additional protection mitigating adverse selection and health factor discrimination. Additional flexibility for the transition to individual coverage HRAs from traditional group health plans. The Departments also considered regulatory alternatives that would allow employers to phase in offering individual coverage HRAs, in response to comments noting that the transition from traditional group health plans to individual coverage HRAs could be a substantial change from an employee perspective. The Departments considered whether additional flexibility was needed, in particular because the permitted classes of employees that apply under the final rules provide employers some flexibility to manage the transition to individual coverage HRAs. However, the Departments also considered that certain additional flexibility could benefit employers and employees, without adding significant complexity or increasing the risk of adverse selection. Accordingly, the final rules provide that, notwithstanding the general rule that a plan sponsor may only offer either a traditional group health plan or an individual coverage HRA to a class of employees, a plan sponsor that offers a traditional group health plan to a class of employees may prospectively offer employees in that class hired on or after a certain date in the future an individual coverage HRA, while continuing to offer employees in the class hired before the new hire date a traditional group health plan. Alternatives considered regarding excepted benefit HRAs. As proposed, the excepted benefit HRA would allow for the reimbursement of premiums for STLDI. In response to commenters requesting that the excepted benefit HRA not be permitted to reimburse STLDI premiums due to adverse selection concerns and concerns about the comprehensiveness of STLDI, the Departments considered whether to finalize as proposed or whether to PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 28975 prohibit the reimbursement of STLDI premiums under all excepted benefit HRAs. The Departments also considered whether to prohibit the reimbursement of STLDI premiums for only certain excepted benefit HRAs, more specifically, those sponsored by employers that offer traditional group health plans in the small group market, where commenters asserted this aspect of the rule would have particularly damaging effects because employers would not have a direct negative financial consequence from offering the excepted benefit for STLDI in addition to a traditional small group market plan in which case lower-risk employees would likely choose the STLDI and higher-risk employees would choose the traditional small group market health plan. The Departments determined that excepted benefit HRAs generally should be allowed to reimburse premiums for STLDI because it can be a viable health insurance option for many people in many circumstances, no individual is required to enroll in STLDI, and STLDI disclosure requirements are sufficient to apprise consumers of its limits. As explained earlier in this preamble, the Departments do not expect that allowing the excepted benefit HRA to reimburse STLDI premiums will produce adverse selection in the small group market. In particular, the Departments note that individuals who choose to use the excepted benefit HRA to purchase STLDI are likely to be uninsured otherwise, including lower-wage workers who are increasingly declining employer offers of traditional group coverage.313 The purchase of STLDI coverage by these individuals will have no effect on the small group or individual market. However, in response to concerns raised by commenters, the final rules also contain a special rule to address commenters’ concerns about the potential for adverse selection in the small group markets. Under the special rule, the Departments may restrict excepted benefit HRAs from being able to reimburse STLDI premiums, for employers offering fully-insured or partially-insured traditional group health plans in the small group market in a state, if certain criteria are satisfied, including that HHS makes a finding, in consultation with DOL and the Treasury 313 In 1999, 17 percent of workers eligible for employer coverage at small firms (those with 3 to 199 workers) turned down the offer of employer coverage. By 2011, this share had climbed to 22 percent, and in 2018 it was 27 percent. See Kaiser Family Foundation, ‘‘Employer Health Benefits 2018 Survey,’’ Figure 3.1, available at https:// files.kff.org/attachment/Report-Employer-HealthBenefits-Annual-Survey-2018. E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28976 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations Department, that the reimbursement of premiums for STLDI by excepted benefit HRAs has caused significant harm to the small group market in the state that is the principal place of business of the small employer and this finding must be made after submission of a written recommendation by the applicable state regulatory authority of such state. The proposed excepted benefit HRA rules did not contain a specific notice requirement. However, several commenters suggested that the final rules impose certain notice requirements for excepted benefit HRAs, including to inform participants and beneficiaries of the annual dollar limit for benefits under the excepted benefit HRA, other terms and conditions of the excepted benefit HRA, and participants’ and beneficiaries’ rights under the excepted benefit HRA. In response, the Departments considered whether to impose a notice requirement, whether to finalize as proposed with no notice requirement, or whether to explain the disclosure requirements otherwise applicable to excepted benefit HRAs. In the final rules, the Departments do not impose a notice requirement on privatesector, employment-based plans covered by ERISA but, instead, explain that excepted benefit HRAs that are subject to ERISA are already subject to a number of disclosure provisions, under which excepted benefit HRAs should generally provide information on eligibility to receive benefits, annual or lifetime caps or other limits on benefits under the plan, and a description or summary of the benefits. However, for non-federal governmental plans, which are not subject to ERISA, the final rules announce HHS’ intent to propose a notice requirement, similar to the disclosures required under ERISA. Under the proposed excepted benefit HRA rules, the Departments proposed that annual amounts newly made available under the HRA would be limited to $1,800, indexed for inflation. Many commenters supported the proposed dollar limit as a reasonable mid-point of the different limits that would result in applying various methodologies, however some requested that the limit be increased, including to allow for the additional purchase of excepted benefit policies or for more expensive STLDI policies and others requested it not be subject to any dollar limit. Some of these commenters favored a higher limit for excepted benefit HRAs based on age and number of dependents to reflect that participants who are older or have dependents are likely to have higher healthcare costs. The Departments considered as regulatory alternatives the various limits VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 suggested by commenters, including the annual salary reduction contribution limit for health FSAs or 15 percent of the cost of coverage under the employer’s primary plan. The final rules do not remove or increase the dollar limit for the excepted benefit HRA. The Departments agree that increasing the dollar limit would encourage certain participants to rely solely on benefits reimbursed through the excepted benefit HRA and could lead to adverse selection. Also, in order to constitute a limited excepted benefit, as explained earlier in this preamble, because the benefit is not otherwise limited in scope, the HRA must have a strict dollar limit. In determining the appropriate dollar limit for excepted benefit HRAs, the Departments considered other, similar limited excepted benefits. The Departments agree with commenters’ assertions that the proposed limit was reasonable and rational, especially considering the relatively low cost of excepted benefits coverage, such as dental or vision coverage. Additionally, although the Departments recognize that healthcare expenses may be higher for participants who are older or have dependents, adopting a higher limit to account for a combination of factors like age and family size could allow an excepted benefit HRA to be too large and to resemble major medical coverage and would add significant complexity to the rule. Applicability date. The proposed rules were generally proposed to be applicable for plan years beginning on or after January 1, 2020. In response to comments expressing concern that issuers, state insurance regulators, the Exchanges, and employers would not be prepared for implementation of the final rules by 2020, the Departments considered whether to finalize the applicability date as proposed or whether to delay the applicability date until 2021. The Departments have determined that, in consideration that Executive Order 13813, issued in October 2017, set forth HRA expansion as an Administration priority ‘‘in the near term,’’ and in order to provide Americans with more options for financing their healthcare, the regulations should be applicable, as proposed, for 2020. However, the Departments acknowledge and also considered the crucial role that the Exchanges have in implementation and operationalization of the final rules, and the Departments will work closely with the Exchanges on implementation. The Departments considered the comments and the concerns raised by various State Exchanges, issuers, employers and other PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 stakeholders related to the ability of the Exchanges to fully implement changes related to the final rules in time for open enrollment for the 2020 plan year. The Departments recognize that Exchanges may be unable to fully implement changes related to the final rules in time for open enrollment for the 2020 plan year. However, prior to full implementation, the Departments will work with the Exchanges on their strategies to provide information to consumers about affordability of individual coverage HRAs and eligibility for APTC, including how employees can access individual health insurance coverage through the Exchanges and determine whether they should use APTC. In fact, multiple conversations have already occurred between program and operational experts at HHS and officials from State Exchanges regarding implementation in the event the rule was finalized as proposed (including with an applicability date as proposed). Ongoing technical assistance will be provided related to the development of tools and functionality by Exchanges to support employers and employees with understanding HRA affordability determinations and their impact on APTC eligibility, as well as the SEP for those with an offer of an individual coverage HRA. Specific assistance could include sharing technical and educational documentation from FFE implementation that can be leveraged to support State Exchange efforts. In addition, the Departments will provide assistance to Exchanges in developing information and tools that could be provided to employers and employees to help ensure smooth implementation before the full system changes are complete. This could include State Exchanges providing employees with information on how they can calculate HRA affordability and determine the impact on APTC in the absence of system changes that can make those calculations for the employee. The Departments also considered that many individuals covered by an individual coverage HRA will prefer to select off-Exchange individual health insurance plans because salary reductions through a cafeteria plan may be used to pay premiums for offExchange coverage, if the employer so allows, and may not be used to pay premiums for Exchange coverage. To the extent a significant proportion of employees with individual coverage HRAs purchase individual health insurance coverage off the Exchange, concerns about burden on the Exchanges, and concerns regarding the E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations effects of timely operationalization of the PTC rules, are mitigated. Further, the Departments have worked to release the final rules as early in 2019 as possible, in recognition of the implementation timing issues raised and the Departments note, and considered, that plan sponsors may choose if and when to offer an individual coverage HRA (or an excepted benefit HRA) and may do so any time on or after the applicability date. The Departments intend to provide the guidance necessary for plan sponsors to offer individual coverage HRAs and excepted benefit HRAs for the 2020 plan year, but the Departments also expect that plan sponsors will take the time they need to evaluate the final rules and to take advantage of these new coverage options if and when it is best for their workforce. D. Paperwork Reduction Act— Department of Health and Human Services Under the Paperwork Reduction Act of 1995 (PRA), HHS is required to provide 30-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to OMB for review and approval. To fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the PRA requires that HHS solicit comment on the following issues: • The need for the information collection and its usefulness in carrying out the proper functions of our agency. • The accuracy of HHS’ estimate of the information collection burden. • The quality, utility, and clarity of the information to be collected. • Recommendations to minimize the information collection burden on the affected public, including automated collection techniques. 28977 1. Wage Estimates To derive wage estimates, the Departments generally used data from the Bureau of Labor Statistics to derive average labor costs (including a 100 percent increase for fringe benefits and overhead) for estimating the burden associated with the information collection requirements (ICRs).314 Table 3 below presents the mean hourly wage, the cost of fringe benefits and overhead, and the adjusted hourly wage. As indicated, employee hourly wage estimates have been adjusted by a factor of 100 percent. This is necessarily a rough adjustment, both because fringe benefits and overhead costs vary significantly across employers, and because methods of estimating these costs vary widely across studies. Nonetheless, there is no practical alternative, and the Departments are of the view that doubling the hourly wage to estimate total cost is a reasonably accurate estimation method. TABLE 3—ADJUSTED HOURLY WAGES USED IN BURDEN ESTIMATES Occupational code Occupation title Compensation and Benefits Manager ............................................................. Lawyer ............................................................................................................. All Occupations ................................................................................................ jbell on DSK3GLQ082PROD with RULES2 2. ICRs Regarding Substantiation of Individual Health Insurance Coverage (45 CFR 146.123(c)(5)) Under the final rules, an HRA must implement reasonable procedures to annually verify that participants or dependents, whose medical care expenses are reimbursable by the HRA are, or will be, enrolled in individual health insurance coverage or Medicare for the entire plan year on or before the first day of the plan year, or, for an individual who is not eligible to participate in the individual coverage HRA on the first day of the plan year, by the date HRA coverage begins (annual coverage substantiation requirement). In addition to the annual substantiation of coverage, with each new request for reimbursement of an incurred medical care expense for the same plan year, the final rules provide that the HRA may not reimburse a participant for any medical care expenses unless, prior to each reimbursement, the participant provides 314 See May 2017 Bureau of Labor Statistics, Occupational Employment Statistics, National VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 Mean hourly wage ($/hour) 11–3111 23–1011 00–0000 $62.50 68.22 24.34 Fringe benefits and overhead ($/hour) $62.50 68.22 24.34 Adjusted hourly wage ($/hour) $125.00 136.44 48.68 substantiation that the individual on whose behalf reimbursement of medical care expenses are requested to be reimbursed were enrolled in individual health insurance coverage or Medicare for the month during which the medical care expenses were incurred. The attestation may be part of the form used for requesting reimbursement. To satisfy these substantiation requirements, the HRA may require that the participant submit a document provided by a third party (for example, an explanation of benefits or insurance card) showing that the participant and any dependent(s) covered by the individual coverage HRA are, or will be, enrolled in individual health insurance coverage or Medicare during the plan year or an attestation by the participant stating that the participant and any dependent(s) are, or will be, enrolled in individual health insurance coverage or Medicare, the date coverage began or will begin, and the name of the provider of the coverage. Additionally, nothing in the final rules would prohibit an individual coverage HRA from establishing procedures to comply with the substantiation requirements through electronic means, so long as the procedures are reasonable to verify enrollment. The ongoing substantiation may be in the form of a written attestation by the participant, which may be part of the form used for requesting reimbursement and which will minimize the burden on plan sponsors and participants. The ongoing substantiation requirement may also be satisfied by a document from a third party. The associated cost of substantiation will be minimal and is, therefore, not estimated. The Departments are releasing guidance providing model attestation language, separate from the final rules. However, the Departments note that individual coverage HRAs will not be required to use the model attestation. For those HRAs that elect to use the model attestation language provided by the Departments, it will further reduce burden for HRAs and participants. The burden related to these ICRs will be reviewed under emergency review Occupational Employment and Wage Estimates, available at https://www.bls.gov/oes/current/oes_ nat.htm. PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 E:\FR\FM\20JNR2.SGM 20JNR2 28978 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations 3. ICRs Regarding Notice Requirement for Individual Coverage HRA (45 CFR 146.123(c)(6)) These final rules include a requirement that an HRA provide written notice to eligible participants. In general, the HRA will be required to provide a written notice to each participant at least 90 days before the beginning of each plan year. For participants who are not yet eligible to participate at the beginning of the plan year (or who are not eligible when the notice is provided at least 90 days prior to the beginning of the plan year), the HRA must provide the notice no later than the date on which the HRA may first take effect for the participant. However, the Departments encourage the HRA to provide the notice as soon as practicable prior to the date the HRA may first take effect. The final rules provide that if the HRA is sponsored by an employer that is established less than 120 days prior to the beginning of the first plan year of the HRA, the notice may be provided no later than the date on which the HRA may first take effect for the participant. The written notice will be required to include certain relevant information, including a description of the terms of the HRA, including the maximum dollar amount made available that is used in the affordability determination under the Code section 36B rules including information on when the amounts will be made available (for example, monthly or annually at the beginning of the plan year); a statement of the right of the participant to opt-out of and waive future reimbursement under the HRA; a description of the potential availability of the PTC for a participant who opts out of and waives an HRA if the HRA is not affordable under the PTC rules; a description of the PTC eligibility consequences for a participant who accepts the HRA; a statement on how the participant may find assistance for determining their individual coverage HRA affordability; a statement that the participant must inform any Exchange to which they apply for advance payments of the PTC of certain relevant information; contact information (including at least a phone number) of an individual or a group of individuals who participants may contact with questions regarding the individual coverage HRA; a statement that the participant should retain the written notice because it may be needed to determine whether the participant is allowed the PTC; a statement that the HRA may not reimburse any medical care expense unless the substantiation requirements are satisfied; a statement of availability of an SEP for employees and dependents who newly gain access to the HRA; the date as of which coverage under the HRA may first become effective and the date on which the HRA plan year ends; and a statement to clarify further that there are multiple types of HRAs and the type the participant is being offered is an individual coverage HRA. The written notice may include other information, as long as the additional content does not conflict with the required information. The written notice will not need to include information specific to a participant. The Departments are providing model language contemporaneously on certain aspects of the notice that are not employer-specific, including model language describing the PTC consequences of being offered and accepting an individual coverage HRA, how the participant may find information to determine whether the individual coverage HRA offered is affordable, and language to meet the requirement to include a statement regarding the availability of an SEP in the individual market for individuals for whom an individual coverage HRA is newly made available. While the Departments hope it will be useful to employers, plan sponsors will not be required to use the model language and the final rules do not prohibit an employer from providing more individualized notices, such as different notices for different classes of employees, if the employer so chooses. The Departments estimate that for each HRA plan sponsor, a compensation and benefits manager will need 2 hours (at $125 per hour) and a lawyer will need 1 hour (at $136.44 per hour) to prepare the notices. The total burden for an HRA plan sponsor will be 3 hours with an equivalent cost of approximately $386. This burden will be incurred the first time the plan sponsor provides an individual coverage HRA. In subsequent years, the burden to update the notice is expected to be minimal and therefore is not estimated. If the HRA plan sponsor elects to use the model notice, the burden may be reduced. HHS estimates that in 2020, an estimated 1,203 state and local government entities will offer individual coverage HRAs.315 The total burden to prepare notices will be approximately 3,610 hours with an equivalent cost of approximately $464,984. In 2021 approximately 1,805 additional state and local government entities will offer individual coverage HRAs for the first time and will incur a burden of approximately 5,415 hours with an equivalent cost of approximately $697,476. In 2022, approximately 3,008 additional state and local government entities will offer individual coverage HRAs for the first time and will incur a burden of approximately 9,024 hours with an equivalent cost of approximately $1.16 million. HRA plan sponsors will provide the notice to eligible participants every year. HHS estimates that HRA plan sponsors will provide printed notices to approximately 99,178 eligible participants 316 in 2020, 243,438 eligible participants in 2021 and 477,859 eligible participants in 2022. The Departments anticipate that the notices will be approximately 6 pages long and the cost of materials and printing will be $0.05 per page, with a total cost of $0.30 per notice. It is assumed that these notices will be provided along with other benefits information with no additional mailing cost. The Departments assume that approximately 54 percent of notices will be provided electronically and approximately 46 percent will be provided in print along with other benefits information. Therefore, in 2020, state and local government entities providing individual coverage HRAs will print approximately 45,622 notices at a cost of approximately $13,687. In 2021, approximately 111,981 notices will be printed at a cost of approximately $33,594 and in 2022, approximately 219,815 notices will be printed at a cost of approximately $65,945. 315 U.S. Department of the Treasury, Office of Tax Analysis simulation model suggests that in 2020, approximately 80,000 employers will offer individual coverage HRAs, with 1.1 million individuals receiving an offer of an individual coverage HRA. These numbers will increase to 200,000 employers and 2.7 million individuals in 2021 and to 400,000 employers and 5.3 million individuals in 2022. The Departments estimate that there is, on average, 1 dependent for every policyholder. The Departments also estimate that approximately 2 percent of employers are state and local government entities, accounting for approximately 14 percent of participants. 316 U.S. Department of the Treasury, Office of Tax Analysis simulation model provides estimates of the number of participants and dependents offered an individual coverage HRA. Number of eligible participants is estimated based on the assumption that 75 percent of eligible participants will enroll in their employers’ plans. See Kaiser Family Foundation, ‘‘2017 Employer Health Benefits Survey’’, Section 3, https://www.kff.org/healthcosts/report/2017-employer-health-benefits-survey/. jbell on DSK3GLQ082PROD with RULES2 and approval. They have been submitted to OMB in conjunction with this final rule and are pending approval. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations 28979 TABLE 4—ANNUAL BURDEN AND COSTS Estimated number of employers newly offering HRAs Year Total annual burden (hours) Total estimated labor cost Total estimated printing and materials cost 2020 ........................................................................... 2021 ........................................................................... 2022 ........................................................................... 1,203 1,805 3,008 99,178 243,438 477,859 3,610 5,415 9,024 $464,984 697,476 1,162,461 $13,687 33,594 65,945 3 year average .................................................... 2,005 273,492 6,016 774,974 37,742 The burden related to these ICRs will be reviewed under emergency review and approval. They have been submitted to OMB in conjunction with this final rule and are pending approval. 4. ICRs Regarding Notice Requirement for Excepted Benefit HRAs In response to commenters’ concerns, the final rules announce HHS’ intent to propose a notice requirement with respect to excepted benefit HRAs sponsored by nonfederal governmental plan sponsors in future notice and comment rulemaking. It is anticipated that the proposed excepted benefit HRA notice would describe conditions pertaining to eligibility to receive benefits, annual or lifetime caps or other limits on benefits under the plan, and a description or summary of the benefits consistent with the requirements of 29 CFR 2520.102–3(j)(2), (3). At that time, HHS will estimate the burden associated with this requirement, solicit public comment, and request OMB approval in accordance with the PRA, as may be necessary. 5. ICRs Regarding Notification of Termination of Coverage (45 CFR 146.123(c)(1)(iii)) jbell on DSK3GLQ082PROD with RULES2 Estimated number of notices to all eligible participants Under the final rules, if an individual’s health insurance coverage is cancelled or terminated, including retroactively, for failure to pay premiums or any other reason (for example, a rescission), the individual coverage HRA must require that the individual notify the HRA that coverage has been cancelled or terminated and the date on which the cancellation or termination is effective. The associated cost of this notification will be minimal and is, therefore, not estimated. The burden related to these ICRs will be reviewed under emergency review and approval. They have been submitted to OMB in conjunction with this final rule and are pending approval. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 6. ICRs Regarding Special Rule for Excepted Benefit HRAs (45 CFR 146.145(b)(3)(viii)(F)) Under the final rules, an excepted benefit HRA offered by certain small employers must not reimburse premiums for STLDI in a state, if the Secretary of HHS makes a finding (in consultation with the Secretaries of Labor and the Treasury) that the reimbursement of premiums for STLDI by excepted benefit HRAs has caused significant harm to the small group market in the state that is the principal place of business of the small employer. The finding by the Secretary of HHS may be made only after submission of a written recommendation by the applicable state authority of such state, in a form and manner as specified in guidance published by HHS. The written recommendation must include evidence that the reimbursement of premiums for STLDI by excepted benefit HRAs established by fully-insured or partially-insured small employers in the state has caused significant harm to the state’s small group market, including with respect to premiums. HHS anticipates fewer than 10 states will submit recommendations annually. Under 5 CFR 1320.3(c)(4), this ICR will not be subject to the PRA as we anticipate it will affect fewer than 10 entities in a 12-month period. 7. ICRs Regarding SEPs (45 CFR 155.420(d)(14)) The final SEP rules include a new SEP at 45 CFR 155.420(d)(14), to allow individuals who newly gain access to an individual coverage HRA or are newly provided a QSEHRA to enroll in or change their individual health insurance coverage. As stated earlier in the preamble, the FFEs will require individuals to submit documentation to confirm their SEP eligibility prior to effectuating their enrollment, and encourages State Exchanges to do so, as PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 well. Consistent with other SEPs subject to pre-enrollment verification, individuals will be required to provide supporting documentation, such as the HRA notice required under the final rules, within 30 days of plan selection. HHS estimates that an additional 330,000 consumers will submit documents in 2020 to verify their eligibility to enroll through the SEP in the Exchanges, and that a consumer will, on average, spend approximately 1 hour gathering and submitting required documentation. Using the average hourly wage for all occupations (at an hourly rate of $48.68), the opportunity cost to a consumer completing this task is estimated to be approximately $48.68. The total annual burden on those consumers submitting documentation will be approximately 330,000 hours with an equivalent cost of approximately $16,064,400. As new individual coverage HRA enrollments increase, these costs also increase in subsequent years. In 2021, an additional 480,000 consumers will submit documents and incur burden of 480,000 hours with an equivalent cost of approximately $23,366,400 and in 2022 an additional 780,000 consumers will submit documents and incur burden of 780,000 hours with an equivalent cost of approximately $37,970,400. The threeyear average is 530,000 additional consumers submitting documents, with a total burden of 530,000 hours and an equivalent cost of $25,800,400 per year. HHS will amend the information collection currently approved under OMB control number 0938–1207 (Medicaid and Children’s Health Insurance Programs: Essential Health Benefits in Alternative Benefit Plans, Eligibility Notices, Fair Hearing and Appeal Processes, and Premiums and Cost Sharing; Exchanges: Eligibility and Enrollment (CMS–10468)) to account for this additional burden. E:\FR\FM\20JNR2.SGM 20JNR2 28980 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations TABLE 5—ANNUAL RECORDKEEPING AND REPORTING REQUIREMENTS Total annual burden (hours) OMB control No. § 146.123(c)(6) (Notice for Individual Coverage HRAs). 45 CFR 155.420(d)(14) (SEP) ..... 0938–NEW ......... 0938–1207 ......... 530,000 530,000 1 Total ...................................... ............................. 532,005 803,492 ........................ Respondents HHS has submitted a copy of the final rules to OMB for its review of the rule’s information collection and recordkeeping requirements. The requirements are not effective until they have been approved by OMB. To obtain copies of the supporting statement and any related forms for the collections discussed in this rule, please visit CMS’ website at www.cms.hhs.gov/ PaperworkReductionActof1995, or call the Reports Clearance Office at 410– 786–1326. HHS invites public comments on these information collection requirements. If you wish to comment, please identify the rule (CMS–9918–F), the ICR’s CFR citation, CMS ID number, and OMB control number. Comments and recommendations must be received by the OMB desk officer via one of the following transmissions: OMB, Office of Information and Regulatory Affairs, Attention: CMS Desk Officer, Fax: (202) 395–5806 OR, Email: OIRA_submission@omb.eop.gov. To obtain copies of a supporting statement and any related forms for the collection(s) summarized in this rule, you may make your request using one of following: 1. Access CMS’ website address at https://www.cms.gov/Regulations-andGuidance/Legislation/ PaperworkReductionActof1995/PRAListing.html. 2. Email your request, including your address, phone number, OMB number, and CMS document identifier, to Paperwork@cms.hhs.gov. 3. Call the Reports Clearance Office at (410) 786–1326. ICR-related comments are due July 22, 2019. E. Paperwork Reduction Act— Department of Labor and Department of the Treasury As part of the continuing effort to reduce paperwork and respondent burden, the Departments conduct a preclearance consultation program to provide the general public and federal agencies with an opportunity to comment on proposed and continuing collections of information in accordance VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 Responses 2,005 8. Submission of PRA-Related Comments jbell on DSK3GLQ082PROD with RULES2 Burden per response (hours) Regulation section 273,492 3 Hourly labor cost of reporting 6,016 $128.81 $774,974 530,000 48.68 536,016 ........................ with the PRA. This helps to ensure that the public understands the Departments’ collection instructions, respondents can provide the requested data in the desired format, reporting burden (time and financial resources) is minimized, collection instruments are clearly understood, and the Departments can properly assess the impact of collection requirements on respondents. Under the PRA, an agency may not conduct or sponsor, and an individual is not required to respond to, a collection of information unless it displays a valid OMB control number. In accordance with the requirements of the PRA, DOL published notice on October 29, 2018 (83 FR 54420, 54454) requesting an OMB control number for three new information collections (ICs) contained in the proposed rules. Two ICs are sponsored jointly by DOL and the Treasury Department: (1) Verification of Enrollment in Individual Health Insurance Coverage (26 CFR 54.9802–4(c)(5), 29 CFR 2590.702– 2(c)(5) and 45 CFR 146.123(c)(5)); and (2) HRA Notice to Participants (26 CFR 54.9802–4(c)(6), 29 CFR 2590.702– 2(c)(6) and 45 CFR 146.123(c)(6)). A third IC is sponsored solely by DOL (29 CFR 2510.3–1): (3) Notice to Participants that Individual Health Insurance Coverage Policy is Not Subject to Title I of ERISA. In response to comments received on the proposal, the Departments have added two additional information collections entitled Participant Notify Individual Coverage HRA of Cancelled or Terminated Coverage (26 CFR 54.9802– 4(c)(1)(iii), 29 CFR 2590.702–2(c)(1)(iii) and 45 CFR 146.123(c)(1)(iii)) and Notice for Excepted Benefit HRAs (26 CFR 54.9831–1(c)(3)(viii)(E), 29 CFR 2590.732(c)(3)(viii)(E) and 45 CFR 146.145(c)(3)(viii)(E)). With regard to the Treasury Department, the collection of information contained in these regulations is submitted to OMB for review in accordance with the PRA as follows. The collection of information in these regulations is in 26 CFR 54.9815– 2711(d)(4) and 26 CFR 54.9802– 4(c)(1)(iii), (c)(5) and (c)(6). The burden for the collection of information PO 00000 Frm 00094 Fmt 4701 Sfmt 4700 Total labor cost of reporting Printing and materials cost Total cost $37,742 $812,716 25,800,400 0 25,800,400 26,575,374 37,742 26,613,116 contained in these regulations is reflected in the burden for OMB Control Number 1545–0123 for the U. S. Business Income Tax Return, 1545–0074 for U.S. Individual Income Tax Return, and 1545–0047 Return of Organizations Exempt From Income Tax. The estimated annual burden per respondent, estimated annual burden per recordkeeper, or estimated number of respondents is updated annually. The Departments submitted an information collection request (ICR) to OMB in accordance with 44 U.S.C. 3507(d) contemporaneously with the publication of the proposed rules for OMB’s review. A copy of the ICR may be obtained by contacting the PRA addressee identified or at https:// www.RegInfo.gov. PRA Addressee: G. Christopher Cosby, Office of Policy and Research, U.S. Department of Labor, Employee Benefits Security Administration, 200 Constitution Avenue NW, Room N– 5718, Washington, DC 20210. Telephone (202) 693–8410; Fax: (202) 219–5333. These are not toll-free numbers. ICRs submitted to OMB also are available at https://www.RegInfo.gov. In connection with the final rules, the Departments are submitting an ICR to OMB requesting approval of a new collection of information under OMB Control Number 1210–0160. Below is a description of the information collections contained in the final rules and their burden. 1. Verification of Enrollment in Individual Health Insurance Coverage In order for an HRA to be integrated with individual health insurance coverage (or Medicare, if applicable), among other requirements, in general, the HRA must implement, and comply with, reasonable procedures to substantiate that participants and dependents covered by the HRA are, or will be, enrolled in individual health insurance coverage (or Medicare, if applicable) for the plan year (or for the portion of the plan year the individual is covered by the HRA, if applicable). This requirement may be satisfied by providing a document from a third party, like an issuer, verifying coverage. As an alternative procedure, this requirement may also be satisfied if the E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations 28981 HRA requires participants to provide an attestation of coverage, including the date coverage begins and the provider of the coverage. In addition, following the initial substantiation of coverage, with each new request for reimbursement of an incurred medical care expense for the same plan year, the HRA may not reimburse participants for any medical care expenses unless, prior to each reimbursement, the participant provides substantiation that the individual whose medical care expenses are requested to be reimbursed continues to be enrolled in individual health insurance coverage (or Medicare, if applicable) for the month during which the medical care expenses were incurred. The HRA must implement, and comply with, reasonable procedures to satisfy this requirement. This substantiation may be in the form of a written attestation by the participant, which may be part of the form used for requesting reimbursement, or a document from a third party (for example, a health insurance issuer). Documentation, including proof that expenditure of funds is for a medical care expense, is currently universal when seeking reimbursement from an HRA. For the new requirements contained in the final rules regarding verification of enrollment in individual health insurance coverage (or Medicare, if applicable), the HRA can require proof of coverage or attestations of coverage as part of the processes that already exist for when participants seek reimbursement from HRAs for premiums or other medical care expenses. The additional burden is de minimis, because the attestation can be a part of the information already required when seeking reimbursement. To the extent an HRA develops additional processes for the requirement that individuals verify enrollment in individual health insurance coverage (or Medicare) for the plan year, the additional burden is also expected to be de minimis because it involves either attestation or providing documents that already exist. The Departments are providing model attestation language, separate from the final rules. However, the Departments note that individual coverage HRAs will not be required to use the model attestation. For those HRAs that elect to use the model attestation language provided by the Departments, it will further reduce burden for the HRAs and participants. Section II.A.8 of this preamble discusses comments received on the requirement to verify enrollment including II.A.8.a In General, II.A.8.b Methods of Substantiation, and II.A.8.c Reliance on Documentation or Attestation. 2. HRA Notice to Participants The final rules (29 CFR 2590.702– 2(c)(6)(ii)) require an HRA to provide written notice to eligible participants including, among other things, the following information: (1) A description of the terms of the HRA, including the amounts newly made available as used in the affordability determination under the Code section 36B final rules; (2) a statement of the right of the participant to opt-out of and waive future reimbursement under the HRA; (3) a description of the potential availability of the PTC for a participant who opts out of and waives an HRA if the HRA is not affordable under the final PTC rules; and (4) a description of the PTC eligibility consequences for a participant who accepts the HRA. The written notice may include other information, as long as the additional information does not conflict with the required information. The written notice does not need to include information specific to a participant. In response to public comments, the Departments are separately publishing a model notice that can be used to satisfy these requirements, although the HRA will be required to add certain information specific to the particular HRA. The Departments note that individual coverage HRAs will not be required to use the model notice. For those HRAs that elect to use the model notice language provided by the Departments, it will further reduce burden for the HRAs. In general, the HRA must provide the written notice to each participant at least 90 days before the beginning of each plan year. For participants who are not yet eligible to participate at the beginning of the plan year (or who are not eligible when the notice is provided at least 90 days prior to the beginning of the plan year), the HRA must provide the notice no later than the date on which the HRA may first take effect for the participant. Also, for any participant who is employed by an employer that is first established less than 120 days before the beginning of the first plan year of the HRA, the notice must be provided no later than the date on which the HRA may first take effect for the participant. Section II.A.9 of the preamble discusses comments received on the notice, the Departments’ responses and changes made to the notice requirement including II.A.9.a Notice Content, II.A.9.b Notice Individualization, II.A.9.c Model Notice, II.A.9.d Notice Timing and Delivery. The Departments estimate that a compensation and benefits manager would require two hours (at $125 per hour) and a lawyer would require one hour (at $136.44 per hour) to prepare the notice for each HRA. Thus, the total hour burden for each HRA would be 3 hours with an equivalent cost of approximately $386. The Departments estimate that each notice would be six pages, with total materials and printing cost of $0.30 per notice ($0.05 per page). The Departments estimate that 78,797 private employers would 317 newly offer individual coverage HRAs in 2020 318 as a result of the final rules in the first year. Therefore, the Departments estimate the total hour burden for these HRAs to prepare the notices would be 236,390 hours with an equivalent cost of $30,450,216. All individual coverage HRAs are required to annually send the notice to all eligible participants (those eligible to enroll). The Departments estimate that there would be 634,155 eligible participants at private employers in 2020 that would need to receive the notice.319 The Departments assume that approximately 54 percent of notices would be provided electronically and approximately 46 percent would be provided in print along with other benefits information. Therefore, a total of 291,711 notices will be printed at a 317 U.S. Department of the Treasury, Office of Tax Analysis used a simulation model to obtain these estimates. For 2020, the model estimated that 80,000 employers will offer individual coverage HRAs and 1.1 million individuals will be offered those HRAs. Based on DOL estimates about 98 percent of these will be in the private market, and the rest will be through public employers like state and local governments. There are on average one dependent for every policy holder. ‘‘Health Insurance Coverage Bulletin’’, Abstract of the Auxiliary Data for the March 2016 Annual Social and Economic Supplement of the Current Population Survey, July 25, 2017. https:// www.dol.gov/sites/default/files/ebsa/researchers/ data/health-and-welfare/health-insurancecoverage-bulletin-2016.pdf. 318 Comparable numbers for 2021 are 118,195 private employers will newly offer individual coverage HRAs and 1,556,562 eligible participants in all individual coverage HRAs will receive notices, and for 2022 196,992 private employers will newly offer individual coverage HRAs and 3,055,474 eligible participants in all individual coverage HRAs will receive notices. 319 Number of eligible participants is estimated based on Treasury estimates of the number of individuals enrolled in individual coverage HRAs, the assumption that there are two enrollees per employee participant, and the assumption that 75 percent of eligible participants would enroll in their employers’ plans. See Kaiser Family Foundation, ‘‘2017 Employer Health Benefits Survey’’, Section 3, https://www.kff.org/health-costs/report/2017employer-health-benefits-survey/. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 E:\FR\FM\20JNR2.SGM 20JNR2 28982 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations cost of $87,513. Tables 6 and 7 provide estimates for years 2020, 2021 and 2022. TABLE 6—BURDEN TO PREPARE HRA NOTICE FOR THE FIRST TIME-PRIVATE SECTOR EMPLOYERS Year Number of employers newly offering HRAs Legal cost per hour Number of hours for legal Benefit manager cost per hour Number of hours for benefit manager Total hour burden Total equivalent cost (a) (b) (c) (d) = 1 * (b) (e) (f) = 2 * (b) (g) = (d) + (f) (c) * (d) + (e) * (f) 2020 .................................. 2021 .................................. 2022 .................................. 78,797 118,195 196,992 $136.44 136.44 136.44 78,797 118,195 196,992 $125.00 125.00 125.00 157,593 236,390 393,984 236,390 354,585 590,976 $30,450,216 45,675,324 76,125,539 TABLE 7—BURDEN TO PROVIDE NOTICE TO ALL ELIGIBLE PRIVATE SECTOR PARTICIPANTS Year Total number of notices Number of notices sent by mail Cost per notice Total cost burden (a) (b) (c) (d) (e) = (c) * (d) 2020 ........................................................................................................... 2021 ........................................................................................................... 2022 ........................................................................................................... jbell on DSK3GLQ082PROD with RULES2 3. Notice to Participants That Individual Health Insurance Coverage Policy Is Not Subject to Title I of ERISA In the final rules, DOL clarifies that individual health insurance coverage, the premiums of which are reimbursed by an HRA, QSEHRA, or supplemental salary reduction arrangement is not considered an ‘‘employee welfare benefit plan’’ with the consumer protections provided under ERISA, if certain safe harbor conditions are satisfied. HRA plan sponsors are required to notify participants of this fact (29 CFR 2510.3–1(l)(5)). For an HRA, this notice requirement is satisfied if annually the notice requirement in 26 CFR 54.9802–4(c)(6) and 29 CFR 2590.702–2(c)(6) is satisfied, which is part of the HRA Notice to Participants discussed earlier in this preamble. Therefore, this notice requirement imposes no additional burden. For QSEHRAs and for HRAs not subject to 26 CFR 54.9802–4(c)(6) and 29 CFR 2590.702–2(c)(6), but that reimburse premiums for individual health insurance coverage, the plan sponsor may use the following language to satisfy this condition: ‘‘The individual health insurance coverage that is paid for by this plan, if any, is not subject to the rules and consumer protections of the Employee Retirement Income Security Act. You should contact your state insurance department for more information regarding your rights and responsibilities if you purchase individual health insurance coverage.’’ The Departments estimate that this burden will be de minimis, because the VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 634,155 1,556,562 3,055,474 required text is provided in the rule and can be included with other notices. Section II.A.9 of the preamble discusses comments received on the notice required to be provided to participants eligible for an individual coverage HRA. 4. Participant Notifies Individual Coverage HRA of Cancelled or Terminated Coverage The final rules require that if a covered individual fails to pay the applicable premium(s) by the end of a grace period and the coverage is cancelled or terminated, including retroactively, or if individual health insurance coverage is cancelled or terminated retroactively for some other reason (for example, a rescission), the individual coverage HRA must require that the individual notify the HRA that coverage has been cancelled or terminated and the date on which the coverage cancellation or termination is effective (26 CFR 54.9802–4(c)(1)(iii), 29 CFR 2590.702–254.9801–4(c)(1)(iii) and 45 CFR 146.123(c)(1)(iii)). The Departments have concluded that the burden associated with this notification requirement is de minimis for participants that cancel coverage, because they can satisfy the requirement by making a phone call or sending an email. Other related comments are discussed in section II.A.2.d of this preamble. 5. Notice for Excepted Benefit HRAs In response to commenters’ concerns, the final rules announce HHS’ intent to propose a notice requirement with PO 00000 Frm 00096 Fmt 4701 Sfmt 4700 291,711 716,019 1,405,518 $0.30 0.30 0.30 $87,513 214,806 421,655 respect to excepted benefit HRAs sponsored by non-federal governmental plan sponsors in future notice and comment rulemaking. It is anticipated that the proposed excepted benefit HRA notice would be required to state conditions pertaining to eligibility to receive benefits, annual or lifetime caps or other limits on benefits under the excepted benefit HRA, and a description of or summary of the benefits consistent with the content and timing of DOL’s SPD requirements. For private-sector, employment-based plans, other notice requirements under Part 1 of ERISA already apply. For example, excepted benefit HRAs that are ERISA-covered plans must provide a SPD, SMM, and summaries of material reductions in covered services or benefits.320 The excepted benefit HRA’s SPD must include, for example, the conditions pertaining to eligibility to receive benefits; a description or summary of the benefits; the circumstances that may result in disqualification, ineligibility, or denial, loss, forfeiture, suspension, offset, reduction, or recovery (for example, by exercise of subrogation or reimbursement rights) of any benefits; and the procedures governing claims for benefits under the excepted benefit HRA. Accordingly, for excepted benefit HRAs that are subject to ERISA, the burden for providing information regarding excepted benefit HRAs is captured under DOL’s SPD information collection (OMB Control Number 1210– 320 See 29 CFR 2520.104b–2, 2520.104b–3(a), and (d)(3). E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 0039), which includes a growth factor for new SPDs and SMMs provided to participants to notify them regarding coverage under new plans and plan amendments. Additional comments are discussed in section II.B.7 of this preamble. The information collections are summarized as follows: Type of Review: New Collection. Agency: DOL–EBSA, Treasury—IRS. Title: Notice for Health Reimbursement Arrangements integrated with Individual Health Insurance Coverage. OMB Numbers: 1210–0160 (DOL), 1545–0123, 1545–0074, and 1545–0047 (Treasury). Affected Public: Private Sector. Total Respondents: 1,442,876 threeyear average. Total Responses: 18,798,855 threeyear average. Frequency of Response: Annually. Estimated Total Annual Burden Hours: 196,992 for each agency (combined total is 393,984 hours). Three year average. Estimated Total Annual Burden Cost: $120,662 for each agency (combined total is $241,325). Three year average. F. Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes certain requirements with respect to federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are likely to have a significant economic impact on a substantial number of small entities. Unless an agency certifies that a final rule is not likely to have a significant economic impact on a substantial number of small entities, section 604 of the RFA requires that the agency prepare a final regulatory flexibility analysis describing the impact of the rule on small entities. Small entities include small businesses, organizations, and governmental jurisdictions. The RFA generally defines a ‘‘small entity’’ as (1) a proprietary firm meeting the size standards of the Small Business Administration (SBA) (13 CFR 121.201), (2) a nonprofit organization that is not dominant in its field, or (3) a small government jurisdiction with a population of less than 50,000. (States and individuals are not included in the definition of ‘‘small entity.’’) The Departments use as their measure of significant economic impact on a substantial number of small entities a change in revenues of more than 3 to 5 percent. The Departments do not expect the final rules to produce costs or benefits VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 in excess of 3 to 5 percent of revenues for small entities. Entities that choose to offer an individual coverage HRA instead of a traditional group health plan are likely to experience a modest increase or decrease in administrative burden associated with health benefits. Entities that newly offer health benefits in the form of an individual coverage HRA would bear modest administrative costs. However, offering an individual coverage HRA is entirely voluntary on the part of employers, and no employer that would experience substantial costs would be expected to offer an individual coverage HRA. In addition, the final rules would provide large and small employers with an additional choice of a tax-preferred health benefit to offer their employees, potentially enabling them to attract and retain workers and maintain a healthier workforce. In addition, section 1102(b) of the Social Security Act requires agencies to prepare a regulatory impact analysis if a rule may have a significant economic impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 604 of the RFA. The final rules will not have a direct effect on small rural hospitals though there may be an indirect effect. By reducing the number of uninsured persons, the final rules could reduce administrative costs, such as billing costs and the costs of helping patients obtain public health benefits. The final rules could also reduce the cost of uncompensated care borne by small rural hospitals and other healthcare providers (and shift such costs to insured persons). However, the Departments have determined that the final rules will not have a significant impact on the operations of a substantial number of small rural hospitals. G. Impact of Regulations on Small Business—Department of the Treasury Pursuant to section 7805(f) of the Code, the proposed rule that preceded this final rule was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business, and no comments were received. H. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any 1 year by state, local, or Tribal governments, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated PO 00000 Frm 00097 Fmt 4701 Sfmt 4700 28983 annually for inflation. In 2019, that threshold is approximately $154 million. These final rules do not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. I. Federalism Executive Order 13132 outlines fundamental principles of federalism. It requires adherence to specific criteria by Federal agencies in formulating and implementing policies that have ‘‘substantial direct effects’’ on the states, the relationship between the national government and states, or on the distribution of power and responsibilities among the various levels of government. Federal agencies promulgating regulations that have these federalism implications must consult with state and local officials, and describe the extent of their consultation and the nature of the concerns of state and local officials in the preamble to the final rules. Federal officials have discussed the issues related to implementation of the policies in the proposed rules with state regulatory officials. Over multiple individual and group conversations, federal and state officials shared information about how and when Exchange systems and processes could be updated to support implementation of individual coverage HRAs while minimizing burden and confusion for both employers and consumers. State Exchanges expressed interest in how the FFEs would update information and systems to support employers and employees with HRA affordability determinations and the impact on APTC eligibility. The FFEs explained possible ways in which the federal platform would approach these issues and operations if the rules were finalized as proposed and agreed to share related documentation once implementation begins, to support state efforts. Some State Exchanges expressed concerns in these conversations that fully implementing these changes would take several months and likely would not be finished before individual coverage HRAs become available starting on January 1, 2020. The FFEs offered suggestions for information that could be provided to employers and consumers to address these concerns and ensure smooth implementation before system changes are complete. J. Congressional Review Act This final rule is subject to the Congressional Review Act provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 E:\FR\FM\20JNR2.SGM 20JNR2 28984 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations U.S.C. 801 et seq.) and will be transmitted to the Congress and to the Comptroller General for review in accordance with such provisions. K. Reducing Regulation and Controlling Regulatory Cost Executive Order 13771, titled Reducing Regulation and Controlling Regulatory Costs, was issued on January 30, 2017 and requires that the costs associated with significant new regulations ‘‘shall, to the extent permitted by law, be offset by the elimination of existing costs associated with at least two prior regulations.’’ This final rule is an Executive Order 13771 deregulatory action. Statutory Authority The Department of the Treasury regulations are adopted pursuant to the authority contained in sections 7805 and 9833 of the Code. The Department of Labor regulations are adopted pursuant to the authority contained in 29 U.S.C. 1002, 1135, 1182, 1185d, 1191a, 1191b, and 1191c; Secretary of Labor’s Order 1–2011, 77 FR 1088 (Jan. 9, 2012). The Department of Health and Human Services regulations are adopted pursuant to the authority contained in sections 2701 through 2763, 2791, 2792, and 2794 of the PHS Act (42 U.S.C. 300gg–300gg–63, 300gg–91, 300gg–92 and 300gg–94), as amended; sections 1311 and 1321 of PPACA (42 U.S.C. 13031 and 18041). List of Subjects 26 CFR Part 1 26 CFR Part 54 Excise taxes, Health care, Health insurance, Pensions, Reporting and recordkeeping requirements. 29 CFR Part 2510 Employee benefit plans, Pensions. 29 CFR Part 2590 Continuation coverage, Disclosure, Employee benefit plans, Group health plans, Health care, Health insurance, Medical child support, Reporting and recordkeeping requirements. jbell on DSK3GLQ082PROD with RULES2 Exchange establishment standards and other related standards under the Affordable Care Act. Kirsten Wielobob, Deputy Commissioner for Services and Enforcement, Internal Revenue Service. Approved: June 6, 2019. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). Signed at Washington, DC, this 10th day of June, 2019. Preston Rutledge, Assistant Secretary, Employee Benefits Security Administration, Department of Labor. Dated: June 7, 2019. Seema Verma, Administrator, Centers for Medicare & Medicaid Services. Dated: June 7, 2019. Alex M. Azar II, Secretary, Department of Health and Human Services. DEPARTMENT OF THE TREASURY Internal Revenue Service Amendments to the Regulations Accordingly, 26 CFR parts 1 and 54 are amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: ■ * * * * * Par 2. Section 1.36B–0 is amended by— ■ a. Adding entries for §§ 1.36B– 2(c)(3)(i)(A) and (B). ■ b. Revising the entry for § 1.36B– 2(c)(5). ■ c. Adding entries for §§ 1.36B– 2(c)(5)(i) and (ii), 1.36B–2(c)(5)(iii), 1.36B–2(c)(5)(iii)(A) and (B), and 1.36B– 2(c)(5)(iv) through (ix). The additions and revision read as follows: ■ § 1.36B–0 Table of contents. * * * § 1.36B–2 credit. 45 CFR Parts 144 and 146 Health care, Health insurance, Reporting and recordkeeping requirements. 45 CFR Part 147 Health care, Health insurance, Reporting and recordkeeping 18:08 Jun 19, 2019 45 CFR Part 155 Authority: 26 U.S.C. 7805. Income taxes, Reporting and recordkeeping requirements. VerDate Sep<11>2014 requirements, and State regulation of health insurance. Jkt 247001 * * Eligibility for premium tax * * * * * (c) * * * (3) * * * (i) In general. (A) Plans other than health reimbursement arrangements (HRAs) or other account-based group health plans PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 described in paragraph (c)(3)(i)(B) of this section. (B) HRAs and other account-based group health plans integrated with individual health insurance coverage. * * * * * (5) Affordable HRA or other accountbased group health plan. (i) In general. (ii) Required HRA contribution. (iii) Monthly amounts. (A) Monthly lowest cost silver plan premium. (B) Monthly HRA amount. (iv) Employee safe harbor. (v) Amounts used for affordability determination. (vi) Affordability for part-year period. (vii) Related individual not allowed as a personal exemption deduction. (viii) Post-employment coverage. (ix) Examples. * * * * * ■ Par. 3. Section 1.36B–2 is amended by: ■ a. Redesignating the text of paragraph (c)(3)(i) as paragraph (c)(3)(i)(A). ■ b. Revising the subject heading to newly designated paragraph (c)(3)(i)(A). ■ c. Adding paragraph (c)(3)(i)(B). ■ d. Adding a sentence at the end of paragraphs (c)(3)(ii) and (c)(3)(v)(A)(1) and (2). ■ e. Revising paragraphs (c)(3)(v)(A)(3) and (5). ■ f. Adding a sentence at the end of paragraph (c)(3)(vi). ■ g. Adding paragraph (c)(5). ■ h. Revising paragraph (e)(1). ■ i. Adding paragraph (e)(3). The revisions and additions read as follows: § 1.36B–2 credit. Eligibility for premium tax * * * * * (c) * * * (3) * * * (i) * * * (A) Plans other than health reimbursement arrangements (HRAs) or other account-based group health plans described in paragraph (c)(3)(i)(B) of this section. * * * (B) HRAs and other account-based group health plans integrated with individual health insurance coverage. An employee who is offered an HRA or other account-based group health plan that would be integrated with individual health insurance coverage (or Medicare Part A and B or Medicare Part C), within the meaning of §§ 54.9802–4 and 54.9815–2711(d)(4) of this chapter, if the employee enrolls in individual health insurance coverage (or Medicare Part A and B or Medicare Part C), and an individual who is offered the HRA or E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations other account-based group health plan because of a relationship to the employee (a related HRA individual), are eligible for minimum essential coverage under an eligible employersponsored plan for any month for which the HRA or other account-based group health plan is offered if the HRA or other account-based group health plan is affordable for the month under paragraph (c)(5) of this section or if the employee does not opt out of and waive future reimbursements from the HRA or other account-based group health plan. An HRA or other account-based group health plan described in this paragraph (c)(3)(i)(B) that is affordable for a month under paragraph (c)(5) of this section is treated as providing minimum value for the month. For purposes of paragraphs (c)(3) and (5) of this section, the definitions under § 54.9815–2711(d)(6) of this chapter apply. (ii) * * * The plan year for an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is the plan’s 12-month coverage period (or the remainder of the 12-month coverage period for a newly eligible individual or an individual who enrolls during a special enrollment period). * * * * * (v) * * * (A) * * * (1) * * * See paragraph (c)(5) of this section for rules for when an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is affordable for an employee for a month. (2) * * * See paragraph (c)(5) of this section for rules for when an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is affordable for a related HRA individual for a month. (3) Employee safe harbor. An eligible employer-sponsored plan is not affordable for an employee or a related individual for a plan year if, when the employee or a related individual enrolls in a qualified health plan for a period coinciding with the plan year (in whole or in part), an Exchange determines that the eligible employer-sponsored plan is not affordable for that plan year. This paragraph (c)(3)(v)(A)(3) does not apply to a determination made as part of the redetermination process described in 45 CFR 155.335 unless the individual receiving an Exchange redetermination notification affirmatively responds and provides current information about affordability. This paragraph (c)(3)(v)(A)(3) does not apply for an individual who, with intentional or reckless disregard for the facts, provides VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 incorrect information to an Exchange concerning the portion of the annual premium for coverage for the employee or related individual under the plan. A reckless disregard of the facts occurs if the taxpayer makes little or no effort to determine whether the information provided to the Exchange is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct a reasonable person would observe. A disregard of the facts is intentional if the taxpayer knows that the information provided to the Exchange is inaccurate. See paragraph (c)(5) of this section for an employee safe harbor that applies when an Exchange determines that an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is not affordable for an employee or a related HRA individual for the period of enrollment in a qualified health plan. * * * * * (5) Employer contributions to HRAs integrated with eligible employersponsored plans. Amounts newly made available for the current plan year under an HRA that an employee may use to pay premiums, or may use to pay costsharing or benefits not covered by the primary plan in addition to premiums, reduce the employee’s required contribution if the HRA would be integrated, within the meaning of § 54.9815–2711(d)(2) of this chapter, with an eligible employer-sponsored plan for an employee enrolled in the plan. The eligible employer-sponsored plan and the HRA must be offered by the same employer. Employer contributions to an HRA described in this paragraph (c)(3)(v)(A)(5) reduce an employee’s required contribution only to the extent the amount of the annual contribution is required under the terms of the plan or otherwise determinable within a reasonable time before the employee must decide whether to enroll in the eligible employer-sponsored plan. * * * * * (vi) * * * An HRA or other accountbased group health plan described in paragraph (c)(3)(i)(B) of this section that is affordable for a month under paragraph (c)(5) of this section is treated as providing minimum value for the month. * * * * * (5) Affordable HRA or other accountbased group health plan—(i) In general. Except as otherwise provided in this paragraph (c)(5), an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is affordable for a month if the employee’s required HRA PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 28985 contribution (as defined in paragraph (c)(5)(ii) of this section) for the month does not exceed 1/12 of the product of the employee’s household income for the taxable year and the required contribution percentage (as defined in paragraph (c)(3)(v)(C) of this section). (ii) Required HRA contribution. An employee’s required HRA contribution is the excess of— (A) The monthly premium for the lowest cost silver plan for self-only coverage of the employee offered in the Exchange for the rating area in which the employee resides, over (B) The monthly self-only HRA or other account-based group health plan amount (or the monthly maximum amount available to the employee under the HRA or other account-based group health plan if the HRA or other accountbased group health plan provides for reimbursements up to a single dollar amount regardless of whether an employee has self-only or other-thanself-only coverage). (iii) Monthly amounts—(A) Monthly lowest cost silver plan premium. For purposes of paragraph (c)(5)(ii)(A) of this section, the premium for the lowest cost silver plan is determined without regard to any wellness program incentive that affects premiums unless the wellness program incentive relates exclusively to tobacco use, in which case the incentive is treated as earned. If the premium differs for tobacco users and non-tobacco users, the premium for the lowest cost silver plan is the premium that applies to non-tobacco users. For the purpose of this paragraph (c)(5)(iii)(A), the term wellness program incentive has the same meaning as the term reward in 26 CFR 54.9802– 1(f)(1)(i). A silver-level qualified health plan that is used for purposes of determining a taxpayer’s lowest cost silver plan for self-only coverage under paragraph (c)(5)(ii)(A) of this section does not cease to be the taxpayer’s lowest cost silver plan for self-only coverage solely because the plan terminates or closes to enrollment during the taxable year. (B) Monthly HRA amount. For purposes of paragraph (c)(5)(ii)(B) of this section, the monthly self-only HRA or other account-based group health plan amount is the self-only HRA or other account-based group health plan amount newly made available under the HRA for the plan year, divided by the number of months in the plan year the HRA or other account-based group health plan is available to the employee. The monthly maximum amount available to the employee under the HRA or other account-based group health plan is the maximum amount E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28986 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations newly made available for the plan year to the employee under the plan, divided by the number of months in the plan year the HRA or other account-based group health plan is available to the employee. (iv) Employee safe harbor. An HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is not affordable for a month for an employee or a related HRA individual if, when the employee or related HRA individual enrolls in a qualified health plan for a period coinciding with the period the HRA or other account-based group health plan is available to the employee or related HRA individual (in whole or in part), an Exchange determines that the HRA or other account-based group health plan is not affordable for the period of enrollment in the qualified health plan. This paragraph (c)(5)(iv) does not apply to a determination made as part of the redetermination process described in 45 CFR 155.335 unless the individual receiving an Exchange redetermination notification affirmatively responds and provides current information about affordability. This paragraph (c)(5)(iv) does not apply for an individual who, with intentional or reckless disregard for the facts, provides incorrect information to an Exchange concerning the relevant HRA or other account-based group health plan amount offered by the employee’s employer. A reckless disregard of the facts occurs if the taxpayer makes little or no effort to determine whether the information provided to the Exchange is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct a reasonable person would observe. A disregard of the facts is intentional if the taxpayer knows that the information provided to the Exchange is inaccurate. (v) Amounts used for affordability determination. Only amounts that are newly made available for the plan year of the HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section and determinable within a reasonable time before the beginning of the plan year of the HRA or other account-based health plan are considered in determining whether an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is affordable. Amounts made available for a prior plan year that carry over to the current plan year are not taken into account for purposes of this paragraph (c)(5). Similarly, amounts made available to account for amounts remaining in a different HRA or other account-based group health plan the VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 employer previously provided to the employee and under which the employee is no longer covered are not taken into account for purposes of this paragraph (c)(5). (vi) Affordability for part-year period. Affordability under this paragraph (c)(5) is determined separately for each employment period that is less than a full calendar year or for the portions of the plan year of an employer’s HRA or other account-based group health plan that fall in different taxable years of an applicable taxpayer. An HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is affordable for a part-year period if the employee’s annualized required HRA contribution for the partyear period does not exceed the required contribution percentage of the applicable taxpayer’s household income for the taxable year. The employee’s annualized required HRA contribution is the employee’s required HRA contribution for the part-year period times a fraction, the numerator of which is 12 and the denominator of which is the number of months in the part-year period during the applicable taxpayer’s taxable year. Only full calendar months are included in the computation under this paragraph (c)(5)(vi). (vii) Related individual not allowed as a personal exemption deduction. A related HRA individual is treated as ineligible for minimum essential coverage under an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section for months that the employee opted out of and waived future reimbursements from the HRA or other account-based group health plan and the employee is not allowed a personal exemption deduction under section 151 for the related HRA individual. (viii) Post-employment coverage. An individual who is offered an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section, for months after an employee terminates employment with the employer offering the HRA or other account-based group health plan, is eligible for minimum essential coverage under the HRA or other account-based group health plan for months after termination of employment only if the employee does not forfeit or opt out of and waive future reimbursements from the HRA or other account-based group health plan for months after termination of employment. (ix) Examples. The following examples illustrate the provisions of this paragraph (c)(5). The required contribution percentage is defined in PO 00000 Frm 00100 Fmt 4701 Sfmt 4700 paragraph (c)(3)(v)(C) of this section and is updated annually. Because the required contribution percentage for 2020 has not yet been determined, the examples assume a required contribution percentage for 2020 of 9.78 percent. (A) Example 1: Determination of affordability—(1) Facts. In 2020 Taxpayer A is single, has no dependents, and has household income of $28,000. A is an employee of Employer X for all of 2020. X offers its employees an HRA described in paragraph (c)(3)(i)(B) of this section that reimburses $2,400 of medical care expenses for single employees with no children (the self-only HRA amount) and $4,000 for employees with a spouse or children for the medical expenses of the employees and their family members. A enrolls in a qualified health plan through the Exchange in the rating area in which A resides and remains enrolled for all of 2020. The monthly premium for the lowest cost silver plan for self-only coverage of A that is offered in the Exchange for the rating area in which A resides is $500. (2) Conclusion. A’s required HRA contribution, as defined in paragraph (c)(5)(ii) of this section, is $300, the excess of $500 (the monthly premium for the lowest cost silver plan for self-only coverage of A) over $200 (1/12 of the self-only HRA amount provided by Employer X to its employees). In addition, 1/12 of the product of 9.78 percent and A’s household income is $228 ($28,000 × .0978 = $2,738; $2,738/12 = $228). Because A’s required HRA contribution of $300 exceeds $228 (1/12 of the product of 9.78 percent and A’s household income), the HRA is unaffordable for A for each month of 2020 under paragraph (c)(5) of this section. If A opts out of and waives future reimbursements from the HRA, A is not eligible for minimum essential coverage under the HRA for each month of 2020 under paragraph (c)(3)(i)(B) of this section. (B) Example 2: Determination of affordability for a related HRA individual— (1) Facts. In 2020 Taxpayer B is married and has one child who is a dependent of B for 2020. B has household income of $28,000. B is an employee of Employer X for all of 2020. X offers its employees an HRA described in paragraph (c)(3)(i)(B) of this section that reimburses $3,600 of medical care expenses for single employees with no children (the self-only HRA amount) and $5,000 for employees with a spouse or children for the medical expenses of the employees and their family members. B, B’s spouse, and B’s child enroll in a qualified health plan through the Exchange in the rating area in which B resides and they remain enrolled for all of 2020. No advance credit payments are made for their coverage. The monthly premium for the lowest cost silver plan for self-only coverage of B that is offered in the Exchange for the rating area in which B resides is $500. (2) Conclusion. B’s required HRA contribution, as defined in paragraph (c)(5)(ii) of this section, is $200, the excess of $500 (the monthly premium for the lowest cost silver plan for self-only coverage for B) over $300 (1/12 of the self-only HRA amount E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations provided by Employer X to its employees). In addition, 1/12 of the product of 9.78 percent and B’s household income for 2020 is $228 ($28,000 × .0978 = $2,738; $2,738/12 = $228). Because B’s required HRA contribution of $200 does not exceed $228 (1/12 of the product of 9.78 percent and B’s household income for 2020), the HRA is affordable for B under paragraph (c)(5) of this section, and B is eligible for minimum essential coverage under an eligible employer-sponsored plan for each month of 2020 under paragraph (c)(3)(i)(B) of this section. In addition, B’s spouse and child are also eligible for minimum essential coverage under an eligible employer-sponsored plan for each month of 2020 under paragraph (c)(3)(i)(B) of this section. (C) Example 3: Exchange determines that HRA is unaffordable—(1) Facts. The facts are the same as in paragraph (c)(5)(ix)(B) of this section (Example 2), except that B, when enrolling in Exchange coverage for B’s family, received a determination by the Exchange that the HRA was unaffordable, because B believed B’s household income would be lower than it turned out to be. Consequently, advance credit payments were made for their 2020 coverage. (2) Conclusion. Under paragraph (c)(5)(iv) of this section, the HRA is considered unaffordable for B, B’s spouse, and B’s child for each month of 2020 provided that B did not, with intentional or reckless disregard for the facts, provide incorrect information to the Exchange concerning the HRA. (D) Example 4: Affordability determined for part of a taxable year (part-year period)— (1) Facts. Taxpayer C is an employee of Employer X. C’s household income for 2020 is $28,000. X offers its employees an HRA described in paragraph (c)(3)(i)(B) of this section that reimburses medical care expenses of $3,600 for single employees without children (the self-only HRA amount) and $5,000 to employees with a spouse or children for the medical expenses of the employees and their family members. X’s HRA plan year is September 1 to August 31 and C is first eligible to participate in the HRA for the period beginning September 1, 2020. C enrolls in a qualified health plan through the Exchange in the rating area in which C resides for all of 2020. The monthly premium for the lowest cost silver plan for self-only coverage of C that is offered in the Exchange for the rating area in which C resides for 2020 is $500. (2) Conclusion. Under paragraph (c)(3)(vi) of this section, the affordability of the HRA is determined separately for the period September 1 through December 31, 2020, and for the period January 1 through August 31, 2021. C’s required HRA contribution, as defined in paragraph (c)(5)(ii) of this section, for the period September 1 through December 31, 2020, is $200, the excess of $500 (the monthly premium for the lowest cost silver plan for self-only coverage for C) over $300 (1/12 of the self-only HRA amount provided by X to its employees). In addition, 1/12 of the product of 9.78 percent and C’s household income is $228 ($28,000 × .0978 = $2,738; $2,738/12 = $228). Because C’s required HRA contribution of $200 does not exceed $228, the HRA is affordable for C for VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 each month in the period September 1 through December 31, 2020, under paragraph (c)(5) of this section. Affordability for the period January 1 through August 31, 2021, is determined using C’s 2021 household income and required HRA contribution. (E) Example 5: Carryover amounts ignored in determining affordability—(1) Facts. Taxpayer D is an employee of Employer X for all of 2020 and 2021. D is single. For each of 2020 and 2021, X offers its employees an HRA described in paragraph (c)(3)(i)(B) of this section that provides reimbursement for medical care expenses of $2,400 to single employees with no children (the self-only HRA amount) and $4,000 to employees with a spouse or children for the medical expenses of the employees and their family members. Under the terms of the HRA, amounts that an employee does not use in a calendar year may be carried over and used in the next calendar year. In 2020, D used only $1,500 of her $2,400 maximum reimbursement and the unused $900 is carried over and may be used by D in 2021. (2) Conclusion. Under paragraph (c)(5)(v) of this section, only the $2,400 self-only HRA amount offered to D for 2021 is considered in determining whether D’s HRA is affordable for D. The $900 carryover amount is not considered in determining the affordability of the HRA. * * * * * (e) * * * (1) Except as provided in paragraphs (e)(2) and (3) of this section, this section applies to taxable years ending after December 31, 2013. * * * * * (3) Paragraphs (c)(3)(i)(B) and (c)(5) of this section, and the last sentences of paragraphs (c)(3)(ii), (c)(3)(v)(A)(1) through (3), and (c)(3)(vi) of this section apply to taxable years beginning on or after January 1, 2020. PART 54—PENSION EXCISE TAXES Par. 4. The authority citation for part 54 is amended by adding an entry for § 54.9802–4 in numerical order to read in part as follows: Authority: 26 U.S.C. 7805. * * * * * Section 54.9802–4 is also issued under 26 U.S.C. 9833. * * * * * Par. 5. Section 54.9801–2 is amended by revising the definition of ‘‘Group health insurance coverage’’ to read as follows: ■ § 54.9801–2 Definitions. * * * * * Group health insurance coverage means health insurance coverage offered in connection with a group health plan. Individual health insurance coverage reimbursed by the arrangements described in 29 CFR 2510.3–1(l) is not offered in connection with a group PO 00000 Frm 00101 Fmt 4701 Sfmt 4700 28987 health plan, and is not group health insurance coverage, provided all the conditions in 29 CFR 2510.3–1(l) are satisfied. * * * * * ■ Par. 6. Section 54.9802–4 is added to read as follows: § 54.9802–4 Special Rule Allowing Integration of Health Reimbursement Arrangements (HRAs) and Other AccountBased Group Health Plans with Individual Health Insurance Coverage and Medicare and Prohibiting Discrimination In HRAs and Other Account-Based Group Health Plans. (a) Scope. This section applies to health reimbursement arrangements (HRAs) and other account-based group health plans, as defined in § 54.9815– 2711(d)(6)(i) of this chapter. For ease of reference, the term ‘‘HRA’’ is used in this section to include other accountbased group health plans. For related regulations, see 26 CFR 1.36B–2(c)(3)(i) and (c)(5), 29 CFR 2510.3–1(l), and 45 CFR 155.420. (b) Purpose. This section provides the conditions that an HRA must satisfy in order to be integrated with individual health insurance coverage for purposes of Public Health Service Act (PHS Act) sections 2711 and 2713 and § 54.9815– 2711(d)(4) of this chapter (referred to as an individual coverage HRA). This section also allows an individual coverage HRA to be integrated with Medicare for purposes of PHS Act sections 2711 and 2713 and § 54.9815– 2711(d)(4), subject to the conditions provided in this section (see paragraph (e) of this section). Some of the conditions set forth in this section specifically relate to compliance with PHS Act sections 2711 and 2713 and some relate to the effect of having or being offered an individual coverage HRA on eligibility for the premium tax credit under section 36B. In addition, this section provides conditions that an individual coverage HRA must satisfy in order to comply with the nondiscrimination provisions in section 9802 and PHS Act section 2705 (which is incorporated in section 9815) and that are consistent with the provisions of the Patient Protection and Affordable Care Act, Public Law 111–148 (124 Stat. 119 (2010)), and the Health Care and Education Reconciliation Act of 2010, Public Law 111–152 (124 Stat. 1029 (2010)), each as amended, that are designed to create a competitive individual market. These conditions are intended to prevent an HRA plan sponsor from intentionally or unintentionally, directly or indirectly, steering any participants or dependents with adverse health factors away from its traditional group health plan, if any, E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28988 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations and toward individual health insurance coverage. (c) General rule. An HRA will be considered to be integrated with individual health insurance coverage for purposes of PHS Act sections 2711 and 2713 and § 54.9815–2711(d)(4) of this chapter and will not be considered to discriminate in violation of section 9802 and PHS Act section 2705 solely because it is integrated with individual health insurance coverage, provided that the conditions of this paragraph (c) are satisfied. See paragraph (e) of this section for how these conditions apply to an individual coverage HRA integrated with Medicare. For purposes of this section, medical care expenses means medical care expenses as defined in § 54.9815–2711(d)(6)(ii) of this chapter and Exchange means Exchange as defined in 45 CFR 155.20. (1) Enrollment in individual health insurance coverage—(i) In general. The HRA must require that the participant and any dependent(s) are enrolled in individual health insurance coverage that is subject to and complies with the requirements in PHS Act section 2711 (and § 54.9815–2711(a)(2) of this chapter) and PHS Act section 2713 (and § 54.9815–2713(a)(1) of this chapter), for each month that the individual(s) are covered by the HRA. For purposes of this paragraph (c), all individual health insurance coverage, except for individual health insurance coverage that consists solely of excepted benefits, is treated as being subject to and complying with PHS Act sections 2711 and 2713. References to individual health insurance coverage in this paragraph (c) do not include individual health insurance coverage that consists solely of excepted benefits. (ii) Forfeiture. The HRA must provide that if any individual covered by the HRA ceases to be covered by individual health insurance coverage, the HRA will not reimburse medical care expenses that are incurred by that individual after the individual health insurance coverage ceases. In addition, if the participant and all dependents covered by the participant’s HRA cease to be covered by individual health insurance coverage, the participant must forfeit the HRA. In either case, the HRA must reimburse medical care expenses incurred by the individual prior to the cessation of individual health insurance coverage to the extent the medical care expenses are otherwise covered by the HRA, but the HRA may limit the period to submit medical care expenses for reimbursement to a reasonable specified time period. If a participant or dependent loses coverage under the HRA for a reason other than cessation of VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 individual health insurance coverage, COBRA and other continuation coverage requirements may apply. (iii) Grace periods and retroactive termination of individual health insurance coverage. In the event an individual is initially enrolled in individual health insurance coverage and subsequently timely fails to pay premiums for the coverage, with the result that the individual is in a grace period, the individual is considered to be enrolled in individual health insurance coverage for purposes of this paragraph (c)(1) and the individual coverage HRA must reimburse medical care expenses incurred by the individual during that time period to the extent the medical care expenses are otherwise covered by the HRA. If the individual fails to pay the applicable premium(s) by the end of the grace period and the coverage is cancelled or terminated, including retroactively, or if the individual health insurance coverage is cancelled or terminated retroactively for some other reason (for example, a rescission), an individual coverage HRA must require that a participant notify the HRA that coverage has been cancelled or terminated and the date on which the cancellation or termination is effective. After the individual coverage HRA has received the notice of cancellation or termination, the HRA may not reimburse medical care expenses incurred on and after the date the individual health insurance coverage was cancelled or terminated, which is considered to be the date of termination of coverage under the HRA. (2) No traditional group health plan may be offered to same participants. To the extent a plan sponsor offers any class of employees (as defined in paragraph (d) of this section) an individual coverage HRA, the plan sponsor may not also offer a traditional group health plan to the same class of employees, except as provided in paragraph (d)(5) of this section. For purposes of this section, a traditional group health plan is any group health plan other than either an account-based group health plan or a group health plan that consists solely of excepted benefits. Therefore, a plan sponsor may not offer a choice between an individual coverage HRA or a traditional group health plan to any participant or dependent. (3) Same terms requirement—(i) In general. If a plan sponsor offers an individual coverage HRA to a class of employees described in paragraph (d) of this section, the HRA must be offered on the same terms to all participants within the class, except as provided in PO 00000 Frm 00102 Fmt 4701 Sfmt 4700 paragraphs (c)(3)(ii) through (vi) and (d)(5) of this section. (ii) Carryover amounts, salary reduction arrangements, and transfer amounts. Amounts that are not used to reimburse medical care expenses for any plan year that are made available to participants in later plan years are disregarded for purposes of determining whether an HRA is offered on the same terms, provided that the method for determining whether participants have access to unused amounts in future years, and the methodology and formula for determining the amounts of unused funds which they may access in future years, is the same for all participants in a class of employees. In addition, the ability to pay the portion of the premium for individual health insurance coverage that is not covered by the HRA, if any, by using a salary reduction arrangement under section 125 is considered to be a term of the HRA for purposes of this paragraph (c)(3). Therefore, an HRA is not provided on the same terms unless the salary reduction arrangement, if made available to any participant in a class of employees, is made available on the same terms to all participants (other than former employees, as defined in paragraph (c)(3)(iv) of this section) in the class of employees. Further, to the extent that a participant in an individual coverage HRA was previously covered by another HRA and the current individual coverage HRA makes available amounts that were not used to reimburse medical care expenses under the prior HRA (transferred amounts), the transferred amounts are disregarded for purposes of determining whether the HRA is offered on the same terms, provided that if the HRA makes available transferred amounts, it does so on the same terms for all participants in the class of employees. (iii) Permitted variation. An HRA does not fail to be provided on the same terms solely because the maximum dollar amount made available to participants in a class of employees to reimburse medical care expenses for any plan year increases in accordance with paragraph (c)(3)(iii)(A) or (B) of this section. (A) Variation due to number of dependents. An HRA does not fail to be provided on the same terms to participants in a class of employees solely because the maximum dollar amount made available to those participants to reimburse medical care expenses for any plan year increases as the number of the participant’s dependents who are covered under the HRA increases, so long as the same E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations maximum dollar amount attributable to the increase in family size is made available to all participants in that class of employees with the same number of dependents covered by the HRA. (B) Variation due to age. An HRA does not fail to be provided on the same terms to participants in a class of employees solely because the maximum dollar amount made available under the terms of the HRA to those participants to reimburse medical care expenses for any plan year increases as the age of the participant increases, so long as the requirements in paragraphs (c)(3)(iii)(B)(1) and (2) of this section are satisfied. For the purpose of this paragraph (c)(3)(iii)(B), the plan sponsor may determine the age of the participant using any reasonable method for a plan year, so long as the plan sponsor determines each participant’s age for the purpose of this paragraph (c)(3)(iii)(B) using the same method for all participants in the class of employees for the plan year and the method is determined prior to the plan year. (1) The same maximum dollar amount attributable to the increase in age is made available to all participants who are the same age. (2) The maximum dollar amount made available to the oldest participant(s) is not more than three times the maximum dollar amount made available to the youngest participant(s). (iv) Former employees. An HRA does not fail to be treated as provided on the same terms if the plan sponsor offers the HRA to some, but not all, former employees within a class of employees. However, if a plan sponsor offers the HRA to one or more former employees within a class of employees, the HRA must be offered to the former employee(s) on the same terms as to all other employees within the class, except as provided in paragraph (c)(3)(ii) of this section. For purposes of this section, a former employee is an employee who is no longer performing services for the employer. (v) New employees or new dependents. For a participant whose coverage under the HRA becomes effective later than the first day of the plan year, the HRA does not fail to be treated as being provided on the same terms to the participant if the maximum dollar amount made available to the participant either is the same as the maximum dollar amount made available to participants in the participant’s class of employees whose coverage became effective as of the first day of the plan year, or is pro-rated consistent with the portion of the plan year in which the participant is covered by the HRA. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 Similarly, if the HRA provides for variation in the maximum amount made available to participants in a class of employees based on the number of a participant’s dependents covered by the HRA, and the number of a participant’s dependents covered by the HRA changes during a plan year (either increasing or decreasing), the HRA does not fail to be treated as being provided on the same terms to the participant if the maximum dollar amount made available to the participant either is the same as the maximum dollar amount made available to participants in the participant’s class of employees who had the same number of dependents covered by the HRA on the first day of the plan year or is pro-rated for the remainder of the plan year after the change in the number of the participant’s dependents covered by the HRA consistent with the portion of the plan year in which that number of dependents are covered by the HRA. The method the HRA uses to determine amounts made available for participants whose coverage under the HRA is effective later than the first day of the plan year or who have changes in the number of dependents covered by the HRA during a plan year must be the same for all participants in the class of employees and the method must be determined prior to the beginning of the plan year. (vi) HSA-compatible HRAs. An HRA does not fail to be treated as provided on the same terms if the plan sponsor offers participants in a class of employees a choice between an HSAcompatible individual coverage HRA and an individual coverage HRA that is not HSA compatible, provided both types of HRAs are offered to all participants in the class of employees on the same terms. For the purpose of this paragraph (c)(3)(vi), an HSAcompatible individual coverage HRA is an individual coverage HRA that is limited in accordance with applicable guidance under section 223 such that an individual covered by such an HRA is not disqualified from being an eligible individual under section 223. (vii) Examples. The following examples illustrate the provisions of this paragraph (c)(3), without taking into account the provisions of paragraph (d) of this section. In each example, the HRA is an individual coverage HRA that has a calendar year plan year and may reimburse any medical care expenses, including premiums for individual health insurance coverage (except as provided in paragraph (c)(3)(vii)(E) of this section (Example 5)). Further, in each example, assume the HRA is offered on the same terms, except as PO 00000 Frm 00103 Fmt 4701 Sfmt 4700 28989 otherwise specified in the example and that no participants or dependents are Medicare beneficiaries. (A) Example 1: Carryover amounts permitted—(1) Facts. For 2020 and again for 2021, Plan Sponsor A offers all employees $7,000 each in an HRA, and the HRA provides that amounts that are unused at the end of a plan year may be carried over to the next plan year, with no restrictions on the use of the carryover amounts compared to the use of newly available amounts. At the end of 2020, some employees have used all of the funds in their HRAs, while other employees have balances remaining that range from $500 to $1,750 that are carried over to 2021 for those employees. (2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(A) (Example 1) for 2020 because Plan Sponsor A offers all employees the same amount, $7,000, in an HRA for that year. The same terms requirement is also satisfied for 2021 because Plan Sponsor A again offers all employees the same amount for that year, and the carryover amounts that some employees have are disregarded in applying the same terms requirement because the amount of the carryover for each employee (that employee’s balance) and each employee’s access to the carryover amounts is based on the same terms. (B) Example 2: Employees hired after the first day of the plan year—(1) Facts. For 2020, Plan Sponsor B offers all employees employed on January 1, 2020, $7,000 each in an HRA for the plan year. Employees hired after January 1, 2020, are eligible to enroll in the HRA with an effective date of the first day of the month following their date of hire, as long as they have enrolled in individual health insurance coverage effective on or before that date, and the amount offered to these employees is pro-rated based on the number of months remaining in the plan year, including the month which includes their coverage effective date. (2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(B) (Example 2) for 2020 because Plan Sponsor B offers all employees employed on the first day of the plan year the same amount, $7,000, in an HRA for that plan year and all employees hired after January 1, 2020, a prorata amount based on the portion of the plan year during which they are enrolled in the HRA. (C) Example 3: HRA amounts offered vary based on number of dependents—(1) Facts. For 2020, Plan Sponsor C offers its employees the following amounts in an HRA: $1,500, if the employee is the only individual covered by the HRA; $3,500, if the employee and one dependent are covered by the HRA; and $5,000, if the employee and more than one dependent are covered by the HRA. (2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(C) (Example 3) because paragraph (c)(3)(iii)(A) of this section allows the maximum dollar amount made available in an HRA to increase as the number of the participant’s E:\FR\FM\20JNR2.SGM 20JNR2 28990 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 dependents covered by the HRA increases and Plan Sponsor C makes the same amount available to each employee with the same number of dependents covered by the HRA. (D) Example 4: HRA amounts offered vary based on increases in employees’ ages—(1) Facts. For 2020, Plan Sponsor D offers its employees the following amounts in an HRA: $1,000 each for employees age 25 to 35; $2,000 each for employees age 36 to 45; $2,500 each for employees age 46 to 55; and $4,000 each for employees over age 55. (2) Conclusion. The same terms requirement of this paragraph (c)(3) is not satisfied in this paragraph (c)(3)(vii)(D) (Example 4) because the terms of the HRA provide the oldest participants (those over age 55) with more than three times the amount made available to the youngest participants (those ages 25 to 35), in violation of paragraph (c)(3)(iii)(B)(2) of this section. (E) Example 5: Application of same terms requirement to premium only HRA—(1) Facts. For 2020, Plan Sponsor E offers its employees an HRA that reimburses only premiums for individual health insurance coverage, up to $10,000 for the year. Employee A enrolls in individual health insurance coverage with a $5,000 premium for the year and is reimbursed $5,000 from the HRA. Employee B enrolls in individual health insurance coverage with an $8,000 premium for the year and is reimbursed $8,000 from the HRA. (2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(E) (Example 5) because Plan Sponsor E offers the HRA on the same terms to all employees, notwithstanding that some employees receive a greater amount of reimbursement than others based on the cost of the individual health insurance coverage selected by the employee. (4) Opt out. Under the terms of the HRA, a participant who is otherwise eligible for coverage must be permitted to opt out of and waive future reimbursements on behalf of the participant and all dependents eligible for the HRA from the HRA once, and only once, with respect to each plan year. The HRA may establish timeframes for enrollment in (and opting out of) the HRA but, in general, the opportunity to opt out must be provided in advance of the first day of the plan year. For participants who become eligible to participate in the HRA on a date other than the first day of the plan year (or who become eligible fewer than 90 days prior to the plan year or for whom the notice under paragraph (c)(6) of this section is required to be provided as set forth in paragraph (c)(6)(i)(C) of this section), or for a dependent who newly becomes eligible during the plan year, this opportunity must be provided during the applicable HRA enrollment period(s) established by the HRA for these individuals. Further, under the terms of the HRA, upon termination of employment, for a VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 participant who is covered by the HRA, either the remaining amounts in the HRA must be forfeited or the participant must be permitted to permanently opt out of and waive future reimbursements from the HRA on behalf of the participant and all dependents covered by the HRA. (5) Reasonable procedures for coverage substantiation—(i) Substantiation of individual health insurance coverage for the plan year. The HRA must implement, and comply with, reasonable procedures to substantiate that participants and each dependent covered by the HRA are, or will be, enrolled in individual health insurance coverage for the plan year (or for the portion of the plan year the individual is covered by the HRA, if applicable). The HRA may establish the date by which this substantiation must be provided, but, in general, the date may be no later than the first day of the plan year. However, for a participant who is not eligible to participate in the HRA on the first day of the plan year (or who becomes eligible fewer than 90 days prior to the plan year or for whom the notice under paragraph (c)(6) of this section is required to be provided as set forth in paragraph (c)(6)(i)(C) of this section), the HRA may establish the date by which this substantiation must be provided, but that date may be no later than the date the HRA coverage begins. Similarly, for a participant who adds a new dependent during the plan year, the HRA may establish the date by which this substantiation must be provided, but the date may be no later than the date the HRA coverage for the new dependent begins; however, to the extent the dependent’s coverage under the HRA is effective retroactively, the HRA may establish a reasonable time by which this substantiation is required, but must require it be provided before the HRA will reimburse any medical care expense for the newly added dependent. The reasonable procedures an HRA may use to implement the substantiation requirement set forth in this paragraph (c)(5)(i) may include a requirement that a participant substantiate enrollment by providing either: (A) A document from a third party (for example, the issuer or an Exchange) showing that the participant and any dependents covered by the HRA are, or will be, enrolled in individual health insurance coverage (for example, an insurance card or an explanation of benefits document pertaining to the relevant time period or documentation from the Exchange showing that the individual has completed the application and plan selection); or PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 (B) An attestation by the participant stating that the participant and dependent(s) covered by the HRA are, or will be, enrolled in individual health insurance coverage, the date coverage began or will begin, and the name of the provider of the coverage. (ii) Coverage substantiation with each request for reimbursement of medical care expenses. Following the initial substantiation of coverage, with each new request for reimbursement of an incurred medical care expense for the same plan year, the HRA may not reimburse a participant for any medical care expenses unless, prior to each reimbursement, the participant substantiates that the individual on whose behalf medical care expenses are requested to be reimbursed continues to be enrolled in individual health insurance coverage for the month during which the medical care expenses were incurred. The HRA must implement, and comply with, reasonable procedures to satisfy this requirement. This substantiation may be in the form of a written attestation by the participant, which may be part of the form used to request reimbursement, or a document from a third party (for example, a health insurance issuer) showing that the participant or the dependent, if applicable, are or were enrolled in individual health insurance coverage for the applicable month. (iii) Reliance on substantiation. For purposes of this paragraph (c)(5), an HRA may rely on the participant’s documentation or attestation unless the HRA, its plan sponsor, or any other entity acting in an official capacity on behalf of the HRA has actual knowledge that any individual covered by the HRA is not, or will not be, enrolled in individual health insurance coverage for the plan year (or applicable portion of the plan year) or the month, as applicable. (6) Notice requirement—(i) Timing. The HRA must provide a written notice to each participant: (A) At least 90 calendar days before the beginning of each plan year for any participant who is not described in either paragraph (c)(6)(i)(B) or (C) of this section; (B) No later than the date on which the HRA may first take effect for the participant, for any participant who is not eligible to participate at the beginning of the plan year (or is not eligible to participate at the time the notice is provided at least 90 calendar days before the beginning of the plan year pursuant to paragraph (c)(6)(i)(A) of this section); or (C) No later than the date on which the HRA may first take effect for the E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations participant, for any participant who is employed by an employer that is first established less than 120 days before the beginning of the first plan year of the HRA; this paragraph (c)(6)(i)(C) applies only with respect to the first plan year of the HRA. (ii) Content. The notice must include all the information described in this paragraph (c)(6)(ii) (and may include any additional information that does not conflict with that information). To the extent that the Departments of the Treasury, Labor and Health and Human Services provide model notice language for certain elements of this required notice, HRAs are permitted, but not required, to use the model language. (A) A description of the terms of the HRA, including the maximum dollar amount available for each participant (including the self-only HRA amount available for the plan year (or the maximum dollar amount available for the plan year if the HRA provides for reimbursements up to a single dollar amount regardless of whether a participant has self-only or other than self-only coverage)), any rules regarding the proration of the maximum dollar amount applicable to any participant (or dependent, if applicable) who is not eligible to participate in the HRA for the entire plan year, whether (and which of) the participant’s dependents are eligible for the HRA, a statement that there are different kinds of HRAs (including a qualified small employer health reimbursement arrangement) and the HRA being offered is an individual coverage HRA, a statement that the HRA requires the participant and any covered dependents to be enrolled in individual health insurance coverage (or Medicare Part A and B or Medicare Part C, if applicable), a statement that the coverage in which the participant and any covered dependents must be enrolled cannot be short-term, limitedduration insurance or consist solely of excepted benefits, if the HRA is subject to the Employee Retirement Income Security Act (ERISA), a statement that individual health insurance coverage in which the participant and any covered dependents are enrolled is not subject to ERISA, if the conditions under 29 CFR 2510.3–1(l) are satisfied, the date as of which coverage under the HRA may first become effective (both for participants whose coverage will become effective on the first day of the plan year and for participants whose HRA coverage may become effective at a later date), the dates on which the HRA plan year begins and ends, and the dates on which the amounts newly made available under the HRA will be made available. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 (B) A statement of the right of the participant to opt out of and waive future reimbursements from the HRA, as set forth under paragraph (c)(4) of this section. (C) A description of the potential availability of the premium tax credit if the participant opts out of and waives future reimbursements from the HRA and the HRA is not affordable for one or more months under § 1.36B–2(c)(5) of this chapter, a statement that even if the participant opts out of and waives future reimbursements from an HRA, the offer will prohibit the participant (and, potentially, the participant’s dependents) from receiving a premium tax credit for the participant’s coverage (or the dependent’s coverage, if applicable) on an Exchange for any month that the HRA is affordable under § 1.36B–2(c)(5) of this chapter, a statement describing how the participant may find assistance with determining affordability, a statement that, if the participant is a former employee, the offer of the HRA does not render the participant (or the participant’s dependents, if applicable) ineligible for the premium tax credit regardless of whether it is affordable under § 1.36B–2(c)(5) of this chapter, and a statement that if the participant or dependent is enrolled in Medicare, he or she is ineligible for the premium tax credit without regard to the offer or acceptance of the HRA; (D) A statement that if the participant accepts the HRA, the participant may not claim a premium tax credit for the participant’s Exchange coverage for any month the HRA may be used to reimburse medical care expenses of the participant, and a premium tax credit may not be claimed for the Exchange coverage of the participant’s dependents for any month the HRA may be used to reimburse medical care expenses of the dependents. (E) A statement that the participant must inform any Exchange to which the participant applies for advance payments of the premium tax credit of the availability of the HRA; the self-only HRA amount available for the HRA plan year (or the maximum dollar amount available for the plan year if the HRA provides for reimbursements up to a single dollar amount regardless of whether a participant has self-only or other than self-only coverage) as set forth in the written notice in accordance with paragraph (c)(6)(ii)(A) of this section; whether the HRA is also available to the participant’s dependents and if so, which ones; the date as of which coverage under the HRA may first become effective; the date on which the plan year begins and the date on PO 00000 Frm 00105 Fmt 4701 Sfmt 4700 28991 which it ends; and whether the participant is a current employee or former employee. (F) A statement that the participant should retain the written notice because it may be needed to determine whether the participant is allowed a premium tax credit on the participant’s individual income tax return. (G) A statement that the HRA may not reimburse any medical care expense unless the substantiation requirement set forth in paragraph (c)(5)(ii) of this section is satisfied and a statement that the participant must also provide the substantiation required by paragraph (c)(5)(i) of this section. (H) A statement that if the individual health insurance coverage (or coverage under Medicare Part A and B or Medicare Part C) of a participant or dependent ceases, the HRA will not reimburse any medical care expenses that are incurred by the participant or dependent, as applicable, after the coverage ceases, and a statement that the participant must inform the HRA if the participant’s or dependent’s individual health insurance coverage (or coverage under Medicare Part A and B or Medicare Part C) is cancelled or terminated retroactively and the date on which the cancellation or termination is effective. (I) The contact information (including a phone number) for an individual or a group of individuals who participants may contact in order to receive additional information regarding the HRA. The plan sponsor may determine which individual or group of individuals is best suited to be the specified contact. (J) A statement of availability of a special enrollment period to enroll in or change individual health insurance coverage, through or outside of an Exchange, for the participant and any dependents who newly gain access to the HRA and are not already covered by the HRA. (d) Classes of employees—(1) In general. This paragraph (d) sets forth the rules for determining classes of employees. Paragraph (d)(2) of this section sets forth the specific classes of employees; paragraph (d)(3) of this section sets forth a minimum class size requirement that applies in certain circumstances; paragraph (d)(4) of this section sets forth rules regarding the definition of ‘‘full-time employees,’’ ‘‘part-time employees,’’ and ‘‘seasonal employees’’; paragraph (d)(5) of this section sets forth a special rule for new hires; and paragraph (d)(6) of this section addresses student premium reduction arrangements. For purposes of this section, including determining E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28992 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations classes under this paragraph (d), the employer is the common law employer and is determined without regard to the rules under sections 414(b), (c), (m), and (o) that would treat the common law employer as a single employer with certain other entities. (2) List of classes. Participants may be treated as belonging to a class of employees based on whether they are, or are not, included in the classes described in this paragraph (d)(2). If the individual coverage HRA is offered to former employees, former employees are considered to be in the same class in which they were included immediately before separation from service. Before each plan year, a plan sponsor must determine for the plan year which classes of employees it intends to treat separately and the definition of the relevant class(es) it will apply, to the extent these regulations permit a choice. After the classes and the definitions of the classes are established for a plan year, a plan sponsor may not make changes to the classes of employees or the definitions of those relevant classes with respect to that plan year. (i) Full-time employees, defined at the election of the plan sponsor to mean either full-time employees under section 4980H (and § 54.4980H–1(a)(21) of this chapter) or employees who are not parttime employees (as described in § 1.105–11(c)(2)(iii)(C) of this chapter); (ii) Part-time employees, defined at the election of the plan sponsor to mean either employees who are not full-time employees under section 4980H (and under § 54.4980H–1(a)(21) of this chapter (which defines full-time employee)) or employees who are parttime employees as described in § 1.105– 11(c)(2)(iii)(C) of this chapter; (iii) Employees who are paid on a salary basis; (iv) Non-salaried employees (such as, for example, hourly employees); (v) Employees whose primary site of employment is in the same rating area as defined in 45 CFR 147.102(b); (vi) Seasonal employees, defined at the election of the plan sponsor to mean seasonal employees as described in either § 54.4980H–1(a)(38) or § 1.105– 11(c)(2)(iii)(C) of this chapter; (vii) Employees included in a unit of employees covered by a particular collective bargaining agreement (or an appropriate related participation agreement) in which the plan sponsor participates (as described in § 1.105– 11(c)(2)(iii)(D) of this chapter); (viii) Employees who have not satisfied a waiting period for coverage (if the waiting period complies with § 54.9815–2708 of this chapter); VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 (ix) Non-resident aliens with no U.S.based income (as described in § 1.105– 11(c)(2)(iii)(E) of this chapter); (x) Employees who, under all the facts and circumstances, are employees of an entity that hired the employees for temporary placement at an entity that is not the common law employer of the employees and that is not treated as a single employer with the entity that hired the employees for temporary placement under section 414(b), (c), (m), or (o); or (xi) A group of participants described as a combination of two or more of the classes of employees set forth in paragraphs (d)(2)(i) through (x) of this section. (3) Minimum class size requirement— (i) In general. If a class of employees is subject to the minimum class size requirement as set forth in this paragraph (d)(3), the class must consist of at least a minimum number of employees (as described in paragraphs (d)(3)(iii) and (iv) of this section), otherwise, the plan sponsor may not treat that class as a separate class of employees. Paragraph (d)(3)(ii) of this section sets forth the circumstances in which the minimum class size requirement applies to a class of employees, paragraph (d)(3)(iii) of this section sets forth the rules for determining the applicable class size minimum, and paragraph (d)(3)(iv) of this section sets forth the rules for a plan sponsor to determine if it satisfies the minimum class size requirement with respect to a class of employees. (ii) Circumstances in which minimum class size requirement applies—(A) The minimum class size requirement applies only if a plan sponsor offers a traditional group health plan to one or more classes of employees and offers an individual coverage HRA to one or more other classes of employees. (B) The minimum class size requirement does not apply to a class of employees offered a traditional group health plan or a class of employees offered no coverage. (C) The minimum class size requirement applies to a class of employees offered an individual coverage HRA if the class is full-time employees, part-time employees, salaried employees, non-salaried employees, or employees whose primary site of employment is in the same rating area (described in paragraph (d)(2)(i), (ii), (iii), (iv), or (v) of this section, respectively, and referred to collectively as the applicable classes or individually as an applicable class), except that: (1) In the case of the class of employees whose primary site of PO 00000 Frm 00106 Fmt 4701 Sfmt 4700 employment is in the same rating area (as described in paragraph (d)(2)(v) of this section), the minimum class size requirement does not apply if the geographic area defining the class is a State or a combination of two or more entire States; and (2) In the case of the classes of employees that are full-time employees and part-time employees (as described in paragraphs (d)(2)(i) and (ii) of this section, respectively), the minimum class size requirement applies only to those classes (and the classes are only applicable classes) if the employees in one such class are offered a traditional group health plan while the employees in the other such class are offered an individual coverage HRA. In such a case, the minimum class size requirement applies only to the class offered an individual coverage HRA. (D) A class of employees offered an individual coverage HRA is also subject to the minimum class size requirement if the class is a class of employees created by combining at least one of the applicable classes (as defined in paragraph (d)(3)(ii)(C) of this section) with any other class, except that the minimum class size requirement shall not apply to a class that is the result of a combination of one of the applicable classes and a class of employees who have not satisfied a waiting period (as described in paragraph (d)(2)(viii) of this section). (iii) Determination of the applicable class size minimum—(A) In general. The minimum number of employees that must be in a class of employees that is subject to the minimum class size requirement (the applicable class size minimum) is determined prior to the beginning of the plan year for each plan year of the individual coverage HRA and is: (1) 10, for an employer with fewer than 100 employees; (2) A number, rounded down to a whole number, equal to 10 percent of the total number of employees, for an employer with 100 to 200 employees; and (3) 20, for an employer with more than 200 employees. (B) Determining employer size. For purposes of this paragraph (d)(3), the number of employees of an employer is determined in advance of the plan year of the HRA based on the number of employees that the employer reasonably expects to employ on the first day of the plan year. (iv) Determining if a class satisfies the applicable class size minimum. For purposes of this paragraph (d)(3), whether a class of employees satisfies the applicable class size minimum for a E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations plan year of the individual coverage HRA is based on the number of employees in the class offered the individual coverage HRA as of the first day of the plan year. Therefore, this determination is not based on the number of employees that actually enroll in the individual coverage HRA, and this determination is not affected by changes in the number of employees in the class during the plan year. (4) Consistency requirement. For any plan year, a plan sponsor may define ‘‘full-time employee,’’ ‘‘part-time employee,’’ and ‘‘seasonal employee’’ in accordance with the relevant provisions of sections 105(h) or 4980H, as set forth in paragraphs (d)(2)(i), (ii), and (vi) of this section, if: (i) To the extent applicable under the HRA for the plan year, each of the three classes of employees are defined in accordance with section 105(h) or each of the three classes of employees are defined in accordance with section 4980H for the plan year; and (ii) The HRA plan document sets forth the applicable definitions prior to the beginning of the plan year to which the definitions will apply. (5) Special rule for new hires—(i) In general. Notwithstanding paragraphs (c)(2) and (3) of this section, a plan sponsor that offers a traditional group health plan to a class of employees may prospectively offer the employees in that class of employees who are hired on or after a certain future date (the new hire date) an individual coverage HRA (with this group of employees referred to as the new hire subclass), while continuing to offer employees in that class of employees who are hired before the new hire date a traditional group health plan (with the rule set forth in this sentence referred to as the special rule for new hires). For the new hire subclass, the individual coverage HRA must be offered on the same terms to all participants within the subclass, in accordance with paragraph (c)(3) of this section. In accordance with paragraph (c)(2) of this section, a plan sponsor may not offer a choice between an individual coverage HRA or a traditional group health plan to any employee in the new hire subclass or to any employee in the class who is not a member of the new hire subclass. (ii) New hire date. A plan sponsor may set the new hire date for a class of employees prospectively as any date on or after January 1, 2020. A plan sponsor may set different new hire dates prospectively for separate classes of employees. (iii) Discontinuation of use of special rule for new hires and multiple applications of the special rule for new VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 hires. A plan sponsor may discontinue use of the special rule for new hires at any time for any class of employees. In that case, the new hire subclass is no longer treated as a separate subclass of employees. In the event a plan sponsor applies the special rule for new hires to a class of employees and later discontinues use of the rule to the class of employees, the plan sponsor may later apply the rule if the application of the rule would be permitted under the rules for initial application of the special rule for new hires. If a plan sponsor, in accordance with the requirements for the special rule for new hires, applies the rule to a class of employees subsequent to any prior application and discontinuance of the rule to that class, the new hire date must be prospective. (iv) Application of the minimum class size requirement under the special rule for new hires. The minimum class size requirement set forth in paragraph (d)(3) of this section does not apply to the new hire subclass. However, if a plan sponsor subdivides the new hire subclass subsequent to creating the new hire subclass, the minimum class size requirement set forth in paragraph (d)(3) of this section applies to any class of employees created by subdividing the new hire subclass, if the minimum class size requirement otherwise applies. (6) Student employees offered student premium reduction arrangements. For purposes of this section, if an institution of higher education (as defined in the Higher Education Act of 1965) offers a student employee a student premium reduction arrangement, the employee is not considered to be part of the class of employees to which the employee would otherwise belong. For the purpose of this paragraph (d)(6) and paragraph (f)(1) of this section, a student premium reduction arrangement is defined as any program offered by an institution of higher education under which the cost of insured or self-insured student health coverage is reduced for certain students through a credit, offset, reimbursement, stipend or similar arrangement. A student employee offered a student premium reduction arrangement is also not counted for purposes of determining the applicable class size minimum under paragraph (d)(3)(iii) of this section. If a student employee is not offered a student premium reduction arrangement (including if the student employee is offered an individual coverage HRA instead), the student employee is considered to be part of the class of employees to which the employee otherwise belongs and is counted for purposes of determining the applicable PO 00000 Frm 00107 Fmt 4701 Sfmt 4700 28993 class size minimum under paragraph (d)(3)(iii) of this section. (e) Integration of Individual Coverage HRAs with Medicare—(1) General rule. An individual coverage HRA will be considered to be integrated with Medicare (and deemed to comply with PHS Act sections 2711 and 2713 and § 54.9815–2711(d)(4) of this chapter), provided that the conditions of paragraph (c) of this section are satisfied, subject to paragraph (e)(2) of this section. Nothing in this section requires that a participant and his or her dependents all have the same type of coverage; therefore, an individual coverage HRA may be integrated with Medicare for some individuals and with individual health insurance coverage for others, including, for example, a participant enrolled in Medicare Part A and B or Part C and his or her dependents enrolled in individual health insurance coverage. (2) Application of conditions in paragraph (c) of this section—(i) In general. Except as provided in paragraph (e)(2)(ii) of this section, in applying the conditions of paragraph (c) of this section with respect to integration with Medicare, a reference to ‘‘individual health insurance coverage’’ is deemed to refer to coverage under Medicare Part A and B or Part C. References in this section to integration of an HRA with Medicare refer to integration of an individual coverage HRA with Medicare Part A and B or Part C. (ii) Exceptions. For purposes of the statement regarding ERISA under the notice content element under paragraph (c)(6)(ii)(A) of this section and the statement regarding the availability of a special enrollment period under the notice content element under paragraph (c)(6)(ii)(J) of this section, the term individual health insurance coverage means only individual health insurance coverage and does not also mean coverage under Medicare Part A and B or Part C. (f) Examples—(1) Examples regarding classes and the minimum class size requirement. The following examples illustrate the provisions of paragraph (c)(3) of this section, taking into account the provisions of paragraphs (d)(1) through (4) and (d)(6) of this section. In each example, the HRA is an individual coverage HRA that may reimburse any medical care expenses, including premiums for individual health insurance coverage and it is assumed that no participants or dependents are Medicare beneficiaries. (i) Example 1: Collectively bargained employees offered traditional group health E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28994 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations plan; non-collectively bargained employees offered HRA—(A) Facts. For 2020, Plan Sponsor A offers its employees covered by a collective bargaining agreement a traditional group health plan (as required by the collective bargaining agreement) and all other employees (non-collectively bargained employees) each an HRA on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(i) (Example 1) because collectively bargained and non-collectively bargained employees may be treated as different classes of employees, one of which may be offered a traditional group health plan and the other of which may be offered an individual coverage HRA, and Plan Sponsor A offers the HRA on the same terms to all participants who are non-collectively bargained employees. The minimum class size requirement does not apply to this paragraph (f)(1)(i) (Example 1) even though Plan Sponsor A offers one class a traditional group health plan and one class the HRA because collectively bargained and non-collectively bargained employees are not applicable classes that are subject to the minimum class size requirement. (ii) Example 2: Collectively bargained employees in one unit offered traditional group health plan and in another unit offered HRA—(A) Facts. For 2020, Plan Sponsor B offers its employees covered by a collective bargaining agreement with Local 100 a traditional group health plan (as required by the collective bargaining agreement), and its employees covered by a collective bargaining agreement with Local 200 each an HRA on the same terms (as required by the collective bargaining agreement). (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(ii) (Example 2) because the employees covered by the collective bargaining agreements with the two separate bargaining units (Local 100 and Local 200) may be treated as two different classes of employees and Plan Sponsor B offers an HRA on the same terms to the participants covered by the agreement with Local 200. The minimum class size requirement does not apply to this paragraph (f)(1)(ii) (Example 2) even though Plan Sponsor B offers the Local 100 employees a traditional group health plan and the Local 200 employees an HRA because collectively bargained employees are not applicable classes that are subject to the minimum class size requirement. (iii) Example 3: Employees in a waiting period offered no coverage; other employees offered an HRA—(A) Facts. For 2020, Plan Sponsor C offers its employees who have completed a waiting period that complies with the requirements for waiting periods in § 54.9815–2708 of this chapter each an HRA on the same terms and does not offer coverage to its employees who have not completed the waiting period. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(iii) (Example 3) because employees who have completed a waiting period and employees who have not completed a waiting period may be treated as different classes and Plan VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 Sponsor C offers the HRA on the same terms to all participants who have completed the waiting period. The minimum class size requirement does not apply to this paragraph (f)(1)(iii) (Example 3) because Plan Sponsor C does not offer at least one class of employees a traditional group health plan and because the class of employees who have not completed a waiting period and the class of employees who have completed a waiting period are not applicable classes that are subject to the minimum class size requirement. (iv) Example 4: Employees in a waiting period offered an HRA; other employees offered a traditional group health plan—(A) Facts. For 2020, Plan Sponsor D offers its employees who have completed a waiting period that complies with the requirements for waiting periods in § 54.9815–2708 of this chapter a traditional group health plan and offers its employees who have not completed the waiting period each an HRA on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(iv) (Example 4) because employees who have completed a waiting period and employees who have not completed a waiting period may be treated as different classes and Plan Sponsor D offers an HRA on the same terms to all participants who have not completed the waiting period. The minimum class size requirement does not apply to this paragraph (f)(1)(iv) (Example 4) even though Plan Sponsor D offers employees who have completed a waiting period a traditional group health plan and employees who have not completed a waiting period an HRA because the class of employees who have not completed a waiting period is not an applicable class that is subject to the minimum class size requirement (nor is the class made up of employees who have completed the waiting period). (v) Example 5: Staffing firm employees temporarily placed with customers offered an HRA; other employees offered a traditional group health plan—(A) Facts. Plan Sponsor E is a staffing firm that places certain of its employees on temporary assignments with customers that are not the common law employers of Plan Sponsor E’s employees or treated as a single employer with Plan Sponsor E under section 414(b), (c), (m), or (o) (unrelated entities); other employees work in Plan Sponsor E’s office managing the staffing business (non-temporary employees). For 2020, Plan Sponsor E offers its employees who are on temporary assignments with customers each an HRA on the same terms. All other employees are offered a traditional group health plan. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(v) (Example 5) because the employees who are hired for temporary placement at an unrelated entity and non-temporary employees of Plan Sponsor E may be treated as different classes of employees and Plan Sponsor E offers an HRA on the same terms to all participants temporarily placed with customers. The minimum class size requirement does not apply to this paragraph PO 00000 Frm 00108 Fmt 4701 Sfmt 4700 (f)(1)(v) (Example 5) even though Plan Sponsor E offers one class a traditional group health plan and one class the HRA because the class of employees hired for temporary placement is not an applicable class that is subject to the minimum class size requirement (nor is the class made up of nontemporary employees). (vi) Example 6: Staffing firm employees temporarily placed with customers in rating area 1 offered an HRA; other employees offered a traditional group health plan—(A) Facts. The facts are the same as in paragraph (f)(1)(v) of this section (Example 5), except that Plan Sponsor E has work sites in rating area 1 and rating area 2, and it offers its 10 employees on temporary assignments with a work site in rating area 1 an HRA on the same terms. Plan Sponsor E has 200 other employees in rating areas 1 and 2, including its non-temporary employees in rating areas 1 and 2 and its employees on temporary assignments with a work site in rating area 2, all of whom are offered a traditional group health plan. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(vi) (Example 6) because, even though the employees who are temporarily placed with customers generally may be treated as employees of a different class, because Plan Sponsor E is also using a rating area to identify the class offered the HRA (which is an applicable class for the minimum class size requirement) and is offering one class the HRA and another class the traditional group health plan, the minimum class size requirement applies to the class offered the HRA, and the class offered the HRA fails to satisfy the minimum class size requirement. Because Plan Sponsor E employs 210 employees, the applicable class size minimum is 20, and the HRA is offered to only 10 employees. (vii) Example 7: Employees in State 1 offered traditional group health plan; employees in State 2 offered HRA—(A) Facts. Plan Sponsor F employs 45 employees whose work site is in State 1 and 7 employees whose primary site of employment is in State 2. For 2020, Plan Sponsor F offers its 45 employees in State 1 a traditional group health plan, and each of its 7 employees in State 2 an HRA on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(vii) (Example 7) because Plan Sponsor F offers the HRA on the same terms to all employees with a work site in State 2 and that class is a permissible class under paragraph (d) of this section. This is because employees whose work sites are in different rating areas may be considered different classes and a plan sponsor may create a class of employees by combining classes of employees, including by combining employees whose work site is in one rating area with employees whose work site is in a different rating area, or by combining all employees whose work site is in a state. The minimum class size requirement does not apply to this paragraph (f)(1)(vii) (Example 7) because the minimum class size requirement does not apply if the geographic area defining a class E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations of employees is a state or a combination of two or more entire states. (viii) Example 8: Full-time seasonal employees offered HRA; all other full-time employees offered traditional group health plan; part-time employees offered no coverage—(A) Facts. Plan Sponsor G employs 6 full-time seasonal employees, 75 full-time employees who are not seasonal employees, and 5 part-time employees. For 2020, Plan Sponsor G offers each of its 6 full-time seasonal employees an HRA on the same terms, its 75 full-time employees who are not seasonal employees a traditional group health plan, and offers no coverage to its 5 part-time employees. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(viii) (Example 8) because full-time seasonal employees and full-time employees who are not seasonal employees may be considered different classes and Plan Sponsor G offers the HRA on the same terms to all full-time seasonal employees. The minimum class size requirement does not apply to the class offered the HRA in this paragraph (f)(1)(viii) (Example 8) because part-time employees are not offered coverage and full-time employees are not an applicable class subject to the minimum class size requirement if part-time employees are not offered coverage. (ix) Example 9: Full-time employees in rating area 1 offered traditional group health plan; full-time employees in rating area 2 offered HRA; part-time employees offered no coverage—(A) Facts. Plan Sponsor H employs 17 full-time employees and 10 parttime employees whose work site is in rating area 1 and 552 full-time employees whose work site is in rating area 2. For 2020, Plan Sponsor H offers its 17 full-time employees in rating area 1 a traditional group health plan and each of its 552 full-time employees in rating area 2 an HRA on the same terms. Plan Sponsor H offers no coverage to its 10 part-time employees in rating area 1. Plan Sponsor H reasonably expects to employ 569 employees on the first day of the HRA plan year. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(ix) (Example 9) because employees whose work sites are in different rating areas may be considered different classes and Plan Sponsor H offers the HRA on the same terms to all full-time employees in rating area 2. The minimum class size requirement applies to the class offered the HRA in this paragraph (f)(1)(ix) (Example 9) because the minimum class size requirement applies to a class based on a geographic area unless the geographic area is a state or a combination of two or more entire states. However, the minimum class size requirement applies only to the class offered the HRA, and Plan Sponsor H offers the HRA to the 552 full-time employees in rating area 2 on the first day of the plan year, satisfying the minimum class size requirement (because the applicable class size minimum for Plan Sponsor H is 20). (x) Example 10: Employees in rating area 1 offered HRA; employees in rating area 2 VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 offered traditional group health plan—(A) Facts. The facts are the same as in paragraph (f)(1)(ix) of this section (Example 9) except that Plan Sponsor H offers its 17 full-time employees in rating area 1 the HRA and offers its 552 full-time employees in rating area 2 the traditional group health plan. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(x) (Example 10) because, even though employees whose work sites are in different rating areas generally may be considered different classes and Plan Sponsor H offers the HRA on the same terms to all participants in rating area 1, the HRA fails to satisfy the minimum class size requirement. Specifically, the minimum class size requirement applies to this paragraph (f)(1)(x) (Example 10) because the minimum class size requirement applies to a class based on a geographic area unless the geographic area is a state or a combination of two or more entire states. Further, the applicable class size minimum for Plan Sponsor H is 20 employees, and the HRA is only offered to the 17 full-time employees in rating area 1 on the first day of the HRA plan year. (xi) Example 11: Employees in State 1 and rating area 1 of State 2 offered HRA; employees in all other rating areas of State 2 offered traditional group health plan—(A) Facts. For 2020, Plan Sponsor I offers an HRA on the same terms to a total of 200 employees it employs with work sites in State 1 and in rating area 1 of State 2. Plan Sponsor I offers a traditional group health plan to its 150 employees with work sites in other rating areas in State 2. Plan Sponsor I reasonably expects to employ 350 employees on the first day of the HRA plan year. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xi) (Example 11). Plan Sponsor I may treat all of the employees with a work site in State 1 and rating area 1 of State 2 as a class of employees because employees whose work sites are in different rating areas may be considered different classes and a plan sponsor may create a class of employees by combining classes of employees, including by combining employees whose work site is in one rating area with a class of employees whose work site is in a different rating area. The minimum class size requirement applies to the class of employees offered the HRA (made up of employees in State 1 and in rating area 1 of State 2) because the minimum class size requirement applies to a class based on a geographic area unless the geographic area is a state or a combination of two or more entire states. In this case, the class is made up of a state plus a rating area which is not the entire state. However, this class satisfies the minimum class size requirement because the applicable class size minimum for Plan Sponsor I is 20, and Plan Sponsor I offered the HRA to 200 employees on the first day of the plan year. (xii) Example 12: Salaried employees offered a traditional group health plan; hourly employees offered an HRA—(A) Facts. Plan Sponsor J has 163 salaried employees and 14 hourly employees. For 2020, Plan Sponsor J offers its 163 salaried employees a PO 00000 Frm 00109 Fmt 4701 Sfmt 4700 28995 traditional group health plan and each of its 14 hourly employees an HRA on the same terms. Plan Sponsor J reasonably expects to employ 177 employees on the first day of the HRA plan year. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(xii) (Example 12) because, even though salaried and hourly employees generally may be considered different classes and Plan Sponsor J offers the HRA on the same terms to all hourly employees, the HRA fails to satisfy the minimum class size requirement. Specifically, the minimum class size requirement applies in this paragraph (f)(1)(xii) (Example 12) because employees who are paid on a salaried basis and employees who are not paid on a salaried basis are applicable classes subject to the minimum class size requirement. Because Plan Sponsor J reasonably expects to employ between 100 and 200 employees on the first day of the plan year, the applicable class size minimum is 10 percent, rounded down to a whole number. Ten percent of 177 total employees, rounded down to a whole number is 17, and the HRA is offered to only 14 hourly employees. (xiii) Example 13: Part-time employees and full-time employees offered different HRAs; no traditional group health plan offered—(A) Facts. Plan Sponsor K has 50 full-time employees and 7 part-time employees. For 2020, Plan Sponsor K offers its 50 full-time employees $2,000 each in an HRA otherwise provided on the same terms and each of its 7 part-time employees $500 in an HRA otherwise provided on the same terms. Plan Sponsor K reasonably expects to employ 57 employees on the first day of the HRA plan year. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xiii) (Example 13) because full-time employees and part-time employees may be treated as different classes and Plan Sponsor K offers an HRA on the same terms to all the participants in each class. The minimum class size requirement does not apply to either the full-time class or the part-time class because (although in certain circumstances the minimum class size requirement applies to a class of full-time employees and a class of part-time employees) Plan Sponsor K does not offer any class of employees a traditional group health plan, and the minimum class size requirement applies only when, among other things, at least one class of employees is offered a traditional group health plan while another class is offered an HRA. (xiv) Example 14: No employees offered an HRA—(A) Facts. The facts are the same facts as in paragraph (f)(1)(xiii) of this section (Example 13), except that Plan Sponsor K offers its full-time employees a traditional group health plan and does not offer any group health plan (either a traditional group health plan or an HRA) to its part-time employees. (B) Conclusion. The regulations set forth under this section do not apply to Plan Sponsor K because Plan Sponsor K does not offer an individual coverage HRA to any employee. E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28996 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations (xv) Example 15: Full-time employees offered traditional group health plan; parttime employees offered HRA—(A) Facts. The facts are the same as in paragraph (f)(1)(xiii) of this section (Example 13), except that Plan Sponsor K offers its full-time employees a traditional group health plan and offers each of its part-time employees $500 in an HRA and otherwise on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(xv) (Example 15) because, even though the full-time employees and the part-time employees generally may be treated as different classes, in this paragraph (f)(1)(xv) (Example 15), the minimum class size requirement applies to the part-time employees, and it is not satisfied. Specifically, the minimum class size requirement applies to the part-time employees because that requirement applies to an applicable class offered an HRA when one class is offered a traditional group health plan while another class is offered an HRA, and to the part-time and full-time employee classes when one of those classes is offered a traditional group health plan while the other is offered an HRA. Because Plan Sponsor K reasonably expects to employ fewer than 100 employees on the first day of the HRA plan year, the applicable class size minimum for Plan Sponsor K is 10 employees, but Plan Sponsor K offered the HRA only to its 7 part-time employees. (xvi) Example 16: Satisfying minimum class size requirement based on employees offered HRA—(A) Facts. Plan Sponsor L employs 78 full-time employees and 12 parttime employees. For 2020, Plan Sponsor L offers its 78 full-time employees a traditional group health plan and each of its 12 parttimes employees an HRA on the same terms. Only 6 part-time employees enroll in the HRA. Plan Sponsor L reasonably expects to employ fewer than 100 employees on the first day of the HRA plan year. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xvi) (Example 16) because full-time employees and part-time employees may be treated as different classes, Plan Sponsor L offers an HRA on the same terms to all the participants in the part-time class, and the minimum class size requirement is satisfied. Specifically, whether a class of employees satisfies the applicable class size minimum is determined as of the first day of the plan year based on the number of employees in a class that is offered an HRA, not on the number of employees who enroll in the HRA. The applicable class size minimum for Plan Sponsor L is 10 employees, and Plan Sponsor L offered the HRA to its 12 part-time employees. (xvii) Example 17: Student employees offered student premium reduction arrangements and same terms requirement— (A) Facts. Plan Sponsor M is an institution of higher education that offers each of its part-time employees an HRA on the same terms, except that it offers its part-time employees who are student employees a student premium reduction arrangement, and the student premium reduction arrangement VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 provides different amounts to different parttime student employees. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xvii) (Example 17) because Plan Sponsor M offers the HRA on the same terms to its part-time employees who are not students and because the part-time student employees offered a student premium reduction arrangement (and their varying HRAs) are not taken into account as part-time employees for purposes of determining whether a class of employees is offered an HRA on the same terms. (xiii) Example 18: Student employees offered student premium reduction arrangements and minimum class size requirement—(A) Facts. Plan Sponsor N is an institution of higher education with 25 hourly employees. Plan Sponsor N offers 15 of its hourly employees, who are student employees, a student premium reduction arrangement and it wants to offer its other 10 hourly employees an HRA for 2022. Plan Sponsor N offers its salaried employees a traditional group health plan. Plan Sponsor N reasonably expects to have 250 employees on the first day of the 2022 HRA plan year, 15 of which will have offers of student premium reduction arrangements. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(xviii) (Example 18). The minimum class size requirement will apply to the class of hourly employees to which Plan Sponsor N wants to offer the HRA because Plan Sponsor N offers a class of employees a traditional group health plan and another class the HRA, and the minimum class size requirement generally applies to a class of hourly employees offered an HRA. Plan Sponsor N’s applicable class size minimum is 20 because Plan Sponsor N reasonably expects to employ 235 employees on the first day of the plan year (250 employees minus 15 employees receiving a student premium reduction arrangement). Plan Sponsor N may not offer the HRA to its hourly employees because the 10 employees offered the HRA as of the first day of the plan year does not satisfy the applicable class size minimum. (2) Examples regarding special rule for new hires. The following examples illustrate the provisions of paragraph (c)(3) of this section, taking into account the provisions of paragraph (d) of this section, in particular the special rule for new hires under paragraph (d)(5) of this section. In each example, the HRA is an individual coverage HRA that has a calendar year plan year and may reimburse any medical care expenses, including premiums for individual health insurance coverage. The examples also assume that no participants or dependents are Medicare beneficiaries. (i) Example 1: Application of special rule for new hires to all employees—(A) Facts. For 2021, Plan Sponsor A offers all employees a traditional group health plan. For 2022, Plan Sponsor A offers all employees hired on or PO 00000 Frm 00110 Fmt 4701 Sfmt 4700 after January 1, 2022, an HRA on the same terms and continues to offer the traditional group health plan to employees hired before that date. On the first day of the 2022 plan year, Plan Sponsor A has 2 new hires who are offered the HRA. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(i) (Example 1) because, under the special rule for new hires in paragraph (d)(5) of this section, the employees newly hired on and after January 1, 2022, may be treated as a new hire subclass, Plan Sponsor A offers the HRA on the same terms to all participants in the new hire subclass, and the minimum class size requirement does not apply to the new hire subclass. (ii) Example 2: Application of special rule for new hires to full-time employees—(A) Facts. For 2021, Plan Sponsor B offers a traditional group health plan to its full-time employees and does not offer any coverage to its part-time employees. For 2022, Plan Sponsor B offers full-time employees hired on or after January 1, 2022, an HRA on the same terms, continues to offer its full-time employees hired before that date a traditional group health plan, and continues to offer no coverage to its part-time employees. On the first day of the 2022 plan year, Plan Sponsor B has 2 new hire, full-time employees who are offered the HRA. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(ii) (Example 2) because, under the special rule for new hires in paragraph (d)(5) of this section, the full-time employees newly hired on and after January 1, 2022, may be treated as a new hire subclass and Plan Sponsor B offers the HRA on the same terms to all participants in the new hire subclass. The minimum class size requirement does not apply to the new hire subclass. (iii) Example 3: Special rule for new hires impermissibly applied retroactively—(A) Facts. For 2025, Plan Sponsor C offers a traditional group health plan to its full-time employees. For 2026, Plan Sponsor C wants to offer an HRA to its full-time employees hired on and after January 1, 2023, while continuing to offer a traditional group health plan to its full-time employees hired before January 1, 2023. (B) Conclusion. The special rule for new hires under paragraph (d)(5) of this section does not apply in this paragraph (f)(2)(iii) (Example 3) because the rule must be applied prospectively. That is, Plan Sponsor C may not, in 2026, choose to apply the special rule for new hires retroactive to 2023. If Plan Sponsor C were to offer an HRA in this way, it would fail to satisfy the conditions under paragraphs (c)(2) and (3) of this section because the new hire subclass would not be treated as a subclass for purposes of applying those rules and, therefore, all full-time employees would be treated as one class to which either a traditional group health plan or an HRA could be offered, but not both. (iv) Example 4: Permissible second application of the special rule for new hires to the same class of employees—(A) Facts. For 2021, Plan Sponsor D offers all of its fulltime employees a traditional group health E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations plan. For 2022, Plan Sponsor D applies the special rule for new hires and offers an HRA on the same terms to all employees hired on and after January 1, 2022, and continues to offer a traditional group health plan to fulltime employees hired before that date. For 2025, Plan Sponsor D discontinues use of the special rule for new hires, and again offers all full-time employees a traditional group health plan. In 2030, Plan Sponsor D decides to apply the special rule for new hires to the full-time employee class again, offering an HRA to all full-time employees hired on and after January 1, 2030, on the same terms, while continuing to offer employees hired before that date a traditional group health plan. (B) Conclusion. Plan Sponsor D has permissibly applied the special rule for new hires and is in compliance with the requirements of paragraphs (c)(2) and (3) of this section. (v) Example 5: Impermissible second application of the special rule for new hires to the same class of employees—(A) Facts. The facts are the same as in paragraph (f)(2)(iv) of this section (Example 4), except that for 2025, Plan Sponsor D discontinues use of the special rule for new hires by offering all full-time employees an HRA on the same terms. Further, for 2030, Plan Sponsor D wants to continue to offer an HRA on the same terms to all full-time employees hired before January 1, 2030, and to offer all full-time employees hired on or after January 1, 2030, an HRA in a different amount. (B) Conclusion. Plan Sponsor D may not apply the special rule for new hires for 2030 to the class of full-time employees being offered an HRA because the special rule for new hires may only be applied to a class that is being offered a traditional group health plan. (vi) Example 6: New full-time employees offered different HRAs in different rating areas—(A) Facts. Plan Sponsor E has work sites in rating area 1, rating area 2, and rating area 3. For 2021, Plan Sponsor E offers its full-time employees a traditional group health plan. For 2022, Plan Sponsor E offers its full-time employees hired on or after January 1, 2022, in rating area 1 an HRA of $3,000, its full-time employees hired on or after January 1, 2022, in rating area 2 an HRA of $5,000, and its full-time employees hired on or after January 1, 2022, in rating area 3 an HRA of $7,000. Within each class offered an HRA, Plan Sponsor E offers the HRA on the same terms. Plan Sponsor E offers its fulltime employees hired prior to January 1, 2022, in each of those classes a traditional group health plan. On the first day of the 2022 plan year, there is one new hire, fulltime employee in rating area 1, three new hire, full-time employees in rating area 2, and 10 new hire-full-time employees in rating area 3. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(vi) (Example 6) because, under the special rule for new hires in paragraph (d)(5) of this section, the full-time employees in each of the three rating areas newly hired on and after January 1, 2022, may be treated as three new hire subclasses and Plan Sponsor E VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 offers the HRA on the same terms to all participants in the new hire subclasses. Further, the minimum class size requirement does not apply to the new hire subclasses. (vii) Example 7: New full-time employee class subdivided based on rating area—(A) Facts. Plan Sponsor F offers its full-time employees hired on or after January 1, 2022, an HRA on the same terms and it continues to offer its full-time employees hired before that date a traditional group health plan. Plan Sponsor F offers no coverage to its part-time employees. For the 2025 plan year, Plan Sponsor F wants to subdivide the full-time new hire subclass so that those whose work site is in rating area 1 will be offered the traditional group health plan and those whose work site is in rating area 2 will continue to receive the HRA. Plan Sponsor F reasonably expects to employ 219 employees on January 1, 2025. As of January 1, 2025, Plan Sponsor F has 15 full-time employees whose work site in in rating area 2 and who were hired between January 1, 2022, and January 1, 2025. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(2)(vii) (Example 7) because the new hire subclass has been subdivided in a manner that is subject to the minimum class size requirement, and the class offered the HRA fails to satisfy the minimum class size requirement. Specifically, once the new hire subclass is subdivided the general rules for applying the minimum class size requirement apply to the employees offered the HRA in the new hire subclass. In this case, because the subdivision of the new hire full-time subclass is based on rating areas; a class based on rating areas is an applicable class subject to the minimum class size requirement; and the employees in one rating area are to be offered the HRA, while the employees in the other rating area are offered the traditional group health plan, the minimum class size requirement would apply on and after the date of the subdivision. Further, the minimum class size requirement would not be satisfied, because the applicable class size minimum for Plan Sponsor F would be 20, and only 15 employees in rating area 2 would be offered the HRA. (viii) Example 8: New full-time employee class subdivided based on state—(A) Facts. The facts are the same as in paragraph (f)(2)(vii) of this section (Example 7), except that for the 2025 plan year, Plan Sponsor F intends to subdivide the new hire, full-time class so that those in State 1 will be offered the traditional group health plan and those in State 2 will each be offered an HRA on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(viii) (Example 8) because even though the new hire subclass has been subdivided, it has been subdivided in a manner that is not subject to the minimum class size requirement as the subdivision is based on the entire state. (ix) Example 9: New full-time employees and part-time employees offered HRA—(A) Facts. In 2021, Plan Sponsor G offers its full- PO 00000 Frm 00111 Fmt 4701 Sfmt 4700 28997 time employees a traditional group health plan and does not offer coverage to its parttime employees. For the 2022 plan year, Plan Sponsor G offers its full-time employees hired on or after January 1, 2022, and all of its part-time employees, including those hired before January 1, 2022, and those hired on and after January 1, 2022, an HRA on the same terms, and it continues to offer its fulltime employees hired before January 1, 2022, a traditional group health plan. (B) Conclusion. The minimum class size requirement applies to the part-time employees offered the HRA in 2022 because the class is being offered an HRA; the special rule for new hires does not apply (because this class was not previously offered a traditional group health plan) and so it is not a new hire subclass exempt from the minimum class size requirement; another class of employees (that is, full-time hired before January 1, 2022) are being offered a traditional group health plan; and the parttime employee class is generally an applicable classes that is subject to the minimum class size requirement. However, because the full-time, new hire subclass is based on the special rule for new hires, the minimum class size requirement does not apply to full-time new hires offered an HRA in 2022. (g) Applicability date. This section applies to plan years beginning on or after January 1, 2020. ■ Par. 7. Section 54.9815–2711 is amended by revising paragraphs (c), (d), and (e) to read as follows: § 54.9815–2711 limits. * No lifetime or annual * * * * (c) Definition of essential health benefits. The term ‘‘essential health benefits’’ means essential health benefits under section 1302(b) of the Patient Protection and Affordable Care Act and applicable regulations. For the purpose of this section, a group health plan or a health insurance issuer that is not required to provide essential health benefits under section 1302(b) must define ‘‘essential health benefits’’ in a manner that is consistent with the following: (1) For plan years beginning before January 1, 2020, one of the EHBbenchmark plans applicable in a State under 45 CFR 156.110, and including coverage of any additional required benefits that are considered essential health benefits consistent with 45 CFR 155.170(a)(2), or one of the three Federal Employees Health Benefits Program (FEHBP) plan options as defined by 45 CFR 156.100(a)(3), supplemented as necessary, to satisfy the standards in 45 CFR 156.110; or (2) For plan years beginning on or after January 1, 2020, an EHBbenchmark plan selected by a State in accordance with the available options and requirements for EHB-benchmark E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 28998 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations plan selection at 45 CFR 156.111, including an EHB-benchmark plan in a State that takes no action to change its EHB-benchmark plan and thus retains the EHB-benchmark plan applicable in that State for the prior year in accordance with 45 CFR 156.111(d)(1), and including coverage of any additional required benefits that are considered essential health benefits consistent with 45 CFR 155.170(a)(2). (d) Health reimbursement arrangements (HRAs) and other account-based group health plans—(1) In general. If an HRA or other accountbased group health plan is integrated with another group health plan or individual health insurance coverage and the other group health plan or individual health insurance coverage, as applicable, separately is subject to and satisfies the requirements in PHS Act section 2711 and paragraph (a)(2) of this section, the fact that the benefits under the HRA or other account-based group health plan are limited does not cause the HRA or other account-based group health plan to fail to satisfy the requirements of PHS Act section 2711 and paragraph (a)(2) of this section. Similarly, if an HRA or other accountbased group health plan is integrated with another group health plan or individual health insurance coverage and the other group health plan or individual health insurance coverage, as applicable, separately is subject to and satisfies the requirements in PHS Act section 2713 and § 54.9815–2713(a)(1) of this chapter, the fact that the benefits under the HRA or other account-based group health plan are limited does not cause the HRA or other account-based group health plan to fail to satisfy the requirements of PHS Act section 2713 and § 54.9815–2713(a)(1) of this chapter. For the purpose of this paragraph (d), all individual health insurance coverage, except for coverage that consists solely of excepted benefits, is treated as being subject to and complying with PHS Act sections 2711 and 2713. (2) Requirements for an HRA or other account-based group health plan to be integrated with another group health plan. An HRA or other account-based group health plan is integrated with another group health plan for purposes of PHS Act section 2711 and paragraph (a)(2) of this section if it satisfies the requirements under one of the integration methods set forth in paragraph (d)(2)(i) or (ii) of this section. For purposes of the integration methods under which an HRA or other accountbased group health plan is integrated with another group health plan, integration does not require that the HRA or other account-based group VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 health plan and the other group health plan with which it is integrated share the same plan sponsor, the same plan document or governing instruments, or file a single Form 5500, if applicable. An HRA or other account-based group health plan integrated with another group health plan for purposes of PHS Act section 2711 and paragraph (a)(2) of this section may not be used to purchase individual health insurance coverage unless that coverage consists solely of excepted benefits, as defined in 45 CFR 148.220. (i) Method for integration with a group health plan: Minimum value not required. An HRA or other accountbased group health plan is integrated with another group health plan for purposes of this paragraph (d) if: (A) The plan sponsor offers a group health plan (other than the HRA or other account-based group health plan) to the employee that does not consist solely of excepted benefits; (B) The employee receiving the HRA or other account-based group health plan is actually enrolled in a group health plan (other than the HRA or other account-based group health plan) that does not consist solely of excepted benefits, regardless of whether the plan is offered by the same plan sponsor (referred to as non-HRA group coverage); (C) The HRA or other account-based group health plan is available only to employees who are enrolled in nonHRA group coverage, regardless of whether the non-HRA group coverage is offered by the plan sponsor of the HRA or other account-based group health plan (for example, the HRA may be offered only to employees who do not enroll in an employer’s group health plan but are enrolled in other non-HRA group coverage, such as a group health plan maintained by the employer of the employee’s spouse); (D) The benefits under the HRA or other account-based group health plan are limited to reimbursement of one or more of the following—co-payments, coinsurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care expenses that do not constitute essential health benefits as defined in paragraph (c) of this section; and (E) Under the terms of the HRA or other account-based group health plan, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan at least annually and, upon termination of employment, either the remaining amounts in the HRA or other account-based group health plan are PO 00000 Frm 00112 Fmt 4701 Sfmt 4700 forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan (see paragraph (d)(3) of this section for additional rules regarding forfeiture and waiver). (ii) Method for integration with another group health plan: Minimum value required. An HRA or other account-based group health plan is integrated with another group health plan for purposes of this paragraph (d) if: (A) The plan sponsor offers a group health plan (other than the HRA or other account-based group health plan) to the employee that provides minimum value pursuant to section 36B(c)(2)(C)(ii) (and its implementing regulations and applicable guidance); (B) The employee receiving the HRA or other account-based group health plan is actually enrolled in a group health plan (other than the HRA or other account-based group health plan) that provides minimum value pursuant to section 36B(c)(2)(C)(ii) (and applicable guidance), regardless of whether the plan is offered by the plan sponsor of the HRA or other account-based group health plan (referred to as non-HRA MV group coverage); (C) The HRA or other account-based group health plan is available only to employees who are actually enrolled in non-HRA MV group coverage, regardless of whether the non-HRA MV group coverage is offered by the plan sponsor of the HRA or other account-based group health plan (for example, the HRA may be offered only to employees who do not enroll in an employer’s group health plan but are enrolled in other non-HRA MV group coverage, such as a group health plan maintained by an employer of the employee’s spouse); and (D) Under the terms of the HRA or other account-based group health plan, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan at least annually, and, upon termination of employment, either the remaining amounts in the HRA or other account-based group health plan are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan (see paragraph (d)(3) of this section for additional rules regarding forfeiture and waiver). (3) Forfeiture. For purposes of integration under paragraphs (d)(2)(i)(E) and (d)(2)(ii)(D) of this section, forfeiture or waiver occurs even if the E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations forfeited or waived amounts may be reinstated upon a fixed date, a participant’s death, or the earlier of the two events (the reinstatement event). For the purpose of this paragraph (d)(3), coverage under an HRA or other account-based group health plan is considered forfeited or waived prior to a reinstatement event only if the participant’s election to forfeit or waive is irrevocable, meaning that, beginning on the effective date of the election and through the date of the reinstatement event, the participant and the participant’s beneficiaries have no access to amounts credited to the HRA or other account-based group health plan. This means that upon and after reinstatement, the reinstated amounts under the HRA or other account-based group health plan may not be used to reimburse or pay medical care expenses incurred during the period after forfeiture and prior to reinstatement. (4) Requirements for an HRA or other account-based group health plan to be integrated with individual health insurance coverage or Medicare Part A and B or Medicare Part C. An HRA or other account-based group health plan is integrated with individual health insurance coverage or Medicare Part A and B or Medicare Part C (and treated as complying with PHS Act sections 2711 and 2713) if the HRA or other account-based group health plan satisfies the requirements of § 54.9802– 4(c) of this chapter (as modified by § 54.9802–4(e), for HRAs or other account-based group health plans integrated with Medicare Part A and B or Medicare Part C). (5) Integration with Medicare Part B and D. For employers that are not required to offer their non-HRA group health plan coverage to employees who are Medicare beneficiaries, an HRA or other account-based group health plan that may be used to reimburse premiums under Medicare Part B or D may be integrated with Medicare (and deemed to comply with PHS Act sections 2711 and 2713) if the following requirements are satisfied with respect to employees who would be eligible for the employer’s non-HRA group health plan but for their eligibility for Medicare (and the integration rules under paragraphs (d)(2)(i) and (ii) of this section continue to apply to employees who are not eligible for Medicare): (i) The plan sponsor offers a group health plan (other than the HRA or other account-based group health plan and that does not consist solely of excepted benefits) to employees who are not eligible for Medicare; (ii) The employee receiving the HRA or other account-based group health VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 plan is actually enrolled in Medicare Part B or D; (iii) The HRA or other account-based group health plan is available only to employees who are enrolled in Medicare Part B or D; and (iv) The HRA or other account-based group health plan complies with paragraphs (d)(2)(i)(E) and (d)(2)(ii)(D) of this section. (6) Definitions. The following definitions apply for purposes of this section. (i) Account-based group health plan. An account-based group health plan is an employer-provided group health plan that provides reimbursements of medical care expenses with the reimbursement subject to a maximum fixed dollar amount for a period. An HRA is a type of account-based group health plan. An account-based group health plan does not include a qualified small employer health reimbursement arrangement, as defined in section 9831(d)(2). (ii) Medical care expenses. Medical care expenses means expenses for medical care as defined under section 213(d). (e) Applicability date. The provisions of this section are applicable to group health plans and health insurance issuers for plan years beginning on or after January 1, 2020. Until the applicability date for this section, plans and issuers are required to continue to comply with the corresponding sections of 26 CFR part 54, contained in the 26 CFR, subchapter D, revised as of April 1, 2018. ■ Par. 8. Section 54.9831–1 is amended by revising paragraph (c)(3)(i) and adding paragraph (c)(3)(viii) to read as follows: § 54.9831–1 Special rules relating to group health plans. * * * * * (c) * * * (3) * * * (i) In general. Limited-scope dental benefits, limited-scope vision benefits, or long-term care benefits are excepted if they are provided under a separate policy, certificate, or contract of insurance, or are otherwise not an integral part of a group health plan as described in paragraph (c)(3)(ii) of this section. In addition, benefits provided under a health flexible spending arrangement (health FSA) are excepted benefits if they satisfy the requirements of paragraph (c)(3)(v) of this section; benefits provided under an employee assistance program are excepted benefits if they satisfy the requirements of paragraph (c)(3)(vi) of this section; benefits provided under limited PO 00000 Frm 00113 Fmt 4701 Sfmt 4700 28999 wraparound coverage are excepted benefits if they satisfy the requirements of paragraph (c)(3)(vii) of this section; and benefits provided under a health reimbursement arrangement or other account-based group health plan, other than a health FSA, are excepted benefits if they satisfy the requirements of paragraph (c)(3)(viii) of this section. * * * * * (viii) Health reimbursement arrangements (HRAs) and other account-based group health plans. Benefits provided under an HRA or other account-based group health plan, other than a health FSA, are excepted if they satisfy all of the requirements of this paragraph (c)(3)(viii). See paragraph (c)(3)(v) of this section for the circumstances in which benefits provided under a health FSA are excepted benefits. For purposes of this paragraph (c)(3)(viii), the term ‘‘HRA or other account-based group health plan’’ has the same meaning as ‘‘accountbased group health plan’’ set forth in § 54.9815–2711(d)(6)(i) of this part, except that the term does not include health FSAs. For ease of reference, an HRA or other account-based group health plan that satisfies the requirements of this paragraph (c)(3)(viii) is referred to as an excepted benefit HRA. (A) Otherwise not an integral part of the plan. Other group health plan coverage that is not limited to excepted benefits and that is not an HRA or other account-based group health plan must be made available by the same plan sponsor for the plan year to the participant. (B) Benefits are limited in amount— (1) Limit on annual amounts made available. The amounts newly made available for each plan year under the HRA or other account-based group health plan do not exceed $1,800. In the case of any plan year beginning after December 31, 2020, the dollar amount in the preceding sentence shall be increased by an amount equal to such dollar amount multiplied by the cost-ofliving adjustment. The cost of living adjustment is the percentage (if any) by which the C–CPI–U for the preceding calendar year exceeds the C–CPI–U for calendar year 2019. The term ‘‘C–CPI– U’’ means the Chained Consumer Price Index for All Urban Consumers as published by the Bureau of Labor Statistics of the Department of Labor. The C–CPI–U for any calendar year is the average of the C–CPI–U as of the close of the 12-month period ending on March 31 of such calendar year. The values of the C–CPI–U used for any calendar year shall be the latest values E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 29000 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations so published as of the date on which the Bureau publishes the initial value of the C–CPI–U for the month of March for the preceding calendar year. Any such increase that is not a multiple of $50 shall be rounded down to the next lowest multiple of $50. The Department of the Treasury and the Internal Revenue Service will publish the adjusted amount for plan years beginning in any calendar year no later than June 1 of the preceding calendar year. (2) Carryover amounts. If the terms of the HRA or other account-based group health plan allow unused amounts to be made available to participants and dependents in later plan years, such carryover amounts are disregarded for purposes of determining whether benefits are limited in amount. (3) Multiple HRAs or other accountbased group health plans. If the plan sponsor provides more than one HRA or other account-based group health plan to the participant for the same time period, the amounts made available under all such plans are aggregated to determine whether the benefits are limited in amount, except that HRAs or other account-based group health plans that reimburse only excepted benefits are not included in determining whether the benefits are limited in amount. (C) Prohibition on reimbursement of certain health insurance premiums. The HRA or other account-based group health plan must not reimburse premiums for individual health insurance coverage, group health plan coverage (other than COBRA continuation coverage or other continuation coverage), or Medicare Part A, B, C, or D, except that the HRA or other account-based group health plan may reimburse premiums for such coverage that consists solely of excepted benefits. See also, paragraph (c)(3)(viii)(F) of this section. (D) Uniform availability. The HRA or other account-based group health plan is made available under the same terms to all similarly situated individuals, as defined in § 54.9802–1(d) of this part, regardless of any health factor (as described in § 54.9802–1(a)). (E) Notice requirement. See 29 CFR 2520.102–3(j)(2) and (3) and 29 CFR 2520.104b–2(a) for rules regarding the time, manner, and content for summary plan descriptions (including a description of conditions pertaining to eligibility to receive benefits; annual or lifetime caps or other limits on benefits under the plan; and a description or summary of the benefits) applicable to plans subject to Tile I of the Employee VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 Retirement Income Security Act of 1974, as amended. (F) Special rule. The HRA or other account-based group health plan must not reimburse premiums for short-term, limited-duration insurance (as defined in § 54.9801–2 of this part) if the conditions of this paragraph (c)(3)(viii)(F) are satisfied. (1) The HRA or other account-based group health plan is offered by a small employer (as defined in PHS Act section 2791(e)(4)). (2) The other group health plan coverage offered by the employer pursuant to paragraph (c)(3)(viii)(A) of this section is either fully-insured or partially-insured. (3) The Secretary of Health and Human Services (HHS) makes a finding, in consultation with the Secretaries of Labor and the Treasury, that the reimbursement of premiums for shortterm, limited-duration insurance by excepted benefit HRAs has caused significant harm to the small group market in the state that is the principal place of business of the small employer. (4) The finding by the Secretary of HHS is made after submission of a written recommendation by the applicable state authority of such state, in a form and manner specified by HHS. The written recommendation must include evidence that the reimbursement of premiums for shortterm, limited-duration insurance by excepted benefit HRAs established by insured or partially-insured small employers in the state has caused significant harm to the state’s small group market, including with respect to premiums. (5) The restriction shall be imposed or discontinued by publication by the Secretary of HHS of a notice in the Federal Register and shall apply only prospectively and with a reasonable time for plan sponsors to comply. * * * * * DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Chapter XXV For the reasons stated in the preamble, the Department of Labor amends 29 CFR parts 2510 and 2590 as set forth below: PART 2510—DEFINITION OF TERMS USED IN SUBCHAPTERS C, D, E, F, G, AND L OF THIS CHAPTER 9. The authority citation for part 2510 is revised to read as follows: ■ Authority: 29 U.S.C. 1002(1), 1002(3), 1002(2), 1002(5), 1002(16), 1002(21), PO 00000 Frm 00114 Fmt 4701 Sfmt 4700 1002(37), 1002(38), 1002(40), 1002(42), 1031, and 1135; Secretary of Labor’s Order No. 1– 2011, 77 FR 1088 (Jan. 9, 2012); Secs. 2510.3– 21, 2510.3–101 and 2510.3–102 also issued under sec. 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. at 237 (2012), E.O. 12108, 44 FR 1065 (Jan. 3, 1979) and 29 U.S.C. 1135 note. Sec. 2510.3–38 is also issued under sec. 1, Pub. L. 105–72, 111 Stat. 1457 (1997). 10. Section 2510.3–1 is amended by adding paragraph (l) to read as follows: ■ § 2510.3–1 Employee welfare benefit plan. * * * * * (l) Safe harbor for health reimbursement arrangements (HRAs) and certain other arrangements that reimburse individual health insurance coverage. For purposes of title I of the Act and this chapter, the terms ‘‘employee welfare benefit plan’’ and ‘‘welfare plan’’ shall not include individual health insurance coverage the premiums of which are reimbursed by a health reimbursement arrangement (HRA) (or other account-based group health plan), including an HRA or other account-based group health plan integrated with individual health insurance coverage (as described in § 2590.702–2 of this chapter), an HRA that covers fewer than two current employees (as described in § 2590.732(b) of this chapter) and that reimburses premiums for individual health insurance coverage, a qualified small employer health reimbursement arrangement (QSEHRA), as defined in section 9831(d)(2) of the Code, or an arrangement under which an employer allows employees to pay the portion of the premium for individual health insurance coverage that is not covered by an HRA or other account-based group health plan with which the coverage is integrated by using a salary reduction arrangement in a cafeteria plan under section 125 of the Code (supplemental salary reduction arrangement), if all the conditions of this paragraph (l) are satisfied. (1) The purchase of any individual health insurance coverage is completely voluntary for participants and beneficiaries. The fact that a plan sponsor requires such coverage to be purchased as a condition for participation in an HRA or supplemental salary reduction arrangement does not make the purchase involuntary. (2) The employer, employee organization, or other plan sponsor does not select or endorse any particular issuer or insurance coverage. In contrast, providing general contact information regarding availability of health insurance in a state (such as E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations providing information regarding www.HealthCare.gov or contact information for a state insurance commissioner’s office) or providing general health insurance educational information (such as the uniform glossary of health coverage and medical terms available at: https://www.dol.gov/ sites/default/files/ebsa/laws-andregulations/laws/affordable-care-act/ for-employers-and-advisers/sbcuniform-glossary-of-coverage-andmedical-terms-final.pdf) is permitted. (3) Reimbursement for non-group health insurance premiums is limited solely to individual health insurance coverage (as defined in § 2590.701–2 of this chapter) that does not consist solely of excepted benefits (as defined in § 2590.732(c) of this chapter). (4) The employer, employee organization, or other plan sponsor receives no consideration in the form of cash or otherwise in connection with the employee’s selection or renewal of any individual health insurance coverage. (5) Each plan participant is notified annually that the individual health insurance coverage is not subject to title I of ERISA. For an HRA that is integrated with individual health insurance coverage, the notice must satisfy the notice requirement set forth in § 2590.702–2(c)(6) of this chapter. A QSEHRA or an HRA not subject to the notice requirement set forth in § 2590.702–2(c)(6) of this chapter may use the following language to satisfy this condition: ‘‘The individual health insurance coverage that is paid for by this plan, if any, is not subject to the rules and consumer protections of the Employee Retirement Income Security Act. You should contact your state insurance department for more information regarding your rights and responsibilities if you purchase individual health insurance coverage.’’ A supplemental salary reduction arrangement is not required to provide this notice as the notice will be provided by the HRA that such an arrangement supplements. PART 2590—RULES AND REGULATIONS FOR GROUP HEALTH PLANS. 11. The authority citation for part 2590 continues to read as follows: jbell on DSK3GLQ082PROD with RULES2 ■ Authority: 29 U.S.C. 1027, 1059, 1135, 1161–1168, 1169, 1181–1183, 1181 note, 1185, 1185a, 1185b, 1191, 1191a, 1191b, and 1191c; sec. 101(g), Pub. L. 104–191, 110 Stat. 1936; sec. 401(b), Pub. L. 105–200, 112 Stat. 645 (42 U.S.C. 651 note); sec. 512(d), Pub. L. 110–343, 122 Stat. 3881; sec. 1001, 1201, and 1562(e), Pub. L. 111–148, 124 Stat. 119, as VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 amended by Pub. L. 111–152, 124 Stat. 1029; Division M, Pub. L. 113–235, 128 Stat. 2130; Secretary of Labor’s Order 1–2011, 77 FR 1088 (Jan. 9, 2012). 12. Section 2590.701–2 is amended by revising the definition of ‘‘group health insurance coverage’’ to read as follows: ■ § 2590.701–2 Definitions. * * * * * Group health insurance coverage means health insurance coverage offered in connection with a group health plan. Individual health insurance coverage reimbursed by the arrangements described in 29 CFR 2510.3–1(l) is not offered in connection with a group health plan, and is not group health insurance coverage, provided all the conditions in 29 CFR 2510.3–1(l) are satisfied. * * * * * ■ 13. Section 2590.702–2 is added to read as follows: § 2590.702–2 Special Rule Allowing Integration of Health Reimbursement Arrangements (HRAs) and Other AccountBased Group Health Plans with Individual Health Insurance Coverage and Medicare and Prohibiting Discrimination In HRAs and Other Account-Based Group Health Plans. (a) Scope. This section applies to health reimbursement arrangements (HRAs) and other account-based group health plans, as defined in § 2590.715– 2711(d)(6)(i) of this part. For ease of reference, the term ‘‘HRA’’ is used in this section to include other accountbased group health plans. For related regulations, see 26 CFR 1.36B–2(c)(3)(i) and (c)(5), 29 CFR 2510.3–1(l), and 45 CFR 155.420. (b) Purpose. This section provides the conditions that an HRA must satisfy in order to be integrated with individual health insurance coverage for purposes of Public Health Service Act (PHS Act) sections 2711 and 2713 and § 2590.715– 2711(d)(4) of this part (referred to as an individual coverage HRA). This section also allows an individual coverage HRA to be integrated with Medicare for purposes of PHS Act sections 2711 and 2713 and § 2590.715–2711(d)(4), subject to the conditions provided in this section (see paragraph (e) of this section). Some of the conditions set forth in this section specifically relate to compliance with PHS Act sections 2711 and 2713 and some relate to the effect of having or being offered an individual coverage HRA on eligibility for the premium tax credit under section 36B of the Code. In addition, this section provides conditions that an individual coverage HRA must satisfy in order to comply with the nondiscrimination provisions in ERISA section 702 and PO 00000 Frm 00115 Fmt 4701 Sfmt 4700 29001 PHS Act section 2705 (which is incorporated in ERISA section 715) and that are consistent with the provisions of the Patient Protection and Affordable Care Act, Public Law 111–148 (124 Stat. 119 (2010)), and the Health Care and Education Reconciliation Act of 2010, Public Law 111–152 (124 Stat. 1029 (2010)), each as amended, that are designed to create a competitive individual market. These conditions are intended to prevent an HRA plan sponsor from intentionally or unintentionally, directly or indirectly, steering any participants or dependents with adverse health factors away from its traditional group health plan, if any, and toward individual health insurance coverage. (c) General rule. An HRA will be considered to be integrated with individual health insurance coverage for purposes of PHS Act sections 2711 and 2713 and § 2590.715–2711(d)(4) of this part and will not be considered to discriminate in violation of ERISA section 702 and PHS Act section 2705 solely because it is integrated with individual health insurance coverage, provided that the conditions of this paragraph (c) are satisfied. See paragraph (e) of this section for how these conditions apply to an individual coverage HRA integrated with Medicare. For purposes of this section, medical care expenses means medical care expenses as defined in § 2590.715– 2711(d)(6)(ii) of this part and Exchange means Exchange as defined in 45 CFR 155.20. (1) Enrollment in individual health insurance coverage—(i) In general. The HRA must require that the participant and any dependent(s) are enrolled in individual health insurance coverage that is subject to and complies with the requirements in PHS Act sections 2711 (and § 2590.715–2711(a)(2) of this part) and PHS Act section 2713 (and § 2590.715–2713(a)(1) of this part), for each month that the individual(s) are covered by the HRA. For purposes of this paragraph (c), all individual health insurance coverage, except for individual health insurance coverage that consists solely of excepted benefits, is treated as being subject to and complying with PHS Act sections 2711 and 2713. References to individual health insurance coverage in this paragraph (c) do not include individual health insurance coverage that consists solely of excepted benefits. (ii) Forfeiture. The HRA must provide that if any individual covered by the HRA ceases to be covered by individual health insurance coverage, the HRA will not reimburse medical care expenses that are incurred by that individual after E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 29002 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations the individual health insurance coverage ceases. In addition, if the participant and all dependents covered by the participant’s HRA cease to be covered by individual health insurance coverage, the participant must forfeit the HRA. In either case, the HRA must reimburse medical care expenses incurred by the individual prior to the cessation of individual health insurance coverage to the extent the medical care expenses are otherwise covered by the HRA, but the HRA may limit the period to submit medical care expenses for reimbursement to a reasonable specified time period. If a participant or dependent loses coverage under the HRA for a reason other than cessation of individual health insurance coverage, COBRA and other continuation coverage requirements may apply. (iii) Grace periods and retroactive termination of individual health insurance coverage. In the event an individual is initially enrolled in individual health insurance coverage and subsequently timely fails to pay premiums for the coverage, with the result that the individual is in a grace period, the individual is considered to be enrolled in individual health insurance coverage for purposes of this paragraph (c)(1) and the individual coverage HRA must reimburse medical care expenses incurred by the individual during that time period to the extent the medical care expenses are otherwise covered by the HRA. If the individual fails to pay the applicable premium(s) by the end of the grace period and the coverage is cancelled or terminated, including retroactively, or if the individual health insurance coverage is cancelled or terminated retroactively for some other reason (for example, a rescission), an individual coverage HRA must require that a participant notify the HRA that coverage has been cancelled or terminated and the date on which the cancellation or termination is effective. After the individual coverage HRA has received the notice of cancellation or termination, the HRA may not reimburse medical care expenses incurred on and after the date the individual health insurance coverage was cancelled or terminated, which is considered to be the date of termination of coverage under the HRA. (2) No traditional group health plan may be offered to same participants. To the extent a plan sponsor offers any class of employees (as defined in paragraph (d) of this section) an individual coverage HRA, the plan sponsor may not also offer a traditional group health plan to the same class of employees, except as provided in VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 paragraph (d)(5) of this section. For purposes of this section, a traditional group health plan is any group health plan other than either an account-based group health plan or a group health plan that consists solely of excepted benefits. Therefore, a plan sponsor may not offer a choice between an individual coverage HRA or a traditional group health plan to any participant or dependent. (3) Same terms requirement—(i) In general. If a plan sponsor offers an individual coverage HRA to a class of employees described in paragraph (d) of this section, the HRA must be offered on the same terms to all participants within the class, except as provided in paragraphs (c)(3)(ii) through (vi) and (d)(5) of this section. (ii) Carryover amounts, salary reduction arrangements, and transfer amounts. Amounts that are not used to reimburse medical care expenses for any plan year that are made available to participants in later plan years are disregarded for purposes of determining whether an HRA is offered on the same terms, provided that the method for determining whether participants have access to unused amounts in future years, and the methodology and formula for determining the amounts of unused funds which they may access in future years, is the same for all participants in a class of employees. In addition, the ability to pay the portion of the premium for individual health insurance coverage that is not covered by the HRA, if any, by using a salary reduction arrangement under section 125 of the Code is considered to be a term of the HRA for purposes of this paragraph (c)(3). Therefore, an HRA is not provided on the same terms unless the salary reduction arrangement, if made available to any participant in a class of employees, is made available on the same terms to all participants (other than former employees, as defined in paragraph (c)(3)(iv) of this section) in the class of employees. Further, to the extent that a participant in an individual coverage HRA was previously covered by another HRA and the current individual coverage HRA makes available amounts that were not used to reimburse medical care expenses under the prior HRA (transferred amounts), the transferred amounts are disregarded for purposes of determining whether the HRA is offered on the same terms, provided that if the HRA makes available transferred amounts, it does so on the same terms for all participants in the class of employees. (iii) Permitted variation. An HRA does not fail to be provided on the same terms solely because the maximum PO 00000 Frm 00116 Fmt 4701 Sfmt 4700 dollar amount made available to participants in a class of employees to reimburse medical care expenses for any plan year increases in accordance with paragraph (c)(3)(iii)(A) or (B) of this section. (A) Variation due to number of dependents. An HRA does not fail to be provided on the same terms to participants in a class of employees solely because the maximum dollar amount made available to those participants to reimburse medical care expenses for any plan year increases as the number of the participant’s dependents who are covered under the HRA increases, so long as the same maximum dollar amount attributable to the increase in family size is made available to all participants in that class of employees with the same number of dependents covered by the HRA. (B) Variation due to age. An HRA does not fail to be provided on the same terms to participants in a class of employees solely because the maximum dollar amount made available under the terms of the HRA to those participants to reimburse medical care expenses for any plan year increases as the age of the participant increases, so long as the requirements in paragraphs (c)(3)(iii)(B)(1) and (2) of this section are satisfied. For the purpose of this paragraph (c)(3)(iii)(B), the plan sponsor may determine the age of the participant using any reasonable method for a plan year, so long as the plan sponsor determines each participant’s age for the purpose of this paragraph (c)(3)(iii)(B) using the same method for all participants in the class of employees for the plan year and the method is determined prior to the plan year. (1) The same maximum dollar amount attributable to the increase in age is made available to all participants who are the same age. (2) The maximum dollar amount made available to the oldest participant(s) is not more than three times the maximum dollar amount made available to the youngest participant(s). (iv) Former employees. An HRA does not fail to be treated as provided on the same terms if the plan sponsor offers the HRA to some, but not all, former employees within a class of employees. However, if a plan sponsor offers the HRA to one or more former employees within a class of employees, the HRA must be offered to the former employee(s) on the same terms as to all other employees within the class, except as provided in paragraph (c)(3)(ii) of this section. For purposes of this section, a former employee is an employee who is E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations no longer performing services for the employer. (v) New employees or new dependents. For a participant whose coverage under the HRA becomes effective later than the first day of the plan year, the HRA does not fail to be treated as being provided on the same terms to the participant if the maximum dollar amount made available to the participant either is the same as the maximum dollar amount made available to participants in the participant’s class of employees whose coverage became effective as of the first day of the plan year, or is pro-rated consistent with the portion of the plan year in which the participant is covered by the HRA. Similarly, if the HRA provides for variation in the maximum amount made available to participants in a class of employees based on the number of a participant’s dependents covered by the HRA, and the number of a participant’s dependents covered by the HRA changes during a plan year (either increasing or decreasing), the HRA does not fail to be treated as being provided on the same terms to the participant if the maximum dollar amount made available to the participant either is the same as the maximum dollar amount made available to participants in the participant’s class of employees who had the same number of dependents covered by the HRA on the first day of the plan year or is pro-rated for the remainder of the plan year after the change in the number of the participant’s dependents covered by the HRA consistent with the portion of the plan year in which that number of dependents are covered by the HRA. The method the HRA uses to determine amounts made available for participants whose coverage under the HRA is effective later than the first day of the plan year or who have changes in the number of dependents covered by the HRA during a plan year must be the same for all participants in the class of employees and the method must be determined prior to the beginning of the plan year. (vi) HSA-compatible HRAs. An HRA does not fail to be treated as provided on the same terms if the plan sponsor offers participants in a class of employees a choice between an HSAcompatible individual coverage HRA and an individual coverage HRA that is not HSA compatible, provided both types of HRAs are offered to all participants in the class of employees on the same terms. For the purpose of this paragraph (c)(3)(vi), an HSAcompatible individual coverage HRA is an individual coverage HRA that is limited in accordance with applicable VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 guidance under section 223 of the Code such that an individual covered by such an HRA is not disqualified from being an eligible individual under section 223 of the Code. (vii) Examples. The following examples illustrate the provisions of this paragraph (c)(3), without taking into account the provisions of paragraph (d) of this section. In each example, the HRA is an individual coverage HRA that has a calendar year plan year and may reimburse any medical care expenses, including premiums for individual health insurance coverage (except as provided in paragraph (c)(3)(vii)(E) of this section (Example 5)). Further, in each example, assume the HRA is offered on the same terms, except as otherwise specified in the example and that no participants or dependents are Medicare beneficiaries. (A) Example 1: Carryover amounts permitted—(1) Facts. For 2020 and again for 2021, Plan Sponsor A offers all employees $7,000 each in an HRA, and the HRA provides that amounts that are unused at the end of a plan year may be carried over to the next plan year, with no restrictions on the use of the carryover amounts compared to the use of newly available amounts. At the end of 2020, some employees have used all of the funds in their HRAs, while other employees have balances remaining that range from $500 to $1,750 that are carried over to 2021 for those employees. (2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(A) (Example 1) for 2020 because Plan Sponsor A offers all employees the same amount, $7,000, in an HRA for that year. The same terms requirement is also satisfied for 2021 because Plan Sponsor A again offers all employees the same amount for that year, and the carryover amounts that some employees have are disregarded in applying the same terms requirement because the amount of the carryover for each employee (that employee’s balance) and each employee’s access to the carryover amounts is based on the same terms. (B) Example 2: Employees hired after the first day of the plan year—(1) Facts. For 2020, Plan Sponsor B offers all employees employed on January 1, 2020, $7,000 each in an HRA for the plan year. Employees hired after January 1, 2020, are eligible to enroll in the HRA with an effective date of the first day of the month following their date of hire, as long as they have enrolled in individual health insurance coverage effective on or before that date, and the amount offered to these employees is prorated based on the number of months remaining in the plan year, including the month which includes their coverage effective date. (2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(B) (Example 2) for 2020 because Plan Sponsor B offers all employees employed on the first PO 00000 Frm 00117 Fmt 4701 Sfmt 4700 29003 day of the plan year the same amount, $7,000, in an HRA for that plan year and all employees hired after January 1, 2020, a prorata amount based on the portion of the plan year during which they are enrolled in the HRA. (C) Example 3: HRA amounts offered vary based on number of dependents—(1) Facts. For 2020, Plan Sponsor C offers its employees the following amounts in an HRA: $1,500, if the employee is the only individual covered by the HRA; $3,500, if the employee and one dependent are covered by the HRA; and $5,000, if the employee and more than one dependent are covered by the HRA. (2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(C) (Example 3) because paragraph (c)(3)(iii)(A) of this section allows the maximum dollar amount made available in an HRA to increase as the number of the participant’s dependents covered by the HRA increases and Plan Sponsor C makes the same amount available to each employee with the same number of dependents covered by the HRA. (D) Example 4: HRA amounts offered vary based on increases in employees’ ages—(1) Facts. For 2020, Plan Sponsor D offers its employees the following amounts in an HRA: $1,000 each for employees age 25 to 35; $2,000 each for employees age 36 to 45; $2,500 each for employees age 46 to 55; and $4,000 each for employees over age 55. (2) Conclusion. The same terms requirement of this paragraph (c)(3) is not satisfied in this paragraph (c)(3)(vii)(D) (Example 4) because the terms of the HRA provide the oldest participants (those over age 55) with more than three times the amount made available to the youngest participants (those ages 25 to 35), in violation of paragraph (c)(3)(iii)(B)(2) of this section. (E) Example 5: Application of same terms requirement to premium only HRA—(1) Facts. For 2020, Plan Sponsor E offers its employees an HRA that reimburses only premiums for individual health insurance coverage, up to $10,000 for the year. Employee A enrolls in individual health insurance coverage with a $5,000 premium for the year and is reimbursed $5,000 from the HRA. Employee B enrolls in individual health insurance coverage with an $8,000 premium for the year and is reimbursed $8,000 from the HRA. (2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(E) (Example 5) because Plan Sponsor E offers the HRA on the same terms to all employees, notwithstanding that some employees receive a greater amount of reimbursement than others based on the cost of the individual health insurance coverage selected by the employee. (4) Opt out. Under the terms of the HRA, a participant who is otherwise eligible for coverage must be permitted to opt out of and waive future reimbursements on behalf of the participant and all dependents eligible for the HRA from the HRA once, and only once, with respect to each plan year. The HRA may establish E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 29004 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations timeframes for enrollment in (and opting out of) the HRA but, in general, the opportunity to opt out must be provided in advance of the first day of the plan year. For participants who become eligible to participate in the HRA on a date other than the first day of the plan year (or who become eligible fewer than 90 days prior to the plan year or for whom the notice under paragraph (c)(6) of this section is required to be provided as set forth in paragraph (c)(6)(i)(C) of this section), or for a dependent who newly becomes eligible during the plan year, this opportunity must be provided during the applicable HRA enrollment period(s) established by the HRA for these individuals. Further, under the terms of the HRA, upon termination of employment, for a participant who is covered by the HRA, either the remaining amounts in the HRA must be forfeited or the participant must be permitted to permanently opt out of and waive future reimbursements from the HRA on behalf of the participant and all dependents covered by the HRA. (5) Reasonable procedures for coverage substantiation—(i) Substantiation of individual health insurance coverage for the plan year. The HRA must implement, and comply with, reasonable procedures to substantiate that participants and each dependent covered by the HRA are, or will be, enrolled in individual health insurance coverage for the plan year (or for the portion of the plan year the individual is covered by the HRA, if applicable). The HRA may establish the date by which this substantiation must be provided, but, in general, the date may be no later than the first day of the plan year. However, for a participant who is not eligible to participate in the HRA on the first day of the plan year (or who becomes eligible fewer than 90 days prior to the plan year or for whom the notice under paragraph (c)(6) of this section is required to be provided as set forth in paragraph (c)(6)(i)(C) of this section), the HRA may establish the date by which this substantiation must be provided, but that date may be no later than the date the HRA coverage begins. Similarly, for a participant who adds a new dependent during the plan year, the HRA may establish the date by which this substantiation must be provided, but the date may be no later than the date the HRA coverage for the new dependent begins; however, to the extent the dependent’s coverage under the HRA is effective retroactively, the HRA may establish a reasonable time by which this substantiation is required, but must require it be provided before VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 the HRA will reimburse any medical care expense for the newly added dependent. The reasonable procedures an HRA may use to implement the substantiation requirement set forth in this paragraph (c)(5)(i) may include a requirement that a participant substantiate enrollment by providing either: (A) A document from a third party (for example, the issuer or an Exchange) showing that the participant and any dependents covered by the HRA are, or will be, enrolled in individual health insurance coverage (for example, an insurance card or an explanation of benefits document pertaining to the relevant time period or documentation from the Exchange showing that the individual has completed the application and plan selection); or (B) An attestation by the participant stating that the participant and dependent(s) covered by the HRA are, or will be, enrolled in individual health insurance coverage, the date coverage began or will begin, and the name of the provider of the coverage. (ii) Coverage substantiation with each request for reimbursement of medical care expenses. Following the initial substantiation of coverage, with each new request for reimbursement of an incurred medical care expense for the same plan year, the HRA may not reimburse a participant for any medical care expenses unless, prior to each reimbursement, the participant substantiates that the individual on whose behalf medical care expenses are requested to be reimbursed continues to be enrolled in individual health insurance coverage for the month during which the medical care expenses were incurred. The HRA must implement, and comply with, reasonable procedures to satisfy this requirement. This substantiation may be in the form of a written attestation by the participant, which may be part of the form used to request reimbursement, or a document from a third party (for example, a health insurance issuer) showing that the participant or the dependent, if applicable, are or were enrolled in individual health insurance coverage for the applicable month. (iii) Reliance on substantiation. For purposes of this paragraph (c)(5), an HRA may rely on the participant’s documentation or attestation unless the HRA, its plan sponsor, or any other entity acting in an official capacity on behalf of the HRA has actual knowledge that any individual covered by the HRA is not, or will not be, enrolled in individual health insurance coverage for the plan year (or applicable portion of PO 00000 Frm 00118 Fmt 4701 Sfmt 4700 the plan year) or the month, as applicable. (6) Notice requirement—(i) Timing. The HRA must provide a written notice to each participant: (A) At least 90 calendar days before the beginning of each plan year for any participant who is not described in either paragraph (c)(6)(i)(B) or (C) of this section; (B) No later than the date on which the HRA may first take effect for the participant, for any participant who is not eligible to participate at the beginning of the plan year (or is not eligible to participate at the time the notice is provided at least 90 calendar days before the beginning of the plan year pursuant to paragraph (c)(6)(i)(A) of this section); or (C) No later than the date on which the HRA may first take effect for the participant, for any participant who is employed by an employer that is first established less than 120 days before the beginning of the first plan year of the HRA; this paragraph (c)(6)(i)(C) applies only with respect to the first plan year of the HRA. (ii) Content. The notice must include all the information described in this paragraph (c)(6)(ii) (and may include any additional information that does not conflict with that information). To the extent that the Departments of the Treasury, Labor and Health and Human Services provide model notice language for certain elements of this required notice, HRAs are permitted, but not required, to use the model language. (A) A description of the terms of the HRA, including the maximum dollar amount available for each participant (including the self-only HRA amount available for the plan year (or the maximum dollar amount available for the plan year if the HRA provides for reimbursements up to a single dollar amount regardless of whether a participant has self-only or other than self-only coverage)), any rules regarding the proration of the maximum dollar amount applicable to any participant (or dependent, if applicable) who is not eligible to participate in the HRA for the entire plan year, whether (and which of) the participant’s dependents are eligible for the HRA, a statement that there are different kinds of HRAs (including a qualified small employer health reimbursement arrangement) and the HRA being offered is an individual coverage HRA, a statement that the HRA requires the participant and any covered dependents to be enrolled in individual health insurance coverage (or Medicare Part A and B or Medicare Part C, if applicable), a statement that the coverage in which the participant and E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations any covered dependents must be enrolled cannot be short-term, limitedduration insurance or consist solely of excepted benefits, a statement that individual health insurance coverage in which the participant and any covered dependents are enrolled is not subject to the Employee Retirement Income Security Act if the conditions under § 2510.3–1(l) of this chapter are satisfied, the date as of which coverage under the HRA may first become effective (both for participants whose coverage will become effective on the first day of the plan year and for participants whose HRA coverage may become effective at a later date), the dates on which the HRA plan year begins and ends, and the dates on which the amounts newly made available under the HRA will be made available. (B) A statement of the right of the participant to opt out of and waive future reimbursements from the HRA, as set forth under paragraph (c)(4) of this section. (C) A description of the potential availability of the premium tax credit if the participant opts out of and waives future reimbursements from the HRA and the HRA is not affordable for one or more months under 26 CFR 1.36B– 2(c)(5), a statement that even if the participant opts out of and waives future reimbursements from an HRA, the offer will prohibit the participant (and, potentially, the participant’s dependents) from receiving a premium tax credit for the participant’s coverage (or the dependent’s coverage, if applicable) on an Exchange for any month that the HRA is affordable under 26 CFR 1.36B–2(c)(5), a statement describing how the participant may find assistance with determining affordability, a statement that, if the participant is a former employee, the offer of the HRA does not render the participant (or the participant’s dependents, if applicable) ineligible for the premium tax credit regardless of whether it is affordable under 26 CFR 1.36B–2(c)(5), and a statement that if the participant or dependent is enrolled in Medicare, he or she is ineligible for the premium tax credit without regard to the offer or acceptance of the HRA; (D) A statement that if the participant accepts the HRA, the participant may not claim a premium tax credit for the participant’s Exchange coverage for any month the HRA may be used to reimburse medical care expenses of the participant, and a premium tax credit may not be claimed for the Exchange coverage of the participant’s dependents for any month the HRA may be used to reimburse medical care expenses of the dependents. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 (E) A statement that the participant must inform any Exchange to which the participant applies for advance payments of the premium tax credit of the availability of the HRA; the self-only HRA amount available for the HRA plan year (or the maximum dollar amount available for the plan year if the HRA provides for reimbursements up to a single dollar amount regardless of whether a participant has self-only or other than self-only coverage) as set forth in the written notice in accordance with paragraph (c)(6)(ii)(A) of this section; whether the HRA is also available to the participant’s dependents and if so, which ones; the date as of which coverage under the HRA may first become effective; the date on which the plan year begins and the date on which it ends; and whether the participant is a current employee or former employee. (F) A statement that the participant should retain the written notice because it may be needed to determine whether the participant is allowed a premium tax credit on the participant’s individual income tax return. (G) A statement that the HRA may not reimburse any medical care expense unless the substantiation requirement set forth in paragraph (c)(5)(ii) of this section is satisfied and a statement that the participant must also provide the substantiation required by paragraph (c)(5)(i) of this section. (H) A statement that if the individual health insurance coverage (or coverage under Medicare Part A and B or Medicare Part C) of a participant or dependent ceases, the HRA will not reimburse any medical care expenses that are incurred by the participant or dependent, as applicable, after the coverage ceases, and a statement that the participant must inform the HRA if the participant’s or dependent’s individual health insurance coverage (or coverage under Medicare Part A and B or Medicare Part C) is cancelled or terminated retroactively and the date on which the cancellation or termination is effective. (I) The contact information (including a phone number) for an individual or a group of individuals who participants may contact in order to receive additional information regarding the HRA. The plan sponsor may determine which individual or group of individuals is best suited to be the specified contact. (J) A statement of availability of a special enrollment period to enroll in or change individual health insurance coverage, through or outside of an Exchange, for the participant and any dependents who newly gain access to PO 00000 Frm 00119 Fmt 4701 Sfmt 4700 29005 the HRA and are not already covered by the HRA. (d) Classes of employees—(1) In general. This paragraph (d) sets forth the rules for determining classes of employees. Paragraph (d)(2) of this section sets forth the specific classes of employees; paragraph (d)(3) of this section sets forth a minimum class size requirement that applies in certain circumstances; paragraph (d)(4) of this section sets forth rules regarding the definition of ‘‘full-time employees,’’ ‘‘part-time employees,’’ and ‘‘seasonal employees’’; paragraph (d)(5) of this section sets forth a special rule for new hires; and paragraph (d)(6) of this section addresses student premium reduction arrangements. For purposes of this section, including determining classes under this paragraph (d), the employer is the common law employer and is determined without regard to the rules under sections 414(b), (c), (m), and (o) of the Code that would treat the common law employer as a single employer with certain other entities. (2) List of classes. Participants may be treated as belonging to a class of employees based on whether they are, or are not, included in the classes described in this paragraph (d)(2). If the individual coverage HRA is offered to former employees, former employees are considered to be in the same class in which they were included immediately before separation from service. Before each plan year, a plan sponsor must determine for the plan year which classes of employees it intends to treat separately and the definition of the relevant class(es) it will apply, to the extent these regulations permit a choice. After the classes and the definitions of the classes are established for a plan year, a plan sponsor may not make changes to the classes of employees or the definitions of those relevant classes with respect to that plan year. (i) Full-time employees, defined at the election of the plan sponsor to mean either full-time employees under section 4980H of the Code (and 26 CFR 54.4980H–1(a)(21)) or employees who are not part-time employees (as described in 26 CFR 1.105– 11(c)(2)(iii)(C)); (ii) Part-time employees, defined at the election of the plan sponsor to mean either employees who are not full-time employees under section 4980H of the Code (and under 26 CFR 54.4980H– 1(a)(21) (which defines full-time employee)) or employees who are parttime employees as described in 26 CFR 1.105–11(c)(2)(iii)(C); (iii) Employees who are paid on a salary basis; E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 29006 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations (iv) Non-salaried employees (such as, for example, hourly employees); (v) Employees whose primary site of employment is in the same rating area as defined in 45 CFR 147.102(b); (vi) Seasonal employees, defined at the election of the plan sponsor to mean seasonal employees as described in either 26 CFR 54.4980H–1(a)(38) or 26 CFR 1.105–11(c)(2)(iii)(C); (vii) Employees included in a unit of employees covered by a particular collective bargaining agreement (or an appropriate related participation agreement) in which the plan sponsor participates (as described in 26 CFR 1.105–11(c)(2)(iii)(D)); (viii) Employees who have not satisfied a waiting period for coverage (if the waiting period complies with § 2590.715–2708 of this part); (ix) Non-resident aliens with no U.S.based income (as described in 26 CFR 1.105–11(c)(2)(iii)(E)); (x) Employees who, under all the facts and circumstances, are employees of an entity that hired the employees for temporary placement at an entity that is not the common law employer of the employees and that is not treated as a single employer with the entity that hired the employees for temporary placement under section 414(b), (c), (m), or (o) of the Code; or (xi) A group of participants described as a combination of two or more of the classes of employees set forth in paragraphs (d)(2)(i) through (x) of this section. (3) Minimum class size requirement— (i) In general. If a class of employees is subject to the minimum class size requirement as set forth in this paragraph (d)(3), the class must consist of at least a minimum number of employees (as described in paragraphs (d)(3)(iii) and (iv) of this section), otherwise, the plan sponsor may not treat that class as a separate class of employees. Paragraph (d)(3)(ii) of this section sets forth the circumstances in which the minimum class size requirement applies to a class of employees, paragraph (d)(3)(iii) of this section sets forth the rules for determining the applicable class size minimum, and paragraph (d)(3)(iv) of this section sets forth the rules for a plan sponsor to determine if it satisfies the minimum class size requirement with respect to a class of employees. (ii) Circumstances in which minimum class size requirement applies—(A) The minimum class size requirement applies only if a plan sponsor offers a traditional group health plan to one or more classes of employees and offers an individual coverage HRA to one or more other classes of employees. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 (B) The minimum class size requirement does not apply to a class of employees offered a traditional group health plan or a class of employees offered no coverage. (C) The minimum class size requirement applies to a class of employees offered an individual coverage HRA if the class is full-time employees, part-time employees, salaried employees, non-salaried employees, or employees whose primary site of employment is in the same rating area (described in paragraph (d)(2)(i), (ii), (iii), (iv), or (v) of this section, respectively, and referred to collectively as the applicable classes or individually as an applicable class), except that: (1) In the case of the class of employees whose primary site of employment is in the same rating area (as described in paragraph (d)(2)(v) of this section), the minimum class size requirement does not apply if the geographic area defining the class is a State or a combination of two or more entire States; and (2) In the case of the classes of employees that are full-time employees and part-time employees (as described in paragraphs (d)(2)(i) and (ii) of this section, respectively), the minimum class size requirement applies only to those classes (and the classes are only applicable classes) if the employees in one such class are offered a traditional group health plan while the employees in the other such class are offered an individual coverage HRA. In such a case, the minimum class size requirement applies only to the class offered an individual coverage HRA. (D) A class of employees offered an individual coverage HRA is also subject to the minimum class size requirement if the class is a class of employees created by combining at least one of the applicable classes (as defined in paragraph (d)(3)(ii)(C) of this section) with any other class, except that the minimum class size requirement shall not apply to a class that is the result of a combination of one of the applicable classes and a class of employees who have not satisfied a waiting period (as described in paragraph (d)(2)(viii) of this section). (iii) Determination of the applicable class size minimum—(A) In general. The minimum number of employees that must be in a class of employees that is subject to the minimum class size requirement (the applicable class size minimum) is determined prior to the beginning of the plan year for each plan year of the individual coverage HRA and is: PO 00000 Frm 00120 Fmt 4701 Sfmt 4700 (1) 10, for an employer with fewer than 100 employees; (2) A number, rounded down to a whole number, equal to 10 percent of the total number of employees, for an employer with 100 to 200 employees; and (3) 20, for an employer with more than 200 employees. (B) Determining employer size. For purposes of this paragraph (d)(3), the number of employees of an employer is determined in advance of the plan year of the HRA based on the number of employees that the employer reasonably expects to employ on the first day of the plan year. (iv) Determining if a class satisfies the applicable class size minimum. For purposes of this paragraph (d)(3), whether a class of employees satisfies the applicable class size minimum for a plan year of the individual coverage HRA is based on the number of employees in the class offered the individual coverage HRA as of the first day of the plan year. Therefore, this determination is not based on the number of employees that actually enroll in the individual coverage HRA, and this determination is not affected by changes in the number of employees in the class during the plan year. (4) Consistency requirement. For any plan year, a plan sponsor may define ‘‘full-time employee,’’ ‘‘part-time employee,’’ and ‘‘seasonal employee’’ in accordance with the relevant provisions of sections 105(h) or 4980H of the Code, as set forth in paragraphs (d)(2)(i), (ii), and (vi) of this section, if: (i) To the extent applicable under the HRA for the plan year, each of the three classes of employees are defined in accordance with section 105(h) of the Code or each of the three classes of employees are defined in accordance with section 4980H of the Code for the plan year; and (ii) The HRA plan document sets forth the applicable definitions prior to the beginning of the plan year to which the definitions will apply. (5) Special rule for new hires—(i) In general. Notwithstanding paragraphs (c)(2) and (3) of this section, a plan sponsor that offers a traditional group health plan to a class of employees may prospectively offer the employees in that class of employees who are hired on or after a certain future date (the new hire date) an individual coverage HRA (with this group of employees referred to as the new hire subclass), while continuing to offer employees in that class of employees who are hired before the new hire date a traditional group health plan (with the rule set forth in this sentence referred to as the special E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations rule for new hires). For the new hire subclass, the individual coverage HRA must be offered on the same terms to all participants within the subclass, in accordance with paragraph (c)(3) of this section. In accordance with paragraph (c)(2) of this section, a plan sponsor may not offer a choice between an individual coverage HRA or a traditional group health plan to any employee in the new hire subclass or to any employee in the class who is not a member of the new hire subclass. (ii) New hire date. A plan sponsor may set the new hire date for a class of employees prospectively as any date on or after January 1, 2020. A plan sponsor may set different new hire dates prospectively for separate classes of employees. (iii) Discontinuation of use of special rule for new hires and multiple applications of the special rule for new hires. A plan sponsor may discontinue use of the special rule for new hires at any time for any class of employees. In that case, the new hire subclass is no longer treated as a separate subclass of employees. In the event a plan sponsor applies the special rule for new hires to a class of employees and later discontinues use of the rule to the class of employees, the plan sponsor may later apply the rule if the application of the rule would be permitted under the rules for initial application of the special rule for new hires. If a plan sponsor, in accordance with the requirements for the special rule for new hires, applies the rule to a class of employees subsequent to any prior application and discontinuance of the rule to that class, the new hire date must be prospective. (iv) Application of the minimum class size requirement under the special rule for new hires. The minimum class size requirement set forth in paragraph (d)(3) of this section does not apply to the new hire subclass. However, if a plan sponsor subdivides the new hire subclass subsequent to creating the new hire subclass, the minimum class size requirement set forth in paragraph (d)(3) of this section applies to any class of employees created by subdividing the new hire subclass, if the minimum class size requirement otherwise applies. (6) Student employees offered student premium reduction arrangements. For purposes of this section, if an institution of higher education (as defined in the Higher Education Act of 1965) offers a student employee a student premium reduction arrangement, the employee is not considered to be part of the class of employees to which the employee would otherwise belong. For the purpose of this paragraph (d)(6) and VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 paragraph (f)(1) of this section, a student premium reduction arrangement is defined as any program offered by an institution of higher education under which the cost of insured or self-insured student health coverage is reduced for certain students through a credit, offset, reimbursement, stipend or similar arrangement. A student employee offered a student premium reduction arrangement is also not counted for purposes of determining the applicable class size minimum under paragraph (d)(3)(iii) of this section. If a student employee is not offered a student premium reduction arrangement (including if the student employee is offered an individual coverage HRA instead), the student employee is considered to be part of the class of employees to which the employee otherwise belongs and is counted for purposes of determining the applicable class size minimum under paragraph (d)(3)(iii) of this section. (e) Integration of Individual Coverage HRAs with Medicare—(1) General rule. An individual coverage HRA will be considered to be integrated with Medicare (and deemed to comply with PHS Act sections 2711 and 2713 and § 2590.715–2711(d)(4) of this part), provided that the conditions of paragraph (c) of this section are satisfied, subject to paragraph (e)(2) of this section. Nothing in this section requires that a participant and his or her dependents all have the same type of coverage; therefore, an individual coverage HRA may be integrated with Medicare for some individuals and with individual health insurance coverage for others, including, for example, a participant enrolled in Medicare Part A and B or Part C and his or her dependents enrolled in individual health insurance coverage. (2) Application of conditions in paragraph (c) of this section—(i) In general. Except as provided in paragraph (e)(2)(ii) of this section, in applying the conditions of paragraph (c) of this section with respect to integration with Medicare, a reference to ‘‘individual health insurance coverage’’ is deemed to refer to coverage under Medicare Part A and B or Part C. References in this section to integration of an HRA with Medicare refer to integration of an individual coverage HRA with Medicare Part A and B or Part C. (ii) Exceptions. For purposes of the statement regarding ERISA under the notice content element under paragraph (c)(6)(ii)(A) of this section and the statement regarding the availability of a special enrollment period under the notice content element under paragraph PO 00000 Frm 00121 Fmt 4701 Sfmt 4700 29007 (c)(6)(ii)(J) of this section, the term individual health insurance coverage means only individual health insurance coverage and does not also mean coverage under Medicare Part A and B or Part C. (f) Examples—(1) Examples regarding classes and the minimum class size requirement. The following examples illustrate the provisions of paragraph (c)(3) of this section, taking into account the provisions of paragraphs (d)(1) through (4) and (d)(6) of this section. In each example, the HRA is an individual coverage HRA that may reimburse any medical care expenses, including premiums for individual health insurance coverage and it is assumed that no participants or dependents are Medicare beneficiaries. (i) Example 1: Collectively bargained employees offered traditional group health plan; non-collectively bargained employees offered HRA—(A) Facts. For 2020, Plan Sponsor A offers its employees covered by a collective bargaining agreement a traditional group health plan (as required by the collective bargaining agreement) and all other employees (non-collectively bargained employees) each an HRA on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(i) (Example 1) because collectively bargained and non-collectively bargained employees may be treated as different classes of employees, one of which may be offered a traditional group health plan and the other of which may be offered an individual coverage HRA, and Plan Sponsor A offers the HRA on the same terms to all participants who are non-collectively bargained employees. The minimum class size requirement does not apply to this paragraph (f)(1)(i) (Example 1) even though Plan Sponsor A offers one class a traditional group health plan and one class the HRA because collectively bargained and non-collectively bargained employees are not applicable classes that are subject to the minimum class size requirement. (ii) Example 2: Collectively bargained employees in one unit offered traditional group health plan and in another unit offered HRA—(A) Facts. For 2020, Plan Sponsor B offers its employees covered by a collective bargaining agreement with Local 100 a traditional group health plan (as required by the collective bargaining agreement), and its employees covered by a collective bargaining agreement with Local 200 each an HRA on the same terms (as required by the collective bargaining agreement). (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(ii) (Example 2) because the employees covered by the collective bargaining agreements with the two separate bargaining units (Local 100 and Local 200) may be treated as two different classes of employees and Plan Sponsor B offers an HRA on the same terms to the participants covered by the agreement with Local 200. The minimum class size E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 29008 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations requirement does not apply to this paragraph (f)(1)(ii) (Example 2) even though Plan Sponsor B offers the Local 100 employees a traditional group health plan and the Local 200 employees an HRA because collectively bargained employees are not applicable classes that are subject to the minimum class size requirement. (iii) Example 3: Employees in a waiting period offered no coverage; other employees offered an HRA—(A) Facts. For 2020, Plan Sponsor C offers its employees who have completed a waiting period that complies with the requirements for waiting periods in § 2590.715–2708 of this part each an HRA on the same terms and does not offer coverage to its employees who have not completed the waiting period. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(iii) (Example 3) because employees who have completed a waiting period and employees who have not completed a waiting period may be treated as different classes and Plan Sponsor C offers the HRA on the same terms to all participants who have completed the waiting period. The minimum class size requirement does not apply to this paragraph (f)(1)(iii) (Example 3) because Plan Sponsor C does not offer at least one class of employees a traditional group health plan and because the class of employees who have not completed a waiting period and the class of employees who have completed a waiting period are not applicable classes that are subject to the minimum class size requirement. (iv) Example 4: Employees in a waiting period offered an HRA; other employees offered a traditional group health plan—(A) Facts. For 2020, Plan Sponsor D offers its employees who have completed a waiting period that complies with the requirements for waiting periods in § 2590.715–2708 of this part a traditional group health plan and offers its employees who have not completed the waiting period each an HRA on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(iv) (Example 4) because employees who have completed a waiting period and employees who have not completed a waiting period may be treated as different classes and Plan Sponsor D offers an HRA on the same terms to all participants who have not completed the waiting period. The minimum class size requirement does not apply to this paragraph (f)(1)(iv) (Example 4) even though Plan Sponsor D offers employees who have completed a waiting period a traditional group health plan and employees who have not completed a waiting period an HRA because the class of employees who have not completed a waiting period is not an applicable class that is subject to the minimum class size requirement (nor is the class made up of employees who have completed the waiting period). (v) Example 5: Staffing firm employees temporarily placed with customers offered an HRA; other employees offered a traditional group health plan—(A) Facts. Plan Sponsor E is a staffing firm that places certain of its VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 employees on temporary assignments with customers that are not the common law employers of Plan Sponsor E’s employees or treated as a single employer with Plan Sponsor E under section 414(b), (c), (m), or (o) of the Code (unrelated entities); other employees work in Plan Sponsor E’s office managing the staffing business (nontemporary employees). For 2020, Plan Sponsor E offers its employees who are on temporary assignments with customers each an HRA on the same terms. All other employees are offered a traditional group health plan. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(v) (Example 5) because the employees who are hired for temporary placement at an unrelated entity and non-temporary employees of Plan Sponsor E may be treated as different classes of employees and Plan Sponsor E offers an HRA on the same terms to all participants temporarily placed with customers. The minimum class size requirement does not apply to this paragraph (f)(1)(v) (Example 5) even though Plan Sponsor E offers one class a traditional group health plan and one class the HRA because the class of employees hired for temporary placement is not an applicable class that is subject to the minimum class size requirement (nor is the class made up of nontemporary employees). (vi) Example 6: Staffing firm employees temporarily placed with customers in rating area 1 offered an HRA; other employees offered a traditional group health plan—(A) Facts. The facts are the same as in paragraph (f)(1)(v) of this section (Example 5), except that Plan Sponsor E has work sites in rating area 1 and rating area 2, and it offers its 10 employees on temporary assignments with a work site in rating area 1 an HRA on the same terms. Plan Sponsor E has 200 other employees in rating areas 1 and 2, including its non-temporary employees in rating areas 1 and 2 and its employees on temporary assignments with a work site in rating area 2, all of whom are offered a traditional group health plan. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(vi) (Example 6) because, even though the employees who are temporarily placed with customers generally may be treated as employees of a different class, because Plan Sponsor E is also using a rating area to identify the class offered the HRA (which is an applicable class for the minimum class size requirement) and is offering one class the HRA and another class the traditional group health plan, the minimum class size requirement applies to the class offered the HRA, and the class offered the HRA fails to satisfy the minimum class size requirement. Because Plan Sponsor E employs 210 employees, the applicable class size minimum is 20, and the HRA is offered to only 10 employees. (vii) Example 7: Employees in State 1 offered traditional group health plan; employees in State 2 offered HRA—(A) Facts. Plan Sponsor F employs 45 employees whose work site is in State 1 and 7 employees PO 00000 Frm 00122 Fmt 4701 Sfmt 4700 whose primary site of employment is in State 2. For 2020, Plan Sponsor F offers its 45 employees in State 1 a traditional group health plan, and each of its 7 employees in State 2 an HRA on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(vii) (Example 7) because Plan Sponsor F offers the HRA on the same terms to all employees with a work site in State 2 and that class is a permissible class under paragraph (d) of this section. This is because employees whose work sites are in different rating areas may be considered different classes and a plan sponsor may create a class of employees by combining classes of employees, including by combining employees whose work site is in one rating area with employees whose work site is in a different rating area, or by combining all employees whose work site is in a state. The minimum class size requirement does not apply to this paragraph (f)(1)(vii) (Example 7) because the minimum class size requirement does not apply if the geographic area defining a class of employees is a state or a combination of two or more entire states. (viii) Example 8: Full-time seasonal employees offered HRA; all other full-time employees offered traditional group health plan; part-time employees offered no coverage—(A) Facts. Plan Sponsor G employs 6 full-time seasonal employees, 75 full-time employees who are not seasonal employees, and 5 part-time employees. For 2020, Plan Sponsor G offers each of its 6 full-time seasonal employees an HRA on the same terms, its 75 full-time employees who are not seasonal employees a traditional group health plan, and offers no coverage to its 5 part-time employees. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(viii) (Example 8) because full-time seasonal employees and full-time employees who are not seasonal employees may be considered different classes and Plan Sponsor G offers the HRA on the same terms to all full-time seasonal employees. The minimum class size requirement does not apply to the class offered the HRA in this paragraph (f)(1)(viii) (Example 8) because part-time employees are not offered coverage and full-time employees are not an applicable class subject to the minimum class size requirement if part-time employees are not offered coverage. (ix) Example 9: Full-time employees in rating area 1 offered traditional group health plan; full-time employees in rating area 2 offered HRA; part-time employees offered no coverage—(A) Facts. Plan Sponsor H employs 17 full-time employees and 10 parttime employees whose work site is in rating area 1 and 552 full-time employees whose work site is in rating area 2. For 2020, Plan Sponsor H offers its 17 full-time employees in rating area 1 a traditional group health plan and each of its 552 full-time employees in rating area 2 an HRA on the same terms. Plan Sponsor H offers no coverage to its 10 part-time employees in rating area 1. Plan Sponsor H reasonably expects to employ 569 employees on the first day of the HRA plan year. E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(ix) (Example 9) because employees whose work sites are in different rating areas may be considered different classes and Plan Sponsor H offers the HRA on the same terms to all full-time employees in rating area 2. The minimum class size requirement applies to the class offered the HRA in this paragraph (f)(1)(ix) (Example 9) because the minimum class size requirement applies to a class based on a geographic area unless the geographic area is a state or a combination of two or more entire states. However, the minimum class size requirement applies only to the class offered the HRA, and Plan Sponsor H offers the HRA to the 552 full-time employees in rating area 2 on the first day of the plan year, satisfying the minimum class size requirement (because the applicable class size minimum for Plan Sponsor H is 20). (x) Example 10: Employees in rating area 1 offered HRA; employees in rating area 2 offered traditional group health plan—(A) Facts. The facts are the same as in paragraph (f)(1)(ix) of this section (Example 9) except that Plan Sponsor H offers its 17 full-time employees in rating area 1 the HRA and offers its 552 full-time employees in rating area 2 the traditional group health plan. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(x) (Example 10) because, even though employees whose work sites are in different rating areas generally may be considered different classes and Plan Sponsor H offers the HRA on the same terms to all participants in rating area 1, the HRA fails to satisfy the minimum class size requirement. Specifically, the minimum class size requirement applies to this paragraph (f)(1)(x) (Example 10) because the minimum class size requirement applies to a class based on a geographic area unless the geographic area is a state or a combination of two or more entire states. Further, the applicable class size minimum for Plan Sponsor H is 20 employees, and the HRA is only offered to the 17 full-time employees in rating area 1 on the first day of the HRA plan year. (xi) Example 11: Employees in State 1 and rating area 1 of State 2 offered HRA; employees in all other rating areas of State 2 offered traditional group health plan—(A) Facts. For 2020, Plan Sponsor I offers an HRA on the same terms to a total of 200 employees it employs with work sites in State 1 and in rating area 1 of State 2. Plan Sponsor I offers a traditional group health plan to its 150 employees with work sites in other rating areas in State 2. Plan Sponsor I reasonably expects to employ 350 employees on the first day of the HRA plan year. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xi) (Example 11). Plan Sponsor I may treat all of the employees with a work site in State 1 and rating area 1 of State 2 as a class of employees because employees whose work sites are in different rating areas may be considered different classes and a plan sponsor may create a class of employees by VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 combining classes of employees, including by combining employees whose work site is in one rating area with a class of employees whose work site is in a different rating area. The minimum class size requirement applies to the class of employees offered the HRA (made up of employees in State 1 and in rating area 1 of State 2) because the minimum class size requirement applies to a class based on a geographic area unless the geographic area is a state or a combination of two or more entire states. In this case, the class is made up of a state plus a rating area which is not the entire state. However, this class satisfies the minimum class size requirement because the applicable class size minimum for Plan Sponsor I is 20, and Plan Sponsor I offered the HRA to 200 employees on the first day of the plan year. (xii) Example 12: Salaried employees offered a traditional group health plan; hourly employees offered an HRA—(A) Facts. Plan Sponsor J has 163 salaried employees and 14 hourly employees. For 2020, Plan Sponsor J offers its 163 salaried employees a traditional group health plan and each of its 14 hourly employees an HRA on the same terms. Plan Sponsor J reasonably expects to employ 177 employees on the first day of the HRA plan year. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(xii) (Example 12) because, even though salaried and hourly employees generally may be considered different classes and Plan Sponsor J offers the HRA on the same terms to all hourly employees, the HRA fails to satisfy the minimum class size requirement. Specifically, the minimum class size requirement applies in this paragraph (f)(1)(xii) (Example 12) because employees who are paid on a salaried basis and employees who are not paid on a salaried basis are applicable classes subject to the minimum class size requirement. Because Plan Sponsor J reasonably expects to employ between 100 and 200 employees on the first day of the plan year, the applicable class size minimum is 10 percent, rounded down to a whole number. Ten percent of 177 total employees, rounded down to a whole number is 17, and the HRA is offered to only 14 hourly employees. (xiii) Example 13: Part-time employees and full-time employees offered different HRAs; no traditional group health plan offered—(A) Facts. Plan Sponsor K has 50 full-time employees and 7 part-time employees. For 2020, Plan Sponsor K offers its 50 full-time employees $2,000 each in an HRA otherwise provided on the same terms and each of its 7 part-time employees $500 in an HRA otherwise provided on the same terms. Plan Sponsor K reasonably expects to employ 57 employees on the first day of the HRA plan year. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xiii) (Example 13) because full-time employees and part-time employees may be treated as different classes and Plan Sponsor K offers an HRA on the same terms to all the participants in each class. The minimum class size requirement does not apply to PO 00000 Frm 00123 Fmt 4701 Sfmt 4700 29009 either the full-time class or the part-time class because (although in certain circumstances the minimum class size requirement applies to a class of full-time employees and a class of part-time employees) Plan Sponsor K does not offer any class of employees a traditional group health plan, and the minimum class size requirement applies only when, among other things, at least one class of employees is offered a traditional group health plan while another class is offered an HRA. (xiv) Example 14: No employees offered an HRA—(A) Facts. The facts are the same facts as in paragraph (f)(1)(xiii) of this section (Example 13), except that Plan Sponsor K offers its full-time employees a traditional group health plan and does not offer any group health plan (either a traditional group health plan or an HRA) to its part-time employees. (B) Conclusion. The regulations set forth under this section do not apply to Plan Sponsor K because Plan Sponsor K does not offer an individual coverage HRA to any employee. (xv) Example 15: Full-time employees offered traditional group health plan; parttime employees offered HRA—(A) Facts. The facts are the same as in paragraph (f)(1)(xiii) of this section (Example 13), except that Plan Sponsor K offers its full-time employees a traditional group health plan and offers each of its part-time employees $500 in an HRA and otherwise on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(xv) (Example 15) because, even though the full-time employees and the part-time employees generally may be treated as different classes, in this paragraph (f)(1)(xv) (Example 15), the minimum class size requirement applies to the part-time employees, and it is not satisfied. Specifically, the minimum class size requirement applies to the part-time employees because that requirement applies to an applicable class offered an HRA when one class is offered a traditional group health plan while another class is offered an HRA, and to the part-time and full-time employee classes when one of those classes is offered a traditional group health plan while the other is offered an HRA. Because Plan Sponsor K reasonably expects to employ fewer than 100 employees on the first day of the HRA plan year, the applicable class size minimum for Plan Sponsor K is 10 employees, but Plan Sponsor K offered the HRA only to its 7 part-time employees. (xvi) Example 16: Satisfying minimum class size requirement based on employees offered HRA—(A) Facts. Plan Sponsor L employs 78 full-time employees and 12 parttime employees. For 2020, Plan Sponsor L offers its 78 full-time employees a traditional group health plan and each of its 12 parttimes employees an HRA on the same terms. Only 6 part-time employees enroll in the HRA. Plan Sponsor L reasonably expects to employ fewer than 100 employees on the first day of the HRA plan year. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 29010 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations (f)(1)(xvi) (Example 16) because full-time employees and part-time employees may be treated as different classes, Plan Sponsor L offers an HRA on the same terms to all the participants in the part-time class, and the minimum class size requirement is satisfied. Specifically, whether a class of employees satisfies the applicable class size minimum is determined as of the first day of the plan year based on the number of employees in a class that is offered an HRA, not on the number of employees who enroll in the HRA. The applicable class size minimum for Plan Sponsor L is 10 employees, and Plan Sponsor L offered the HRA to its 12 part-time employees. (xvii) Example 17: Student employees offered student premium reduction arrangements and same terms requirement— (A) Facts. Plan Sponsor M is an institution of higher education that offers each of its part-time employees an HRA on the same terms, except that it offers its part-time employees who are student employees a student premium reduction arrangement, and the student premium reduction arrangement provides different amounts to different parttime student employees. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xvii) (Example 17) because Plan Sponsor M offers the HRA on the same terms to its part-time employees who are not students and because the part-time student employees offered a student premium reduction arrangement (and their varying HRAs) are not taken into account as part-time employees for purposes of determining whether a class of employees is offered an HRA on the same terms. (xiii) Example 18: Student employees offered student premium reduction arrangements and minimum class size requirement—(A) Facts. Plan Sponsor N is an institution of higher education with 25 hourly employees. Plan Sponsor N offers 15 of its hourly employees, who are student employees, a student premium reduction arrangement and it wants to offer its other 10 hourly employees an HRA for 2022. Plan Sponsor N offers its salaried employees a traditional group health plan. Plan Sponsor N reasonably expects to have 250 employees on the first day of the 2022 HRA plan year, 15 of which will have offers of student premium reduction arrangements. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(xviii) (Example 18). The minimum class size requirement will apply to the class of hourly employees to which Plan Sponsor N wants to offer the HRA because Plan Sponsor N offers a class of employees a traditional group health plan and another class the HRA, and the minimum class size requirement generally applies to a class of hourly employees offered an HRA. Plan Sponsor N’s applicable class size minimum is 20 because Plan Sponsor N reasonably expects to employ 235 employees on the first day of the plan year (250 employees minus 15 employees receiving a student premium reduction arrangement). Plan Sponsor N may not offer the HRA to its hourly employees VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 because the 10 employees offered the HRA as of the first day of the plan year does not satisfy the applicable class size minimum. (2) Examples regarding special rule for new hires. The following examples illustrate the provisions of paragraph (c)(3) of this section, taking into account the provisions of paragraph (d) of this section, in particular the special rule for new hires under paragraph (d)(5) of this section. In each example, the HRA is an individual coverage HRA that has a calendar year plan year and may reimburse any medical care expenses, including premiums for individual health insurance coverage. The examples also assume that no participants or dependents are Medicare beneficiaries. (i) Example 1: Application of special rule for new hires to all employees—(A) Facts. For 2021, Plan Sponsor A offers all employees a traditional group health plan. For 2022, Plan Sponsor A offers all employees hired on or after January 1, 2022, an HRA on the same terms and continues to offer the traditional group health plan to employees hired before that date. On the first day of the 2022 plan year, Plan Sponsor A has 2 new hires who are offered the HRA. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(i) (Example 1) because, under the special rule for new hires in paragraph (d)(5) of this section, the employees newly hired on and after January 1, 2022, may be treated as a new hire subclass, Plan Sponsor A offers the HRA on the same terms to all participants in the new hire subclass, and the minimum class size requirement does not apply to the new hire subclass. (ii) Example 2: Application of special rule for new hires to full-time employees—(A) Facts. For 2021, Plan Sponsor B offers a traditional group health plan to its full-time employees and does not offer any coverage to its part-time employees. For 2022, Plan Sponsor B offers full-time employees hired on or after January 1, 2022, an HRA on the same terms, continues to offer its full-time employees hired before that date a traditional group health plan, and continues to offer no coverage to its part-time employees. On the first day of the 2022 plan year, Plan Sponsor B has 2 new hire, full-time employees who are offered the HRA. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(ii) (Example 2) because, under the special rule for new hires in paragraph (d)(5) of this section, the full-time employees newly hired on and after January 1, 2022, may be treated as a new hire subclass and Plan Sponsor B offers the HRA on the same terms to all participants in the new hire subclass. The minimum class size requirement does not apply to the new hire subclass. (iii) Example 3: Special rule for new hires impermissibly applied retroactively—(A) Facts. For 2025, Plan Sponsor C offers a traditional group health plan to its full-time employees. For 2026, Plan Sponsor C wants PO 00000 Frm 00124 Fmt 4701 Sfmt 4700 to offer an HRA to its full-time employees hired on and after January 1, 2023, while continuing to offer a traditional group health plan to its full-time employees hired before January 1, 2023. (B) Conclusion. The special rule for new hires under paragraph (d)(5) of this section does not apply in this paragraph (f)(2)(iii) (Example 3) because the rule must be applied prospectively. That is, Plan Sponsor C may not, in 2026, choose to apply the special rule for new hires retroactive to 2023. If Plan Sponsor C were to offer an HRA in this way, it would fail to satisfy the conditions under paragraphs (c)(2) and (3) of this section because the new hire subclass would not be treated as a subclass for purposes of applying those rules and, therefore, all full-time employees would be treated as one class to which either a traditional group health plan or an HRA could be offered, but not both. (iv) Example 4: Permissible second application of the special rule for new hires to the same class of employees—(A) Facts. For 2021, Plan Sponsor D offers all of its fulltime employees a traditional group health plan. For 2022, Plan Sponsor D applies the special rule for new hires and offers an HRA on the same terms to all employees hired on and after January 1, 2022, and continues to offer a traditional group health plan to fulltime employees hired before that date. For 2025, Plan Sponsor D discontinues use of the special rule for new hires, and again offers all full-time employees a traditional group health plan. In 2030, Plan Sponsor D decides to apply the special rule for new hires to the full-time employee class again, offering an HRA to all full-time employees hired on and after January 1, 2030, on the same terms, while continuing to offer employees hired before that date a traditional group health plan. (B) Conclusion. Plan Sponsor D has permissibly applied the special rule for new hires and is in compliance with the requirements of paragraphs (c)(2) and (3) of this section. (v) Example 5: Impermissible second application of the special rule for new hires to the same class of employees—(A) Facts. The facts are the same as in paragraph (f)(2)(iv) of this section (Example 4), except that for 2025, Plan Sponsor D discontinues use of the special rule for new hires by offering all full-time employees an HRA on the same terms. Further, for 2030, Plan Sponsor D wants to continue to offer an HRA on the same terms to all full-time employees hired before January 1, 2030, and to offer all full-time employees hired on or after January 1, 2030, an HRA in a different amount. (B) Conclusion. Plan Sponsor D may not apply the special rule for new hires for 2030 to the class of full-time employees being offered an HRA because the special rule for new hires may only be applied to a class that is being offered a traditional group health plan. (vi) Example 6: New full-time employees offered different HRAs in different rating areas—(A) Facts. Plan Sponsor E has work sites in rating area 1, rating area 2, and rating area 3. For 2021, Plan Sponsor E offers its full-time employees a traditional group health plan. For 2022, Plan Sponsor E offers E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations its full-time employees hired on or after January 1, 2022, in rating area 1 an HRA of $3,000, its full-time employees hired on or after January 1, 2022, in rating area 2 an HRA of $5,000, and its full-time employees hired on or after January 1, 2022, in rating area 3 an HRA of $7,000. Within each class offered an HRA, Plan Sponsor E offers the HRA on the same terms. Plan Sponsor E offers its fulltime employees hired prior to January 1, 2022, in each of those classes a traditional group health plan. On the first day of the 2022 plan year, there is one new hire, fulltime employee in rating area 1, three new hire, full-time employees in rating area 2, and 10 new hire-full-time employees in rating area 3. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(vi) (Example 6) because, under the special rule for new hires in paragraph (d)(5) of this section, the full-time employees in each of the three rating areas newly hired on and after January 1, 2022, may be treated as three new hire subclasses and Plan Sponsor E offers the HRA on the same terms to all participants in the new hire subclasses. Further, the minimum class size requirement does not apply to the new hire subclasses. (vii) Example 7: New full-time employee class subdivided based on rating area—(A) Facts. Plan Sponsor F offers its full-time employees hired on or after January 1, 2022, an HRA on the same terms and it continues to offer its full-time employees hired before that date a traditional group health plan. Plan Sponsor F offers no coverage to its part-time employees. For the 2025 plan year, Plan Sponsor F wants to subdivide the full-time new hire subclass so that those whose work site is in rating area 1 will be offered the traditional group health plan and those whose work site is in rating area 2 will continue to receive the HRA. Plan Sponsor F reasonably expects to employ 219 employees on January 1, 2025. As of January 1, 2025, Plan Sponsor F has 15 full-time employees whose work site in in rating area 2 and who were hired between January 1, 2022, and January 1, 2025. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(2)(vii) (Example 7) because the new hire subclass has been subdivided in a manner that is subject to the minimum class size requirement, and the class offered the HRA fails to satisfy the minimum class size requirement. Specifically, once the new hire subclass is subdivided the general rules for applying the minimum class size requirement apply to the employees offered the HRA in the new hire subclass. In this case, because the subdivision of the new hire full-time subclass is based on rating areas; a class based on rating areas is an applicable class subject to the minimum class size requirement; and the employees in one rating area are to be offered the HRA, while the employees in the other rating area are offered the traditional group health plan, the minimum class size requirement would apply on and after the date of the subdivision. Further, the minimum class size requirement would not be satisfied, because VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 the applicable class size minimum for Plan Sponsor F would be 20, and only 15 employees in rating area 2 would be offered the HRA. (viii) Example 8: New full-time employee class subdivided based on state—(A) Facts. The facts are the same as in paragraph (f)(2)(vii) of this section (Example 7), except that for the 2025 plan year, Plan Sponsor F intends to subdivide the new hire, full-time class so that those in State 1 will be offered the traditional group health plan and those in State 2 will each be offered an HRA on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(viii) (Example 8) because even though the new hire subclass has been subdivided, it has been subdivided in a manner that is not subject to the minimum class size requirement as the subdivision is based on the entire state. (ix) Example 9: New full-time employees and part-time employees offered HRA—(A) Facts. In 2021, Plan Sponsor G offers its fulltime employees a traditional group health plan and does not offer coverage to its parttime employees. For the 2022 plan year, Plan Sponsor G offers its full-time employees hired on or after January 1, 2022, and all of its part-time employees, including those hired before January 1, 2022, and those hired on and after January 1, 2022, an HRA on the same terms, and it continues to offer its fulltime employees hired before January 1, 2022, a traditional group health plan. (B) Conclusion. The minimum class size requirement applies to the part-time employees offered the HRA in 2022 because the class is being offered an HRA; the special rule for new hires does not apply (because this class was not previously offered a traditional group health plan) and so it is not a new hire subclass exempt from the minimum class size requirement; another class of employees (that is, full-time hired before January 1, 2022) are being offered a traditional group health plan; and the parttime employee class is generally an applicable classes that is subject to the minimum class size requirement. However, because the full-time, new hire subclass is based on the special rule for new hires, the minimum class size requirement does not apply to full-time new hires offered an HRA in 2022. (g) Applicability date. This section applies to plan years beginning on or after January 1, 2020. ■ 14. Section 2590.715–2711 is amended by revising paragraphs (c), (d), and (e) to read as follows: § 2590.715–2711 limits. No lifetime or annual * * * * * (c) Definition of essential health benefits. The term ‘‘essential health benefits’’ means essential health benefits under section 1302(b) of the Patient Protection and Affordable Care Act and applicable regulations. For the purpose of this section, a group health PO 00000 Frm 00125 Fmt 4701 Sfmt 4700 29011 plan or a health insurance issuer that is not required to provide essential health benefits under section 1302(b) must define ‘‘essential health benefits’’ in a manner that is consistent with the following: (1) For plan years beginning before January 1, 2020, one of the EHBbenchmark plans applicable in a State under 45 CFR 156.110, and including coverage of any additional required benefits that are considered essential health benefits consistent with 45 CFR 155.170(a)(2), or one of the three Federal Employees Health Benefits Program (FEHBP) plan options as defined by 45 CFR 156.100(a)(3), supplemented as necessary, to satisfy the standards in 45 CFR 156.110; or (2) For plan years beginning on or after January 1, 2020, an EHBbenchmark plan selected by a State in accordance with the available options and requirements for EHB-benchmark plan selection at 45 CFR 156.111, including an EHB-benchmark plan in a State that takes no action to change its EHB-benchmark plan and thus retains the EHB-benchmark plan applicable in that State for the prior year in accordance with 45 CFR 156.111(d)(1), and including coverage of any additional required benefits that are considered essential health benefits consistent with 45 CFR 155.170(a)(2). (d) Health reimbursement arrangements (HRAs) and other account-based group health plans—(1) In general. If an HRA or other accountbased group health plan is integrated with another group health plan or individual health insurance coverage and the other group health plan or individual health insurance coverage, as applicable, separately is subject to and satisfies the requirements in PHS Act section 2711 and paragraph (a)(2) of this section, the fact that the benefits under the HRA or other account-based group health plan are limited does not cause the HRA or other account-based group health plan to fail to satisfy the requirements of PHS Act section 2711 and paragraph (a)(2) of this section. Similarly, if an HRA or other accountbased group health plan is integrated with another group health plan or individual health insurance coverage and the other group health plan or individual health insurance coverage, as applicable, separately is subject to and satisfies the requirements in PHS Act section 2713 and § 2590.715–2713(a)(1) of this part, the fact that the benefits under the HRA or other account-based group health plan are limited does not cause the HRA or other account-based group health plan to fail to satisfy the requirements of PHS Act section 2713 E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 29012 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations and § 2590.715–2713(a)(1) of this part. For the purpose of this paragraph (d), all individual health insurance coverage, except for coverage that consists solely of excepted benefits, is treated as being subject to and complying with PHS Act sections 2711 and 2713. (2) Requirements for an HRA or other account-based group health plan to be integrated with another group health plan. An HRA or other account-based group health plan is integrated with another group health plan for purposes of PHS Act section 2711 and paragraph (a)(2) of this section if it satisfies the requirements under one of the integration methods set forth in paragraph (d)(2)(i) or (ii) of this section. For purposes of the integration methods under which an HRA or other accountbased group health plan is integrated with another group health plan, integration does not require that the HRA or other account-based group health plan and the other group health plan with which it is integrated share the same plan sponsor, the same plan document or governing instruments, or file a single Form 5500, if applicable. An HRA or other account-based group health plan integrated with another group health plan for purposes of PHS Act section 2711 and paragraph (a)(2) of this section may not be used to purchase individual health insurance coverage unless that coverage consists solely of excepted benefits, as defined in 45 CFR 148.220. (i) Method for integration with a group health plan: Minimum value not required. An HRA or other accountbased group health plan is integrated with another group health plan for purposes of this paragraph (d) if: (A) The plan sponsor offers a group health plan (other than the HRA or other account-based group health plan) to the employee that does not consist solely of excepted benefits; (B) The employee receiving the HRA or other account-based group health plan is actually enrolled in a group health plan (other than the HRA or other account-based group health plan) that does not consist solely of excepted benefits, regardless of whether the plan is offered by the same plan sponsor (referred to as non-HRA group coverage); (C) The HRA or other account-based group health plan is available only to employees who are enrolled in nonHRA group coverage, regardless of whether the non-HRA group coverage is offered by the plan sponsor of the HRA or other account-based group health plan (for example, the HRA may be offered only to employees who do not enroll in an employer’s group health VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 plan but are enrolled in other non-HRA group coverage, such as a group health plan maintained by the employer of the employee’s spouse); (D) The benefits under the HRA or other account-based group health plan are limited to reimbursement of one or more of the following—co-payments, coinsurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care expenses that do not constitute essential health benefits as defined in paragraph (c) of this section; and (E) Under the terms of the HRA or other account-based group health plan, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan at least annually and, upon termination of employment, either the remaining amounts in the HRA or other account-based group health plan are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan (see paragraph (d)(3) of this section for additional rules regarding forfeiture and waiver). (ii) Method for integration with another group health plan: Minimum value required. An HRA or other account-based group health plan is integrated with another group health plan for purposes of this paragraph (d) if: (A) The plan sponsor offers a group health plan (other than the HRA or other account-based group health plan) to the employee that provides minimum value pursuant to Code section 36B(c)(2)(C)(ii) (and its implementing regulations and applicable guidance); (B) The employee receiving the HRA or other account-based group health plan is actually enrolled in a group health plan (other than the HRA or other account-based group health plan) that provides minimum value pursuant to Code section 36B(c)(2)(C)(ii) (and applicable guidance), regardless of whether the plan is offered by the plan sponsor of the HRA or other accountbased group health plan (referred to as non-HRA MV group coverage); (C) The HRA or other account-based group health plan is available only to employees who are actually enrolled in non-HRA MV group coverage, regardless of whether the non-HRA MV group coverage is offered by the plan sponsor of the HRA or other account-based group health plan (for example, the HRA may be offered only to employees who do not enroll in an employer’s group health plan but are enrolled in other non-HRA MV group coverage, PO 00000 Frm 00126 Fmt 4701 Sfmt 4700 such as a group health plan maintained by an employer of the employee’s spouse); and (D) Under the terms of the HRA or other account-based group health plan, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan at least annually, and, upon termination of employment, either the remaining amounts in the HRA or other account-based group health plan are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan (see paragraph (d)(3) of this section for additional rules regarding forfeiture and waiver). (3) Forfeiture. For purposes of integration under paragraphs (d)(2)(i)(E) and (d)(2)(ii)(D) of this section, forfeiture or waiver occurs even if the forfeited or waived amounts may be reinstated upon a fixed date, a participant’s death, or the earlier of the two events (the reinstatement event). For the purpose of this paragraph (d)(3), coverage under an HRA or other account-based group health plan is considered forfeited or waived prior to a reinstatement event only if the participant’s election to forfeit or waive is irrevocable, meaning that, beginning on the effective date of the election and through the date of the reinstatement event, the participant and the participant’s beneficiaries have no access to amounts credited to the HRA or other account-based group health plan. This means that upon and after reinstatement, the reinstated amounts under the HRA or other account-based group health plan may not be used to reimburse or pay medical care expenses incurred during the period after forfeiture and prior to reinstatement. (4) Requirements for an HRA or other account-based group health plan to be integrated with individual health insurance coverage or Medicare Part A and B or Medicare Part C. An HRA or other account-based group health plan is integrated with individual health insurance coverage or Medicare Part A and B or Medicare Part C (and treated as complying with PHS Act sections 2711 and 2713) if the HRA or other account-based group health plan satisfies the requirements of § 2590.702– 2(c) of this part (as modified by § 2590.702–2(e), for HRAs or other account-based group health plans integrated with Medicare Part A and B or Medicare Part C). (5) Integration with Medicare Part B and D. For employers that are not required to offer their non-HRA group E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations health plan coverage to employees who are Medicare beneficiaries, an HRA or other account-based group health plan that may be used to reimburse premiums under Medicare Part B or D may be integrated with Medicare (and deemed to comply with PHS Act sections 2711 and 2713) if the following requirements are satisfied with respect to employees who would be eligible for the employer’s non-HRA group health plan but for their eligibility for Medicare (and the integration rules under paragraphs (d)(2)(i) and (ii) of this section continue to apply to employees who are not eligible for Medicare): (i) The plan sponsor offers a group health plan (other than the HRA or other account-based group health plan and that does not consist solely of excepted benefits) to employees who are not eligible for Medicare; (ii) The employee receiving the HRA or other account-based group health plan is actually enrolled in Medicare Part B or D; (iii) The HRA or other account-based group health plan is available only to employees who are enrolled in Medicare Part B or D; and (iv) The HRA or other account-based group health plan complies with paragraphs (d)(2)(i)(E) and (d)(2)(ii)(D) of this section. (6) Definitions. The following definitions apply for purposes of this section. (i) Account-based group health plan. An account-based group health plan is an employer-provided group health plan that provides reimbursements of medical care expenses with the reimbursement subject to a maximum fixed dollar amount for a period. An HRA is a type of account-based group health plan. An account-based group health plan does not include a qualified small employer health reimbursement arrangement, as defined in Code section 9831(d)(2). (ii) Medical care expenses. Medical care expenses means expenses for medical care as defined under Code section 213(d). (e) Applicability date. The provisions of this section are applicable to group health plans and health insurance issuers for plan years beginning on or after January 1, 2020. Until the applicability date for this section, plans and issuers are required to continue to comply with the corresponding sections of this part, contained in the 29 CFR parts 1927 to end edition, revised as of July 1, 2018. ■ 15. Section 2590.732 is amended by revising paragraph (c)(3)(i) and adding paragraph (c)(3)(viii) to read as follows: VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 § 2590.732 Special rules relating to group health plans. * * * * * (c) * * * (3) * * * (i) In general. Limited-scope dental benefits, limited-scope vision benefits, or long-term care benefits are excepted if they are provided under a separate policy, certificate, or contract of insurance, or are otherwise not an integral part of a group health plan as described in paragraph (c)(3)(ii) of this section. In addition, benefits provided under a health flexible spending arrangement (health FSA) are excepted benefits if they satisfy the requirements of paragraph (c)(3)(v) of this section; benefits provided under an employee assistance program are excepted benefits if they satisfy the requirements of paragraph (c)(3)(vi) of this section; benefits provided under limited wraparound coverage are excepted benefits if they satisfy the requirements of paragraph (c)(3)(vii) of this section; and benefits provided under a health reimbursement arrangement or other account-based group health plan, other than a health FSA, are excepted benefits if they satisfy the requirements of paragraph (c)(3)(viii) of this section. * * * * * (viii) Health reimbursement arrangements (HRAs) and other account-based group health plans. Benefits provided under an HRA or other account-based group health plan, other than a health FSA, are excepted if they satisfy all of the requirements of this paragraph (c)(3)(viii). See paragraph (c)(3)(v) of this section for the circumstances in which benefits provided under a health FSA are excepted benefits. For purposes of this paragraph (c)(3)(viii), the term ‘‘HRA or other account-based group health plan’’ has the same meaning as ‘‘accountbased group health plan’’ set forth in § 2590.715–2711(d)(6)(i) of this part, except that the term does not include health FSAs. For ease of reference, an HRA or other account-based group health plan that satisfies the requirements of this paragraph (c)(3)(viii) is referred to as an excepted benefit HRA. (A) Otherwise not an integral part of the plan. Other group health plan coverage that is not limited to excepted benefits and that is not an HRA or other account-based group health plan must be made available by the same plan sponsor for the plan year to the participant. (B) Benefits are limited in amount— (1) Limit on annual amounts made available. The amounts newly made PO 00000 Frm 00127 Fmt 4701 Sfmt 4700 29013 available for each plan year under the HRA or other account-based group health plan do not exceed $1,800. In the case of any plan year beginning after December 31, 2020, the dollar amount in the preceding sentence shall be increased by an amount equal to such dollar amount multiplied by the cost-ofliving adjustment. The cost of living adjustment is the percentage (if any) by which the C–CPI–U for the preceding calendar year exceeds the C–CPI–U for calendar year 2019. The term ‘‘C–CPI– U’’ means the Chained Consumer Price Index for All Urban Consumers as published by the Bureau of Labor Statistics of the Department of Labor. The C–CPI–U for any calendar year is the average of the C–CPI–U as of the close of the 12-month period ending on March 31 of such calendar year. The values of the C–CPI–U used for any calendar year shall be the latest values so published as of the date on which the Bureau publishes the initial value of the C–CPI–U for the month of March for the preceding calendar year. Any such increase that is not a multiple of $50 shall be rounded down to the next lowest multiple of $50. The Department of the Treasury and the Internal Revenue Service will publish the adjusted amount for plan years beginning in any calendar year no later than June 1 of the preceding calendar year. (2) Carryover amounts. If the terms of the HRA or other account-based group health plan allow unused amounts to be made available to participants and dependents in later plan years, such carryover amounts are disregarded for purposes of determining whether benefits are limited in amount. (3) Multiple HRAs or other accountbased group health plans. If the plan sponsor provides more than one HRA or other account-based group health plan to the participant for the same time period, the amounts made available under all such plans are aggregated to determine whether the benefits are limited in amount, except that HRAs or other account-based group health plans that reimburse only excepted benefits are not included in determining whether the benefits are limited in amount. (C) Prohibition on reimbursement of certain health insurance premiums. The HRA or other account-based group health plan must not reimburse premiums for individual health insurance coverage, group health plan coverage (other than COBRA continuation coverage or other continuation coverage), or Medicare Part A, B, C, or D, except that the HRA or other account-based group health plan E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 29014 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations may reimburse premiums for such coverage that consists solely of excepted benefits. See also, paragraph (c)(3)(viii)(F) of this section. (D) Uniform availability. The HRA or other account-based group health plan is made available under the same terms to all similarly situated individuals, as defined in § 2590.702(d) of this part, regardless of any health factor (as described in § 2590.702(a)). (E) Notice requirement. See sections 2520.102–3(j)(2) and (3) and 2520.104b– 2(a) of this chapter regarding the time, manner, and content for summary plan descriptions (including a description of conditions pertaining to eligibility to receive benefits; annual or lifetime caps or other limits on benefits under the plan; and a description or summary of the benefits). (F) Special rule. The HRA or other account-based group health plan must not reimburse premiums for short-term, limited-duration insurance (as defined in § 2590.701–2 of this part) if the conditions of this paragraph (c)(3)(viii)(F) are satisfied. (1) The HRA or other account-based group health plan is offered by a small employer (as defined in PHS Act section 2791(e)(4)). (2) The other group health plan coverage offered by the employer pursuant to paragraph (c)(3)(viii)(A) of this section is either fully-insured or partially-insured. (3) The Secretary of Health and Human Services (HHS) makes a finding, in consultation with the Secretaries of Labor and the Treasury, that the reimbursement of premiums for shortterm, limited-duration insurance by excepted benefit HRAs has caused significant harm to the small group market in the state that is the principal place of business of the small employer. (4) The finding by the Secretary of HHS is made after submission of a written recommendation by the applicable state authority of such state, in a form and manner specified by HHS. The written recommendation must include evidence that the reimbursement of premiums for shortterm, limited-duration insurance by excepted benefit HRAs established by insured or partially-insured small employers in the state has caused significant harm to the state’s small group market, including with respect to premiums. (5) The restriction shall be imposed or discontinued by publication by the Secretary of HHS of a notice in the Federal Register and shall apply only prospectively and with a reasonable time for plan sponsors to comply. * * * * * VerDate Sep<11>2014 19:46 Jun 19, 2019 Jkt 247001 DEPARTMENT OF HEALTH AND HUMAN SERVICES 45 CFR Chapter 1 For the reasons stated in the preamble, the Department of Health and Human Services amends 45 CFR parts 144, 146, 147, and 155 as set forth below: PART 144—REQUIREMENTS RELATING TO HEALTH INSURANCE COVERAGE 16. The authority for part 144 is revised to read as follows: ■ Authority: 42 U.S.C. 300gg through 300gg– 63, 300gg–91, and 300gg–92. 17. Section 144.103 is amended by revising the definition of ‘‘Group health insurance coverage’’ to read as follows: ■ § 144.103 Definitions. * * * * * Group health insurance coverage means health insurance coverage offered in connection with a group health plan. Individual health insurance coverage reimbursed by the arrangements described in 29 CFR 2510.3–1(l) is not offered in connection with a group health plan, and is not group health insurance coverage, provided all the conditions in 29 CFR 2510.3–1(l) are satisfied. * * * * * PART 146—REQUIREMENTS FOR THE GROUP HEALTH INSURANCE MARKET 18. The authority citation for part 146 continues to read as follows: Authority: 42 U.S.C. 300gg–1 through 300gg–5, 300gg–11 through 300gg–23, 300gg– 91, and 300gg–92. 19. Section 146.123 is added to read as follows: ■ § 146.123 Special rule allowing integration of Health Reimbursement Arrangements (HRAs) and other account-based group health plans with individual health insurance coverage and medicare and prohibiting discrimination in HRAs and other account-based group health plans. (a) Scope. This section applies to health reimbursement arrangements (HRAs) and other account-based group health plans, as defined in § 147.126(d)(6)(i) of this subchapter. For ease of reference, the term ‘‘HRA’’ is used in this section to include other account-based group health plans. For related regulations, see 26 CFR 1.36B– 2(c)(3)(i) and (c)(5), 29 CFR 2510.3–1(l), and 45 CFR 155.420. (b) Purpose. This section provides the conditions that an HRA must satisfy in order to be integrated with individual PO 00000 Frm 00128 Fmt 4701 Sfmt 4700 health insurance coverage for purposes of Public Health Service Act (PHS Act) sections 2711 and 2713 and § 147.126(d)(4) of this subchapter (referred to as an individual coverage HRA). This section also allows an individual coverage HRA to be integrated with Medicare for purposes of PHS Act sections 2711 and 2713 and § 147.126(d)(4) of this subchapter, subject to the conditions provided in this section (see paragraph (e) of this section). Some of the conditions set forth in this section specifically relate to compliance with PHS Act sections 2711 and 2713 and some relate to the effect of having or being offered an individual coverage HRA on eligibility for the premium tax credit under section 36B of the Internal Revenue Code (Code). In addition, this section provides conditions that an individual coverage HRA must satisfy in order to comply with the nondiscrimination provisions in PHS Act section 2705 and that are consistent with the provisions of the Patient Protection and Affordable Care Act, Public Law 111–148 (124 Stat. 119 (2010)), and the Health Care and Education Reconciliation Act of 2010, Public Law 111–152 (124 Stat. 1029 (2010)), each as amended, that are designed to create a competitive individual market. These conditions are intended to prevent an HRA plan sponsor from intentionally or unintentionally, directly or indirectly, steering any participants or dependents with adverse health factors away from its traditional group health plan, if any, and toward individual health insurance coverage. (c) General rule. An HRA will be considered to be integrated with individual health insurance coverage for purposes of PHS Act sections 2711 and 2713 and § 147.126(d)(4) of this subchapter and will not be considered to discriminate in violation of PHS Act section 2705 solely because it is integrated with individual health insurance coverage, provided that the conditions of this paragraph (c) are satisfied. See paragraph (e) of this section for how these conditions apply to an individual coverage HRA integrated with Medicare. For purposes of this section, medical care expenses means medical care expenses as defined in § 147.126(d)(6)(ii) of this subchapter and Exchange means Exchange as defined in § 155.20 of this subchapter. (1) Enrollment in individual health insurance coverage—(i) In general. The HRA must require that the participant and any dependent(s) are enrolled in individual health insurance coverage that is subject to and complies with the requirements in PHS Act sections 2711 E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations (and § 147.126(a)(2) of this subchapter) and PHS Act section 2713 (and § 147.130(a)(1) of this subchapter), for each month that the individual(s) are covered by the HRA. For purposes of this paragraph (c), all individual health insurance coverage, except for individual health insurance coverage that consists solely of excepted benefits, is treated as being subject to and complying with PHS Act sections 2711 and 2713. References to individual health insurance coverage in this paragraph (c) do not include individual health insurance coverage that consists solely of excepted benefits. (ii) Forfeiture. The HRA must provide that if any individual covered by the HRA ceases to be covered by individual health insurance coverage, the HRA will not reimburse medical care expenses that are incurred by that individual after the individual health insurance coverage ceases. In addition, if the participant and all dependents covered by the participant’s HRA cease to be covered by individual health insurance coverage, the participant must forfeit the HRA. In either case, the HRA must reimburse medical care expenses incurred by the individual prior to the cessation of individual health insurance coverage to the extent the medical care expenses are otherwise covered by the HRA, but the HRA may limit the period to submit medical care expenses for reimbursement to a reasonable specified time period. If a participant or dependent loses coverage under the HRA for a reason other than cessation of individual health insurance coverage, COBRA and other continuation coverage requirements may apply. (iii) Grace periods and retroactive termination of individual health insurance coverage. In the event an individual is initially enrolled in individual health insurance coverage and subsequently timely fails to pay premiums for the coverage, with the result that the individual is in a grace period, the individual is considered to be enrolled in individual health insurance coverage for purposes of this paragraph (c)(1) and the individual coverage HRA must reimburse medical care expenses incurred by the individual during that time period to the extent the medical care expenses are otherwise covered by the HRA. If the individual fails to pay the applicable premium(s) by the end of the grace period and the coverage is cancelled or terminated, including retroactively, or if the individual health insurance coverage is cancelled or terminated retroactively for some other reason (for example, a rescission), an individual coverage HRA must require that a VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 participant notify the HRA that coverage has been cancelled or terminated and the date on which the cancellation or termination is effective. After the individual coverage HRA has received the notice of cancellation or termination, the HRA may not reimburse medical care expenses incurred on and after the date the individual health insurance coverage was cancelled or terminated, which is considered to be the date of termination of coverage under the HRA. (2) No traditional group health plan may be offered to same participants. To the extent a plan sponsor offers any class of employees (as defined in paragraph (d) of this section) an individual coverage HRA, the plan sponsor may not also offer a traditional group health plan to the same class of employees, except as provided in paragraph (d)(5) of this section. For purposes of this section, a traditional group health plan is any group health plan other than either an account-based group health plan or a group health plan that consists solely of excepted benefits. Therefore, a plan sponsor may not offer a choice between an individual coverage HRA or a traditional group health plan to any participant or dependent. (3) Same terms requirement—(i) In general. If a plan sponsor offers an individual coverage HRA to a class of employees described in paragraph (d) of this section, the HRA must be offered on the same terms to all participants within the class, except as provided in paragraphs (c)(3)(ii) through (vi) and (d)(5) of this section. (ii) Carryover amounts, salary reduction arrangements, and transfer amounts. Amounts that are not used to reimburse medical care expenses for any plan year that are made available to participants in later plan years are disregarded for purposes of determining whether an HRA is offered on the same terms, provided that the method for determining whether participants have access to unused amounts in future years, and the methodology and formula for determining the amounts of unused funds which they may access in future years, is the same for all participants in a class of employees. In addition, the ability to pay the portion of the premium for individual health insurance coverage that is not covered by the HRA, if any, by using a salary reduction arrangement under section 125 of the Code is considered to be a term of the HRA for purposes of this paragraph (c)(3). Therefore, an HRA is not provided on the same terms unless the salary reduction arrangement, if made available to any participant in a class of employees, is made available on PO 00000 Frm 00129 Fmt 4701 Sfmt 4700 29015 the same terms to all participants (other than former employees, as defined in paragraph (c)(3)(iv) of this section) in the class of employees. Further, to the extent that a participant in an individual coverage HRA was previously covered by another HRA and the current individual coverage HRA makes available amounts that were not used to reimburse medical care expenses under the prior HRA (transferred amounts), the transferred amounts are disregarded for purposes of determining whether the HRA is offered on the same terms, provided that if the HRA makes available transferred amounts, it does so on the same terms for all participants in the class of employees. (iii) Permitted variation. An HRA does not fail to be provided on the same terms solely because the maximum dollar amount made available to participants in a class of employees to reimburse medical care expenses for any plan year increases in accordance with paragraph (c)(3)(iii)(A) or (B) of this section. (A) Variation due to number of dependents. An HRA does not fail to be provided on the same terms to participants in a class of employees solely because the maximum dollar amount made available to those participants to reimburse medical care expenses for any plan year increases as the number of the participant’s dependents who are covered under the HRA increases, so long as the same maximum dollar amount attributable to the increase in family size is made available to all participants in that class of employees with the same number of dependents covered by the HRA. (B) Variation due to age. An HRA does not fail to be provided on the same terms to participants in a class of employees solely because the maximum dollar amount made available under the terms of the HRA to those participants to reimburse medical care expenses for any plan year increases as the age of the participant increases, so long as the requirements in paragraphs (c)(3)(iii)(B)(1) and (2) of this section are satisfied. For the purpose of this paragraph (c)(3)(iii)(B), the plan sponsor may determine the age of the participant using any reasonable method for a plan year, so long as the plan sponsor determines each participant’s age for the purpose of this paragraph (c)(3)(iii)(B) using the same method for all participants in the class of employees for the plan year and the method is determined prior to the plan year. (1) The same maximum dollar amount attributable to the increase in age is E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 29016 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations made available to all participants who are the same age. (2) The maximum dollar amount made available to the oldest participant(s) is not more than three times the maximum dollar amount made available to the youngest participant(s). (iv) Former employees. An HRA does not fail to be treated as provided on the same terms if the plan sponsor offers the HRA to some, but not all, former employees within a class of employees. However, if a plan sponsor offers the HRA to one or more former employees within a class of employees, the HRA must be offered to the former employee(s) on the same terms as to all other employees within the class, except as provided in paragraph (c)(3)(ii) of this section. For purposes of this section, a former employee is an employee who is no longer performing services for the employer. (v) New employees or new dependents. For a participant whose coverage under the HRA becomes effective later than the first day of the plan year, the HRA does not fail to be treated as being provided on the same terms to the participant if the maximum dollar amount made available to the participant either is the same as the maximum dollar amount made available to participants in the participant’s class of employees whose coverage became effective as of the first day of the plan year, or is pro-rated consistent with the portion of the plan year in which the participant is covered by the HRA. Similarly, if the HRA provides for variation in the maximum amount made available to participants in a class of employees based on the number of a participant’s dependents covered by the HRA, and the number of a participant’s dependents covered by the HRA changes during a plan year (either increasing or decreasing), the HRA does not fail to be treated as being provided on the same terms to the participant if the maximum dollar amount made available to the participant either is the same as the maximum dollar amount made available to participants in the participant’s class of employees who had the same number of dependents covered by the HRA on the first day of the plan year or is pro-rated for the remainder of the plan year after the change in the number of the participant’s dependents covered by the HRA consistent with the portion of the plan year in which that number of dependents are covered by the HRA. The method the HRA uses to determine amounts made available for participants whose coverage under the HRA is effective later than the first day of the VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 plan year or who have changes in the number of dependents covered by the HRA during a plan year must be the same for all participants in the class of employees and the method must be determined prior to the beginning of the plan year. (vi) HSA-compatible HRAs. An HRA does not fail to be treated as provided on the same terms if the plan sponsor offers participants in a class of employees a choice between an HSAcompatible individual coverage HRA and an individual coverage HRA that is not HSA compatible, provided both types of HRAs are offered to all participants in the class of employees on the same terms. For the purpose of this paragraph (c)(3)(vi), an HSAcompatible individual coverage HRA is an individual coverage HRA that is limited in accordance with applicable guidance under section 223 of the Code such that an individual covered by such an HRA is not disqualified from being an eligible individual under section 223 of the Code. (vii) Examples. The following examples illustrate the provisions of this paragraph (c)(3), without taking into account the provisions of paragraph (d) of this section. In each example, the HRA is an individual coverage HRA that has a calendar year plan year and may reimburse any medical care expenses, including premiums for individual health insurance coverage (except as provided in paragraph (c)(3)(vii)(E) of this section (Example 5)). Further, in each example, assume the HRA is offered on the same terms, except as otherwise specified in the example and that no participants or dependents are Medicare beneficiaries. (A) Example 1: Carryover amounts permitted—(1) Facts. For 2020 and again for 2021, Plan Sponsor A offers all employees $7,000 each in an HRA, and the HRA provides that amounts that are unused at the end of a plan year may be carried over to the next plan year, with no restrictions on the use of the carryover amounts compared to the use of newly available amounts. At the end of 2020, some employees have used all of the funds in their HRAs, while other employees have balances remaining that range from $500 to $1,750 that are carried over to 2021 for those employees. (2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(A) (Example 1) for 2020 because Plan Sponsor A offers all employees the same amount, $7,000, in an HRA for that year. The same terms requirement is also satisfied for 2021 because Plan Sponsor A again offers all employees the same amount for that year, and the carryover amounts that some employees have are disregarded in applying the same terms requirement because the amount of the carryover for each employee PO 00000 Frm 00130 Fmt 4701 Sfmt 4700 (that employee’s balance) and each employee’s access to the carryover amounts is based on the same terms. (B) Example 2: Employees hired after the first day of the plan year—(1) Facts. For 2020, Plan Sponsor B offers all employees employed on January 1, 2020, $7,000 each in an HRA for the plan year. Employees hired after January 1, 2020, are eligible to enroll in the HRA with an effective date of the first day of the month following their date of hire, as long as they have enrolled in individual health insurance coverage effective on or before that date, and the amount offered to these employees is pro-rated based on the number of months remaining in the plan year, including the month which includes their coverage effective date. (2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(B) (Example 2) for 2020 because Plan Sponsor B offers all employees employed on the first day of the plan year the same amount, $7,000, in an HRA for that plan year and all employees hired after January 1, 2020, a prorata amount based on the portion of the plan year during which they are enrolled in the HRA. (C) Example 3: HRA amounts offered vary based on number of dependents—(1) Facts. For 2020, Plan Sponsor C offers its employees the following amounts in an HRA: $1,500, if the employee is the only individual covered by the HRA; $3,500, if the employee and one dependent are covered by the HRA; and $5,000, if the employee and more than one dependent are covered by the HRA. (2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(C) (Example 3) because paragraph (c)(3)(iii)(A) of this section allows the maximum dollar amount made available in an HRA to increase as the number of the participant’s dependents covered by the HRA increases and Plan Sponsor C makes the same amount available to each employee with the same number of dependents covered by the HRA. (D) Example 4: HRA amounts offered vary based on increases in employees’ ages—(1) Facts. For 2020, Plan Sponsor D offers its employees the following amounts in an HRA: $1,000 each for employees age 25 to 35; $2,000 each for employees age 36 to 45; $2,500 each for employees age 46 to 55; and $4,000 each for employees over age 55. (2) Conclusion. The same terms requirement of this paragraph (c)(3) is not satisfied in this paragraph (c)(3)(vii)(D) (Example 4) because the terms of the HRA provide the oldest participants (those over age 55) with more than three times the amount made available to the youngest participants (those ages 25 to 35), in violation of paragraph (c)(3)(iii)(B)(2) of this section. (E) Example 5: Application of same terms requirement to premium only HRA—(1) Facts. For 2020, Plan Sponsor E offers its employees an HRA that reimburses only premiums for individual health insurance coverage, up to $10,000 for the year. Employee A enrolls in individual health insurance coverage with a $5,000 premium for the year and is reimbursed $5,000 from the HRA. Employee B enrolls in individual E:\FR\FM\20JNR2.SGM 20JNR2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 health insurance coverage with an $8,000 premium for the year and is reimbursed $8,000 from the HRA. Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(E) (Example 5) because Plan Sponsor E offers the HRA on the same terms to all employees, notwithstanding that some employees receive a greater amount of reimbursement than others based on the cost of the individual health insurance coverage selected by the employee. (4) Opt out. Under the terms of the HRA, a participant who is otherwise eligible for coverage must be permitted to opt out of and waive future reimbursements on behalf of the participant and all dependents eligible for the HRA from the HRA once, and only once, with respect to each plan year. The HRA may establish timeframes for enrollment in (and opting out of) the HRA but, in general, the opportunity to opt out must be provided in advance of the first day of the plan year. For participants who become eligible to participate in the HRA on a date other than the first day of the plan year (or who become eligible fewer than 90 days prior to the plan year or for whom the notice under paragraph (c)(6) of this section is required to be provided as set forth in paragraph (c)(6)(i)(C) of this section), or for a dependent who newly becomes eligible during the plan year, this opportunity must be provided during the applicable HRA enrollment period(s) established by the HRA for these individuals. Further, under the terms of the HRA, upon termination of employment, for a participant who is covered by the HRA, either the remaining amounts in the HRA must be forfeited or the participant must be permitted to permanently opt out of and waive future reimbursements from the HRA on behalf of the participant and all dependents covered by the HRA. (5) Reasonable procedures for coverage substantiation—(i) Substantiation of individual health insurance coverage for the plan year. The HRA must implement, and comply with, reasonable procedures to substantiate that participants and each dependent covered by the HRA are, or will be, enrolled in individual health insurance coverage for the plan year (or for the portion of the plan year the individual is covered by the HRA, if applicable). The HRA may establish the date by which this substantiation must be provided, but, in general, the date may be no later than the first day of the plan year. However, for a participant who is not eligible to participate in the HRA on the first day of the plan year (or who becomes eligible fewer than 90 VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 days prior to the plan year or for whom the notice under paragraph (c)(6) of this section is required to be provided as set forth in paragraph (c)(6)(i)(C) of this section), the HRA may establish the date by which this substantiation must be provided, but that date may be no later than the date the HRA coverage begins. Similarly, for a participant who adds a new dependent during the plan year, the HRA may establish the date by which this substantiation must be provided, but the date may be no later than the date the HRA coverage for the new dependent begins; however, to the extent the dependent’s coverage under the HRA is effective retroactively, the HRA may establish a reasonable time by which this substantiation is required, but must require it be provided before the HRA will reimburse any medical care expense for the newly added dependent. The reasonable procedures an HRA may use to implement the substantiation requirement set forth in this paragraph (c)(5)(i) may include a requirement that a participant substantiate enrollment by providing either: (A) A document from a third party (for example, the issuer or an Exchange) showing that the participant and any dependents covered by the HRA are, or will be, enrolled in individual health insurance coverage (for example, an insurance card or an explanation of benefits document pertaining to the relevant time period or documentation from the Exchange showing that the individual has completed the application and plan selection); or (B) An attestation by the participant stating that the participant and dependent(s) covered by the HRA are, or will be, enrolled in individual health insurance coverage, the date coverage began or will begin, and the name of the provider of the coverage. (ii) Coverage substantiation with each request for reimbursement of medical care expenses. Following the initial substantiation of coverage, with each new request for reimbursement of an incurred medical care expense for the same plan year, the HRA may not reimburse a participant for any medical care expenses unless, prior to each reimbursement, the participant substantiates that the individual on whose behalf medical care expenses are requested to be reimbursed continues to be enrolled in individual health insurance coverage for the month during which the medical care expenses were incurred. The HRA must implement, and comply with, reasonable procedures to satisfy this requirement. This substantiation may be in the form of a written attestation by the participant, PO 00000 Frm 00131 Fmt 4701 Sfmt 4700 29017 which may be part of the form used to request reimbursement, or a document from a third party (for example, a health insurance issuer) showing that the participant or the dependent, if applicable, are or were enrolled in individual health insurance coverage for the applicable month. (iii) Reliance on substantiation. For purposes of this paragraph (c)(5), an HRA may rely on the participant’s documentation or attestation unless the HRA, its plan sponsor, or any other entity acting in an official capacity on behalf of the HRA has actual knowledge that any individual covered by the HRA is not, or will not be, enrolled in individual health insurance coverage for the plan year (or applicable portion of the plan year) or the month, as applicable. (6) Notice requirement—(i) Timing. The HRA must provide a written notice to each participant: (A) At least 90 calendar days before the beginning of each plan year for any participant who is not described in either paragraph (c)(6)(i)(B) or (C) of this section; (B) No later than the date on which the HRA may first take effect for the participant, for any participant who is not eligible to participate at the beginning of the plan year (or is not eligible to participate at the time the notice is provided at least 90 calendar days before the beginning of the plan year pursuant to paragraph (c)(6)(i)(A) of this section); or (C) No later than the date on which the HRA may first take effect for the participant, for any participant who is employed by an employer that is first established less than 120 days before the beginning of the first plan year of the HRA; this paragraph (c)(6)(i)(C) applies only with respect to the first plan year of the HRA. (ii) Content. The notice must include all the information described in this paragraph (c)(6)(ii) (and may include any additional information that does not conflict with that information). To the extent that the Departments of the Treasury, Labor and Health and Human Services provide model notice language for certain elements of this required notice, HRAs are permitted, but not required, to use the model language. (A) A description of the terms of the HRA, including the maximum dollar amount available for each participant (including the self-only HRA amount available for the plan year (or the maximum dollar amount available for the plan year if the HRA provides for reimbursements up to a single dollar amount regardless of whether a participant has self-only or other than E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 29018 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations self-only coverage)), any rules regarding the proration of the maximum dollar amount applicable to any participant (or dependent, if applicable) who is not eligible to participate in the HRA for the entire plan year, whether (and which of) the participant’s dependents are eligible for the HRA, a statement that there are different kinds of HRAs (including a qualified small employer health reimbursement arrangement) and the HRA being offered is an individual coverage HRA, a statement that the HRA requires the participant and any covered dependents to be enrolled in individual health insurance coverage (or Medicare Part A and B or Medicare Part C, if applicable), a statement that the coverage in which the participant and any covered dependents must be enrolled cannot be short-term, limitedduration insurance or consist solely of excepted benefits, if the HRA is subject to the Employee Retirement Income Security Act (ERISA), a statement that individual health insurance coverage in which the participant and any covered dependents are enrolled is not subject to ERISA, if the conditions under 29 CFR 2510.3–1(l) are satisfied, the date as of which coverage under the HRA may first become effective (both for participants whose coverage will become effective on the first day of the plan year and for participants whose HRA coverage may become effective at a later date), the dates on which the HRA plan year begins and ends, and the dates on which the amounts newly made available under the HRA will be made available. (B) A statement of the right of the participant to opt out of and waive future reimbursements from the HRA, as set forth under paragraph (c)(4) of this section. (C) A description of the potential availability of the premium tax credit if the participant opts out of and waives future reimbursements from the HRA and the HRA is not affordable for one or more months under 26 CFR 1.36B– 2(c)(5), a statement that even if the participant opts out of and waives future reimbursements from an HRA, the offer will prohibit the participant (and, potentially, the participant’s dependents) from receiving a premium tax credit for the participant’s coverage (or the dependent’s coverage, if applicable) on an Exchange for any month that the HRA is affordable under 26 CFR 1.36B–2(c)(5), a statement describing how the participant may find assistance with determining affordability, a statement that, if the participant is a former employee, the offer of the HRA does not render the participant (or the participant’s VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 dependents, if applicable) ineligible for the premium tax credit regardless of whether it is affordable under 26 CFR 1.36B–2(c)(5), and a statement that if the participant or dependent is enrolled in Medicare, he or she is ineligible for the premium tax credit without regard to the offer or acceptance of the HRA; (D) A statement that if the participant accepts the HRA, the participant may not claim a premium tax credit for the participant’s Exchange coverage for any month the HRA may be used to reimburse medical care expenses of the participant, and a premium tax credit may not be claimed for the Exchange coverage of the participant’s dependents for any month the HRA may be used to reimburse medical care expenses of the dependents. (E) A statement that the participant must inform any Exchange to which the participant applies for advance payments of the premium tax credit of the availability of the HRA; the self-only HRA amount available for the HRA plan year (or the maximum dollar amount available for the plan year if the HRA provides for reimbursements up to a single dollar amount regardless of whether a participant has self-only or other than self-only coverage) as set forth in the written notice in accordance with paragraph (c)(6)(ii)(A) of this section; whether the HRA is also available to the participant’s dependents and if so, which ones; the date as of which coverage under the HRA may first become effective; the date on which the plan year begins and the date on which it ends; and whether the participant is a current employee or former employee. (F) A statement that the participant should retain the written notice because it may be needed to determine whether the participant is allowed a premium tax credit on the participant’s individual income tax return. (G) A statement that the HRA may not reimburse any medical care expense unless the substantiation requirement set forth in paragraph (c)(5)(ii) of this section is satisfied and a statement that the participant must also provide the substantiation required by paragraph (c)(5)(i) of this section. (H) A statement that if the individual health insurance coverage (or coverage under Medicare Part A and B or Medicare Part C) of a participant or dependent ceases, the HRA will not reimburse any medical care expenses that are incurred by the participant or dependent, as applicable, after the coverage ceases, and a statement that the participant must inform the HRA if the participant’s or dependent’s individual health insurance coverage (or PO 00000 Frm 00132 Fmt 4701 Sfmt 4700 coverage under Medicare Part A and B or Medicare Part C) is cancelled or terminated retroactively and the date on which the cancellation or termination is effective. (I) The contact information (including a phone number) for an individual or a group of individuals who participants may contact in order to receive additional information regarding the HRA. The plan sponsor may determine which individual or group of individuals is best suited to be the specified contact. (J) A statement of availability of a special enrollment period to enroll in or change individual health insurance coverage, through or outside of an Exchange, for the participant and any dependents who newly gain access to the HRA and are not already covered by the HRA. (d) Classes of employees—(1) In general. This paragraph (d) sets forth the rules for determining classes of employees. Paragraph (d)(2) of this section sets forth the specific classes of employees; paragraph (d)(3) of this section sets forth a minimum class size requirement that applies in certain circumstances; paragraph (d)(4) of this section sets forth rules regarding the definition of ‘‘full-time employees,’’ ‘‘part-time employees,’’ and ‘‘seasonal employees’’; paragraph (d)(5) of this section sets forth a special rule for new hires; and paragraph (d)(6) of this section addresses student premium reduction arrangements. For purposes of this section, including determining classes under this paragraph (d), the employer is the common law employer and is determined without regard to the rules under sections 414(b), (c), (m), and (o) of the Code that would treat the common law employer as a single employer with certain other entities. (2) List of classes. Participants may be treated as belonging to a class of employees based on whether they are, or are not, included in the classes described in this paragraph (d)(2). If the individual coverage HRA is offered to former employees, former employees are considered to be in the same class in which they were included immediately before separation from service. Before each plan year, a plan sponsor must determine for the plan year which classes of employees it intends to treat separately and the definition of the relevant class(es) it will apply, to the extent these regulations permit a choice. After the classes and the definitions of the classes are established for a plan year, a plan sponsor may not make changes to the classes of employees or the definitions of those relevant classes with respect to that plan year. E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations (i) Full-time employees, defined at the election of the plan sponsor to mean either full-time employees under section 4980H of the Code (and 26 CFR 54.4980H–1(a)(21)) or employees who are not part-time employees (as described in 26 CFR 1.105– 11(c)(2)(iii)(C)); (ii) Part-time employees, defined at the election of the plan sponsor to mean either employees who are not full-time employees under section 4980H of the Code (and under 26 CFR 54.4980H– 1(a)(21) (which defines full-time employee)) or employees who are parttime employees as described in 26 CFR 1.105–11(c)(2)(iii)(C); (iii) Employees who are paid on a salary basis; (iv) Non-salaried employees (such as, for example, hourly employees); (v) Employees whose primary site of employment is in the same rating area as defined in § 147.102(b) of this subchapter; (vi) Seasonal employees, defined at the election of the plan sponsor to mean seasonal employees as described in either 26 CFR 54.4980H–1(a)(38) or 26 CFR 1.105–11(c)(2)(iii)(C); (vii) Employees included in a unit of employees covered by a particular collective bargaining agreement (or an appropriate related participation agreement) in which the plan sponsor participates (as described in 26 CFR 1.105–11(c)(2)(iii)(D)); (viii) Employees who have not satisfied a waiting period for coverage (if the waiting period complies with § 147.116 of this subchapter); (ix) Non-resident aliens with no U.S.based income (as described in 26 CFR 1.105–11(c)(2)(iii)(E)); (x) Employees who, under all the facts and circumstances, are employees of an entity that hired the employees for temporary placement at an entity that is not the common law employer of the employees and that is not treated as a single employer with the entity that hired the employees for temporary placement under section 414(b), (c), (m), or (o) of the Code; or (xi) A group of participants described as a combination of two or more of the classes of employees set forth in paragraphs (d)(2)(i) through (x) of this section. (3) Minimum class size requirement— (i) In general. If a class of employees is subject to the minimum class size requirement as set forth in this paragraph (d)(3), the class must consist of at least a minimum number of employees (as described in paragraphs (d)(3)(iii) and (iv) of this section), otherwise, the plan sponsor may not treat that class as a separate class of VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 employees. Paragraph (d)(3)(ii) of this section sets forth the circumstances in which the minimum class size requirement applies to a class of employees, paragraph (d)(3)(iii) of this section sets forth the rules for determining the applicable class size minimum, and paragraph (d)(3)(iv) of this section sets forth the rules for a plan sponsor to determine if it satisfies the minimum class size requirement with respect to a class of employees. (ii) Circumstances in which minimum class size requirement applies—(A) The minimum class size requirement applies only if a plan sponsor offers a traditional group health plan to one or more classes of employees and offers an individual coverage HRA to one or more other classes of employees. (B) The minimum class size requirement does not apply to a class of employees offered a traditional group health plan or a class of employees offered no coverage. (C) The minimum class size requirement applies to a class of employees offered an individual coverage HRA if the class is full-time employees, part-time employees, salaried employees, non-salaried employees, or employees whose primary site of employment is in the same rating area (described in paragraph (d)(2)(i), (ii), (iii), (iv), or (v) of this section, respectively, and referred to collectively as the applicable classes or individually as an applicable class), except that: (1) In the case of the class of employees whose primary site of employment is in the same rating area (as described in paragraph (d)(2)(v) of this section), the minimum class size requirement does not apply if the geographic area defining the class is a State or a combination of two or more entire States; and (2) In the case of the classes of employees that are full-time employees and part-time employees (as described in paragraphs (d)(2)(i) and (ii) of this section, respectively), the minimum class size requirement applies only to those classes (and the classes are only applicable classes) if the employees in one such class are offered a traditional group health plan while the employees in the other such class are offered an individual coverage HRA. In such a case, the minimum class size requirement applies only to the class offered an individual coverage HRA. (D) A class of employees offered an individual coverage HRA is also subject to the minimum class size requirement if the class is a class of employees created by combining at least one of the applicable classes (as defined in PO 00000 Frm 00133 Fmt 4701 Sfmt 4700 29019 paragraph (d)(3)(ii)(C) of this section) with any other class, except that the minimum class size requirement shall not apply to a class that is the result of a combination of one of the applicable classes and a class of employees who have not satisfied a waiting period (as described in paragraph (d)(2)(viii) of this section). (iii) Determination of the applicable class size minimum—(A) In general. The minimum number of employees that must be in a class of employees that is subject to the minimum class size requirement (the applicable class size minimum) is determined prior to the beginning of the plan year for each plan year of the individual coverage HRA and is: (1) 10, for an employer with fewer than 100 employees; (2) A number, rounded down to a whole number, equal to 10 percent of the total number of employees, for an employer with 100 to 200 employees; and (3) 20, for an employer with more than 200 employees. (B) Determining employer size. For purposes of this paragraph (d)(3), the number of employees of an employer is determined in advance of the plan year of the HRA based on the number of employees that the employer reasonably expects to employ on the first day of the plan year. (iv) Determining if a class satisfies the applicable class size minimum. For purposes of this paragraph (d)(3), whether a class of employees satisfies the applicable class size minimum for a plan year of the individual coverage HRA is based on the number of employees in the class offered the individual coverage HRA as of the first day of the plan year. Therefore, this determination is not based on the number of employees that actually enroll in the individual coverage HRA, and this determination is not affected by changes in the number of employees in the class during the plan year. (4) Consistency requirement. For any plan year, a plan sponsor may define ‘‘full-time employee,’’ ‘‘part-time employee,’’ and ‘‘seasonal employee’’ in accordance with the relevant provisions of sections 105(h) or 4980H of the Code, as set forth in paragraphs (d)(2)(i), (ii), and (vi) of this section, if: (i) To the extent applicable under the HRA for the plan year, each of the three classes of employees are defined in accordance with section 105(h) of the Code or each of the three classes of employees are defined in accordance with section 4980H of the Code for the plan year; and E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 29020 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations (ii) The HRA plan document sets forth the applicable definitions prior to the beginning of the plan year to which the definitions will apply. (5) Special rule for new hires—(i) In general. Notwithstanding paragraphs (c)(2) and (3) of this section, a plan sponsor that offers a traditional group health plan to a class of employees may prospectively offer the employees in that class of employees who are hired on or after a certain future date (the new hire date) an individual coverage HRA (with this group of employees referred to as the new hire subclass), while continuing to offer employees in that class of employees who are hired before the new hire date a traditional group health plan (with the rule set forth in this sentence referred to as the special rule for new hires). For the new hire subclass, the individual coverage HRA must be offered on the same terms to all participants within the subclass, in accordance with paragraph (c)(3) of this section. In accordance with paragraph (c)(2) of this section, a plan sponsor may not offer a choice between an individual coverage HRA or a traditional group health plan to any employee in the new hire subclass or to any employee in the class who is not a member of the new hire subclass. (ii) New hire date. A plan sponsor may set the new hire date for a class of employees prospectively as any date on or after January 1, 2020. A plan sponsor may set different new hire dates prospectively for separate classes of employees. (iii) Discontinuation of use of special rule for new hires and multiple applications of the special rule for new hires. A plan sponsor may discontinue use of the special rule for new hires at any time for any class of employees. In that case, the new hire subclass is no longer treated as a separate subclass of employees. In the event a plan sponsor applies the special rule for new hires to a class of employees and later discontinues use of the rule to the class of employees, the plan sponsor may later apply the rule if the application of the rule would be permitted under the rules for initial application of the special rule for new hires. If a plan sponsor, in accordance with the requirements for the special rule for new hires, applies the rule to a class of employees subsequent to any prior application and discontinuance of the rule to that class, the new hire date must be prospective. (iv) Application of the minimum class size requirement under the special rule for new hires. The minimum class size requirement set forth in paragraph (d)(3) of this section does not apply to the new VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 hire subclass. However, if a plan sponsor subdivides the new hire subclass subsequent to creating the new hire subclass, the minimum class size requirement set forth in paragraph (d)(3) of this section applies to any class of employees created by subdividing the new hire subclass, if the minimum class size requirement otherwise applies. (6) Student employees offered student premium reduction arrangements. For purposes of this section, if an institution of higher education (as defined in the Higher Education Act of 1965) offers a student employee a student premium reduction arrangement, the employee is not considered to be part of the class of employees to which the employee would otherwise belong. For the purpose of this paragraph (d)(6) and paragraph (f)(1) of this section, a student premium reduction arrangement is defined as any program offered by an institution of higher education under which the cost of insured or self-insured student health coverage is reduced for certain students through a credit, offset, reimbursement, stipend or similar arrangement. A student employee offered a student premium reduction arrangement is also not counted for purposes of determining the applicable class size minimum under paragraph (d)(3)(iii) of this section. If a student employee is not offered a student premium reduction arrangement (including if the student employee is offered an individual coverage HRA instead), the student employee is considered to be part of the class of employees to which the employee otherwise belongs and is counted for purposes of determining the applicable class size minimum under paragraph (d)(3)(iii) of this section. (e) Integration of Individual Coverage HRAs with Medicare—(1) General rule. An individual coverage HRA will be considered to be integrated with Medicare (and deemed to comply with PHS Act sections 2711 and 2713 and § 147.126(d)(4) of this subchapter), provided that the conditions of paragraph (c) of this section are satisfied, subject to paragraph (e)(2) of this section. Nothing in this section requires that a participant and his or her dependents all have the same type of coverage; therefore, an individual coverage HRA may be integrated with Medicare for some individuals and with individual health insurance coverage for others, including, for example, a participant enrolled in Medicare Part A and B or Part C and his or her dependents enrolled in individual health insurance coverage. (2) Application of conditions in paragraph (c) of this section—(i) In PO 00000 Frm 00134 Fmt 4701 Sfmt 4700 general. Except as provided in paragraph (e)(2)(ii) of this section, in applying the conditions of paragraph (c) of this section with respect to integration with Medicare, a reference to ‘‘individual health insurance coverage’’ is deemed to refer to coverage under Medicare Part A and B or Part C. References in this section to integration of an HRA with Medicare refer to integration of an individual coverage HRA with Medicare Part A and B or Part C. (ii) Exceptions. For purposes of the statement regarding ERISA under the notice content element under paragraph (c)(6)(ii)(A) of this section and the statement regarding the availability of a special enrollment period under the notice content element under paragraph (c)(6)(ii)(J) of this section, the term individual health insurance coverage means only individual health insurance coverage and does not also mean coverage under Medicare Part A and B or Part C. (f) Examples—(1) Examples regarding classes and the minimum class size requirement. The following examples illustrate the provisions of paragraph (c)(3) of this section, taking into account the provisions of paragraphs (d)(1) through (4) and (d)(6) of this section. In each example, the HRA is an individual coverage HRA that may reimburse any medical care expenses, including premiums for individual health insurance coverage and it is assumed that no participants or dependents are Medicare beneficiaries. (i) Example 1: Collectively bargained employees offered traditional group health plan; non-collectively bargained employees offered HRA—(A) Facts. For 2020, Plan Sponsor A offers its employees covered by a collective bargaining agreement a traditional group health plan (as required by the collective bargaining agreement) and all other employees (non-collectively bargained employees) each an HRA on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(i) (Example 1) because collectively bargained and non-collectively bargained employees may be treated as different classes of employees, one of which may be offered a traditional group health plan and the other of which may be offered an individual coverage HRA, and Plan Sponsor A offers the HRA on the same terms to all participants who are non-collectively bargained employees. The minimum class size requirement does not apply to this paragraph (f)(1)(i) (Example 1) even though Plan Sponsor A offers one class a traditional group health plan and one class the HRA because collectively bargained and non-collectively bargained employees are not applicable classes that are subject to the minimum class size requirement. (ii) Example 2: Collectively bargained employees in one unit offered traditional E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations group health plan and in another unit offered HRA—(A) Facts. For 2020, Plan Sponsor B offers its employees covered by a collective bargaining agreement with Local 100 a traditional group health plan (as required by the collective bargaining agreement), and its employees covered by a collective bargaining agreement with Local 200 each an HRA on the same terms (as required by the collective bargaining agreement). (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(ii) (Example 2) because the employees covered by the collective bargaining agreements with the two separate bargaining units (Local 100 and Local 200) may be treated as two different classes of employees and Plan Sponsor B offers an HRA on the same terms to the participants covered by the agreement with Local 200. The minimum class size requirement does not apply to this paragraph (f)(1)(ii) (Example 2) even though Plan Sponsor B offers the Local 100 employees a traditional group health plan and the Local 200 employees an HRA because collectively bargained employees are not applicable classes that are subject to the minimum class size requirement. (iii) Example 3: Employees in a waiting period offered no coverage; other employees offered an HRA—(A) Facts. For 2020, Plan Sponsor C offers its employees who have completed a waiting period that complies with the requirements for waiting periods in § 147.116 of this subchapter each an HRA on the same terms and does not offer coverage to its employees who have not completed the waiting period. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(iii) (Example 3) because employees who have completed a waiting period and employees who have not completed a waiting period may be treated as different classes and Plan Sponsor C offers the HRA on the same terms to all participants who have completed the waiting period. The minimum class size requirement does not apply to this paragraph (f)(1)(iii) (Example 3) because Plan Sponsor C does not offer at least one class of employees a traditional group health plan and because the class of employees who have not completed a waiting period and the class of employees who have completed a waiting period are not applicable classes that are subject to the minimum class size requirement. (iv) Example 4: Employees in a waiting period offered an HRA; other employees offered a traditional group health plan—(A) Facts. For 2020, Plan Sponsor D offers its employees who have completed a waiting period that complies with the requirements for waiting periods in § 147.116 of this subchapter a traditional group health plan and offers its employees who have not completed the waiting period each an HRA on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(iv) (Example 4) because employees who have completed a waiting period and employees who have not completed a waiting period VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 may be treated as different classes and Plan Sponsor D offers an HRA on the same terms to all participants who have not completed the waiting period. The minimum class size requirement does not apply to this paragraph (f)(1)(iv) (Example 4) even though Plan Sponsor D offers employees who have completed a waiting period a traditional group health plan and employees who have not completed a waiting period an HRA because the class of employees who have not completed a waiting period is not an applicable class that is subject to the minimum class size requirement (nor is the class made up of employees who have completed the waiting period). (v) Example 5: Staffing firm employees temporarily placed with customers offered an HRA; other employees offered a traditional group health plan—(A) Facts. Plan Sponsor E is a staffing firm that places certain of its employees on temporary assignments with customers that are not the common law employers of Plan Sponsor E’s employees or treated as a single employer with Plan Sponsor E under section 414(b), (c), (m), or (o) of the Code (unrelated entities); other employees work in Plan Sponsor E’s office managing the staffing business (nontemporary employees). For 2020, Plan Sponsor E offers its employees who are on temporary assignments with customers each an HRA on the same terms. All other employees are offered a traditional group health plan. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(v) (Example 5) because the employees who are hired for temporary placement at an unrelated entity and non-temporary employees of Plan Sponsor E may be treated as different classes of employees and Plan Sponsor E offers an HRA on the same terms to all participants temporarily placed with customers. The minimum class size requirement does not apply to this paragraph (f)(1)(v) (Example 5) even though Plan Sponsor E offers one class a traditional group health plan and one class the HRA because the class of employees hired for temporary placement is not an applicable class that is subject to the minimum class size requirement (nor is the class made up of nontemporary employees). (vi) Example 6: Staffing firm employees temporarily placed with customers in rating area 1 offered an HRA; other employees offered a traditional group health plan—(A) Facts. The facts are the same as in paragraph (f)(1)(v) of this section (Example 5), except that Plan Sponsor E has work sites in rating area 1 and rating area 2, and it offers its 10 employees on temporary assignments with a work site in rating area 1 an HRA on the same terms. Plan Sponsor E has 200 other employees in rating areas 1 and 2, including its non-temporary employees in rating areas 1 and 2 and its employees on temporary assignments with a work site in rating area 2, all of whom are offered a traditional group health plan. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(vi) (Example 6) because, even though PO 00000 Frm 00135 Fmt 4701 Sfmt 4700 29021 the employees who are temporarily placed with customers generally may be treated as employees of a different class, because Plan Sponsor E is also using a rating area to identify the class offered the HRA (which is an applicable class for the minimum class size requirement) and is offering one class the HRA and another class the traditional group health plan, the minimum class size requirement applies to the class offered the HRA, and the class offered the HRA fails to satisfy the minimum class size requirement. Because Plan Sponsor E employs 210 employees, the applicable class size minimum is 20, and the HRA is offered to only 10 employees. (vii) Example 7: Employees in State 1 offered traditional group health plan; employees in State 2 offered HRA—(A) Facts. Plan Sponsor F employs 45 employees whose work site is in State 1 and 7 employees whose primary site of employment is in State 2. For 2020, Plan Sponsor F offers its 45 employees in State 1 a traditional group health plan, and each of its 7 employees in State 2 an HRA on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(vii) (Example 7) because Plan Sponsor F offers the HRA on the same terms to all employees with a work site in State 2 and that class is a permissible class under paragraph (d) of this section. This is because employees whose work sites are in different rating areas may be considered different classes and a plan sponsor may create a class of employees by combining classes of employees, including by combining employees whose work site is in one rating area with employees whose work site is in a different rating area, or by combining all employees whose work site is in a state. The minimum class size requirement does not apply to this paragraph (f)(1)(vii) (Example 7) because the minimum class size requirement does not apply if the geographic area defining a class of employees is a state or a combination of two or more entire states. (viii) Example 8: Full-time seasonal employees offered HRA; all other full-time employees offered traditional group health plan; part-time employees offered no coverage—(A) Facts. Plan Sponsor G employs 6 full-time seasonal employees, 75 full-time employees who are not seasonal employees, and 5 part-time employees. For 2020, Plan Sponsor G offers each of its 6 full-time seasonal employees an HRA on the same terms, its 75 full-time employees who are not seasonal employees a traditional group health plan, and offers no coverage to its 5 part-time employees. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(viii) (Example 8) because full-time seasonal employees and full-time employees who are not seasonal employees may be considered different classes and Plan Sponsor G offers the HRA on the same terms to all full-time seasonal employees. The minimum class size requirement does not apply to the class offered the HRA in this paragraph (f)(1)(viii) (Example 8) because part-time employees are not offered coverage E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 29022 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations and full-time employees are not an applicable class subject to the minimum class size requirement if part-time employees are not offered coverage. (ix) Example 9: Full-time employees in rating area 1 offered traditional group health plan; full-time employees in rating area 2 offered HRA; part-time employees offered no coverage—(A) Facts. Plan Sponsor H employs 17 full-time employees and 10 parttime employees whose work site is in rating area 1 and 552 full-time employees whose work site is in rating area 2. For 2020, Plan Sponsor H offers its 17 full-time employees in rating area 1 a traditional group health plan and each of its 552 full-time employees in rating area 2 an HRA on the same terms. Plan Sponsor H offers no coverage to its 10 part-time employees in rating area 1. Plan Sponsor H reasonably expects to employ 569 employees on the first day of the HRA plan year. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(ix) (Example 9) because employees whose work sites are in different rating areas may be considered different classes and Plan Sponsor H offers the HRA on the same terms to all full-time employees in rating area 2. The minimum class size requirement applies to the class offered the HRA in this paragraph (f)(1)(ix) (Example 9) because the minimum class size requirement applies to a class based on a geographic area unless the geographic area is a state or a combination of two or more entire states. However, the minimum class size requirement applies only to the class offered the HRA, and Plan Sponsor H offers the HRA to the 552 full-time employees in rating area 2 on the first day of the plan year, satisfying the minimum class size requirement (because the applicable class size minimum for Plan Sponsor H is 20). (x) Example 10: Employees in rating area 1 offered HRA; employees in rating area 2 offered traditional group health plan—(A) Facts. The facts are the same as in paragraph (f)(1)(ix) of this section (Example 9) except that Plan Sponsor H offers its 17 full-time employees in rating area 1 the HRA and offers its 552 full-time employees in rating area 2 the traditional group health plan. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(x) (Example 10) because, even though employees whose work sites are in different rating areas generally may be considered different classes and Plan Sponsor H offers the HRA on the same terms to all participants in rating area 1, the HRA fails to satisfy the minimum class size requirement. Specifically, the minimum class size requirement applies to this paragraph (f)(1)(x) (Example 10) because the minimum class size requirement applies to a class based on a geographic area unless the geographic area is a state or a combination of two or more entire states. Further, the applicable class size minimum for Plan Sponsor H is 20 employees, and the HRA is only offered to the 17 full-time employees in rating area 1 on the first day of the HRA plan year. (xi) Example 11: Employees in State 1 and rating area 1 of State 2 offered HRA; VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 employees in all other rating areas of State 2 offered traditional group health plan—(A) Facts. For 2020, Plan Sponsor I offers an HRA on the same terms to a total of 200 employees it employs with work sites in State 1 and in rating area 1 of State 2. Plan Sponsor I offers a traditional group health plan to its 150 employees with work sites in other rating areas in State 2. Plan Sponsor I reasonably expects to employ 350 employees on the first day of the HRA plan year. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xi) (Example 11). Plan Sponsor I may treat all of the employees with a work site in State 1 and rating area 1 of State 2 as a class of employees because employees whose work sites are in different rating areas may be considered different classes and a plan sponsor may create a class of employees by combining classes of employees, including by combining employees whose work site is in one rating area with a class of employees whose work site is in a different rating area. The minimum class size requirement applies to the class of employees offered the HRA (made up of employees in State 1 and in rating area 1 of State 2) because the minimum class size requirement applies to a class based on a geographic area unless the geographic area is a state or a combination of two or more entire states. In this case, the class is made up of a state plus a rating area which is not the entire state. However, this class satisfies the minimum class size requirement because the applicable class size minimum for Plan Sponsor I is 20, and Plan Sponsor I offered the HRA to 200 employees on the first day of the plan year. (xii) Example 12: Salaried employees offered a traditional group health plan; hourly employees offered an HRA—(A) Facts. Plan Sponsor J has 163 salaried employees and 14 hourly employees. For 2020, Plan Sponsor J offers its 163 salaried employees a traditional group health plan and each of its 14 hourly employees an HRA on the same terms. Plan Sponsor J reasonably expects to employ 177 employees on the first day of the HRA plan year. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(xii) (Example 12) because, even though salaried and hourly employees generally may be considered different classes and Plan Sponsor J offers the HRA on the same terms to all hourly employees, the HRA fails to satisfy the minimum class size requirement. Specifically, the minimum class size requirement applies in this paragraph (f)(1)(xii) (Example 12) because employees who are paid on a salaried basis and employees who are not paid on a salaried basis are applicable classes subject to the minimum class size requirement. Because Plan Sponsor J reasonably expects to employ between 100 and 200 employees on the first day of the plan year, the applicable class size minimum is 10 percent, rounded down to a whole number. Ten percent of 177 total employees, rounded down to a whole number is 17, and the HRA is offered to only 14 hourly employees. (xiii) Example 13: Part-time employees and full-time employees offered different HRAs; PO 00000 Frm 00136 Fmt 4701 Sfmt 4700 no traditional group health plan offered—(A) Facts. Plan Sponsor K has 50 full-time employees and 7 part-time employees. For 2020, Plan Sponsor K offers its 50 full-time employees $2,000 each in an HRA otherwise provided on the same terms and each of its 7 part-time employees $500 in an HRA otherwise provided on the same terms. Plan Sponsor K reasonably expects to employ 57 employees on the first day of the HRA plan year. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xiii) (Example 13) because full-time employees and part-time employees may be treated as different classes and Plan Sponsor K offers an HRA on the same terms to all the participants in each class. The minimum class size requirement does not apply to either the full-time class or the part-time class because (although in certain circumstances the minimum class size requirement applies to a class of full-time employees and a class of part-time employees) Plan Sponsor K does not offer any class of employees a traditional group health plan, and the minimum class size requirement applies only when, among other things, at least one class of employees is offered a traditional group health plan while another class is offered an HRA. (xiv) Example 14: No employees offered an HRA—(A) Facts. The facts are the same facts as in paragraph (f)(1)(xiii) of this section (Example 13), except that Plan Sponsor K offers its full-time employees a traditional group health plan and does not offer any group health plan (either a traditional group health plan or an HRA) to its part-time employees. (B) Conclusion. The regulations set forth under this section do not apply to Plan Sponsor K because Plan Sponsor K does not offer an individual coverage HRA to any employee. (xv) Example 15: Full-time employees offered traditional group health plan; parttime employees offered HRA—(A) Facts. The facts are the same as in paragraph (f)(1)(xiii) of this section (Example 13), except that Plan Sponsor K offers its full-time employees a traditional group health plan and offers each of its part-time employees $500 in an HRA and otherwise on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(xv) (Example 15) because, even though the full-time employees and the part-time employees generally may be treated as different classes, in this paragraph (f)(1)(xv) (Example 15), the minimum class size requirement applies to the part-time employees, and it is not satisfied. Specifically, the minimum class size requirement applies to the part-time employees because that requirement applies to an applicable class offered an HRA when one class is offered a traditional group health plan while another class is offered an HRA, and to the part-time and full-time employee classes when one of those classes is offered a traditional group health plan while the other is offered an HRA. Because Plan Sponsor K reasonably expects to employ E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations fewer than 100 employees on the first day of the HRA plan year, the applicable class size minimum for Plan Sponsor K is 10 employees, but Plan Sponsor K offered the HRA only to its 7 part-time employees. (xvi) Example 16: Satisfying minimum class size requirement based on employees offered HRA—(A) Facts. Plan Sponsor L employs 78 full-time employees and 12 parttime employees. For 2020, Plan Sponsor L offers its 78 full-time employees a traditional group health plan and each of its 12 parttimes employees an HRA on the same terms. Only 6 part-time employees enroll in the HRA. Plan Sponsor L reasonably expects to employ fewer than 100 employees on the first day of the HRA plan year. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xvi) (Example 16) because full-time employees and part-time employees may be treated as different classes, Plan Sponsor L offers an HRA on the same terms to all the participants in the part-time class, and the minimum class size requirement is satisfied. Specifically, whether a class of employees satisfies the applicable class size minimum is determined as of the first day of the plan year based on the number of employees in a class that is offered an HRA, not on the number of employees who enroll in the HRA. The applicable class size minimum for Plan Sponsor L is 10 employees, and Plan Sponsor L offered the HRA to its 12 part-time employees. (xvii) Example 17: Student employees offered student premium reduction arrangements and same terms requirement— (A) Facts. Plan Sponsor M is an institution of higher education that offers each of its part-time employees an HRA on the same terms, except that it offers its part-time employees who are student employees a student premium reduction arrangement, and the student premium reduction arrangement provides different amounts to different parttime student employees. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xvii) (Example 17) because Plan Sponsor M offers the HRA on the same terms to its part-time employees who are not students and because the part-time student employees offered a student premium reduction arrangement (and their varying HRAs) are not taken into account as part-time employees for purposes of determining whether a class of employees is offered an HRA on the same terms. (xiii) Example 18: Student employees offered student premium reduction arrangements and minimum class size requirement—(A) Facts. Plan Sponsor N is an institution of higher education with 25 hourly employees. Plan Sponsor N offers 15 of its hourly employees, who are student employees, a student premium reduction arrangement and it wants to offer its other 10 hourly employees an HRA for 2022. Plan Sponsor N offers its salaried employees a traditional group health plan. Plan Sponsor N reasonably expects to have 250 employees on the first day of the 2022 HRA plan year, 15 of which will have offers of student premium reduction arrangements. VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(xviii) (Example 18). The minimum class size requirement will apply to the class of hourly employees to which Plan Sponsor N wants to offer the HRA because Plan Sponsor N offers a class of employees a traditional group health plan and another class the HRA, and the minimum class size requirement generally applies to a class of hourly employees offered an HRA. Plan Sponsor N’s applicable class size minimum is 20 because Plan Sponsor N reasonably expects to employ 235 employees on the first day of the plan year (250 employees minus 15 employees receiving a student premium reduction arrangement). Plan Sponsor N may not offer the HRA to its hourly employees because the 10 employees offered the HRA as of the first day of the plan year does not satisfy the applicable class size minimum. (2) Examples regarding special rule for new hires. The following examples illustrate the provisions of paragraph (c)(3) of this section, taking into account the provisions of paragraph (d) of this section, in particular the special rule for new hires under paragraph (d)(5) of this section. In each example, the HRA is an individual coverage HRA that has a calendar year plan year and may reimburse any medical care expenses, including premiums for individual health insurance coverage. The examples also assume that no participants or dependents are Medicare beneficiaries. (i) Example 1: Application of special rule for new hires to all employees—(A) Facts. For 2021, Plan Sponsor A offers all employees a traditional group health plan. For 2022, Plan Sponsor A offers all employees hired on or after January 1, 2022, an HRA on the same terms and continues to offer the traditional group health plan to employees hired before that date. On the first day of the 2022 plan year, Plan Sponsor A has 2 new hires who are offered the HRA. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(i) (Example 1) because, under the special rule for new hires in paragraph (d)(5) of this section, the employees newly hired on and after January 1, 2022, may be treated as a new hire subclass, Plan Sponsor A offers the HRA on the same terms to all participants in the new hire subclass, and the minimum class size requirement does not apply to the new hire subclass. (ii) Example 2: Application of special rule for new hires to full-time employees—(A) Facts. For 2021, Plan Sponsor B offers a traditional group health plan to its full-time employees and does not offer any coverage to its part-time employees. For 2022, Plan Sponsor B offers full-time employees hired on or after January 1, 2022, an HRA on the same terms, continues to offer its full-time employees hired before that date a traditional group health plan, and continues to offer no coverage to its part-time employees. On the first day of the 2022 plan year, Plan Sponsor PO 00000 Frm 00137 Fmt 4701 Sfmt 4700 29023 B has 2 new hire, full-time employees who are offered the HRA. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(ii) (Example 2) because, under the special rule for new hires in paragraph (d)(5) of this section, the full-time employees newly hired on and after January 1, 2022, may be treated as a new hire subclass and Plan Sponsor B offers the HRA on the same terms to all participants in the new hire subclass. The minimum class size requirement does not apply to the new hire subclass. (iii) Example 3: Special rule for new hires impermissibly applied retroactively—(A) Facts. For 2025, Plan Sponsor C offers a traditional group health plan to its full-time employees. For 2026, Plan Sponsor C wants to offer an HRA to its full-time employees hired on and after January 1, 2023, while continuing to offer a traditional group health plan to its full-time employees hired before January 1, 2023. (B) Conclusion. The special rule for new hires under paragraph (d)(5) of this section does not apply in this paragraph (f)(2)(iii) (Example 3) because the rule must be applied prospectively. That is, Plan Sponsor C may not, in 2026, choose to apply the special rule for new hires retroactive to 2023. If Plan Sponsor C were to offer an HRA in this way, it would fail to satisfy the conditions under paragraphs (c)(2) and (3) of this section because the new hire subclass would not be treated as a subclass for purposes of applying those rules and, therefore, all full-time employees would be treated as one class to which either a traditional group health plan or an HRA could be offered, but not both. (iv) Example 4: Permissible second application of the special rule for new hires to the same class of employees—(A) Facts. For 2021, Plan Sponsor D offers all of its fulltime employees a traditional group health plan. For 2022, Plan Sponsor D applies the special rule for new hires and offers an HRA on the same terms to all employees hired on and after January 1, 2022, and continues to offer a traditional group health plan to fulltime employees hired before that date. For 2025, Plan Sponsor D discontinues use of the special rule for new hires, and again offers all full-time employees a traditional group health plan. In 2030, Plan Sponsor D decides to apply the special rule for new hires to the full-time employee class again, offering an HRA to all full-time employees hired on and after January 1, 2030, on the same terms, while continuing to offer employees hired before that date a traditional group health plan. (B) Conclusion. Plan Sponsor D has permissibly applied the special rule for new hires and is in compliance with the requirements of paragraphs (c)(2) and (3) of this section. (v) Example 5: Impermissible second application of the special rule for new hires to the same class of employees—(A) Facts. The facts are the same as in paragraph (f)(2)(iv) of this section (Example 4), except that for 2025, Plan Sponsor D discontinues use of the special rule for new hires by offering all full-time employees an HRA on the same terms. Further, for 2030, Plan E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 29024 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations Sponsor D wants to continue to offer an HRA on the same terms to all full-time employees hired before January 1, 2030, and to offer all full-time employees hired on or after January 1, 2030, an HRA in a different amount. (B) Conclusion. Plan Sponsor D may not apply the special rule for new hires for 2030 to the class of full-time employees being offered an HRA because the special rule for new hires may only be applied to a class that is being offered a traditional group health plan. (vi) Example 6: New full-time employees offered different HRAs in different rating areas—(A) Facts. Plan Sponsor E has work sites in rating area 1, rating area 2, and rating area 3. For 2021, Plan Sponsor E offers its full-time employees a traditional group health plan. For 2022, Plan Sponsor E offers its full-time employees hired on or after January 1, 2022, in rating area 1 an HRA of $3,000, its full-time employees hired on or after January 1, 2022, in rating area 2 an HRA of $5,000, and its full-time employees hired on or after January 1, 2022, in rating area 3 an HRA of $7,000. Within each class offered an HRA, Plan Sponsor E offers the HRA on the same terms. Plan Sponsor E offers its fulltime employees hired prior to January 1, 2022, in each of those classes a traditional group health plan. On the first day of the 2022 plan year, there is one new hire, fulltime employee in rating area 1, three new hire, full-time employees in rating area 2, and 10 new hire-full-time employees in rating area 3. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(vi) (Example 6) because, under the special rule for new hires in paragraph (d)(5) of this section, the full-time employees in each of the three rating areas newly hired on and after January 1, 2022, may be treated as three new hire subclasses and Plan Sponsor E offers the HRA on the same terms to all participants in the new hire subclasses. Further, the minimum class size requirement does not apply to the new hire subclasses. (vii) Example 7: New full-time employee class subdivided based on rating area—(A) Facts. Plan Sponsor F offers its full-time employees hired on or after January 1, 2022, an HRA on the same terms and it continues to offer its full-time employees hired before that date a traditional group health plan. Plan Sponsor F offers no coverage to its part-time employees. For the 2025 plan year, Plan Sponsor F wants to subdivide the full-time new hire subclass so that those whose work site is in rating area 1 will be offered the traditional group health plan and those whose work site is in rating area 2 will continue to receive the HRA. Plan Sponsor F reasonably expects to employ 219 employees on January 1, 2025. As of January 1, 2025, Plan Sponsor F has 15 full-time employees whose work site in in rating area 2 and who were hired between January 1, 2022, and January 1, 2025. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(2)(vii) (Example 7) because the new hire subclass has been subdivided in a manner that is subject to the minimum class size VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 requirement, and the class offered the HRA fails to satisfy the minimum class size requirement. Specifically, once the new hire subclass is subdivided the general rules for applying the minimum class size requirement apply to the employees offered the HRA in the new hire subclass. In this case, because the subdivision of the new hire full-time subclass is based on rating areas; a class based on rating areas is an applicable class subject to the minimum class size requirement; and the employees in one rating area are to be offered the HRA, while the employees in the other rating area are offered the traditional group health plan, the minimum class size requirement would apply on and after the date of the subdivision. Further, the minimum class size requirement would not be satisfied, because the applicable class size minimum for Plan Sponsor F would be 20, and only 15 employees in rating area 2 would be offered the HRA. (viii) Example 8: New full-time employee class subdivided based on state—(A) Facts. The facts are the same as in paragraph (f)(2)(vii) of this section (Example 7), except that for the 2025 plan year, Plan Sponsor F intends to subdivide the new hire, full-time class so that those in State 1 will be offered the traditional group health plan and those in State 2 will each be offered an HRA on the same terms. (B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(viii) (Example 8) because even though the new hire subclass has been subdivided, it has been subdivided in a manner that is not subject to the minimum class size requirement as the subdivision is based on the entire state. (ix) Example 9: New full-time employees and part-time employees offered HRA—(A) Facts. In 2021, Plan Sponsor G offers its fulltime employees a traditional group health plan and does not offer coverage to its parttime employees. For the 2022 plan year, Plan Sponsor G offers its full-time employees hired on or after January 1, 2022, and all of its part-time employees, including those hired before January 1, 2022, and those hired on and after January 1, 2022, an HRA on the same terms, and it continues to offer its fulltime employees hired before January 1, 2022, a traditional group health plan. (B) Conclusion. The minimum class size requirement applies to the part-time employees offered the HRA in 2022 because the class is being offered an HRA; the special rule for new hires does not apply (because this class was not previously offered a traditional group health plan) and so it is not a new hire subclass exempt from the minimum class size requirement; another class of employees (that is, full-time hired before January 1, 2022) are being offered a traditional group health plan; and the parttime employee class is generally an applicable classes that is subject to the minimum class size requirement. However, because the full-time, new hire subclass is based on the special rule for new hires, the minimum class size requirement does not apply to full-time new hires offered an HRA in 2022. PO 00000 Frm 00138 Fmt 4701 Sfmt 4700 (g) Applicability date. This section applies to plan years beginning on or after January 1, 2020. ■ 20. Section 146.145 is amended by revising paragraph (b)(3)(i) and adding paragraph (b)(3)(viii) to read as follows: § 146.145 Special rules relating to group health plans. * * * * * (b) * * * (3) * * * (i) In general. Limited-scope dental benefits, limited-scope vision benefits, or long-term care benefits are excepted if they are provided under a separate policy, certificate, or contract of insurance, or are otherwise not an integral part of a group health plan as described in paragraph (b)(3)(ii) of this section. In addition, benefits provided under a health flexible spending arrangement (health FSA) are excepted benefits if they satisfy the requirements of paragraph (b)(3)(v) of this section; benefits provided under an employee assistance program are excepted benefits if they satisfy the requirements of paragraph (b)(3)(vi) of this section; benefits provided under limited wraparound coverage are excepted benefits if they satisfy the requirements of paragraph (b)(3)(vii) of this section; and benefits provided under a health reimbursement arrangement or other account-based group health plan, other than a health FSA, are excepted benefits if they satisfy the requirements of paragraph (b)(3)(viii) of this section. * * * * * (viii) Health reimbursement arrangements (HRAs) and other account-based group health plans. Benefits provided under an HRA or other account-based group health plan, other than a health FSA, are excepted if they satisfy all of the requirements of this paragraph (b)(3)(viii). See paragraph (b)(3)(v) of this section for the circumstances in which benefits provided under a health FSA are excepted benefits. For purposes of this paragraph (b)(3)(viii), the term ‘‘HRA or other account-based group health plan’’ has the same meaning as ‘‘accountbased group health plan’’ set forth in § 147.126(d)(6)(i) of this subchapter, except that the term does not include health FSAs. For ease of reference, an HRA or other account-based group health plan that satisfies the requirements of this paragraph (b)(3)(viii) is referred to as an excepted benefit HRA. (A) Otherwise not an integral part of the plan. Other group health plan coverage that is not limited to excepted benefits and that is not an HRA or other account-based group health plan must E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations be made available by the same plan sponsor for the plan year to the participant. (B) Benefits are limited in amount— (1) Limit on annual amounts made available. The amounts newly made available for each plan year under the HRA or other account-based group health plan do not exceed $1,800. In the case of any plan year beginning after December 31, 2020, the dollar amount in the preceding sentence shall be increased by an amount equal to such dollar amount multiplied by the cost-ofliving adjustment. The cost of living adjustment is the percentage (if any) by which the C–CPI–U for the preceding calendar year exceeds the C–CPI–U for calendar year 2019. The term ‘‘C–CPI– U’’ means the Chained Consumer Price Index for All Urban Consumers as published by the Bureau of Labor Statistics of the Department of Labor. The C–CPI–U for any calendar year is the average of the C–CPI–U as of the close of the 12-month period ending on March 31 of such calendar year. The values of the C–CPI–U used for any calendar year shall be the latest values so published as of the date on which the Bureau publishes the initial value of the C–CPI–U for the month of March for the preceding calendar year. Any such increase that is not a multiple of $50 shall be rounded down to the next lowest multiple of $50. The Department of the Treasury and the Internal Revenue Service will publish the adjusted amount for plan years beginning in any calendar year no later than June 1 of the preceding calendar year. (2) Carryover amounts. If the terms of the HRA or other account-based group health plan allow unused amounts to be made available to participants and dependents in later plan years, such carryover amounts are disregarded for purposes of determining whether benefits are limited in amount. (3) Multiple HRAs or other accountbased group health plans. If the plan sponsor provides more than one HRA or other account-based group health plan to the participant for the same time period, the amounts made available under all such plans are aggregated to determine whether the benefits are limited in amount, except that HRAs or other account-based group health plans that reimburse only excepted benefits are not included in determining whether the benefits are limited in amount. (C) Prohibition on reimbursement of certain health insurance premiums. The HRA or other account-based group health plan must not reimburse premiums for individual health VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 insurance coverage, group health plan coverage (other than COBRA continuation coverage or other continuation coverage), or Medicare Part A, B, C, or D, except that the HRA or other account-based group health plan may reimburse premiums for such coverage that consists solely of excepted benefits. See also, paragraph (b)(3)(viii)(F) of this section. (D) Uniform availability. The HRA or other account-based group health plan is made available under the same terms to all similarly situated individuals, as defined in § 146.121(d), regardless of any health factor (as described in § 146.121(a)). (E) [Reserved] (F) Special rule. The HRA or other account-based group health plan must not reimburse premiums for short-term, limited-duration insurance (as defined in § 144.103 of this subchapter) if the conditions of this paragraph (b)(3)(viii)(F) are satisfied. (1) The HRA or other account-based group health plan is offered by a small employer (as defined in PHS Act section 2791(e)(4)). (2) The other group health plan coverage offered by the employer pursuant to paragraph (b)(3)(viii)(A) of this section is either fully-insured or partially-insured. (3) The Secretary makes a finding, in consultation with the Secretaries of Labor and the Treasury, that the reimbursement of premiums for shortterm, limited-duration insurance by excepted benefit HRAs has caused significant harm to the small group market in the state that is the principal place of business of the small employer. (4) The finding by the Secretary is made after submission of a written recommendation by the applicable state authority of such state, in a form and manner specified by HHS. The written recommendation must include evidence that the reimbursement of premiums for short-term, limited-duration insurance by excepted benefit HRAs established by insured or partially-insured small employers in the state has caused significant harm to the state’s small group market, including with respect to premiums. (5) The restriction shall be imposed or discontinued by publication by the Secretary of a notice in the Federal Register and shall apply only prospectively and with a reasonable time for plan sponsors to comply. * * * * * PO 00000 Frm 00139 Fmt 4701 Sfmt 4700 29025 PART 147—HEALTH INSURANCE REFORM REQUIREMENTS FOR THE GROUP AND INDIVIDUAL HEALTH INSURANCE MARKETS 21. The authority citation for part 147 is revised to read as follows: ■ Authority: 42 U.S.C. 300gg through 300gg– 63, 300gg–91, and 300gg–92, as amended. 22. Section 147.126 is amended by revising paragraphs (c), (d), and (e) to read as follows: ■ § 147.126 No Lifetime or annual limits. * * * * * (c) Definition of essential health benefits. The term ‘‘essential health benefits’’ means essential health benefits under section 1302(b) of the Patient Protection and Affordable Care Act and applicable regulations. For the purpose of this section, a group health plan or a health insurance issuer that is not required to provide essential health benefits under section 1302(b) must define ‘‘essential health benefits’’ in a manner that is consistent with the following: (1) For plan years beginning before January 1, 2020, one of the EHBbenchmark plans applicable in a State under § 156.110 of this subchapter, and including coverage of any additional required benefits that are considered essential health benefits consistent with § 155.170(a)(2) of this subchapter, or one of the three Federal Employees Health Benefits Program (FEHBP) plan options as defined by § 156.100(a)(3) of this subchapter, supplemented as necessary, to satisfy the standards in § 156.110 of this subchapter; or (2) For plan years beginning on or after January 1, 2020, an EHBbenchmark plan selected by a State in accordance with the available options and requirements for EHB-benchmark plan selection at § 156.111 of this subchapter, including an EHBbenchmark plan in a State that takes no action to change its EHB-benchmark plan and thus retains the EHBbenchmark plan applicable in that State for the prior year in accordance with § 156.111(d)(1) of this subchapter, and including coverage of any additional required benefits that are considered essential health benefits consistent with § 155.170(a)(2) of this subchapter. (d) Health reimbursement arrangements (HRAs) and other account-based group health plans—(1) In general. If an HRA or other accountbased group health plan is integrated with another group health plan or individual health insurance coverage and the other group health plan or individual health insurance coverage, as E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 29026 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations applicable, separately is subject to and satisfies the requirements in PHS Act section 2711 and paragraph (a)(2) of this section, the fact that the benefits under the HRA or other account-based group health plan are limited does not cause the HRA or other account-based group health plan to fail to satisfy the requirements of PHS Act section 2711 and paragraph (a)(2) of this section. Similarly, if an HRA or other accountbased group health plan is integrated with another group health plan or individual health insurance coverage and the other group health plan or individual health insurance coverage, as applicable, separately is subject to and satisfies the requirements in PHS Act section 2713 and § 147.130(a)(1) of this subchapter, the fact that the benefits under the HRA or other account-based group health plan are limited does not cause the HRA or other account-based group health plan to fail to satisfy the requirements of PHS Act section 2713 and § 147.130(a)(1) of this subchapter. For the purpose of this paragraph (d), all individual health insurance coverage, except for coverage that consists solely of excepted benefits, is treated as being subject to and complying with PHS Act sections 2711 and 2713. (2) Requirements for an HRA or other account-based group health plan to be integrated with another group health plan. An HRA or other account-based group health plan is integrated with another group health plan for purposes of PHS Act section 2711 and paragraph (a)(2) of this section if it satisfies the requirements under one of the integration methods set forth in paragraph (d)(2)(i) or (ii) of this section. For purposes of the integration methods under which an HRA or other accountbased group health plan is integrated with another group health plan, integration does not require that the HRA or other account-based group health plan and the other group health plan with which it is integrated share the same plan sponsor, the same plan document or governing instruments, or file a single Form 5500, if applicable. An HRA or other account-based group health plan integrated with another group health plan for purposes of PHS Act section 2711 and paragraph (a)(2) of this section may not be used to purchase individual health insurance coverage unless that coverage consists solely of excepted benefits, as defined in § 148.220 of this subchapter. (i) Method for integration with a group health plan: Minimum value not required. An HRA or other accountbased group health plan is integrated with another group health plan for purposes of this paragraph (d) if: VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 (A) The plan sponsor offers a group health plan (other than the HRA or other account-based group health plan) to the employee that does not consist solely of excepted benefits; (B) The employee receiving the HRA or other account-based group health plan is actually enrolled in a group health plan (other than the HRA or other account-based group health plan) that does not consist solely of excepted benefits, regardless of whether the plan is offered by the same plan sponsor (referred to as non-HRA group coverage); (C) The HRA or other account-based group health plan is available only to employees who are enrolled in nonHRA group coverage, regardless of whether the non-HRA group coverage is offered by the plan sponsor of the HRA or other account-based group health plan (for example, the HRA may be offered only to employees who do not enroll in an employer’s group health plan but are enrolled in other non-HRA group coverage, such as a group health plan maintained by the employer of the employee’s spouse); (D) The benefits under the HRA or other account-based group health plan are limited to reimbursement of one or more of the following—co-payments, coinsurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care expenses that do not constitute essential health benefits as defined in paragraph (c) of this section; and (E) Under the terms of the HRA or other account-based group health plan, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan at least annually and, upon termination of employment, either the remaining amounts in the HRA or other account-based group health plan are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan (see paragraph (d)(3) of this section for additional rules regarding forfeiture and waiver). (ii) Method for integration with another group health plan: Minimum value required. An HRA or other account-based group health plan is integrated with another group health plan for purposes of this paragraph (d) if: (A) The plan sponsor offers a group health plan (other than the HRA or other account-based group health plan) to the employee that provides minimum value pursuant to section 36B(c)(2)(C)(ii) of PO 00000 Frm 00140 Fmt 4701 Sfmt 4700 the Code (and its implementing regulations and applicable guidance); (B) The employee receiving the HRA or other account-based group health plan is actually enrolled in a group health plan (other than the HRA or other account-based group health plan) that provides minimum value pursuant to section 36B(c)(2)(C)(ii) of the Code (and applicable guidance), regardless of whether the plan is offered by the plan sponsor of the HRA or other accountbased group health plan (referred to as non-HRA MV group coverage); (C) The HRA or other account-based group health plan is available only to employees who are actually enrolled in non-HRA MV group coverage, regardless of whether the non-HRA MV group coverage is offered by the plan sponsor of the HRA or other account-based group health plan (for example, the HRA may be offered only to employees who do not enroll in an employer’s group health plan but are enrolled in other non-HRA MV group coverage, such as a group health plan maintained by an employer of the employee’s spouse); and (D) Under the terms of the HRA or other account-based group health plan, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan at least annually, and, upon termination of employment, either the remaining amounts in the HRA or other account-based group health plan are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan (see paragraph (d)(3) of this section for additional rules regarding forfeiture and waiver). (3) Forfeiture. For purposes of integration under paragraphs (d)(2)(i)(E) and (d)(2)(ii)(D) of this section, forfeiture or waiver occurs even if the forfeited or waived amounts may be reinstated upon a fixed date, a participant’s death, or the earlier of the two events (the reinstatement event). For the purpose of this paragraph (d)(3), coverage under an HRA or other account-based group health plan is considered forfeited or waived prior to a reinstatement event only if the participant’s election to forfeit or waive is irrevocable, meaning that, beginning on the effective date of the election and through the date of the reinstatement event, the participant and the participant’s beneficiaries have no access to amounts credited to the HRA or other account-based group health plan. This means that upon and after reinstatement, the reinstated amounts E:\FR\FM\20JNR2.SGM 20JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 119 / Thursday, June 20, 2019 / Rules and Regulations under the HRA or other account-based group health plan may not be used to reimburse or pay medical care expenses incurred during the period after forfeiture and prior to reinstatement. (4) Requirements for an HRA or other account-based group health plan to be integrated with individual health insurance coverage or Medicare Part A and B or Medicare Part C. An HRA or other account-based group health plan is integrated with individual health insurance coverage or Medicare Part A and B or Medicare Part C (and treated as complying with PHS Act sections 2711 and 2713) if the HRA or other account-based group health plan satisfies the requirements of § 146.123(c) of this subchapter (as modified by § 146.123(e), for HRAs or other accountbased group health plans integrated with Medicare Part A and B or Medicare Part C). (5) Integration with Medicare Part B and D. For employers that are not required to offer their non-HRA group health plan coverage to employees who are Medicare beneficiaries, an HRA or other account-based group health plan that may be used to reimburse premiums under Medicare Part B or D may be integrated with Medicare (and deemed to comply with PHS Act sections 2711 and 2713) if the following requirements are satisfied with respect to employees who would be eligible for the employer’s non-HRA group health plan but for their eligibility for Medicare (and the integration rules under paragraphs (d)(2)(i) and (ii) of this section continue to apply to employees who are not eligible for Medicare): (i) The plan sponsor offers a group health plan (other than the HRA or other account-based group health plan and that does not consist solely of excepted benefits) to employees who are not eligible for Medicare; (ii) The employee receiving the HRA or other account-based group health plan is actually enrolled in Medicare Part B or D; (iii) The HRA or other account-based group health plan is available only to employees who are enrolled in Medicare Part B or D; and (iv) The HRA or other account-based group health plan complies with paragraphs (d)(2)(i)(E) and (d)(2)(ii)(D) of this section. (6) Definitions. The following definitions apply for purposes of this section. (i) Account-based group health plan. An account-based group health plan is an employer-provided group health plan that provides reimbursements of medical care expenses with the reimbursement subject to a maximum VerDate Sep<11>2014 18:08 Jun 19, 2019 Jkt 247001 fixed dollar amount for a period. An HRA is a type of account-based group health plan. An account-based group health plan does not include a qualified small employer health reimbursement arrangement, as defined in section 9831(d)(2) of the Code. (ii) Medical care expenses. Medical care expenses means expenses for medical care as defined under section 213(d) of the Code. (e) Applicability date. The provisions of this section are applicable to group health plans and health insurance issuers for plan years beginning on or after January 1, 2020. Until the applicability date for this section, plans and issuers are required to continue to comply with the corresponding sections of this subchapter B, contained in the 45 CFR, subtitle A, parts 1–199, revised as of October 1, 2018. PART 155—EXCHANGE ESTABLISHMENT STANDARDS AND OTHER RELATED STANDARDS UNDER THE AFFORDABLE CARE ACT 23. The authority citation for part 155 is revised to read as follows: ■ Authority: 42 U.S.C. 18021–18024, 18031– 18033, 18041–18042, 18051, 18054, 18071, and 18081–18083. 24. Section 155.420 is amended a. By revising paragraph (a)(4)(iii) introductory text; ■ b. By adding paragraph (b)(2)(vi); ■ c. By redesignating paragraph (c)(3) as paragraph (c)(4); By adding a new paragraph (c)(3); ■ d. In paragraph (d)(12) by removing ‘‘; or’’ and adding ‘‘;’’ in its place; ■ e. In paragraph (d)(13) by removing the period at the end of the paragraph and adding ‘‘; or’’ in its place; and ■ f. By adding paragraph (d)(14). The revisions and additions read as follows: ■ ■ § 155.420 Special enrollment periods. * * * * * (a) * * * (4) * * * (iii) For the other triggering events specified in paragraph (d) of this section, except for paragraphs (d)(2)(i), (d)(4), and (d)(6)(i) and (ii) of this section for becoming newly eligible for cost-sharing reductions, and paragraphs (d)(8), (9), (10), (12), and (14) of this section: * * * * * (b) * * * (2) * * * (vi) If a qualified individual, enrollee, or dependent newly gains access to an individual coverage HRA or is newly provided a QSEHRA, each as described in paragraph (d)(14) of this section, and PO 00000 Frm 00141 Fmt 4701 Sfmt 9990 29027 if the plan selection is made before the day of the triggering event, the Exchange must ensure that coverage is effective on the first day of the month following the date of the triggering event or, if the triggering event is on the first day of a month, on the date of the triggering event. If the plan selection is made on or after the day of the triggering event, the Exchange must ensure that coverage is effective on the first day of the month following plan selection. * * * * * (c) * * * (3) Advanced availability for individuals with an individual coverage HRA or QSEHRA. A qualified individual, enrollee, or his or her dependent who is described in paragraph (d)(14) of this section has 60 days before the triggering event to select a QHP, unless the HRA or QSEHRA was not required to provide the notice setting forth its terms to such individual or enrollee at least 90 days before the beginning of the plan year, as specified in 45 CFR 146.123(c)(6), 26 CFR 54.9802–4(c)(6), and 29 CFR 2590.702– 2(c)(6) or section 9831(d)(4) of the Internal Revenue Code, as applicable, in which case the qualified individual, enrollee, or his or her dependent has 60 days before or after the triggering event to select a QHP. * * * * * (d) * * * (14) The qualified individual, enrollee, or dependent newly gains access to an individual coverage HRA (as defined in 45 CFR 146.123(b)) or is newly provided a qualified small employer health reimbursement arrangement (QSEHRA) (as defined in section 9831(d)(2) of the Internal Revenue Code). The triggering event is the first day on which coverage for the qualified individual, enrollee, or dependent under the individual coverage HRA can take effect, or the first day on which coverage under the QSEHRA takes effect. An individual, enrollee, or dependent will qualify for this special enrollment period regardless of whether they were previously offered or enrolled in an individual coverage HRA or previously provided a QSEHRA, so long as the individual, enrollee, or dependent is not enrolled in the individual coverage HRA or covered by the QSEHRA on the day immediately prior to the triggering event. * * * * * [FR Doc. 2019–12571 Filed 6–13–19; 4:15 pm] BILLING CODE 4120–01;4510–29;4830–01–P E:\FR\FM\20JNR2.SGM 20JNR2

Agencies

[Federal Register Volume 84, Number 119 (Thursday, June 20, 2019)]
[Rules and Regulations]
[Pages 28888-29027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12571]



[[Page 28887]]

Vol. 84

Thursday,

No. 119

June 20, 2019

Part II





Department of the Treasury





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Internal Revenue Service





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26 CFR Parts 1 and 54





Department of Labor





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Employee Benefits Security Administration





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29 CFR Parts 2510 and 2590





Department of Health and Human Services





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45 CFR Parts 144, 146, 147, and 155





Health Reimbursement Arrangements and Other Account-Based Group Health 
Plans; Final Rule

Federal Register / Vol. 84 , No. 119 / Thursday, June 20, 2019 / 
Rules and Regulations

[[Page 28888]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 54

[TD 9867]
RIN 1545-BO46

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Parts 2510 and 2590

RIN 1210-AB87

DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Parts 144, 146, 147, and 155

[CMS-9918-F]
RIN 0938-AT90


Health Reimbursement Arrangements and Other Account-Based Group 
Health Plans

AGENCY: Internal Revenue Service, Department of the Treasury; Employee 
Benefits Security Administration, Department of Labor; Centers for 
Medicare & Medicaid Services, Department of Health and Human Services.

ACTION: Final rule.

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SUMMARY: This document sets forth final rules to expand opportunities 
for working men and women and their families to access affordable, 
quality healthcare through changes to rules under various provisions of 
the Public Health Service Act (PHS Act), the Employee Retirement Income 
Security Act (ERISA), and the Internal Revenue Code (Code) regarding 
health reimbursement arrangements (HRAs) and other account-based group 
health plans. Specifically, the final rules allow integrating HRAs and 
other account-based group health plans with individual health insurance 
coverage or Medicare, if certain conditions are satisfied (an 
individual coverage HRA). The final rules also set forth conditions 
under which certain HRAs and other account-based group health plans 
will be recognized as limited excepted benefits. Also, the Department 
of the Treasury (Treasury Department) and the Internal Revenue Service 
(IRS) are finalizing rules regarding premium tax credit (PTC) 
eligibility for individuals offered an individual coverage HRA. In 
addition, the Department of Labor (DOL) is finalizing a clarification 
to provide assurance that the individual health insurance coverage for 
which premiums are reimbursed by an individual coverage HRA or a 
qualified small employer health reimbursement arrangement (QSEHRA) does 
not become part of an ERISA plan, provided certain safe harbor 
conditions are satisfied. Finally, the Department of Health and Human 
Services (HHS) is finalizing provisions to provide a special enrollment 
period (SEP) in the individual market for individuals who newly gain 
access to an individual coverage HRA or who are newly provided a 
QSEHRA. The goal of the final rules is to expand the flexibility and 
use of HRAs and other account-based group health plans to provide more 
Americans with additional options to obtain quality, affordable 
healthcare. The final rules affect employees and their family members; 
employers, employee organizations, and other plan sponsors; group 
health plans; health insurance issuers; and purchasers of individual 
health insurance coverage.

DATES: 
    Effective date: These final rules are effective on August 19, 2019.
    Applicability dates: The final rules generally apply for plan years 
beginning on or after January 1, 2020. However, the final rules under 
Code section 36B apply for taxable years beginning on or after January 
1, 2020, and the final rules providing a new special enrollment period 
in the individual market apply January 1, 2020. See Section VI of the 
SUPPLEMENTARY INFORMATION section for more information on the 
applicability dates.

FOR FURTHER INFORMATION CONTACT: Christopher Dellana, Internal Revenue 
Service, Department of the Treasury, at (202) 317-5500; Matthew Litton 
or David Sydlik, Employee Benefits Security Administration, Department 
of Labor, at (202) 693-8335; David Mlawsky, Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, at (410) 
786-1565.
    Customer Service Information: Individuals interested in obtaining 
information from the DOL concerning employment-based health coverage 
laws may call the EBSA Toll-Free Hotline at 1-866-444-EBSA (3272) or 
visit the DOL's website (www.dol.gov/ebsa). In addition, information 
from HHS on private health insurance coverage and coverage provided by 
non-federal governmental group health plans can be found on the Centers 
for Medicare & Medicaid Services (CMS) website (www.cms.gov/cciio), and 
information on healthcare reform can be found at www.HealthCare.gov.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Executive Order

    On October 12, 2017, President Trump issued Executive Order 
13813,\1\ ``Promoting Healthcare Choice and Competition Across the 
United States,'' stating, in part, that the ``Administration will 
prioritize three areas for improvement in the near term: association 
health plans (AHPs), short-term, limited-duration insurance (STLDI), 
and health reimbursement arrangements (HRAs).'' With regard to HRAs, 
the Executive Order directs the Secretaries of the Treasury, Labor, and 
HHS to ``consider proposing regulations or revising guidance, to the 
extent permitted by law and supported by sound policy, to increase the 
usability of HRAs, to expand employers' ability to offer HRAs to their 
employees, and to allow HRAs to be used in conjunction with nongroup 
coverage.'' The Executive Order further provides that expanding ``the 
flexibility and use of HRAs would provide many Americans, including 
employees who work at small businesses, with more options for financing 
their healthcare.''
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    \1\ 82 FR 48385 (Oct. 17, 2017). The executive order was issued 
on October 12, 2017 and was published in the Federal Register on 
October 17, 2017.
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B. HRAs and Other Account-Based Group Health Plans

1. In General
    An account-based group health plan is an employer-provided group 
health plan that provides for reimbursement of expenses for medical 
care (as defined under Code section 213(d)) (medical care expenses), 
subject to a maximum fixed-dollar amount of reimbursements for a period 
(for example, a calendar year). An HRA is a type of account-based group 
health plan funded solely by employer contributions (with no salary 
reduction contributions or other contributions by employees) that 
reimburses an employee solely for medical care expenses incurred by the 
employee, or the employee's spouse, dependents, and children who, as of 
the end of the taxable year, have not attained age 27, up to a maximum 
dollar amount for a coverage period.\2\ The reimbursements under these 
types of arrangements are excludable from the employee's income and 
wages for federal income tax and employment tax purposes. Amounts that 
remain in the HRA at the end of the year often may

[[Page 28889]]

be used to reimburse medical care expenses incurred in later years, 
depending on the terms of the HRA.
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    \2\ See IRS Notice 2002-45, 2002-2 CB 93; Revenue Ruling 2002-
41, 2002-2 CB 75; and IRS Notice 2013-54, 2013-40 IRB 287.
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    HRAs are not the only type of account-based group health plan. For 
example, an employer payment plan is also an account-based group health 
plan. An employer payment plan is an arrangement under which an 
employer reimburses an employee for some or all of the premium expenses 
incurred for individual health insurance coverage, or other non-
employer sponsored hospital or medical insurance. This includes a 
reimbursement arrangement described in Revenue Ruling 61-146, 1961-2 CB 
25, or an arrangement under which the employer uses its funds directly 
to pay the premium for individual health insurance coverage or other 
non-employer sponsored hospital or medical insurance covering the 
employee.\3\ Other examples of account-based group health plans include 
health flexible spending arrangements (health FSAs) and certain other 
employer-provided medical reimbursement plans that are not HRAs.\4\
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    \3\ For more information about employer payment plans, see IRS 
Notice 2013-54, Q&A-1 and Q&A-3, and IRS Notice 2015-17, Q&A-4 and 
Q&A-5, 2015-14 IRB 845.
    \4\ For simplicity, the preamble generally refers only to HRAs, 
but references to HRAs should also be considered to include other 
account-based group health plans as defined in the final rules, 
unless otherwise specified. This term does not include QSEHRAs, 
under Code section 9831(d); medical savings accounts (MSAs), under 
Code section 220; or health savings accounts (HSAs), under Code 
section 223. In addition, for purposes of the final rules, the term 
``HRA or other account-based group health plan'' does not include an 
employer arrangement that reimburses the cost of individual health 
insurance coverage through a cafeteria plan under Code section 125 
(cafeteria plan premium arrangements); however see later in this 
preamble for a clarification that plan sponsors may offer such an 
arrangement in addition to an individual coverage HRA. A QSEHRA is 
not a group health plan for purposes of the market requirements of 
the Code (except as provided in Code section 4980I(f)(4)), parts 6 
and 7 of ERISA, and titles XXII and XXVII of the PHS Act, and is not 
included in the definition of HRAs and other account-based group 
health plans for purposes of the final rules or this preamble. A 
QSEHRA is, however, considered a group health plan under the PHS Act 
for purposes of part C of title XI of the Social Security Act (42 
U.S.C. 1320d et seq.). See PHS Act section 2791(a)(1), as amended by 
the 21st Century Cures Act (Cures Act), Public Law 114-255, section 
18001(c).
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2. Application of the Patient Protection and Affordable Care Act to 
HRAs and Other Account-Based Group Health Plans
    The Patient Protection and Affordable Care Act, Public Law 111-148, 
was enacted on March 23, 2010 and the Health Care and Education 
Reconciliation Act of 2010, Public Law 111-152, was enacted on March 
30, 2010 (collectively, PPACA). PPACA reorganized, amended, and added 
to the provisions of part A of title XXVII of the PHS Act relating to 
health coverage requirements for group health plans and health 
insurance issuers in the group and individual markets. The term ``group 
health plan'' includes both insured and self-insured group health 
plans.
    PPACA also added section 715 to ERISA and section 9815 to the Code 
to incorporate the provisions of part A of title XXVII of the PHS Act, 
PHS Act sections 2701 through 2728 (the market requirements), into 
ERISA and the Code, making them applicable to group health plans and 
health insurance issuers providing health insurance coverage in 
connection with group health plans. In accordance with Code section 
9831(b) and (c), ERISA section 732(b) and (c), and PHS Act sections 
2722(b) and (c) and 2763, the market requirements do not apply to a 
group health plan or a health insurance issuer in the group or 
individual market in relation to the provision of excepted benefits 
described in Code section 9832(c), ERISA section 733(c), and PHS Act 
section 2791(c).\5\ See the discussion later in this preamble for 
additional background on excepted benefits. In addition, in accordance 
with Code section 9831(a)(2) and ERISA section 732(a), the market 
requirements do not apply to a group health plan that has fewer than 
two participants who are current employees on the first day of the plan 
year.\6\
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    \5\ While the PPACA amendments to PHS Act section 2722(b) and 
(c) (formerly PHS Act section 2721(c) and (d)) could be read as 
restricting the exemption for excepted benefits so it applies only 
with respect to subpart 2 of part A of title XXVII of the PHS Act, 
HHS does not intend to use its resources to enforce the market 
requirements with respect to excepted benefits offered by non-
federal governmental plan sponsors and encourages states to adopt a 
similar approach with respect to issuers of excepted benefits. See 
75 FR 34537, 34539-34540 (June 17, 2010).
    \6\ While the PPACA amendments to title XXVII of the PHS Act 
removed the parallel provision at section 2722(a) (formerly PHS Act 
section 2721(a)), HHS follows a similar approach for retiree-only 
non-federal governmental plans and encourages states to adopt a 
similar approach with respect to health insurance issuers of 
retiree-only plans. See 75 FR 34537, 34539-34540 (June 17, 2010).
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    PHS Act section 2711, as added by PPACA, generally prohibits group 
health plans and health insurance issuers offering group or individual 
health insurance coverage \7\ from establishing for any individual any 
lifetime or annual limits on the dollar value of essential health 
benefits (EHBs), as defined in PPACA section 1302(b). PHS Act section 
2711, however, does not prevent a group health plan, or a health 
insurance issuer offering group or individual health insurance 
coverage, from placing an annual or lifetime dollar limit for any 
individual on specific covered benefits that are not EHBs, to the 
extent these limits are otherwise permitted under applicable law.\8\
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    \7\ PHS Act section 2711 applies to grandfathered health plans, 
except that the annual dollar limit prohibition does not apply to 
grandfathered individual health insurance coverage. Grandfathered 
health plans are health plans that were in existence as of March 23, 
2010, and that are only subject to certain provisions of PPACA, as 
long as they maintain status as grandfathered health plans under the 
applicable rules. See 26 CFR 54.9815-1251, 29 CFR 2590.715-1251, and 
45 CFR 147.140.
    \8\ For information regarding EHBs, see HHS's February 25, 2013 
final rules addressing EHBs under PPACA section 1302 (78 FR 12834 
(Feb. 25, 2013)); see also HHS Notice of Benefit and Payment 
Parameters for 2016 (80 FR 10871 (Feb. 27, 2015)). In addition, HHS 
issued final rules providing states with additional flexibility to 
define EHBs, starting with plan years beginning on or after January 
1, 2020. See 45 CFR 156.111 (83 FR 16930 (April 17, 2018)). The 
current rules under PHS Act section 2711 include a definition of 
EHBs that applies for plans that are not required to cover EHBs. See 
26 CFR 54.9815-2711(c), 29 CFR 2590.715-2711(c), and 45 CFR 
147.126(c). As explained later in this preamble, the rules set forth 
in this document include amendments to the definition of EHBs under 
the PHS Act section 2711 rules to reflect the updated final EHB 
rules.
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    HRAs are subject to PHS Act section 2711. An HRA generally will 
fail to comply with PHS Act section 2711 because the arrangement is a 
group health plan that imposes an annual dollar limit on EHBs that the 
HRA will reimburse for an individual.\9\
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    \9\ As explained in prior guidance, the Departments of Labor, 
the Treasury and HHS (the Departments) have determined that the 
annual dollar limit prohibition is not applicable to certain 
account-based group health plans that are subject to other statutory 
provisions limiting the benefits available under those plans. See 80 
FR 72192, 72201 (Nov. 18, 2015). Specifically, the Departments have 
explained that the annual dollar limit prohibition does not apply to 
health FSAs that are offered through a cafeteria plan under Code 
section 125 (cafeteria plan) because PPACA section 9005 specifically 
limits salary reduction contributions to health FSAs to $2,500 
(indexed for inflation) per year. Notwithstanding this exclusion for 
certain health FSAs from the application of the annual dollar limit 
prohibition, rules under Code section 125 provide that health FSAs 
are not permitted to reimburse employees for premiums for health 
insurance coverage. See Code section 125(d)(2)(A) and proposed 26 
CFR 1.125-5(k)(4) (72 FR 43938, 43959 (Aug. 6, 2007)). Similarly, 
although MSAs and HSAs generally are not treated as group health 
plans subject to the market requirements, the Departments have 
concluded that the annual dollar limit prohibition would not apply 
to an MSA or HSA even if a particular arrangement did satisfy the 
criteria to be a group health plan because both types of 
arrangements are subject to specific statutory provisions that limit 
the contributions. See 75 FR 37188, 37190 (June 28, 2010); see also 
IRS Notice 2004-2, Q&A-1 and Q&A-3, 2004-2 IRB 269, which defines an 
HSA as a tax-exempt trust or custodial account and a high-deductible 
health plan as a health plan; see also DOL Field Assistance Bulletin 
No. 2004-01, available at https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2004-01 
and DOL Field Assistance Bulletin No. 2006-02, available at https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2006-02, which provide guidance regarding HSAs 
not constituting ``employee welfare benefit plans'' covered by ERISA 
Title I where employer involvement with the HSA is limited. 
Therefore, the final rules do not apply to MSAs, HSAs, or, in 
certain circumstances, health FSAs.

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[[Page 28890]]

    PHS Act section 2713, as added by PPACA, generally requires non-
grandfathered group health plans, and health insurance issuers offering 
non-grandfathered group or individual health insurance coverage, to 
provide coverage for certain preventive services without imposing any 
cost-sharing requirements for these services.\10\ Non-grandfathered 
HRAs are subject to and fail to comply with PHS Act section 2713 
because, while HRAs may be used to reimburse the costs of preventive 
services, HRAs do not reimburse such costs after the HRAs have 
reimbursed the maximum dollar amount for a coverage period, and 
therefore HRAs fail to provide the required coverage, and violate the 
prohibition on imposing cost sharing for preventive services.\11\
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    \10\ See also 26 CFR 54.9815-2713, 29 CFR 2590.715-2713, and 45 
CFR 147.130.
    \11\ Because MSAs and HSAs generally are not treated as group 
health plans, these arrangements are not subject to PHS Act section 
2713. Health FSAs are group health plans and, unless they are 
excepted benefits, will fail to satisfy the requirements of PHS Act 
section 2713 unless they are integrated with other coverage that 
satisfies these requirements. For more information about the 
application of PHS Act section 2713 to health FSAs, see IRS Notice 
2013-54, Q&A-7; DOL Technical Release No. 2013-03, Q&A-7, issued on 
September 13, 2013, available at https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/13-03; and CMS 
Insurance Standards Bulletin, Application of Affordable Care Act 
Provisions to Certain Healthcare Arrangements, September 16, 2013, 
available at https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/cms-hra-notice-9-16-2013.pdf.
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3. Prior Rules and Guidance on Integration of HRAs and Other Account-
Based Group Health Plans
    The Departments previously issued rules and subregulatory guidance 
regarding the application of PHS Act sections 2711 and 2713 to 
HRAs.\12\ The rules and guidance generally provide that, if an HRA is 
``integrated'' with other group health plan coverage that complies with 
PHS Act sections 2711 and 2713, the HRA is considered to be in 
compliance with those sections because the combined arrangement 
complies with them. The rules and guidance also provide that HRAs may 
be integrated with Medicare and TRICARE coverage if certain conditions 
are satisfied, but may not be integrated with individual health 
insurance coverage for purposes of complying with PHS Act sections 2711 
and 2713.\13\
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    \12\ Rules and subregulatory guidance issued on this topic 
include: (1) 75 FR 37188 (June 28, 2010); (2) FAQs about Affordable 
Care Act Implementation (Part XI), available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-xi.pdf or https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs11.html; (3) IRS Notice 2013-
54 and DOL Technical Release No. 2013-03 and CMS Insurance Standards 
Bulletin, Application of Affordable Care Act Provisions to Certain 
Healthcare Arrangements; (4) IRS FAQ on Employer Healthcare 
Arrangements, available at https://www.irs.gov/affordable-care-act/employer-health-care-arrangements; (5) FAQs about Affordable Care 
Act Implementation (Part XXII), available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-xxii.pdf or https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQs-Part-XXII-FINAL.pdf; (6) IRS Notice 
2015-17, issued on February 18, 2015; (7) 80 FR 72192 (Nov. 18, 
2015); (8) IRS Notice 2015-87, 2015-52 IRB 889, issued on December 
16, 2015; (9) IRS Notice 2016-17, 2016-9 IRB 358, issued on February 
5, 2015; DOL Technical Release No. 2016-01, issued on February 5, 
2016, available at https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/16-01; and CMS Insurance 
Standards Bulletin, Application of the Market Reforms and Other 
Provisions of the Affordable Care Act to Student Health Coverage, 
issued on February 5, 2016, available at https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/student-health-bulletin.pdf; (10) FAQs about Affordable Care Act Implementation 
Part 33, available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-33.pdf or 
https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/ACA-FAQ-Set-33-Final.pdf; (11) FAQs about Affordable Care Act 
Implementation Part 37, available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-37.pdf or https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQs-Part-37.pdf; (12) 83 FR 54420 (Oct. 29, 
2018); and (13) IRS Notice 2018-88, 2018-49 IRB 817, issued on 
November 19, 2018.
    \13\ 26 CFR 54.9815-2711(d)(4), 29 CFR 2590.715-2711(d)(4), and 
45 CFR 147.126(d)(4).
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    More specifically, in the preamble to the 2010 interim final rules 
under PHS Act section 2711, the Departments provided that HRAs may be 
integrated with ``other coverage as part of a group health plan'' that 
complies with PHS Act section 2711 in order for the HRAs to be 
considered to satisfy PHS Act section 2711.\14\ The interim final rules 
did not, however, set forth rules for implementing integration; the 
integration methods were set forth in later subregulatory guidance and 
subsequently included in the final rules under PHS Act section 2711 
issued in 2015.
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    \14\ See 75 FR 37187, 37190-37191 (June 28, 2010).
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    On September 13, 2013, the Treasury Department and the IRS issued 
Notice 2013-54, the DOL issued Technical Release 2013-03, and HHS 
issued contemporaneous guidance explaining that HHS concurred with the 
DOL and Treasury Department guidance.\15\ This guidance stated that an 
HRA may not be integrated with individual health insurance coverage for 
purposes of PHS Act sections 2711 and 2713, but described methods for 
integrating an HRA with another group health plan.\16\ The Departments 
later incorporated the provisions of this guidance into the final rules 
issued in 2015 under PHS Act section 2711 \17\, which are summarized 
later in this section of the preamble.
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    \15\ See CMS Insurance Standards Bulletin, Application of 
Affordable Care Act Provisions to Certain Healthcare Arrangements.
    \16\ In addition to describing the integration methods, IRS 
Notice 2013-54 and DOL Technical Release No. 2013-03, in Q&A-5, 
provided that, whether or not an HRA is integrated with other group 
health plan coverage, unused amounts that are credited to the HRA 
while the HRA is integrated with other group health plan coverage 
may be used to reimburse medical care expenses in accordance with 
the terms of the HRA after an employee ceases to be covered by the 
integrated group health plan coverage without causing the HRA to 
fail to comply with PHS Act sections 2711 and 2713. In IRS Notice 
2015-87, Q&A-2, however, the Departments clarified that an HRA that 
includes terms permitting the purchase of individual health 
insurance coverage, even if reimbursement is only allowed after the 
employee ceases to be covered by other integrated group health plan 
coverage, fails to be integrated with other group health plan 
coverage and therefore fails to comply with PHS Act sections 2711 
and 2713.
    \17\ See 80 FR 72192 (Nov. 18, 2015).
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    On November 6, 2014, the Departments issued FAQs about Affordable 
Care Act Implementation (Part XXII).\18\ Q&A-1 reiterated and clarified 
prior subregulatory guidance by explaining that if an employer offers 
its employees cash to reimburse the purchase of individual health 
insurance coverage, the payment arrangement is a group health plan, 
without regard to whether the employer treats the money as a pre-tax or 
post-tax benefit to the employee, and it may not be integrated with 
individual health insurance coverage, and, therefore, will fail to 
comply with PHS Act sections 2711 and 2713.\19\
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    \18\ See FAQs about Affordable Care Act Implementation (Part 
XXII), available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-xxii.pdf or 
https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQs-Part-XXII-FINAL.pdf.
    \19\ The Treasury Department and the IRS note that the 
information included in this preamble is not intended to be guidance 
regarding the proper federal tax treatment or consequences of any 
particular arrangement, except to the extent the preamble addresses 
the application of Code sections 36B, 9801, 9802, 9815, 9831, and 
9832 and PHS Act sections 2711 and 2713.
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    On February 18, 2015, the Treasury Department and the IRS issued 
Notice 2015-17. Q&A-3 provided that an arrangement under which an 
employer reimburses (or pays directly) some or all of the medical care 
expenses for employees covered by TRICARE constitutes an HRA and may 
not be integrated with TRICARE to comply with PHS Act sections 2711 and 
2713 because TRICARE is not a group health

[[Page 28891]]

plan for integration purposes. However, Q&A-3 stated that an HRA that 
pays for or reimburses medical care expenses for employees covered by 
TRICARE may be integrated with another group health plan offered by the 
employer for purposes of PHS Act sections 2711 and 2713 if: (1) The 
employer offers a group health plan (other than the HRA) to the 
employee that does not consist solely of excepted benefits and that 
provides minimum value (MV); (2) the employee participating in the HRA 
is enrolled in TRICARE; (3) the HRA is available only to employees who 
are enrolled in TRICARE; and (4) the HRA is limited to reimbursement of 
cost sharing and excepted benefits, including TRICARE supplemental 
premiums.
    Q&A-3 of Notice 2015-17 also provided that an employer payment plan 
through which an employer reimburses (or pays directly) all or a 
portion of Medicare Part B or D premiums for employees may not be 
integrated with Medicare coverage to comply with PHS Act sections 2711 
and 2713 because Medicare coverage is not a group health plan. However, 
under the notice, this type of employer payment plan may be integrated 
with another group health plan offered by the employer for purposes of 
PHS Act sections 2711 and 2713 if: (1) The employer offers a group 
health plan (other than the employer payment plan) to the employee that 
does not consist solely of excepted benefits and that provides MV; (2) 
the employee participating in the employer payment plan is actually 
enrolled in Medicare Part A and B; (3) the employer payment plan is 
available only to employees who are enrolled in Medicare Part A and 
Part B or D; and (4) the employer payment plan is limited to 
reimbursement of Medicare Part B or D premiums and excepted benefits, 
including Medigap premiums. Notice 2015-17 also includes a general 
reminder that, to the extent such an arrangement is available to active 
employees, it may be subject to restrictions under other laws, such as 
the Medicare secondary payer (MSP) provisions.\20\ See later in this 
preamble for a discussion of the rules provided in the 2015 rules under 
PHS Act section 2711 allowing Medicare Part B and D reimbursement 
arrangements to be integrated with Medicare in certain limited 
circumstances (that is, generally, for HRAs sponsored by employers with 
fewer than 20 employees).
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    \20\ See later in this preamble for a clarification of the 
meaning of this statement included in IRS Notice 2015-17, regarding 
the MSP provisions.
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    On November 18, 2015, the Departments finalized the proposed and 
interim final rules under PHS Act section 2711, incorporating certain 
subregulatory guidance regarding HRA integration, and making various 
additional clarifications (the 2015 rules).\21\ The 2015 rules 
incorporate prior subregulatory guidance that HRAs may not be 
integrated with individual health insurance coverage for purposes of 
complying with PHS Act sections 2711 and 2713. Consistent with the 
initial subregulatory guidance, the 2015 rules provide two methods for 
integration of HRAs with other group health plan coverage.\22\ The 
first method applies to HRAs integrated with other group health plan 
coverage that provides MV (the MV Integration Method).\23\ The second 
method applies to HRAs integrated with other group health plan coverage 
that does not provide MV (the Non-MV Integration Method).\24\
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    \21\ See 80 FR 72192 (Nov. 18, 2015). To the extent the 2015 
rules did not incorporate or modify the prior subregulatory 
guidance, that guidance remains in effect.
    \22\ These two methods of integration were originally discussed 
in IRS Notice 2013-54, Q&A-4, and DOL Technical Release No. 2013-03.
    \23\ See 26 CFR 54.9815-2711(d)(2)(ii), 29 CFR 2590.715-
2711(d)(2)(ii), and 45 CFR 147.126(d)(2)(ii).
    \24\ See 26 CFR 54.9815-2711(d)(2)(i), 29 CFR 2590.715-
2711(d)(2)(i), and 45 CFR 147.126(d)(2)(i).
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    Both the MV Integration Method and the Non-MV Integration Method 
require that: (1) The HRA plan sponsor offer the employee a group 
health plan other than the HRA (non-HRA group coverage); (2) the 
employee receiving the HRA be enrolled in non-HRA group coverage, even 
if the non-HRA group coverage is not offered by the HRA plan sponsor, 
such as a group health plan maintained by an employer of the employee's 
spouse; \25\ and (3) the HRA be made available only to employees who 
are enrolled in non-HRA group coverage, regardless of whether such 
coverage is provided by the HRA plan sponsor. For both integration 
methods, the non-HRA group coverage may not consist solely of excepted 
benefits and, for the MV Integration Method, the non-HRA group coverage 
offered by the employer and in which the employee enrolls must provide 
MV.
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    \25\ In IRS Notice 2015-87, Q&A-4, the Departments clarified 
that an HRA that may be used to reimburse the medical care expenses 
of an employee's spouse or dependents (a family HRA) may not be 
integrated with self-only coverage of the employee under the 
employer's non-HRA group health plan. On January 12, 2017, the 
Departments issued guidance to clarify that a family HRA is 
permitted to be integrated with a combination of coverage under 
qualifying non-HRA group health plan coverage for purposes of 
complying with PHS Act sections 2711 and 2713, provided that all of 
the individuals who are covered under the family HRA are also 
covered under qualifying non-HRA group coverage. See FAQs about 
Affordable Care Act Implementation Part 37, available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-37.pdf or https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQs-Part-37.pdf.
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    In addition, both the MV Integration Method and the Non-MV 
Integration Method require that, under the terms of the HRA, an 
employee (or former employee) be permitted to permanently opt out of 
and waive future reimbursements at least annually from the HRA. Both 
integration methods also require that, upon termination of employment, 
either the funds remaining in the HRA are forfeited or the employee is 
permitted to permanently opt out of and waive future reimbursements 
under the HRA. For this purpose, forfeiture of the funds remaining in 
the HRA, or waiver of future reimbursements under the HRA, occurs even 
if the forfeited or waived amounts may be reinstated upon a fixed date, 
the participant's death, or the earlier of the two events.
    The two methods differ with respect to the expenses that the HRA 
may reimburse. Under the MV Integration Method, the HRA may reimburse 
any medical care expenses, but under the Non-MV Integration Method, the 
HRA may reimburse only co-payments, co-insurance, deductibles, and 
premiums under the non-HRA group coverage, as well as medical care that 
does not constitute EHBs.\26\
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    \26\ Although, in general, an HRA integrated with non-HRA group 
coverage fails to comply with PHS Act section 2711 if the non-HRA 
group coverage with which the HRA is integrated does not cover a 
category of EHB and the HRA is available to cover that category of 
EHB and limits the coverage to the HRA's maximum benefit, the 
Departments have provided that if the non-HRA group coverage 
satisfies the MV Integration Method, an HRA will not be treated as 
failing to comply with PHS Act section 2711, even if the non-HRA 
group coverage with which the HRA is integrated does not cover a 
category of EHB and the HRA is available to cover that category of 
EHB and limits the coverage to the HRA's maximum benefit. See IRS 
Notice 2013-54, Q&A-6.
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    The 2015 rules also include a special integration method for 
certain arrangements offered by employers that are not required to 
offer, and do not offer, non-HRA group coverage to employees who are 
eligible for Medicare coverage (generally, employers with fewer than 20 
employees), but that offer non-HRA group coverage that does not consist 
solely of excepted benefits to employees who are not eligible for 
Medicare.\27\ For these employers, an

[[Page 28892]]

HRA that may be used to reimburse premiums under Medicare Part B or D 
may be integrated with Medicare (and deemed to comply with PHS Act 
sections 2711 and 2713) if the employees who are offered the HRA are 
enrolled in Medicare Part B or D, the HRA is available only to 
employees who are enrolled in Medicare Part B or D, and the HRA 
complies with the opt-out and forfeiture rules under the MV Integration 
Method and Non-MV Integration Method. These employers may use either of 
the non-Medicare-specific integration methods, as applicable, for HRAs 
offered to employees who are ineligible for Medicare.
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    \27\ See 26 CFR 54.9815-2711(d)(5), 29 CFR 2590.715-2711(d)(5), 
and 45 CFR 147.126(d)(5). The 2015 rules did not address the 
Medicare integration rules that apply to employers who are required 
to offer non-HRA group coverage to employees who are eligible for 
Medicare (generally, employers with 20 or more employees). For a 
discussion of those rules, see IRS Notice 2015-17 and the discussion 
in this preamble.
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C. HIPAA Nondiscrimination Provisions

    Prior to the enactment of PPACA, titles I and IV of the Health 
Insurance Portability and Accountability Act of 1996 (HIPAA), Public 
Law 104-191, added Code section 9802, ERISA section 702, and PHS Act 
section 2702 (HIPAA nondiscrimination provisions). The Departments 
published final rules implementing the HIPAA nondiscrimination 
provisions on December 13, 2006 (the 2006 rules).\28\ PPACA section 
1201 reorganized and amended the HIPAA nondiscrimination provisions of 
the PHS Act. Although Code section 9802 and ERISA section 702 were not 
amended, the requirements of PHS Act section 2705 were incorporated by 
reference into Code section 9815 and ERISA section 715.\29\ As amended 
by PPACA, the nondiscrimination provisions of PHS Act section 2705 
largely reflect the 2006 rules and extend the HIPAA nondiscrimination 
protections (but not the wellness program exception) to the individual 
market. These provisions generally prohibit group health plans and 
health insurance issuers in the group and individual markets from 
discriminating against individual participants and beneficiaries in 
eligibility, benefits, or premiums based on a health factor.\30\
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    \28\ 71 FR 75013 (Feb. 12, 2007).
    \29\ PPACA section 1201 moved the HIPAA nondiscrimination 
provisions from PHS Act section 2702 to PHS Act section 2705, with 
some modifications.
    \30\ The HIPAA nondiscrimination provisions set forth eight 
health status related factors. The eight health factors are health 
status, medical condition (including both physical and mental 
illnesses), claims experience, receipt of healthcare, medical 
history, genetic information, evidence of insurability, and 
disability. These terms are largely overlapping and, in combination, 
include any factor related to an individual's health. 66 FR 1377, 
1379 (Jan. 8, 2001).
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    Q&A-2 of FAQs about Affordable Care Act Implementation (Part XXII) 
\31\ provided that, if an employer offers only employees with high 
claims risk a choice between enrollment in a traditional group health 
plan or cash, the arrangement would not comply with the market 
requirements, citing PHS Act section 2705 (which is incorporated by 
reference into Code section 9815 and ERISA section 715), as well as the 
HIPAA nondiscrimination provisions of Code section 9802 and ERISA 
section 702. The Q&A explained that these arrangements violate the 
nondiscrimination provisions regardless of whether: (1) The cash 
payment is treated by the employer as pre-tax or post-tax to the 
employee, (2) the employer is involved in the selection or purchase of 
any individual market product, or (3) the employee obtains any 
individual health insurance coverage. The Departments explained that 
offering cash as an alternative to health coverage for individuals with 
adverse health factors is an eligibility rule that discourages 
participation in the traditional group health plan, in contravention of 
the HIPAA nondiscrimination provisions.
---------------------------------------------------------------------------

    \31\ See FAQs about Affordable Care Act Implementation (Part 
XXII), available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-xxii.pdf or 
https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQs-Part-XXII-FINAL.pdf.
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D. Excepted Benefits

    Code section 9831, ERISA section 732, and PHS Act sections 2722 and 
2763 provide that the requirements of chapter 100 of the Code, part 7 
of ERISA, and title XXVII of the PHS Act do not apply to excepted 
benefits. Excepted benefits are described in Code section 9832, ERISA 
section 733, and PHS Act section 2791.
    There are four statutory categories of excepted benefits, including 
limited excepted benefits. Under the statutory provisions, limited 
excepted benefits may include limited scope vision or dental benefits, 
benefits for long-term care, nursing home care, home healthcare, or 
community-based care, or any combination thereof, and ``such other 
similar, limited benefits as are specified in regulations'' by the 
Departments.\32\ To be excepted benefits under this category, the 
benefits must either: (1) Be insured and provided under a separate 
policy, certificate, or contract of insurance; or (2) otherwise not be 
an integral part of the plan.\33\ The Departments previously exercised 
the authority to specify additional types of limited excepted benefits 
with respect to certain health FSAs, certain employee assistance 
programs, and certain limited wraparound coverage.\34\
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    \32\ See Code section 9832(c)(2), ERISA section 733(c)(2), and 
PHS Act section 2791(c)(2).
    \33\ See Code section 9831(c)(1), ERISA section 732(c)(1), and 
PHS Act section 2722(c)(1) and 2763(b). See also 79 FR 59130, 59131-
59134 (Oct. 1, 2014) discussing the application of these 
requirements to benefits such as limited-scope dental and vision 
benefits and employee assistance programs.
    \34\ See 26 CFR 54.9831-1(c)(3)(v), (vi), and (vii); 29 CFR 
2590.732(c)(3)(v), (vi), and (vii); and 45 CFR 146.145(b)(3)(v), 
(vi), and (vii).
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    Coverage that consists of excepted benefits is not minimum 
essential coverage (MEC).\35\ Therefore, an individual offered or 
covered by an excepted benefit is not deemed ineligible for the PTC by 
virtue of the excepted benefit offer or coverage.\36\ Further, the 
offer of an excepted benefit by an employer is not considered to be an 
offer of MEC under an eligible employer-sponsored plan for purposes of 
Code section 4980H, the employer shared responsibility provisions. 
Thus, an employer does not avoid a payment under Code section 4980H by 
virtue of an offer of an excepted benefit.\37\
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    \35\ See Code section 5000A(f)(3).
    \36\ See Code section 36B(c)(2)(B).
    \37\ See Code section 4980H(a)(1) and (b)(1). See also 26 CFR 
54.4980H-1(a)(14).
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E. Premium Tax Credit

1. In General
    Code section 36B allows for the PTC to be available to applicable 
taxpayers to help with the cost of individual health insurance coverage 
obtained through an Exchange.\38\ Under Code section 36B(a) and (b)(1) 
and 26 CFR 1.36B-3(d), a taxpayer's PTC is the sum of the premium 
assistance amounts for all coverage months during the taxable year for 
individuals in the taxpayer's family.
---------------------------------------------------------------------------

    \38\ Exchanges are entities established under PPACA section 1311 
through which qualified individuals and qualified employers can 
purchase health insurance coverage.
---------------------------------------------------------------------------

    Under Code section 36B(c)(2), a month is not a coverage month for 
an individual if either: (1) The individual is eligible for coverage 
under an eligible employer-sponsored plan and the coverage is 
affordable and provides MV; or (2) the individual is enrolled in an 
eligible employer-sponsored plan, even if the coverage is not 
affordable or does not provide MV.\39\ An eligible employer-sponsored 
plan includes coverage under a self-insured (as well as an insured) 
group health plan \40\ and is MEC unless it consists solely of excepted 
benefits.\41\
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    \39\ See Code section 36B(c)(2)(C)(iii) and 26 CFR 1.36B-
2(c)(3)(vii)(A) and 1.36B-3(c).
    \40\ See 26 CFR 1.5000A-2(c).
    \41\ See Code section 5000A(f)(3) and 26 CFR 1.5000A-2(g).

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[[Page 28893]]

    An HRA is a self-insured group health plan and, therefore, is an 
eligible employer-sponsored plan. Accordingly, under existing rules, an 
individual is ineligible for the PTC for the individual's Exchange 
coverage for a month if the individual is covered by an HRA or is 
eligible for an HRA that is affordable and provides MV for the month.
2. Affordability and Minimum Value
    Under Code section 36B(c)(2)(C) and 26 CFR 1.36B-2(c)(3)(v)(A)(1) 
and (2), an eligible employer-sponsored plan is affordable for an 
employee, or for an individual who may enroll in the coverage because 
of a relationship to the employee, if the amount the employee must pay 
for self-only coverage whether by salary reduction or otherwise (the 
employee's required contribution) does not exceed a specified 
percentage of the employee's household income. The percentage is 
adjusted annually. However, 26 CFR 1.36B-2(c)(3)(v)(A)(3) provides an 
employee safe harbor under which an eligible employer-sponsored plan is 
not considered affordable for the entire plan year of the eligible 
employer-sponsored plan if, at the time an individual enrolls in a 
qualified health plan (QHP) offered through an Exchange, the Exchange 
determines that the eligible employer-sponsored plan is not 
affordable.\42\ Thus, the employee safe harbor locks in the Exchange's 
determination of unaffordability, which is based on estimated household 
income, even if the eligible employer-sponsored plan ultimately proves 
to be affordable based on actual household income for the tax year.
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    \42\ This employee safe harbor does not apply if the individual 
does not respond to a redetermination notice or, with reckless 
disregard for the facts, provides incorrect information to the 
Exchange. See 26 CFR 1.36B-2(c)(3)(v)(A)(3).
---------------------------------------------------------------------------

    Under Code section 36B(c)(2)(C)(ii), an eligible employer-sponsored 
plan provides MV if the plan's share of the total allowed costs of 
benefits provided under the plan is at least 60 percent of the costs. 
PPACA section 1302(d)(2)(C) provides that, in determining the 
percentage of the total allowed costs of benefits provided under a 
group health plan, the rules promulgated by HHS under that paragraph of 
PPACA apply. In general, HHS rules provide that an eligible employer-
sponsored plan provides MV only if the percentage of the total allowed 
costs of benefits provided under the plan is greater than or equal to 
60 percent, and the benefits under the plan include substantial 
coverage of inpatient hospital services and physician services.\43\
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    \43\ See 45 CFR 156.145. See also 80 FR 52678 (Sept. 1, 2015).
---------------------------------------------------------------------------

F. QSEHRAs

1. In General
    The 21st Century Cures Act (Cures Act) Public Law 114-255 was 
enacted on December 13, 2016. Cures Act section 18001 amended the Code, 
ERISA, and the PHS Act to permit an eligible employer to provide a 
QSEHRA to its eligible employees. The Cures Act provides that a QSEHRA 
is not a group health plan for purposes of the market requirements, 
and, as a result, QSEHRAs are not subject to PHS Act sections 2711 and 
2713.\44\ For purposes of these rules, the term ``HRA or other account-
based group health plans'' does not include QSEHRAs, unless otherwise 
specified.
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    \44\ See Code section 9831(d)(1), ERISA section 733(a)(1), and 
PHS Act section 2791(a)(1). However, QSEHRAs are group health plans 
under the PHS Act definition for purposes of part C of title XI of 
the Social Security Act (42 U.S.C. 1320d et seq.). See PHS Act 
section 2791(a)(1), as amended by Cures Act section 18001(c). In 
addition, QSEHRAs were not excluded from ERISA's definition of 
employee welfare benefit plan under ERISA section 3(1) and, 
therefore, remain subject to the requirements for employee welfare 
benefit plans under ERISA. See H. Rept. 114-634--Small Business 
Health Care Relief Act of 2016 (the relevant provisions of this bill 
were passed into law by the Cures Act). Moreover, because QSEHRAs 
are employee welfare benefit plans, individual health insurance 
coverage that is reimbursed by a QSEHRA would not become part of an 
ERISA plan if the conditions of the DOL safe harbor described later 
in this preamble are satisfied.
---------------------------------------------------------------------------

    Pursuant to Code section 9831(d), a QSEHRA is an arrangement that 
generally must be provided on the same terms, subject to certain 
exceptions, and cannot exceed a prescribed maximum amount.\45\ For the 
purpose of identifying who can provide a QSEHRA, the statute provides 
that an eligible employer is an employer that is not an applicable 
large employer (ALE), as defined in Code section 4980H(c)(2), and that 
does not offer a group health plan to any of its employees. The statute 
also requires that an employer providing a QSEHRA satisfies certain 
notice requirements including a statement that the employee should 
provide the information about the permitted benefit to the applicable 
Exchange if the employee applies for advance payments of the premium 
tax credit (APTC).
---------------------------------------------------------------------------

    \45\ See Code section 9831(d) and IRS Notice 2017-67, 2017-47 
IRB 517, for additional detail.
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    On October 31, 2017, the Treasury Department and the IRS issued 
Notice 2017-67 \46\ to provide guidance on the requirements for 
providing a QSEHRA. If an eligible employer complies with the guidance 
provided in Code section 9831(d) and Notice 2017-67, it may provide a 
QSEHRA to its eligible employees and the QSEHRA is not required to 
comply with PHS Act sections 2711 and 2713 because it is not subject to 
those requirements.
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    \46\ See IRS Notice 2017-20, 2017-11 IRB 1010, which extended 
the period for an employer to furnish an initial written notice to 
its eligible employees regarding a QSEHRA, and see FAQs About 
Affordable Care Act Implementation Part 35, Q&A-3, available at 
https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-35.pdf and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQ-Part-35_12-20-16.pdf.
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2. QSEHRAs and the PTC
    The Cures Act also added provisions to Code section 36B relating to 
how participation in a QSEHRA affects a taxpayer's eligibility for the 
PTC and how participation in a QSEHRA affects a taxpayer's computation 
of the PTC. Under Code section 36B(c)(4)(A), if an employee is provided 
a QSEHRA that constitutes affordable coverage for a month, the month is 
not a coverage month for the employee or the employee's spouse or 
dependents, meaning that the PTC is not allowed for that month. Code 
section 36B(c)(4)(C) provides that a QSEHRA constitutes affordable 
coverage for a month if the excess of the monthly premium for the self-
only second lowest cost silver plan in the employee's individual market 
over \1/12\ of the employee's permitted benefit, as defined in Code 
section 9831(d)(3)(C), does not exceed \1/12\ of a specified percentage 
of the employee's household income.
    Code section 36B(c)(4)(B) provides that if an employee is provided 
a QSEHRA that does not constitute affordable coverage for a coverage 
month, the PTC otherwise allowable for the month is reduced by \1/12\ 
of the employee's annual permitted benefit under the QSEHRA.

G. Individual Market Special Enrollment Periods

    Generally, individuals may enroll in or change to different 
individual health insurance coverage only during the annual open 
enrollment period described in 45 CFR 155.410. An individual may 
qualify for an SEP to enroll in or change to a different Exchange plan 
outside of the annual open enrollment period under a variety of 
circumstances prescribed by PPACA section 1311(c)(6)(C) and (D) and as 
described in 45 CFR 155.420. These SEPs are under the jurisdiction of 
HHS, and apply to persons seeking individual health insurance coverage 
through a State Exchange or Federally-facilitated

[[Page 28894]]

Exchange (FFE) and, in most cases, to individuals seeking individual 
health insurance coverage outside an Exchange.\47\
---------------------------------------------------------------------------

    \47\ Group health plans and group health insurance issuers must 
provide SEPs under certain circumstances and the Departments have 
jurisdiction over those provisions. See Code section 9801(f), ERISA 
section 701(f), and PHS Act section 2704(f); see also 26 CFR 
54.9801-6, 29 CFR 2590.701-6, and 45 CFR 146.117. The final rules do 
not affect the group health plan and group health insurance issuer 
SEPs, which continue to apply to group health plans, including HRAs, 
and group health insurance issuers.
---------------------------------------------------------------------------

    Paragraph (d) of 45 CFR 155.420 describes the triggering events 
that qualify individuals, enrollees, and in some cases, their 
dependents for SEPs on the Exchanges through which they can enroll in a 
QHP or change from one QHP to another. Paragraph (b) of 45 CFR 155.420 
describes the coverage effective dates available in connection with 
each SEP. Paragraph (c) describes the availability of each SEP relative 
to its triggering event--that is, whether applicants may select a plan 
after the event or also before the event. That paragraph also describes 
the length of time applicants have to select a plan based on their SEP. 
Paragraph (a)(4) of 45 CFR 155.420 describes the plan changes that 
current Exchange enrollees and their dependents may make upon 
qualifying for an SEP. Generally, current Exchange enrollees who 
qualify for most SEPs may change to another QHP within the same metal 
level, or ``plan category,'' as their current QHP. Current enrollees 
whose dependent(s) qualify for most SEPs may add their dependent(s) to 
their current QHP, or enroll them in a separate QHP.\48\ In 
combination, the rules at 45 CFR 155.420(a)(4) are generally referred 
to as ``plan category limitations.''
---------------------------------------------------------------------------

    \48\ If an enrollee wants to add their dependent(s) to their 
current QHP, but the plan's business rules do not allow the 
dependent(s) to enroll, then the Exchange must allow the enrollee 
and his or her dependent(s) to change to another QHP within the same 
level of coverage, or one metal level higher or lower, if no such 
QHP is available.
---------------------------------------------------------------------------

    With regard to individual health insurance coverage sold outside of 
an Exchange, 45 CFR 147.104(b)(2) provides that health insurance 
issuers must provide SEPs (referred to in the regulation as limited 
open enrollment periods) for the triggering events described in 45 CFR 
155.420(d), except for certain triggering events listed under 45 CFR 
147.104(b)(2). Additionally, 45 CFR 147.104(b)(4)(ii) and (b)(5) apply 
the SEP availability and coverage effective dates at 45 CFR 155.420 to 
SEPs available off-Exchange. However, the plan category limitations do 
not apply outside the Exchanges.

H. Proposed Rules

    In response to Executive Order 13813, the Departments published a 
notice of proposed rulemaking entitled ``Health Reimbursement 
Arrangements and Other Account-Based Group Health Plans'' on October 
29, 2018 (83 FR 54420) (the proposed rules), which would expand the 
flexibility and use of HRAs.
    The proposed rules would expand the use of HRAs in several ways. 
First, the proposed rules included a proposal to remove the current 
prohibition against integrating an HRA with individual health insurance 
coverage \49\ under the PHS Act section 2711 rules (the proposed 
integration rules). The proposed integration rules included a proposal 
to permit an HRA to be integrated with individual health insurance 
coverage and, therefore, to satisfy PHS Act sections 2711 and 2713, if 
the provisions of the proposed rules under 26 CFR 54.9802-4, 29 CFR 
2590.702-2, and 45 CFR 146.123 were satisfied. These final rules refer 
to this type of HRA as an individual coverage HRA.
---------------------------------------------------------------------------

    \49\ For purposes of this preamble and the final rules, 
``individual health insurance coverage'' means health insurance 
coverage offered to individuals in the individual market, but does 
not include STLDI. See PHS Act section 2791(b)(5). See also 26 CFR 
54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103. Individual health 
insurance coverage can include dependent coverage and therefore can 
be self-only coverage or other-than-self-only coverage. ``Individual 
market'' means the market for health insurance coverage offered to 
individuals other than in connection with a group health plan. See 
PHS Act section 2791(e)(1). See also 26 CFR 54.9801-2, 29 CFR 
2590.701-2, and 45 CFR 144.103. As discussed later in this preamble, 
``group health insurance coverage'' means health insurance coverage 
offered in connection with a group health plan. Individual health 
insurance coverage reimbursed by the arrangements described in 29 
CFR 2510.3-1(l) (which is finalized in this rule) is not offered in 
connection with a group health plan, and is not group health 
insurance coverage, provided all the conditions in 29 CFR 2510.3-
1(l) are satisfied. See ERISA section 733(b)(4) and PHS Act section 
2791(b)(4). See also 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 
144.103.
---------------------------------------------------------------------------

    Second, the proposed rules provided an expanded definition of 
limited excepted benefits, under Code section 9832(c)(2), ERISA section 
733(c)(2), and PHS Act section 2791(c)(2)(C), to include certain HRAs 
that are limited in amount and with regard to the types of coverage for 
which premiums may be reimbursed, if certain other conditions are 
satisfied (an excepted benefit HRA) (the proposed excepted benefit HRA 
rules).
    The Treasury Department and the IRS also proposed rules under Code 
section 36B for PTC eligibility for individuals who are offered an 
individual coverage HRA \50\ (the proposed PTC rules). DOL proposed a 
clarification to provide HRA and QSEHRA plan sponsors with assurance 
that the individual health insurance coverage the premiums of which are 
reimbursed by the HRA or QSEHRA does not become part of an ERISA plan 
when certain conditions are satisfied. Finally, HHS proposed changes to 
rules regarding SEPs in the individual market that would provide an SEP 
for individuals who gain access to individual coverage HRAs or who are 
provided QSEHRAs (the proposed SEP rules).\51\
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    \50\ References in the preamble to ``an offer of an individual 
coverage HRA'' or to similar phrases mean an offer of an HRA 
designed to be integrated with individual health insurance coverage 
under the final rules that will be considered integrated with that 
individual health insurance coverage for an individual who enrolls 
in that coverage.
    \51\ On November 19, 2018, the Treasury Department and the IRS 
issued Notice 2018-88. IRS Notice 2018-88 described a number of 
proposals related to the application of Code sections 4980H and 
105(h) to individual coverage HRAs. For additional discussion of IRS 
Notice 2018-88, see elsewhere in this preamble.
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    The Departments requested comments on all aspects of the proposed 
rules, as well as requesting comments on a number of specific issues. 
The Departments received over 500 comments in response to the proposed 
rules from a range of stakeholders, including employers, health 
insurance issuers, State Exchanges, state regulators, unions, and 
individuals. No requests for a public hearing were received. After 
careful consideration of all of the comments, the Departments are 
finalizing the proposed rules with certain modifications made in 
response to comments. These modifications are discussed later in this 
preamble.

II. Overview of the Final Rules on Individual Coverage HRAs and 
Excepted Benefit HRAs--the Departments of the Treasury, Labor, and 
Health and Human Services

A. Integration Rules

1. Integration--In General
    Consistent with the objectives in Executive Order 13813 to consider 
proposing rules to expand and facilitate access to HRAs, the proposed 
rules included a proposal to remove the prohibition on integration of 
an HRA with individual health insurance coverage, if certain conditions 
were satisfied. More specifically, in order to ensure compliance with 
PHS Act sections 2711 and 2713, the proposed rules provided that to be 
integrated with individual health insurance coverage, the HRA must 
require participants \52\

[[Page 28895]]

and any dependents \53\ covered by the HRA \54\ to be enrolled in 
individual health insurance coverage and to substantiate compliance 
with this requirement.
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    \52\ For this purpose, the definition of participant under 26 
CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103 applies, which 
is defined as a participant within the meaning of ERISA section 
3(7). Under ERISA section 3(7), ``the term `participant' means any 
employee or former employee of an employer, or any member or former 
member of an employee organization, who is or may become eligible to 
receive a benefit of any type from an employee benefit plan which 
covers employees of such employer or members of such organization, 
or whose beneficiaries may be eligible to receive any such 
benefit.''
    \53\ For this purpose, the definition of dependent under 26 CFR 
54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103 applies, which is 
defined as ``any individual who is or may become eligible for 
coverage under the terms of a group health plan because of a 
relationship to a participant.''
    \54\ The final rules use several terms interchangeably regarding 
an individual's individual coverage HRA status. These terms 
generally parallel those used when referring to group or individual 
health insurance coverage. Specifically, ``enrolled in'' and 
``covered by,'' both refer to the status of an individual who is 
participating in an individual coverage HRA and can request 
reimbursements for medical care expenses reimbursable under the HRA. 
The date on which an individual coverage HRA ``takes effect'' or 
``begins'' refers to the first date on which reimbursable medical 
care expenses may be incurred. For example, an employee whose 
individual coverage HRA takes effect on June 1 may request 
reimbursements for medical care expenses incurred on or after that 
date, if the individual is enrolled in individual health insurance 
coverage or Medicare on or before June 1.
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    Further, in order to prevent a plan sponsor from intentionally or 
unintentionally, directly or indirectly, steering any participants or 
dependents with adverse health factors away from the plan sponsor's 
traditional group health plan and into the individual market, the 
proposed rules prohibited a plan sponsor from offering employees within 
a class of employees a choice between a traditional group health plan 
and an individual coverage HRA. The proposed rules also required that 
an individual coverage HRA be offered on the same terms to all 
employees within a class of employees, subject to certain exceptions, 
and the proposed rules included proposed classes of employees that 
employers could use for this purpose.
    The proposed rules also required individual coverage HRAs to allow 
employees to opt out of and waive future reimbursements under the HRA 
at certain times, and to provide a notice to eligible participants 
regarding how the offer of the HRA, or enrollment in the HRA, affects 
the ability to claim the PTC. This was proposed because an offer of an 
HRA may affect an individual's eligibility for the PTC, and enrollment 
in an HRA does affect an individual's eligibility for the PTC.
    Each of these conditions, and the related comments received, are 
discussed in the following sections of this preamble. This section of 
the preamble addresses the more general comments on allowing HRAs to be 
integrated with individual health insurance coverage.
    Many commenters supported the proposed rules. Some of these 
commenters expressed general support for the Departments' efforts to 
expand the availability and use of HRAs and the priority the 
Departments have placed on HRAs. Some commenters stated that the 
proposed rules would enable employers to offer more affordable health 
coverage alternatives to employees and could expand health insurance 
coverage, including for lower-wage and part-time and other particular 
groups of employees. Some commenters focused on the potential benefits 
for small employers, commenting that the proposed HRA expansion would 
create new options for small employers that have otherwise been unable 
to offer health insurance coverage due to PPACA-related requirements. 
These commenters asserted that the proposed HRA expansion would help 
small employers provide meaningful benefits, attract talent, and keep 
their workforce healthy. Some commenters expressed general support for 
allowing employers to move to a defined contribution approach for 
health insurance coverage, including because this likely permits 
greater employee choice.
    Some commenters noted that allowing individual coverage HRAs could 
expand and stabilize the individual health insurance market while 
providing greater administrative simplicity and reducing administrative 
costs for employers. In particular, some commenters expressed the view 
that the proposed rules would strengthen the individual market due to 
an increased number of individuals in the individual market and because 
working individuals who would be added to the individual market tend to 
be of lower health risk than those currently comprising the individual 
market risk pool. Some commenters also stated that employers may not 
necessarily be incentivized to segment their risk and, therefore, 
concerns about adverse selection may be overstated.
    Some commenters who generally supported the proposed rules 
emphasized that their support was contingent on any final rules 
retaining the conditions intended to prevent adverse selection. And 
some commenters opposed allowing individual coverage HRAs. These 
commenters stated that the safeguards in the proposed rules were 
insufficient to prevent market segmentation and destabilization of the 
individual market. Several of these commenters argued that market 
segmentation could occur if employers that choose to offer an 
individual coverage HRA have higher-risk employees than those employers 
that choose not to offer an individual coverage HRA and that employers 
may still be able to segment risk based on the proposed classes of 
employees. Some of these commenters asked that the rules be withdrawn, 
or at least delayed, until the potential effects on the individual and 
group markets could be better understood.
    More generally, commenters expressed a number of concerns regarding 
adverse selection and risk-pool effects of the proposed rules, 
including that the proposed rules would change the composition of the 
risk pools for the individual and small group markets, making coverage 
more expensive and less accessible overall. Some commenters were 
concerned that the proposed rules would be particularly harmful to 
self-employed individuals and small business employees because those 
individuals generally rely on coverage in the individual market and, 
according to the commenters, the proposed rules would increase premiums 
in the individual market. Some commenters were also concerned that 
employers may substantially alter traditional group health plans to the 
detriment of all employees who rely on that coverage and that there 
could be negative implications in the small group market for states 
that have merged their individual and small group market risk pools. 
One commenter stated that the negative effects of the proposed rules, 
particularly the increase in individual market premiums and the 
attendant fiscal cost that the commenter expects to occur, are likely 
to outweigh the benefits to employers and their employees. Another 
commenter asserted that the proposed rules would increase premiums due 
to both adverse selection and issuers' increased uncertainty regarding 
the effect of individual coverage HRAs on the individual market.
    The Departments agree with the commenters who asserted that 
allowing individual coverage HRAs will expand flexibility and use of 
HRAs to provide additional options for employers and employees to offer 
and obtain quality, affordable healthcare. The Departments also agree 
that individual coverage HRAs would expand coverage and may provide 
greater administrative

[[Page 28896]]

simplicity and reduce administrative costs for employers.
    The Departments acknowledge the concerns expressed by commenters 
that allowing individual coverage HRAs could cause adverse selection in 
the individual market. As explained in the preamble to the proposed 
rules, allowing individual coverage HRAs could theoretically result in 
opportunities for employers to encourage higher-risk employees (that 
is, employees with high expected medical claims or employees with 
family members with high expected medical claims) to obtain coverage in 
the individual market, external to the traditional group health plan 
sponsored by the employer, in order to reduce the cost of traditional 
group health plan coverage provided by the employer to lower-risk 
employees. This could happen in a number of ways. For example, if 
employees were permitted to choose between participating in an 
employer's traditional group health plan or an individual coverage HRA, 
some higher-risk employees might have an incentive to select the HRA 
and enroll in individual health insurance coverage, depending on the 
relative generosity of the individual coverage HRA and the individual 
health insurance coverage as compared to the traditional group health 
plan. There could be significant differences between these coverage 
options because individual health insurance coverage generally is 
required to cover all categories of EHBs, and large group market and 
self-insured group health plans are not required to do so. An employer 
could also deliberately attempt to steer employees with certain medical 
conditions away from the employer's traditional group health plan. In 
either case, if disproportionately higher-risk employees enrolled in 
individual coverage HRAs, this adverse selection could raise premiums 
in the individual market.
    Both in promulgating the proposed rules and again in response to 
comments provided on the proposed rules, the Departments considered the 
possibility that the individual market could instead be positively 
impacted. Lower-risk employees might choose individual coverage HRAs, 
while higher-risk employees might elect to remain in their employer's 
traditional group health plan. Such an outcome could result for a host 
of reasons, including because higher-risk employees may be more risk 
averse to changing health benefits. Additionally, individual health 
insurance coverage might have more restrictive provider networks than 
traditional group health plans and higher-risk employees are generally 
more sensitive to the make-up of the provider network than lower-risk 
employees. In addition, lower-risk employees might prefer an individual 
coverage HRA because it could allow them to spend less on premiums--
reducing or potentially eliminating out-of-pocket premiums and 
potentially leaving more funds to cover cost sharing. Further, 
employers might be discouraged by the legal risk involved with 
attempting to steer higher-risk employees away from the traditional 
group health plan.
    However, employers also would face strong countervailing incentives 
to maintain (or improve) the average health risk of participants in 
their traditional group health plans. Therefore, the Departments have 
determined that there is a risk of some market segmentation and health 
factor discrimination that could result from allowing individual 
coverage HRAs, but the Departments also have determined that the risk 
can be sufficiently mitigated with conditions of the type provided in 
the proposed rules (and in the final rules) designed to limit adverse 
selection. Moreover, as discussed in more detail later in this 
preamble, the Departments considered the comments requesting that the 
Departments strengthen the conditions intended to limit adverse 
selection, and the Departments are finalizing those proposed conditions 
with some changes in response to comments, including adding a minimum 
class size requirement that will apply to certain classes of employees 
in certain instances. Regarding the concern raised by commenters that 
the proposed conditions would not prevent adverse selection if 
employers with higher-risk employees chose to offer individual coverage 
HRAs, the Departments took that possibility into account in the 
regulatory impact analysis.
    Therefore, taking all of these considerations into account, the 
Departments have determined that allowing individual coverage HRAs will 
produce significant benefits, including increased options and coverage, 
and is not likely to create a material risk of adverse selection in the 
individual market due to the sufficiency of, and changes to strengthen, 
the integration conditions intended to mitigate that risk that are 
finalized in this rulemaking. Accordingly, the Departments are 
finalizing the proposed rules, including each of the conditions 
included in the proposed rules, but with various changes and 
clarifications, as explained later in this preamble.
    A number of commenters expressed concern about the impact on 
employees shifting from traditional group health plans to the 
individual market. Some commenters emphasized that in order to achieve 
the goals of expanding coverage and increasing choice and flexibility 
for employers, it is vital that the individual market be stable and 
well-functioning; otherwise, employers will be unwilling to utilize the 
expanded flexibility. Some commenters recommended that the Departments 
delay issuing the final integration rules until insurance in the 
individual market is more affordable or until clearer information is 
available regarding the long-term stability of the individual market, 
including the impacts of other recent changes such as the expansion of 
STLDI and changes to the PPACA section 1332 waiver program. Some 
commenters asked the Departments to withdraw the proposed integration 
rules and, instead, take other actions to stabilize the individual 
market. One commenter requested that HRA integration with individual 
health insurance coverage be allowed only if each employee is provided 
at least three choices for coverage in the individual market.
    The Departments acknowledge that the extent to which the goals of 
expanding coverage and options through individual coverage HRAs will be 
achieved depends on the existence of a stable individual market. 
Accordingly, the Departments are finalizing the proposed rules with 
conditions on individual coverage HRAs intended to prevent a negative 
impact on the individual market. The Departments expect individual 
coverage HRAs, with the safeguards in the final rules, will 
substantially increase the size of the individual market and will not 
result in significant changes in the average health risk of the 
individual market risk pool. The Departments also understand that 
currently the stability of the individual market varies a great deal 
across the country, and that in some places improvement will likely be 
needed before employers elect to offer individual coverage HRAs. The 
Departments considered these issues in developing the proposed and 
final rules and incorporated significant flexibility, including 
geographic flexibility, to address these issues so that each employer 
may choose what is best for its workforce. However, the final rules do 
not require that a minimum number of individual health insurance plans 
be available to employees in order for the employer to offer an 
individual coverage HRA. There is no compelling justification for such 
a requirement, and

[[Page 28897]]

it is not necessary to ensure compliance with PHS Act sections 2711 and 
2713. Employees often have limited choices with respect to the 
traditional group health plans they are offered, if any, and adopting 
this type of requirement would unnecessarily prevent certain employers 
from offering an individual coverage HRA. Further, suggestions 
regarding changes to the other rules that affect the individual market, 
in order to improve the individual market, are outside the scope of 
this rulemaking.
    Some commenters stated that the proposed rules failed to adequately 
take into account the differences between traditional group health 
plans and individual health insurance coverage, the increased burden on 
employees in choosing and enrolling in a plan in the individual market 
relative to the burden on employees under a traditional group health 
plan, and the significance of the change, from the employee's 
perspective. Other commenters stated that individuals in the individual 
market could face more expensive plans, lower employer contributions, 
narrower networks, and higher cost sharing. Some commenters stated that 
these individuals could also face more confusion and be provided less 
assistance, in part due to decreased federal funding for outreach and 
assistance in the individual market. Some of these commenters asserted 
what they believed to be the comparative advantages of traditional 
group health plans, including that those plans are more robust, cost-
effective, and consumer-friendly. One commenter expressed general 
concern about the shifting of employees from a defined benefit health 
plan system to a defined contribution health plan system, because, 
according to the commenter, it may result in less comprehensive 
coverage.
    The Departments considered, and are aware, that an employee's 
experience enrolling in and having coverage under an individual 
coverage HRA may be different than the experience of enrolling in and 
having coverage under a traditional group health plan. The Departments 
took this into account in developing the proposed and final rules, 
including by requiring the individual coverage HRA to provide a notice 
to eligible participants explaining the individual coverage HRA and the 
possible consequences of the HRA being offered and accepted. The 
Departments understand that employers tend to act in the best interest 
of their workers in order to recruit and retain talent. Therefore, an 
employer offering an individual coverage HRA generally will do so 
because it is a better alternative for a substantial share of their 
employees than a traditional group health plan or no offer of employer-
sponsored coverage. Further, as described later in this preamble, DOL 
is also clarifying the extent to which employers may assist employees 
with regard to enrollment in individual health insurance coverage 
without resulting in the individual health insurance coverage becoming 
part of an ERISA plan. In addition, the Departments are continuing to 
consider ways to assist employees offered an individual coverage HRA, 
including through clear instructions in the Exchange application 
process and other possible methods of outreach and assistance. As to 
the more general comments asserting that traditional group health plans 
have advantages as compared to individual health insurance coverage, 
the Departments acknowledge that there are differences. The Departments 
intend with the final rules to expand the choices available to 
employers and employees and to make an additional option available for 
employers, including those that have not previously offered traditional 
group health plan coverage.
    Some commenters questioned the Departments' legal authority with 
regard to certain aspects of the proposed rules. A few commenters 
questioned whether the Departments have the authority to allow HRAs to 
satisfy PHS Act sections 2711 and 2713 by virtue of integration with 
other coverage, and a few stated that the Departments failed to justify 
the removal of the regulatory prohibition on integration of an HRA with 
individual health insurance coverage. Further, a few commenters 
asserted that the Departments do not have the authority to allow 
individual coverage HRAs because Congress enacted the Cures Act, which 
provided a limited exception to the prohibition on HRAs provided in 
conjunction with individual health insurance coverage in the form of 
QSEHRAs, and the commenters believe this indicates that Congress did 
not intend to allow the Departments to otherwise remove the regulatory 
prohibition on integration of an HRA with individual health insurance 
coverage.
    The Departments disagree with these commenters and, instead, have 
determined that the final rules are justified and within the 
Departments' authority. While HRAs are group health plans subject to 
PHS Act sections 2711 and 2713 and would fail to comply with those 
provisions if they were offered on their own, PHS Act sections 2711 and 
2713 do not speak directly to situations in which an HRA is integrated 
with other coverage that satisfies those statutory requirements. The 
Departments have determined that it is reasonable, and consistent with 
the statutory scheme, to apply PHS Act sections 2711 and 2713 to the 
integrated arrangement rather than to each of its component parts.
    As explained earlier in this preamble, the Departments previously 
determined that it was reasonable to consider an HRA to be compliant 
with PHS Act sections 2711 and 2713 as long as individuals covered by 
the HRA had other employer-provided group health plan coverage 
(including coverage offered by a different employer, such as a spouse's 
employer) that satisfied the conditions in PHS Act sections 2711 and 
2713, subject to certain other conditions.\55\ In that case, under the 
combined arrangement, individuals have the protections intended by 
PPACA, in addition to the HRA that they generally may use to pay for 
premiums or other medical care expenses not covered by the group health 
plan. The Departments now extend this same approach to integration with 
individual health insurance coverage, which the Departments have 
determined is similarly justified and appropriate, as individual health 
insurance coverage is generally subject to and compliant with PHS Act 
sections 2711 and 2713.\56\
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    \55\ The Departments note that under IRS Notice 2015-17, HRAs 
that reimburse certain Medicare premiums and TRICARE expenses may be 
considered integrated with the group health plan coverage offered to 
the employee by the employer although the employee is not enrolled 
in that group coverage and is instead enrolled in Medicare or 
TRICARE, subject to certain conditions. Further, under 26 CFR 
54.9815-2711(d)(5), 29 CFR 2590.715-2711(d)(5), and 45 CFR 
147.126(d)(5), an employer payment plan for Medicare premiums 
offered by certain employers may be considered integrated with 
Medicare (and considered to be compliant with PHS Act sections 2711 
and 2713), subject to certain conditions.
    \56\ Further, for the reasons discussed later in this preamble, 
the Departments have determined that permitting integration of 
individual coverage HRAs with Medicare is also justified and 
appropriate, subject to certain conditions. References in this 
preamble to an individual coverage HRA integrated with Medicare 
refer to an individual coverage HRA integrated with Medicare Part A 
and B or Medicare Part C.
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    In developing the proposed and final rules, the Departments 
considered that the Cures Act provided for QSEHRAs. However, in 
creating QSEHRAs, Congress did not enact a general prohibition on 
integrating an HRA with individual health insurance coverage. Instead, 
Congress allowed a limited HRA that certain small employers may provide 
that is not a group health plan subject to the market requirements and, 
thus, need not be integrated with any

[[Page 28898]]

other health coverage to satisfy PHS Act sections 2711 and 2713. The 
fact that Congress provided some flexibility for certain employers by 
creating QSEHRAs does not preclude the Departments from providing 
additional flexibility through rulemaking to allow individual coverage 
HRAs.\57\ 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.\58\ 
Moreover, by virtue of providing for QSEHRAs, Congress acknowledged and 
left intact the Departments' regulations allowing for integration of 
HRAs with other group health plan coverage. In so doing, Congress 
recognized the Departments' authority to allow HRAs to be integrated 
with other group health plan coverage, which is the same authority the 
Departments now extend to allow integration of HRAs with individual 
health insurance coverage.
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    \57\ Congress has granted the Departments the authority to 
promulgate regulations as may be necessary or appropriate to carry 
out the provisions of the Code, ERISA, and the PHS Act that were 
added as a result of HIPAA and PPACA. See Code section 9833, ERISA 
section 734, and PHS Act section 2792.
    \58\ The Departments note that an employer may not both offer an 
individual coverage HRA and provide a QSEHRA, as a result of the 
QSEHRA rules under Code section 9831(d) and as a result of the 
conditions that apply to individual coverage HRAs.
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    The Departments acknowledge that the final rules, in allowing 
individual coverage HRAs, remove the prohibition on an HRA being 
integrated with individual health insurance coverage that the 
Departments had previously imposed. As noted earlier in this section of 
the preamble, in the 2015 rules and the guidance that preceded those 
rules, the Departments determined that HRAs should not be allowed to be 
integrated with individual health insurance coverage, even though that 
insurance coverage is generally subject to and compliant with PHS Act 
sections 2711 and 2713. The Departments at that time declined to allow 
integration with individual health insurance coverage because of 
concerns about adverse selection in the individual market. Since that 
time, the Departments have observed that many employers, especially 
small employers, continue to struggle to offer health insurance 
coverage to their employees.\59\ Further, the Departments have had 
additional time to consider whether, and what type of, conditions would 
be sufficient to mitigate the risk of adverse selection and health 
factor discrimination that might otherwise result from allowing HRAs to 
be integrated with individual health insurance coverage.
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    \59\ In 2018, 57 percent of firms offered health benefits to at 
least some of their workers; 47 percent of employers with three to 
nine workers offered coverage, while virtually all firms with 1,000 
or more workers offered coverage. See Kaiser Family Foundation, 
``Employer Health Benefits 2018 Annual Survey'', Figure 2.2 at 
https://files.kff.org/attachment/Report-Employer-Health-Benefits-Annual-Survey-2018.
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    The Departments have determined that the advantages to employers 
and employees of individual coverage HRAs warrant allowing them to be 
offered,\60\ notwithstanding the concerns regarding potential adverse 
selection risk to the individual market. This is because the 
Departments expect that the conditions adopted in the final rules will 
significantly mitigate the risk of adverse selection. As to the 
benefits, the final rules will increase flexibility and choices of 
health coverage options for employers and employees. The increased use 
of individual coverage HRAs could potentially reduce healthcare 
spending, particularly less efficient spending, and ultimately result 
in increased taxable wages for workers in firms that currently offer 
traditional group health plans. The final rules are also expected to 
increase the number of low- and moderate-wage workers (and their family 
members) with health insurance coverage.
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    \60\ HRA expansion is an Administration priority. In October 
2017, the President issued Executive Order 13813, directing the 
Departments ``to consider proposing regulations or revising 
guidance, to the extent permitted by law and supported by sound 
policy, to increase the usability of HRAs, to expand employers' 
ability to offer HRAs to their employees, and to allow HRAs to be 
used in conjunction with nongroup coverage.'' The Executive Order 
further provides that expanding ``the flexibility and use of HRAs 
would provide many Americans, including employees who work at small 
businesses, with more options for financing their healthcare.''
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    Accordingly, the Departments disagree with commenters who asserted 
that the Departments are precluded from allowing individual coverage 
HRAs because those arrangements were not previously allowed and that 
such a change is not sufficiently justified. The Departments have 
considered whether to allow HRAs to be integrated with individual 
health insurance coverage, and have determined that a change allowing 
that integration is warranted, subject to a number of significant 
conditions intended to protect against the risk of adverse selection 
and health factor discrimination. This change comes after the 
Departments' consideration of various factors, including the need to 
provide employers and employees additional choices with respect to 
healthcare coverage, the ability of the conditions in the final rules 
to mitigate against adverse selection and health factor discrimination, 
and the anticipated effect of the final rules to increase choice and 
competition and decrease the number of uninsured individuals.
    One commenter stated that allowing individual coverage HRAs is 
contrary to PPACA's intent to create a stable individual market. The 
Departments acknowledge that allowing individual coverage HRAs in a way 
that could lead to large-scale destabilization of the individual market 
could undermine one purpose of PPACA. However, the Departments have 
carefully designed the final rules to be consistent with Congress's 
intent in enacting both PPACA and HIPAA.\61\ In developing the proposed 
and final rules, the Departments considered how to avoid permitting 
discrimination based on health status or similar practices with respect 
to offering individual coverage HRAs to employees that might have 
destabilizing effects on the individual market or lead to higher 
premiums in that market. The Departments have determined that the risk 
of market segmentation and health factor discrimination is sufficiently 
significant to justify including conditions in the final rules intended 
to mitigate those risks, including strengthening certain conditions 
provided for in the proposed rules. Additionally, the Departments have 
determined that the strengthened conditions in the final rules, which 
are described at length later in this preamble, are both sufficient to 
mitigate those risks and consistent with HIPAA and PPACA.
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    \61\ In 1996, Congress enacted the HIPAA nondiscrimination 
provisions, which now generally prohibit group health plans and 
health insurance issuers in the group and individual markets from 
discriminating against individual participants and beneficiaries in 
eligibility, benefits, or premiums based on a health factor. In 
2010, Congress enacted PPACA, in part, because individual health 
insurance coverage was not a viable option for many individuals who 
lacked access to group health plan coverage, given that individual 
market issuers in many states could deny coverage, charge higher 
premiums based on an individual's health risk, or impose preexisting 
condition exclusions based on an individual's health risk. To 
address these issues, PPACA included numerous provisions that were 
intended to create a competitive individual market that would make 
affordable coverage available to individuals who do not have access 
to other health coverage, as set forth in detail in the preamble to 
the proposed rules. See 83 FR 54420, 54428-54429 (Oct. 29, 2018).
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    One commenter stated that it would make little sense to expect 
individual coverage HRAs to comply with PHS Act sections 2711 and 2713 
because HRAs function more like bank accounts than health insurance 
policies. The Departments recognize that HRAs and health insurance 
policies can function

[[Page 28899]]

differently. However, HRAs are group health plans and, therefore, 
generally are subject to the market requirements under the PHS Act, 
except to the extent that they are excepted benefits or are retiree-
only HRAs. The Departments lack the statutory authority to exempt HRAs 
that are otherwise subject to the market requirements from the category 
of group health plans subject to the market requirements. The final 
rules allow individual coverage HRAs to comply with the requirements of 
PHS Act sections 2711 and 2713 in a manner that preserves the 
protections of those sections.
2. Requirement That All Individuals Covered by an Individual Coverage 
HRA Be Enrolled in Individual Health Insurance Coverage
a. In General
    The proposed rules provided that an HRA may be integrated with 
individual health insurance coverage, and would be considered compliant 
with PHS Act sections 2711 and 2713, if the HRA requires the 
participant and any dependent(s) to be enrolled in individual health 
insurance coverage (other than coverage that consists solely of 
excepted benefits) \62\ for each month each individual is covered by 
the HRA. Under the proposed rules, if the participants and dependents 
merely have the ability to obtain individual health insurance coverage, 
but do not actually have that coverage, the HRA would fail to comply 
with PHS Act sections 2711 and 2713.
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    \62\ Throughout this preamble, references to individual health 
insurance coverage in the context of the integration rules do not 
include coverage that consists solely of excepted benefits unless 
otherwise specified. Also, see later in this preamble for a 
discussion of the conditions that apply if an individual coverage 
HRA is integrated with Medicare, in which case references to 
individual health insurance coverage generally are considered to 
also refer to Medicare.
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    Many commenters supported this condition and strongly recommended 
it be included in the final rules. Commenters that supported the 
condition stated that it would reduce or prevent the risk of adverse 
selection and would ensure that employees directed out of the group 
market have access to a stable individual market. The Departments agree 
that the requirement to have individual health insurance coverage in 
order to be covered by an individual coverage HRA is essential and, in 
order to ensure compliance with PHS Act sections 2711 and 2713, the 
final rules adopt this requirement, generally as set forth in the 
proposed integration rules, but with some clarifications as explained 
later in this section of the preamble.\63\
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    \63\ The Departments note that when an individual enrolls in 
individual health insurance coverage, the coverage generally will 
have an effective date that is the first day of a calendar month. 
Other than for mid-month enrollment of a new child, individual 
health insurance plans generally are not made available for coverage 
to start mid-month. Therefore, individual coverage HRA plan sponsors 
will need to take this into account in designing plan terms for 
eligibility for individual coverage HRAs, both with respect to 
employees offered the HRA for the full plan year and for those who 
become covered by the HRA subsequent to the first day of the plan 
year, to ensure compliance with the enrollment requirement under the 
final rules.
---------------------------------------------------------------------------

    One commenter suggested that the final rules should allow an 
individual coverage HRA to provide benefits to dependents who are not 
enrolled in individual health insurance coverage so long as the 
employee-participant is enrolled in individual health insurance 
coverage. The Departments decline to adopt this suggestion because the 
requirements of PHS Act sections 2711 and 2713 apply to group health 
plans with respect to both participants and dependents.\64\
---------------------------------------------------------------------------

    \64\ In addition, the commenter expressed confusion as to how 
this integration requirement applies to a dependent who is not 
covered by the individual coverage HRA, including a dependent 
covered by another type of coverage or a dependent the employee does 
not want to identify to the employer. While under the final rules an 
individual coverage HRA must require that each individual covered by 
the HRA be enrolled in individual health insurance coverage, the 
final rules do not include a requirement that the HRA cover any 
particular dependent(s), provided the HRA complies with PHS Act 
section 2714 and 26 CFR 54.9815-2714, 29 CFR 2590.715-2714, and 45 
CFR 147.120 (relating to dependent coverage of children to age 26), 
nor is there a prohibition on allowing the participant to exclude 
certain dependents from coverage under the HRA.
---------------------------------------------------------------------------

b. Individual Health Insurance Coverage With Which an Individual 
Coverage HRA May Be Integrated
    Commenters generally supported the rule that individual coverage 
HRAs must be integrated with individual health insurance coverage as 
defined in the PHS Act. As discussed in this section of the preamble, 
several commenters requested clarification regarding whether 
integration with various types of individual health insurance coverage 
would be allowed under the proposed rules.
    Some commenters requested that the final rules only permit 
integration with individual health insurance coverage that covers all 
EHBs or that provides comprehensive mental health and substance use 
disorder benefits. The Departments decline to make revisions in 
response to these comments because under PPACA, individual health 
insurance coverage generally is required to cover all EHBs, including 
mental health and substance use disorder services.\65\
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    \65\ See PPACA section 1302 and PHS Act section 2707(a). 
However, the Departments note that grandfathered individual health 
insurance coverage and ``grandmothered'' individual health insurance 
coverage subject to the HHS non-enforcement policy might not cover 
all EHBs. See later in this preamble for a discussion of 
``grandmothered'' individual health insurance coverage.
---------------------------------------------------------------------------

    Commenters also requested that the final rules clarify whether an 
individual coverage HRA may be integrated with individual health 
insurance coverage sold in a state that has a waiver under PPACA 
section 1332.\66\ Some commenters stated that integration with that 
coverage should be permitted so long as the waiver does not allow 
coverage to impose annual or lifetime dollar limits or exclude benefits 
for preventive services. Other commenters argued that integration with 
that coverage should not be permitted because it might not satisfy all 
of the PPACA requirements.
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    \66\ Under PPACA section 1332, a state can apply for a state 
innovation waiver from HHS and the Treasury Department, which allows 
the state, if approved, to implement innovative programs to provide 
access to quality healthcare. States seeking approval for a state 
innovation waiver must demonstrate that the waiver will provide 
access to health insurance coverage that is at least as 
comprehensive and affordable as would be provided under PPACA 
without the waiver, will provide coverage to at least a comparable 
number of residents of the state as would be provided without a 
waiver, and will not increase the federal deficit.
---------------------------------------------------------------------------

    The Departments note that although PPACA section 1332 allows states 
to waive certain provisions of PPACA, it does not allow states to waive 
PHS Act sections 2711 and 2713. Therefore, the final rules do not 
prohibit integration of an HRA with individual health insurance 
coverage obtained in a state with a PPACA section 1332 waiver because 
individual health insurance coverage obtained in that state will be 
subject to PHS Act sections 2711 and 2713.\67\ Other issues with regard 
to PPACA section 1332 are beyond the scope of this rulemaking.
---------------------------------------------------------------------------

    \67\ HHS and the Treasury Department evaluate state PPACA 
section 1332 waiver applications on a case-by-case basis and will 
include a determination of the interaction with the final rules (if 
any).
---------------------------------------------------------------------------

    One commenter requested confirmation that HRAs may be integrated 
with catastrophic plans in the individual market. Another commenter 
requested that the final rules not allow integration of HRAs with 
catastrophic plans because of the limited nature of those plans. The 
Departments note that catastrophic plans, as set forth in PPACA section 
1302(e), are a type of individual health insurance coverage available 
to only certain individuals and that provide only limited benefits 
until the individual has incurred expenses

[[Page 28900]]

sufficient to reach the maximum out-of-pocket limit under PPACA.\68\ 
However, catastrophic plans are subject to the market requirements, 
including PHS Act sections 2711 and 2713. Therefore, the final rules do 
not prohibit integration of an individual coverage HRA with 
catastrophic plans.
---------------------------------------------------------------------------

    \68\ To be eligible for a catastrophic plan, an individual must 
either be under the age of 30 or qualify for a hardship or 
affordability exemption under Code section 5000A. See PPACA section 
1302(e) and 45 CFR 156.155. One commenter suggested that the 
Departments change the definition of catastrophic plan so that it is 
available to individuals other than those who are eligible under 
PPACA section 1302(e). That change is outside the scope of this 
rulemaking.
---------------------------------------------------------------------------

    One commenter asked that the Departments prohibit integration with 
``grandmothered'' individual health insurance coverage, as it is not 
compliant with PPACA. Grandmothered individual health insurance 
coverage refers to certain non-grandfathered health insurance coverage 
with respect to which CMS has announced it will not take enforcement 
action even though the coverage is out of compliance with certain 
specified market requirements. To date, the CMS non-enforcement policy 
has been extended to apply to renewals of such coverage through policy 
years beginning on or before October 1, 2020, provided that all such 
coverage comes into compliance with the specified requirements by 
January 1, 2021.\69\ The Departments note that although grandmothered 
individual health insurance coverage is subject to a non-enforcement 
policy for some market requirements, the non-enforcement policy does 
not extend to compliance with PHS Act sections 2711 and 2713. 
Accordingly, grandmothered plans are subject to PHS Act sections 2711 
and 2713, and under the final rules, an individual coverage HRA may be 
integrated with grandmothered individual health insurance coverage.
---------------------------------------------------------------------------

    \69\ See CMS Insurance Standards Bulletin Series--INFORMATION--
Extension of Limited Non-Enforcement Policy through 2020 (March 25, 
2019), available at https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/Limited-Non-Enforcement-Policy-Extension-Through-CY2020.pdf.
---------------------------------------------------------------------------

    One commenter requested clarification as to whether individual 
health insurance coverage sold through a private exchange model 
qualifies as coverage that may be integrated with an HRA. To the extent 
coverage sold through a private exchange model is individual health 
insurance coverage, within the meaning of the PHS Act,\70\ an HRA may 
be integrated with that coverage. However, the Departments note that as 
part of the final rules DOL is issuing a safe harbor to clarify to 
stakeholders when individual health insurance coverage obtained by a 
participant in an individual coverage HRA would not be part of an 
employee welfare benefit plan under ERISA, which would avoid the 
individual health insurance coverage effectively becoming group 
coverage. See later in this preamble for discussion of how this safe 
harbor would apply with respect to individual health insurance coverage 
offered through web-based platforms, such as private exchanges.
---------------------------------------------------------------------------

    \70\ See PHS Act section 2791(b)(5).
---------------------------------------------------------------------------

    One commenter supported the proposal to prohibit integration with 
individual health insurance coverage that consists solely of excepted 
benefits, noting that this aspect of the rule is consistent with the 
limited nature of excepted benefits. The Departments agree. Because 
coverage consisting solely of excepted benefits is not subject to or 
generally compliant with PHS Act sections 2711 and 2713, the final 
rules provide that individual coverage HRAs may not be integrated with 
individual health insurance coverage that consists solely of excepted 
benefits. However, as discussed later in this preamble, an HRA that 
reimburses only excepted benefits is not subject to the market 
requirements or the final rules.
    See later in this preamble for a discussion of comments received 
regarding integration of HRAs with student health insurance coverage, 
as well as types of coverage other than individual health insurance 
coverage. Also, see later in this preamble for a discussion of the 
conditions under which an individual coverage HRA may be integrated 
with Medicare.
c. Proxy Approach To Verify Compliance
    Under the proposed rules, all individual health insurance coverage 
(except for coverage that consists solely of excepted benefits) would 
be treated as being subject to and compliant with PHS Act sections 2711 
and 2713. The Departments explained that requiring a participant or an 
individual coverage HRA to substantiate compliance with PHS Act 
sections 2711 and 2713 separately for each individual health insurance 
policy in which a participant or dependent is enrolled would be an 
unwieldy and overly burdensome task.
    The Departments acknowledged that this approach would allow 
integration with grandfathered individual health insurance coverage, 
which is not subject to, and might not be compliant with, PHS Act 
sections 2711 and 2713. However, the Departments reasoned that 
requiring participants or HRAs to substantiate compliance with PHS Act 
sections 2711 and 2713 separately for each individual health insurance 
policy in which a participant or dependent is enrolled would be 
impracticable. An independent assessment of compliance could require 
the participant or the HRA to identify for each individual health 
insurance policy in which a participant or dependent is enrolled: (1) 
Which benefits are considered EHBs for purposes of PHS Act section 
2711, and (2) whether all recommended preventive services are covered 
without cost sharing as required under PHS Act section 2713.
    The Departments also noted that only a small number of individuals 
currently are enrolled in grandfathered individual health insurance 
coverage, and that grandfathered individual health insurance coverage 
may not be sold to new enrollees and may be renewed by current 
enrollees only so long as the coverage satisfies strict conditions. 
Additionally, the Departments noted that the number of individuals with 
grandfathered individual health insurance coverage has declined each 
year since PPACA was enacted, and the already small number of 
individuals who have retained grandfathered coverage is expected to 
continue to decline each year. Further, the Departments stated that 
because there are few individuals covered by grandfathered individual 
health insurance coverage, the Departments anticipate that there will 
only be extremely limited instances in which these individuals will be 
offered and accept an individual coverage HRA. Moreover, because new 
enrollees cannot enroll in grandfathered individual health insurance 
coverage, employers offering traditional group health plans would not 
be able to shift workers into this coverage. The Departments also 
explained that although plans are required to disclose grandfathered 
status in any summary of benefits provided under the plan, the 
Departments were concerned that the frequency of this disclosure to 
participants may be insufficient to substantiate compliance if 
integration with these policies were prohibited.
    For these reasons, the Departments preliminarily determined that 
deeming a policy to be compliant with PHS Act sections 2711 and 2713 
for purposes of the proposed rules if it is sold in the individual 
market, referred to as the proxy approach, strikes an appropriate 
balance. The Departments also solicited comments on methods by which an 
HRA could substantiate whether individual health insurance coverage is 
subject to and complies with PHS Act sections 2711 and 2713, including 
how an HRA might identify which benefits

[[Page 28901]]

under the individual health insurance coverage are considered EHBs for 
purposes of PHS Act section 2711 and whether all recommended preventive 
services are covered without cost sharing. The Departments solicited 
comments on whether an alternative approach, such as a requirement that 
an issuer make a representation about compliance and/or grandfathered 
status upon request, would be practical, or whether any other methods 
might be appropriate as an alternative to the proposed proxy approach.
    Some commenters expressed support for the proxy approach, stating 
that it would be unreasonable to require employers or participants to 
substantiate that individual health insurance coverage is compliant 
with PHS Act sections 2711 and 2713. They stated that the proxy 
approach is reasonable with respect to grandfathered individual health 
insurance coverage because the number of individuals with that coverage 
is declining and consumers may not newly purchase grandfathered 
individual health insurance coverage.\71\
---------------------------------------------------------------------------

    \71\ A few commenters expressed concern with what they 
understood to be a proposed requirement that the employer verify 
that each individual health insurance policy in which an employee 
enrolls complies with PHS Act sections 2711 and 2713. Due to this 
concern, they suggested safe harbors to avoid imposing this burden 
on employers, such as only allowing integration with QHPs or plans 
of a certain metal level, and one commenter suggested implementing a 
plan compliance certification system. However, the proposed rules 
did not impose a requirement on the employer to verify the 
compliance of each individual health insurance policy in which an 
employee enrolls with PHS Act sections 2711 and 2713. Furthermore, 
the Departments are not imposing such a requirement in the final 
rules, and are finalizing the proxy approach.
---------------------------------------------------------------------------

    However, some commenters encouraged the Departments to prohibit 
integration with grandfathered coverage because it is not required to 
comply with the annual dollar limit prohibition or the preventive 
services requirement.\72\ Some of these commenters questioned whether 
the Departments had the legal authority to deem such coverage to be in 
compliance with PHS Act sections 2711 and 2713. One commenter disagreed 
with the Departments' assumption that employers and employees would be 
unable to determine if the individual health insurance coverage was 
compliant with PHS Act sections 2711 and 2713. Another commenter noted 
that if only a small number of individuals currently are enrolled in 
grandfathered individual health insurance coverage, prohibiting 
integration with that coverage should impact very few individuals. One 
commenter suggested, as an alternative to the proxy approach, that 
issuers could be required to provide a list of enrolled individuals to 
the individual coverage HRA.
---------------------------------------------------------------------------

    \72\ One commenter objected to the Departments' assertion in the 
preamble to the proposed rules that only a small number of 
individuals are currently enrolled in grandfathered individual 
health insurance coverage. However, the study the commenter cited to 
support the assertion that there is a substantial amount of 
grandfathered individual health insurance coverage remaining relates 
to grandfathered group coverage (not grandfathered individual health 
insurance coverage). See Kaiser Family Foundation, ``Employer Health 
Benefits 2018 Annual Survey'', https://files.kff.org/attachment/Report-Employer-Health-Benefits-Annual-Survey-2018.
---------------------------------------------------------------------------

    The Departments considered these comments and have determined that 
requiring a participant or an HRA to substantiate each individual 
health insurance policy's compliance with PHS Act sections 2711 and 
2713 would be an unwieldy and burdensome task. Further, state and 
federal regulators review policy forms of issuers in the individual 
market for compliance with the federal requirements before the products 
can be offered for sale in the states and undertake market conduct 
examinations to ensure compliance with federal requirements. Thus, it 
is reasonable to assume, as a general matter, that a policy sold in the 
individual market complies with PHS Act sections 2711 and 2713 for 
purposes of the final rules.\73\
---------------------------------------------------------------------------

    \73\ With respect to the suggested alternative approach to the 
proxy approach that the Departments could require issuers to provide 
employers who sponsor individual coverage HRAs with a list of 
individuals covered by individual health insurance coverage, that 
alternative approach appears to also include an assumption that the 
policies sold are in compliance with PHS Act sections 2711 and 2713 
(to avoid requiring confirmation of the compliance of each policy 
enrolled in), while adding burdens on the issuers to track and 
communicate with employers with whom they would not otherwise 
interact. For these reasons, the final rules do not adopt this 
alternative approach.
---------------------------------------------------------------------------

    With respect to grandfathered individual health insurance coverage, 
the Departments have concluded that it is appropriate to adopt the 
proxy approach as proposed because the number of individuals with 
grandfathered individual health insurance coverage is low and expected 
to decrease; individual coverage HRAs and participants may have 
difficulty confirming which benefits under the grandfathered plan are 
considered EHBs for purposes of PHS Act section 2711, whether all 
recommended preventive services are covered without cost sharing, and 
whether a particular policy is grandfathered; and grandfathered 
coverage may not be sold to new enrollees.\74\
---------------------------------------------------------------------------

    \74\ See later in this preamble for a discussion of the 
conditions that apply to an individual coverage HRA integrated with 
Medicare, including that the combined arrangement is considered to 
comply with PHS Act sections 2711 and 2713.
---------------------------------------------------------------------------

d. Forfeiture
    The proposed rules provided that the requirement that each 
individual covered by an individual coverage HRA must be enrolled in 
individual health insurance coverage would apply for each month that 
the individual is covered by the HRA. The proposed rules further 
provided that if an individual covered by the HRA fails to have 
individual health insurance coverage for any month, the HRA would fail 
to comply with PHS Act sections 2711 and 2713 for that month. 
Accordingly, the proposed rules required that an individual coverage 
HRA provide that if any individual covered by the HRA ceases to be 
covered by individual health insurance coverage, the individual may not 
seek reimbursement under the HRA for claims that are incurred after the 
individual health insurance coverage ceases, subject to any applicable 
continuation-of-coverage requirements. Further, under the proposed 
rules, if all individuals in a given family who are covered by the 
individual coverage HRA cease to be covered by individual health 
insurance coverage, the participant must forfeit the HRA, in accordance 
with applicable laws (including COBRA and other continuation-of-
coverage requirements).
    One commenter requested that the Departments clarify how the COBRA 
rules apply when an individual loses access to an individual coverage 
HRA due to failing to maintain individual health insurance coverage. 
Other commenters generally requested guidance on the interaction 
between COBRA and individual coverage HRAs.
    Generally, HRAs are group health plans subject to COBRA 
continuation coverage requirements under Code section 4980B and ERISA 
sections 601 through 608 (COBRA continuation coverage), unless an 
exception applies.\75\ Under the COBRA continuation coverage rules, 
certain individuals who lose employer-sponsored coverage may elect to 
continue the coverage by paying a premium.\76\ In order to qualify for

[[Page 28902]]

COBRA continuation coverage, the loss of coverage must be the result of 
a ``qualifying event.'' The Departments clarify that failure by an 
individual to satisfy the integration requirement of maintaining 
individual health insurance coverage is not a qualifying event for 
purposes of COBRA or other continuation of coverage rules. Thus, the 
loss of eligibility to participate in an individual coverage HRA due to 
the failure of the individual to maintain individual health insurance 
coverage does not create a right to COBRA or other group continuation 
coverage in the individual coverage HRA.
---------------------------------------------------------------------------

    \75\ Plans sponsored by certain small employers, churches, or 
governments are not subject to Code section 4980B. See Code section 
4980B(d).
    \76\ See Code section 4980B and ERISA sections 601-608. See also 
26 CFR 54.4980B-1 et seq. and 29 CFR 2590.606-1, 2590.606-2, 
2590.606-3, and 2590.606-4. Non-federal governmental group health 
plans offered by state or local governments to their respective 
employees are subject to parallel continuation of coverage 
requirements under the PHS Act. See 42 U.S.C. 300bb-1 et seq.
---------------------------------------------------------------------------

    However, a loss of coverage due to a termination of employment or a 
reduction in the number of hours of employment generally is a loss of 
coverage due to a qualifying event. Thus, for example, an employee 
covered by an individual coverage HRA who, due to a reduction in hours, 
is moved to a class of employees who are not offered any group health 
coverage would have a right to COBRA or other group continuation 
coverage in the HRA, as would an individual who loses coverage under 
the HRA due to termination of employment. That HRA COBRA or other group 
continuation coverage would be conditioned on a timely election of 
COBRA or other group continuation coverage and payment of COBRA or 
other group continuation coverage premiums, as well as maintaining (or 
enrolling in) individual health insurance coverage.\77\ Alternatively, 
an employee who loses coverage under an individual coverage HRA for 
these reasons may qualify for an SEP to change his or her individual 
coverage either on- or off-Exchange.\78\
---------------------------------------------------------------------------

    \77\ See IRS Notice 2002-45 for more information on providing 
COBRA continuation coverage under an HRA.
    \78\ See 45 CFR 147.104(b)(2) and 155.420(d)(1)(i).
---------------------------------------------------------------------------

    One commenter requested clarification regarding whether a failure 
to maintain individual health insurance coverage causes retroactive 
forfeiture of the individual coverage HRA. Under the final rules, the 
required forfeiture applies prospectively. The individual coverage HRA 
must allow an employee who loses coverage under the HRA due to failure 
to maintain individual health insurance coverage to seek reimbursement 
for substantiated medical care expenses that were incurred during the 
coverage period prior to the failure to maintain individual health 
insurance coverage. However, the individual coverage HRA may limit the 
time to submit expenses to a reasonable specified period. The final 
rules include some modifications to clarify these rules. The final 
rules also clarify that the prohibition on reimbursing amounts for 
expenses incurred after an individual's individual health insurance 
coverage ceases applies to the individual coverage HRA, rather than to 
the individual seeking reimbursement.
    One commenter requested clarification regarding whether an 
individual with individual health insurance coverage who is in an 
Exchange grace period \79\ is considered to be enrolled in individual 
health insurance coverage for purposes of this integration requirement. 
Under the final rules, in the event an individual initially enrolled in 
individual health insurance coverage fails to pay premiums for the 
individual health insurance coverage timely and is, therefore, in a 
grace period, the individual is considered to be enrolled in individual 
health insurance coverage for purposes of the enrollment requirement, 
and the HRA must reimburse the individual for expenses incurred during 
that time period according to the terms of the HRA. If the individual 
fails to pay the applicable premium(s) by the end of the grace period 
and individual health insurance coverage is cancelled or terminated, 
including retroactively, the HRA must require the individual to notify 
the HRA that the individual health insurance coverage has been 
cancelled or terminated and the date on which the cancellation or 
termination is effective. After the individual coverage HRA has 
received the notice of cancellation or termination, the HRA may not 
reimburse expenses incurred on and after the date of cancellation or 
termination of the individual health insurance coverage, which is 
considered to be the date of termination of coverage under the HRA. 
Although the commenter specifically asked about grace periods, the 
final rules have also been revised to address other situations in which 
coverage is cancelled or terminated retroactively, including 
rescissions,\80\ and in those cases, the same rules regarding 
notification, reimbursement, and date of termination of coverage would 
apply.\81\
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    \79\ The Departments note that while 45 CFR 156.270 provides a 
specific grace period for individuals enrolled in the Exchange who 
are receiving APTC, this grace period would not be applicable for an 
individual covered by an individual coverage HRA because the 
individual will be ineligible for the PTC and APTC. Outside of the 
context of Exchange coverage for which APTC is being provided, grace 
periods are determined by state law.
    \80\ See 45 CFR 147.128 for rules regarding rescissions of 
individual health insurance coverage.
    \81\ The Departments note that in considering whether to attempt 
to recoup reimbursements paid for medical care expenses under an 
individual coverage HRA, including expenses incurred during a period 
in which an individual did not have individual health insurance 
coverage due to a retroactive cancellation or termination of 
coverage, the individual coverage HRA must consider PHS Act section 
2712, which limits a plan's ability to rescind coverage to instances 
in which an individual has committed fraud or intentionally 
misrepresented a material fact. See 26 CFR 54.9815-2712, 29 CFR 
2590.715-2712, and 45 CFR 147.128. See also DOL Advisory Opinion 77-
08A (advising a health plan that depending on the facts and 
circumstances, the hardship to the participant or beneficiary 
resulting from such recovery or the cost to the fund of collection 
efforts may be such that it would be prudent, within the meaning of 
ERISA section 404(a)(1)(B), for the fund not to seek recovery from 
the participant or beneficiary).
---------------------------------------------------------------------------

    One commenter requested that, following separation from service, 
amounts should remain in a former employee's individual coverage HRA 
for out-of-pocket costs and should remain available after the 
individual has access to other coverage. Under the final rules, a plan 
sponsor may permit a former employee to have continued access to an 
individual coverage HRA, and in some circumstances a former employee 
may be able to elect to continue the HRA under the applicable 
continuation of coverage requirements. However, the final rules do not 
include an exception for former employees to the requirement that 
individuals covered by an individual coverage HRA must be enrolled in 
individual health insurance coverage. This is because PHS Act sections 
2711 and 2713 apply with respect to each individual covered by a group 
health plan, including any former employee. Therefore, a former 
employee with an individual coverage HRA is required to be enrolled in 
individual health insurance coverage to ensure that the former employee 
has a combined arrangement that is in compliance with PHS Act sections 
2711 and 2713.\82\
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    \82\ However, as explained earlier in this preamble, a retiree-
only HRA is not subject to the market requirements. Therefore, a 
retiree-only HRA need not comply with the final integration rules, 
including the requirement that individuals receiving the HRA enroll 
in individual health insurance coverage.
---------------------------------------------------------------------------

3. Prohibition Against Offering a Choice Between an Individual Coverage 
HRA and a Traditional Group Health Plan to the Same Class of Employees
a. In General
    To address the previously described concerns about potential 
adverse selection and health factor discrimination, the proposed rules 
provided that a plan sponsor may offer an individual coverage HRA to a 
class of employees only if the plan sponsor

[[Page 28903]]

does not also offer a traditional group health plan to the same class 
of employees. Therefore, a plan sponsor would not be permitted to offer 
any employee a choice between a traditional group health plan and an 
individual coverage HRA.
    Many commenters expressed support for the prohibition against 
allowing a plan sponsor to offer a class of employees a choice between 
an individual coverage HRA and a traditional group health plan. These 
commenters generally stated that this prohibition is essential to 
prevent market segmentation and health status discrimination. They 
noted that, while on its face allowing a choice between the two types 
of coverage may seem appealing, in practice it would lead employers to 
encourage higher-risk employees to go into the individual market, by 
making plan design changes to traditional group health plans to make 
them less attractive to higher-risk employees. This, in turn, could 
have significant detrimental effects on the individual market due to 
the small size of the individual market compared to the size of the 
group market. One commenter noted that the prohibition against offering 
employees a choice between a traditional group health plan and an 
individual coverage HRA would protect employers from baseless claims of 
discrimination. Another commenter stated that permitting employers to 
offer a choice between an individual coverage HRA and a traditional 
group health plan could raise practical and administrative issues for 
employers and issuers, including in estimating participation in the 
traditional group health plan.
    A few commenters opposed the prohibition on offering employees a 
choice between a traditional group health plan and an individual 
coverage HRA, asserting that such a rule would restrict choice for 
employees and flexibility for employers. Some of these commenters 
asserted that the other conditions in the proposed rules, such as the 
same terms requirement and the prohibition on integration with STLDI, 
each described later in this preamble, were sufficient to prevent 
adverse selection.
    A few commenters acknowledged the risk of market segmentation by 
employers in the large group market or that offer self-insured plans, 
but requested that small employers generally, or small employers 
offering plans in the fully insured small group market, be allowed to 
offer their employees a choice between an individual coverage HRA and a 
traditional group health plan. They noted that small employers would 
not have an incentive to send their higher-risk employees to the 
individual market because insured traditional group health plans in the 
small group market are part of a community rated single risk pool. A 
few commenters also noted that allowing small employers to offer 
employees a choice would be consistent with Executive Order 13813, 
which one commenter noted specifically referred to small employers. One 
commenter indicated that the prohibition on choice might dissuade 
employers from offering individual coverage HRAs to their employees. 
The commenter also noted that if given the choice, lower-risk 
employees, rather than higher-risk employees, may leave the employer's 
traditional group health plan and purchase individual health insurance 
coverage.\83\
---------------------------------------------------------------------------

    \83\ One commenter requested that the prohibition against choice 
not apply to spouses and dependents, noting that many employers do 
not contribute to family premiums under group health plans. Although 
the Departments anticipate that employers will generally not offer 
dependents an independent benefit package, for the sake of clarity, 
and in response to this comment, the Departments note that the 
prohibition is intended to apply to both participants and 
dependents, and the final rules are revised to clarify this intent.
---------------------------------------------------------------------------

    The Departments generally agree with commenters that stated that 
permitting employers to offer an employee a choice between an 
individual coverage HRA and a traditional group health plan could lead 
to market segmentation.\84\ Although some lower-risk employees may 
choose to enroll in individual health insurance coverage if offered a 
choice, many employers would have strong economic incentives to 
encourage lower-risk employees to retain traditional group health plan 
coverage and higher-risk employees to enroll in individual health 
insurance coverage.
---------------------------------------------------------------------------

    \84\ Although this condition generally is finalized as proposed, 
the text of the final rules is updated to include a reference to the 
special rule for new hires, explained later in this preamble. In 
general, under the special rule for new hires, a plan sponsor may 
continue to offer some employees in a class of employees a 
traditional group health plan (that is, current employees), while 
offering new employees in that class an individual coverage HRA, 
and, therefore, in that limited case, a plan sponsor may offer a 
traditional group health plan to some employees in a class of 
employees and an individual coverage HRA to other employees in the 
same class of employees. However, the special rule for new hires 
does not provide an exception to the rule that no participant may be 
given a choice between a traditional group health plan and an 
individual coverage HRA.
---------------------------------------------------------------------------

    With respect to the suggestion that the Departments allow employers 
in the small group market to offer a choice to employees, the 
Departments acknowledge that the incentives for these employers to 
segment risk are substantially lower than for other employers offering 
experience-rated coverage or self-insured plans. However, the 
Departments would not expect many small employers to offer this choice 
because the coverage in the small group market and individual market is 
quite similar and because, as the commenters note, small employers that 
purchase health insurance would not have an incentive to segment their 
risk pool. Although allowing small employers to offer a choice would 
not provide small employers much benefit, it would increase the 
complexity of the final rules for entities involved in implementation, 
such as the Exchanges. Additionally, it could cause some uncertainty 
for issuers, and, therefore, increased premiums, in both the individual 
and small group markets. Accordingly, in the final rules, the 
Departments decline to provide an exception for small employers to the 
condition that a plan sponsor may not offer an employee a choice 
between a traditional group health plan and an individual coverage HRA. 
While the Departments are finalizing the proposal to prohibit choice 
between an individual coverage HRA and a traditional group health plan, 
the Departments are generally supportive of maximizing employee choice 
and employer flexibility and so may revisit this issue in future 
rulemaking once the Departments have had the opportunity to gauge the 
results of the initial implementation of individual coverage HRAs.
b. Definition of Traditional Group Health Plan
    For purposes of the condition that a plan sponsor may not offer any 
employee a choice between an individual coverage HRA and a traditional 
group health plan, under the proposed rules, the term ``traditional 
group health plan'' was defined as any group health plan other than: 
(1) An account-based group health plan, or (2) a group health plan that 
consists solely of excepted benefits.
    Several commenters supported the proposed definition, which 
provided that a ``traditional group health plan'' excludes a group 
health plan that consists solely of excepted benefits, so that a plan 
sponsor may offer an employee both an individual coverage HRA and a 
group health plan that consists solely of excepted benefits.\85\

[[Page 28904]]

After considering these comments, the Departments finalize the 
definition of ``traditional group health plan'' in the proposed rules 
without change. Notwithstanding different QSEHRA rules,\86\ under the 
final rules, a traditional group health plan does not include a group 
health plan that consists solely of excepted benefits and, therefore, a 
plan sponsor generally may offer an employee both an individual 
coverage HRA and a group health plan that consists solely of excepted 
benefits.\87\
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    \85\ One commenter asked that the Departments confirm that a 
traditional group health plan means a major medical plan and not a 
group health plan that consists solely of excepted benefits. The 
Departments confirm the definition of traditional group health plan 
does not include a group health plan that consists solely of 
excepted benefits. The commenter also noted that an employer may not 
provide both a QSEHRA and a group health plan that consists solely 
of excepted benefits.
    \86\ See Code section 9831(d)(3)(B)(ii) and IRS Notice 2017-67.
    \87\ But see later in this preamble for a discussion of the 
interaction between excepted benefit HRAs and individual coverage 
HRAs.
---------------------------------------------------------------------------

    One commenter requested that the Departments clarify that the final 
rules would not preclude an employer that offers an individual coverage 
HRA from offering a separate HRA under which only premiums for excepted 
benefits may be reimbursed. The Departments agree that such an 
arrangement is not precluded by these final rules. An HRA under which 
only excepted benefit premiums may be reimbursed is an account-based 
group health plan (and, therefore, not considered a traditional group 
health plan). Further, the HRA under which only excepted benefit 
premiums may be reimbursed is a group health plan that provides only 
excepted benefits (and, therefore, not considered a traditional group 
health plan). See later in this preamble for a discussion of the 
interaction of an excepted benefit HRA and an individual coverage HRA, 
and the difference between an excepted benefit HRA and an HRA that only 
provides excepted benefits.
c. Salary Reduction Arrangements
    The preamble to the proposed rules noted that the Departments were 
aware that some employers may want to allow employees to pay the 
portion of the premium for individual health insurance coverage that is 
not covered by an individual coverage HRA, if any, through a salary 
reduction arrangement under a cafeteria plan. Pursuant to Code section 
125(f)(3), an employer generally may not provide a QHP offered through 
an Exchange as a benefit under its cafeteria plan.\88\ Therefore, an 
employer generally may not permit employees to make salary reduction 
contributions to a cafeteria plan to purchase a QHP offered through an 
Exchange.
---------------------------------------------------------------------------

    \88\ But see Code section 125(f)(3)(B).
---------------------------------------------------------------------------

    However, Code section 125(f)(3) does not apply to individual health 
insurance coverage that is not purchased on an Exchange. Therefore, for 
an employee covered by an individual coverage HRA who purchases 
individual health insurance coverage outside of an Exchange, the 
employer may permit the employee to pay the balance of the premium for 
the coverage through its cafeteria plan, subject to all applicable 
cafeteria plan guidance. Such an arrangement would not be considered to 
be a traditional group health plan for purposes of the final rules.
    Some commenters supported allowing a salary reduction arrangement 
under a cafeteria plan alongside an individual coverage HRA, with one 
commenter noting that this flexibility is essential to ensuring 
successful take-up of individual coverage HRAs. One commenter 
recommended against allowing a salary reduction arrangement alongside 
an individual coverage HRA unless further guidance is issued on 
cafeteria plans addressing nondiscrimination rules and penalties. One 
commenter requested that the Departments work with Congress to 
eliminate the prohibition, under Code section 125(f)(3), against 
purchasing Exchange coverage under a cafeteria plan.
    Under the final rules, as under the proposed rules, an employer may 
permit an employee covered by an individual coverage HRA who purchases 
individual health insurance coverage outside of an Exchange to pay the 
balance of the premium for the coverage through its cafeteria plan, 
subject to all applicable cafeteria plan guidance. This arrangement 
would not be considered to be a traditional group health plan for 
purposes of the final rules. Changes to the statutory prohibition 
regarding the use of cafeteria plans to purchase Exchange coverage are 
outside of the scope of this rulemaking.
    Commenters also raised various other issues related to the 
interaction between individual coverage HRAs and cafeteria plans under 
Code section 125. A few commenters expressed support for the ability to 
integrate a stand-alone cafeteria plan with individual health insurance 
coverage.\89\ And some commenters requested that the Departments 
provide answers to hypothetical scenarios involving the intersection of 
cafeteria plans, HSAs, and HRAs. Neither the proposed rules nor the 
final rules make any changes to the rules under Code section 125. Thus, 
any issues arising under Code section 125, and any guidance requested 
by commenters to address those issues, are beyond the scope of this 
rulemaking. The Treasury Department and the IRS, however, appreciate 
the comments and will consider whether to address some of these issues 
in future guidance.
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    \89\ As noted earlier in this preamble, for purposes of the 
final rules, the term ``HRA or other account-based group health 
plan'' does not include an employer arrangement that reimburses the 
cost of individual health insurance coverage through a cafeteria 
plan under Code section 125.
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4. Same Terms Requirement
a. In General
    To address concerns about health status discrimination leading to 
adverse selection in the individual market, the proposed rules 
generally required that a plan sponsor that offers an individual 
coverage HRA to a class of employees must offer the HRA on the same 
terms (that is, both in the same amount and otherwise on the same terms 
and conditions) to all employees within the class of employees.\90\ As 
part of this proposed condition, the Departments made clear that 
offering a more generous HRA to individuals based on an adverse health 
factor would violate the integration rules.
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    \90\ The Departments note that if an employer chooses not to 
distinguish its employees based on the classes of employees 
permitted under the final rules and offers an individual coverage 
HRA to all of its employees, the same terms requirement would apply 
to all of the employer's employees.
---------------------------------------------------------------------------

    Commenters generally supported the same terms requirement as a 
condition essential to protecting against market segmentation and 
recommended that it be retained in the final rules. Some commenters 
specifically supported the ability under the proposed rules to vary the 
HRA terms and amounts between different classes of employees. Because 
the Departments have concluded that the same terms requirement is 
critical to protecting against adverse selection in the individual 
market, the final rules retain this requirement, but with some 
revisions and clarifications in response to comments as explained later 
in this section of the preamble.
    One commenter stated that the same terms requirement prohibits 
discrimination that could occur either by offering less generous 
benefits to only certain employees in a class of employees or by 
offering more generous benefits to only certain employees in a class of 
employees. The commenter stated that it is critical that this 
prohibition against ``benign'' discrimination be retained in the final 
rules. The Departments agree, and this aspect of the rule is being 
adopted as proposed.
b. Exceptions to the Same Terms Requirement
    The Departments recognize that premiums for individual health

[[Page 28905]]

insurance coverage obtained by individual coverage HRA participants and 
their dependents may vary and, thus, some variation in amounts made 
available under an individual coverage HRA, even within a class of 
employees, may be appropriate. Therefore, the proposed rules provided 
that it would be permissible to increase the maximum dollar amount made 
available under an individual coverage HRA for participants within a 
class of employees as the age of the participant increases, so long as 
the same maximum dollar amount attributable to that increase in age was 
made available to all participants of the same age within the same 
class of employees.
    Commenters generally supported the provision allowing increases in 
individual coverage HRA amounts based on the participant's age, as 
premiums in the individual market generally increase based on age. 
However, some commenters expressed concern that an unlimited ability to 
increase amounts made available under an individual coverage HRA based 
on age could be used to shift older, higher cost workers to the 
individual market. Therefore, these commenters recommended that, to 
avoid adverse selection, the ability to increase amounts by age be tied 
to actual variance in premiums for individual health insurance 
coverage, such as the 3:1 age rating rule in PPACA \91\ or through some 
other reasonable relationship to the cost of individual coverage.
---------------------------------------------------------------------------

    \91\ See PHS Act section 2701(a)(1)(A)(iii).
---------------------------------------------------------------------------

    The Departments agree that imposing an outer bound on the ability 
of a plan sponsor to vary the maximum amounts made available under an 
individual coverage HRA based on a participant's age could further 
protect against adverse selection in the individual market, while not 
hampering the ability of a plan sponsor to provide benefits that 
account for increased costs for older workers in the individual market. 
Therefore, in response to these comments, the same terms requirement is 
revised under the final rules to provide that an individual coverage 
HRA does not fail to be provided on the same terms to a class of 
employees solely because the maximum dollar amount made available under 
the terms of the HRA increases as the age of the participant increases, 
so long as the maximum dollar amount made available under the terms of 
the HRA to the oldest participant(s) is not more than three times the 
maximum dollar amount made available under the terms of the HRA to the 
youngest participant(s). The final rules retain the rule that the same 
maximum dollar amount attributable to the increase in age must be made 
available to all participants in a class of employees who are the same 
age.
    The Departments considered a number of different ways to design the 
limitation on age variation, including by incorporating the federal and 
state age curves, tying the variation to a specific premium for a 
specific policy that a participant in the class of employees could 
purchase, and basing the maximum dollar amount made available by the 
individual coverage HRA on the degree of age variation in individual 
market premiums in the rating area where each employee resides. 
However, the Departments determined that these options would be unduly 
complex and that imposing the 3:1 limit, which is generally based on 
the degree of age variation allowed in individual market premiums under 
PHS Act section 2701, sufficiently limits the potential for abuse.\92\
---------------------------------------------------------------------------

    \92\ Relatedly, on November 19, 2018, the Treasury Department 
and the IRS issued Notice 2018-88, which addressed the application 
of the rules under Code section 105(h) to individual coverage HRAs. 
HRAs generally are subject to the rules under Code section 105(h) 
and its related rules because they are self-insured medical 
reimbursement plans. However, HRAs that reimburse employees only for 
premiums paid to purchase health insurance policies, including 
individual health insurance policies, are not subject to the rules 
under Code section 105(h) and its related rules. See 26 CFR 1.105-
11(b)(2). Notice 2018-88 described an anticipated safe harbor that 
would apply to individual coverage HRAs that are subject to Code 
section 105(h) to address the fact that under the Code section 
105(h) rules, variation in employer contributions based on age is 
not allowed. The Treasury Department and the IRS intend to propose 
rules under Code section 105(h) in the near term that set forth an 
age variation standard that is consistent with the rule included in 
these final integration rules, and the proposed rules under Code 
section 105(h) will be subject to notice and comment.
---------------------------------------------------------------------------

    One commenter expressed concern that permitting, rather than 
requiring, increases in the maximum amount available under an 
individual coverage HRA based on age could invite age discrimination. 
Thus, the commenter argued that the final rules should require 
employers to vary individual coverage HRA amounts based on age to 
account for increases in costs for older workers. The Departments note 
that other federal laws and rules address age discrimination and are 
the more appropriate area of regulation in which to address these 
concerns. Accordingly, the Departments decline to require, but will 
permit, employers to increase individual coverage HRA amounts based on 
participants' ages under the final rules. However, individual coverage 
HRAs may be subject to restrictions imposed under other laws, such as 
those that protect against age discrimination.
    One commenter requested that the Departments clarify the date as of 
which the age of the participant may be determined for this purpose and 
suggested the first day of the HRA plan year. The final rules clarify 
that a participant's age, for purposes of the same terms requirement, 
may be determined by the plan sponsor using any reasonable method for a 
plan year, so long as the plan sponsor determines each participant's 
age for this purpose using the same method for all participants in the 
class of employees for the plan year and the method is determined prior 
to the plan year. For example, as the commenter suggests, the plan 
sponsor may determine each participant's age based on their age on the 
first day of the individual coverage HRA plan year.
    Additionally, the proposed rules included a proposal to permit the 
maximum dollar amount made available under an individual coverage HRA 
within a class of employees to increase as the number of the 
participant's dependents covered under the HRA increased, so long as 
the same maximum dollar amount attributable to that increase in the 
number of dependents is made available to all participants in that 
class of employees with the same number of dependents covered by the 
HRA. Commenters generally supported this provision, as the cost of 
individual health insurance coverage generally increases with an 
increase in the number of dependents covered. Some commenters asked for 
clarification on the extent to which employers may increase amounts 
made available under an individual coverage HRA based on an increase in 
the number of the participant's dependents. One commenter recommended 
that any permitted increase be tied to individual market premium 
variance in order to prevent employers from varying HRA amounts to 
encourage higher-risk employees to shift to the individual market. 
Another commenter recommended that employers be required to vary 
individual coverage HRA amounts based on the number of dependents 
covered by the HRA in order to put employees on equal footing with 
other individuals and allow them to purchase insurance based on their 
relevant circumstances.
    The Departments considered these comments, but have determined that 
providing employers flexibility as to if and how they vary HRA amounts 
based on family size does not raise a significant risk of adverse 
selection or health factor discrimination and,

[[Page 28906]]

instead, avoids unnecessary complexity. Therefore, under the final 
rules, it remains permissible to vary HRA amounts based on the number 
of a participant's dependents covered by the individual coverage HRA as 
proposed. Moreover, there is no specific limit on an employer's ability 
to increase HRA amounts based on the number of a participant's 
dependents covered by the HRA, so long as the same maximum dollar 
amount attributable to that increase in the number of dependents is 
made available to all participants in that class of employees with the 
same number of dependents covered by the HRA.
    Commenters also suggested additional factors for which employers 
should be allowed to vary amounts provided under an individual coverage 
HRA within a class of employees, including earnings or salary, role/
title, and geographic region. The Departments note that the suggestions 
that individual coverage HRA amounts be allowed to vary within a class 
of employees based on earnings, salary, or role/title raise adverse 
selection and health factor discrimination concerns, as these classes 
are more susceptible to manipulation by an employer. Accordingly, the 
Departments decline to adopt any of these suggestions. Regarding 
geographic region, the Departments acknowledge that individual health 
insurance costs vary based on geography, but the Departments decline to 
adopt this suggestion because the issue is already addressed under the 
final rules through the ability to classify employees based on the 
rating area of their primary site of employment.
    A few commenters recommended that the Departments consider an 
employer that contributes the same percentage of an employee's 
individual health insurance premium (for example, 80 percent) to an 
individual coverage HRA to be considered to be providing the individual 
coverage HRA on the same terms to the employees in the class. The 
Departments decline to adopt this suggestion because this type of rule 
would add significant complexity to the same terms requirement, 
particularly with respect to determining how to coordinate the ability 
to vary based on age and family size, and would also raise adverse 
selection concerns, as well as more general concerns about the inherent 
incentives of a percentage-based standard and its effect on healthcare 
spending.
    See later in this preamble for a discussion of the same terms 
requirement as applied to an employer that offers both an HSA-
compatible individual coverage HRA and an individual coverage HRA that 
is not HSA compatible to the same class of employees and for a 
discussion of how the same terms requirement applies if an individual 
coverage HRA makes amounts available based on amounts remaining in 
another HRA by which the participant was previously covered.
c. Former Employees
    The proposed rules generally would apply to an individual coverage 
HRA that includes participants who are former employees in the same way 
that they would apply if the HRA only provided benefits to current 
employees. However, the Departments recognized that eligibility for 
post-employment group health plan coverage, if any, varies widely and 
may be subject to age, service, or other conditions. To avoid undue 
disruption of employers' practices relating to the provision of post-
employment health coverage, the proposed rules provided that an 
individual coverage HRA may be treated as provided on the same terms 
even if the plan sponsor offers the individual coverage HRA to some, 
but not all, former employees within a class of employees (for example, 
to all former employees with a minimum tenure of employment). But, 
under the proposed rules, if a plan sponsor offers the individual 
coverage HRA to one or more former employee(s) within a class of 
employees, the HRA must be offered to those former employee(s) on the 
same terms as all other employees within the class.
    One commenter expressed concern that allowing employers to offer 
some retirees an individual coverage HRA, but not all retirees, creates 
the potential for health status discrimination. The Departments note, 
however, that many nondiscriminatory reasons may influence an 
employer's decisions whether to offer retiree health coverage. For 
example, it is not uncommon for employers to offer retiree health 
coverage only to workers that have been with the company at least 5 
years prior to retirement.\93\ Moreover, the HIPAA nondiscrimination 
rules (as well as other applicable federal and state laws) address 
discrimination based on a health factor.
---------------------------------------------------------------------------

    \93\ See e.g., 5 U.S.C. 8905(b).
---------------------------------------------------------------------------

    One commenter supported treating former employees under the same 
terms as all members of the class of employees. Another commenter 
requested confirmation that employers providing retirees and current 
employees with different amounts in individual coverage HRAs would 
satisfy the same terms requirement and requested confirmation that 
contributing different amounts to former employees based on years of 
service would satisfy the same terms requirement. The final rules 
provide that former employees within a class of employees offered an 
individual coverage HRA need not be offered an individual coverage HRA, 
but if they are, the HRA must be provided to them on the same terms as 
other employees in that class of employees (based on the class in which 
the former employee was included immediately prior to separation from 
service). Therefore, a plan sponsor would not comply with the same 
terms requirement if it provided some employees in a class of employees 
larger or smaller HRA amounts based on years of service or status as a 
former employee.\94\
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    \94\ Also, eligibility conditions that are based solely on the 
lapse of a time period are permissible for no more than 90 days 
under PHS Act section 2708. See 26 CFR 54.9815-2708, 29 CFR 
2590.715-2708, and 45 CFR 147.116.
---------------------------------------------------------------------------

    The Departments received a number of comments on retiree-only HRAs 
in response to the proposed rules. Although the final rules do not 
modify the rules for retiree-only HRAs, the Departments note that the 
market requirements do not apply to a group health plan that has fewer 
than two participants who are current employees on the first day of the 
plan year.\95\ Therefore, a retiree-only HRA need not satisfy the 
requirements of any integration test, including the same terms 
requirement.
---------------------------------------------------------------------------

    \95\ See Code section 9831(a)(2) and ERISA section 732(a). HHS 
follows a similar approach for non-federal governmental retiree-only 
plans and encourages states to adopt a similar approach with respect 
to issuers of retiree-only plans. See 75 FR 34537, 34539 (June 17, 
2010).
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d. New Employees or New Dependents
    One commenter asked for clarification regarding the application of 
the same terms requirement in the case of coverage changes during the 
plan year, including in cases in which an employee gains a dependent. 
In response to this comment, in the final rules, the Departments 
clarify the application of the same terms requirement both for new 
employees and new dependents. Therefore, in the final rules, the 
Departments clarify that, under the same terms requirement, in the case 
of a participant who becomes covered by an individual coverage HRA 
after the first day of the plan year, the individual coverage HRA may 
make the full annual amount available or adopt a reasonable proration 
methodology. The Departments also clarify in the final rules how the 
same terms requirement

[[Page 28907]]

applies if the individual coverage HRA varies the maximum amount 
available based on the number of a participant's dependents covered by 
the HRA and the number of the participant's dependents covered by the 
HRA either increases or decreases during the plan year. In that case, 
the individual coverage HRA may make available the same amount made 
available to participants in the class who had the same number of 
dependents covered by the HRA on the first day of the plan year or may 
adopt a reasonable proration methodology of that amount for the 
remainder of the plan year. The method the individual coverage HRA uses 
to determine amounts made available for participants who enroll during 
the plan year or who have changes in the number of dependents covered 
by the HRA during a plan year must be the same for all participants in 
the class of employees, and the method must be determined prior to the 
beginning of the plan year.
5. Classes of Employees
a. In General
    The proposed and final rules require a plan sponsor that offers an 
individual coverage HRA to a class of employees to offer the individual 
coverage HRA on the same terms to each participant within the class of 
employees, subject to certain exceptions. Also, the proposed and final 
rules provide that a plan sponsor may offer individual coverage HRAs on 
different terms to different classes of employees, and may offer either 
an individual coverage HRA or a traditional group health plan to 
different classes of employees. However, within a class of employees, a 
plan sponsor generally may not offer some employees a traditional group 
health plan and others an individual coverage HRA \96\ (or offer any 
employee a choice between a traditional group health plan or an 
individual coverage HRA). The proposed rules enumerated the classes of 
employees that would apply for these purposes. As discussed in more 
detail in this section of the preamble, the final rules make a number 
of changes to the list of permissible classes of employees in response 
to comments.
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    \96\ The one exception to this general rule, described later in 
this preamble, is the special rule for new hires. However, even 
under the special rule for new hires, no employee may be offered a 
choice between an individual coverage HRA and a traditional group 
health plan.
---------------------------------------------------------------------------

    Many commenters supported the general ability of a plan sponsor to 
offer individual coverage HRAs on different terms to different classes 
of employees and to offer either a traditional group health plan or an 
individual coverage HRA to different classes of employees. These 
commenters applauded the flexibility provided by this aspect of the 
proposed rules, emphasizing that such flexibility is critical for plan 
sponsors that want to offer individual coverage HRAs.
    However, some commenters objected to this aspect of the proposed 
rules, expressing concerns about the ability of plan sponsors to use 
the classes of employees to segment risk. These commenters suggested 
that a plan sponsor that wants to offer an individual coverage HRA 
should not be allowed to offer a traditional group health plan to any 
of its employees and, instead, should be required to offer the HRA, on 
the same terms, to all of its employees and, therefore, fully replace 
the traditional group health plan(s) it may have offered. One commenter 
requested that the Departments disallow the use of different classes of 
employees in applying the final rules as a transitional measure, so 
that plan sponsors would not be allowed to offer some classes of 
employees a traditional group health plan and other classes of 
employees an individual coverage HRA for some transitional period of 
time. A number of commenters, including some of those who generally 
supported the ability to vary benefits on a class-by-class basis, 
expressed concerns about the possibility of adverse selection and, 
therefore, recommended that additional safeguards be provided, or, at a 
minimum, no further flexibility be provided.
    The Departments considered these comments and have determined that 
permitting plan sponsors to offer different benefits to certain classes 
of employees is essential to providing the flexibility needed to 
achieve increased HRA usability and to maximize employee welfare. The 
Departments understand that employers commonly use certain job-based 
classifications for employee benefits and other purposes and that 
failing to provide flexibility to offer different benefits to different 
classes of employees, even for a transitional period of time, could 
reduce the use and availability of individual coverage HRAs. However, 
the Departments acknowledge the concerns regarding the potential for 
adverse selection and health factor discrimination and, therefore, have 
concluded that additional parameters in certain circumstances are 
needed for employers to offer different benefits to different classes 
of employees in order to address the potential for adverse selection 
and health factor discrimination. Accordingly, the final rules permit 
employers to apply the integration rules on a class-by-class basis, as 
was allowed under the proposed rules. However, as explained later in 
this section of the preamble, the final rules make a number of changes, 
including revisions to the list of permissible classes of employees, 
the addition of a minimum class size requirement that applies in 
certain instances, and clarifications of a number of other related 
issues in response to comments.
b. Proposed and Final Classes
    The proposed rules included the following proposed classes of 
employees: (1) Full-time employees (using either the definition that 
applies for purposes of Code section 105(h) or 4980H, as determined by 
the plan sponsor); (2) part-time employees (using either the definition 
that applies for purposes of Code section 105(h) or 4980H, as 
determined by the plan sponsor); (3) seasonal employees (using either 
the definition that applies for purposes of Code section 105(h) or 
4980H, as determined by the plan sponsor); (4) employees who are 
included in a unit of employees covered by a collective bargaining 
agreement (CBA) in which the plan sponsor participates (as described in 
26 CFR 1.105-11(c)(2)(iii)(D)) (the CBA class of employees); (5) 
employees who have not satisfied a waiting period for coverage (if the 
waiting period complies with the waiting period rules in PHS Act 
section 2708 and its implementing rules) (the waiting period class); 
(6) employees who have not attained age 25 prior to the beginning of 
the plan year (as described in 26 CFR 1.105-11(c)(2)(iii)(B)) (the 
under-age-25 class); (7) employees who are non-resident aliens with no 
U.S.-based income (as described in 26 CFR 1.105-11(c)(2)(iii)(E)) 
(generally, foreign employees who work abroad) (the non-resident alien 
class); and (8) employees whose primary site of employment is in the 
same rating area, as defined in 45 CFR 147.102(b) (the rating area 
class). In addition, the proposed rules permitted, as additional 
classes of employees, groups of employees described as a combination of 
two or more of the enumerated classes.
    As explained in the preamble to the proposed rules, the Departments 
took a number of considerations into account in determining the 
proposed classes of employees. First, the proposed classes were ones 
that, based on the Departments' experience, employers historically have 
used for employee benefit purposes other than inducing higher-risk 
employees to leave the plan sponsor's traditional group health plan.

[[Page 28908]]

Second, the proposed classes of employees were not ones that could be 
easily manipulated in order to transfer higher-risk individuals (and 
perceived higher costs) from the employer's traditional group health 
plan to the individual market, as it would be burdensome for employers 
to shift employees from one of these classes of employees to another 
merely for the purpose of offering different types of health benefits 
to employees based on a health factor. Therefore, the Departments 
determined that these proposed classes of employees would balance 
employers' reasonable need to make distinctions among employees with 
respect to offering health benefits with the need to protect against 
adverse selection and health factor discrimination. The Departments 
requested comments on the proposed classes of employees, including 
whether additional classes of employees should be provided and whether 
the proposed classes of employees and any potential additional classes 
are sufficient to mitigate adverse selection concerns.
    Several commenters supported the proposed classes of employees, 
with some insisting that no additional classes be added because of the 
increased likelihood of risk pool manipulation. Several commenters 
expressed support for the proposed list of specific enumerated classes, 
as opposed to an open-ended standard, as a way to mitigate adverse 
selection.
    Some commenters objected to the proposed classes, expressing 
general concern that the rules would provide employers too much 
flexibility, which would lead to manipulation of classes and risk 
segmentation. Some commenters requested that specific classes be 
eliminated or modified. In particular, several commenters expressed 
concern that the under-age-25 class of employees would lead to adverse 
selection. These commenters stated that this class is not justified 
based on a bona fide relationship to employment or the need to provide 
employers flexibility because employers do not typically structure 
benefits based on whether an employee has attained age 25. Some 
commenters raised administrative complexity concerns in their 
objections to this proposed class because employees under age 25 may be 
eligible for coverage under their parents' group health plans. One 
commenter, however, supported this class, stating that it may lead to 
healthier risk entering the individual market. The Departments agree 
with the commenters who raised concerns about the under-age-25 class of 
employees, both as to the potential for adverse selection and the fact 
that employers do not typically structure benefits based on this 
classification and, therefore, do not need the flexibility the proposed 
rules provided.\97\ Therefore, the final rules do not include the 
under-age-25 class of employees as a permitted class of employees.
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    \97\ The Departments note that the under-age-25 class of 
employees was included in the proposed rules because it is a class 
of employees that may be excluded for certain purposes under Code 
section 105(h) and under the QSEHRA rules. See earlier in this 
preamble for a discussion of the application of Code section 105(h) 
to individual coverage HRAs.
---------------------------------------------------------------------------

    With regard to the proposed part-time employee class, several 
commenters supported including the class because of the additional 
flexibility it would provide to employers when determining whether to 
offer any benefits to part-time employees. One commenter highlighted 
that some large employers (who would not be able to provide a QSEHRA) 
may want to offer their part-time employees some level of tax-preferred 
health benefits but have no options today other than offering a 
traditional group health plan. Some commenters also argued that 
providing additional flexibility for employers to offer individual 
coverage HRAs to part-time employees who might otherwise not have been 
offered any benefits could lead to increased enrollment in individual 
health insurance coverage, thereby stabilizing the individual market 
risk pool and reducing premiums. One commenter suggested that the 
Departments should allow multiple gradations of part-time employees 
(for example, employees who work 10 to 20 hours per week, employees who 
work 20 to 30 hours per week, etc.). However, one commenter expressed 
concern that a part-time employee class could be a proxy for higher-
risk employees, and could, therefore, lead to adverse selection, as the 
commenter asserted that many employees who work part-time do so due to 
health issues.
    The Departments agree with those commenters who asserted that a 
part-time employee class should be included in the final rules, as it 
could provide necessary flexibility to allow some employers to offer an 
individual coverage HRA to part-time employees who might otherwise not 
be offered any group health plan benefits. While the Departments do not 
dispute that some employees may change from full-time employee status 
to part-time employee status due to health issues, the Departments have 
determined that allowing full-time employees and part-time employees as 
separate classes of employees is essential for employer flexibility, 
increasing HRA usability, and maximizing employee welfare. Further, the 
Departments have concluded that the requirements of the final rules, 
including these employee classifications, are sufficiently robust to 
mitigate market segmentation. Therefore, the final rules include full-
time employees and part-time employees as separate permitted classes 
for individual coverage HRAs. However, see the discussion later in this 
preamble regarding the definitions of these terms and the application 
of a minimum class size requirement to these classes in certain 
circumstances.
    With regard to a class of employees based on a geographic area, 
some commenters expressed concern that basing the class on the rating 
area of the work site could be too granular risking increased adverse 
selection. Thus, the commenters asserted that a class based on 
geography should instead be determined at the state level. While the 
Departments understand and considered the concern raised by commenters, 
the Departments have determined, based on information regarding the 
significant differences in individual market premiums between rating 
areas within some states and significant differences in the number of 
individual health insurance plans available between rating areas within 
some states, that it would be an unreasonable limitation on employer 
flexibility to prohibit employers from offering different benefits 
based on different work-site rating areas. The Departments concluded 
that a rule that would prohibit employers from differentiating between 
these particular classes of employees for purposes of offering 
individual coverage HRAs would pose significant costs that might 
undermine the willingness of employers to offer an individual coverage 
HRA. Therefore, the final rules allow a class of employees to be based 
on the rating area of the employees' primary work site. However, in 
response to concerns raised by commenters regarding the potential for 
adverse selection and health factor discrimination with this class of 
employees in particular, see the discussion later in this preamble 
regarding the application of a minimum class size requirement to this 
class in certain circumstances.
    With regard to the waiting period class of employees, one commenter 
recommended that this class of employees be limited to a 30-day waiting 
period maximum to provide an additional market segmentation safeguard. 
Another commenter specifically supported this class. The final rules 
include the waiting period

[[Page 28909]]

class of employees, which aligns with the waiting periods allowed under 
PHS Act section 2708 and its implementing rules, because this avoids 
unneeded complexity and burden and the Departments do not consider this 
class of employees to raise significant adverse selection concerns.
    Several commenters requested clarification regarding the CBA class 
of employees, which under the proposed rules was defined as ``employees 
included in a unit of employees covered by a collective bargaining 
agreement in which the plan sponsor participates (as described in 26 
CFR 1.105-11(c)(2)(iii)(D)).'' Commenters sought clarification as to 
whether employers may establish separate classes for employees subject 
to different CBAs or whether all employees subject to various CBAs 
entered into by the employer would be aggregated and considered one 
class of employees for purposes of offering individual coverage HRAs. 
One commenter requested that the Departments clarify whether a class of 
employees based on a CBA would include all the employees subject to 
that CBA or could be based on distinctions within the CBA. Under the 
final rules, employers may establish separate classes of employees for 
employees covered by separate CBAs. However, under the final rules, an 
employer is not specifically permitted to create its own classes of 
employees based on any distinctions relating to employees within one 
CBA. However, an employer is permitted to combine a CBA classification 
with other permitted classes of employees (for example, combining the 
CBA class with the full-time employee and part-time employee classes to 
create full-time and part-time CBA subclasses), thereby allowing the 
employer to make certain further distinctions within the group of 
employees subject to the CBA. The Departments have revised the 
definition of this class of employees in the text of the rules and 
added an example to the text to clarify its meaning in response to 
comments. Further, to account for, and to avoid disruption of, the way 
in which multiemployer plan coverage is sometimes offered, the final 
rules also clarify that the CBA class may include employees covered by 
a CBA and employees covered by an appropriate related participation 
agreement.\98\
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    \98\ A participation agreement allows non-collectively bargained 
employees to participate in a multiemployer plan. Non-collectively 
bargained employees can only participate in a multiemployer plan if 
the plan specifically allows it, and a participation agreement will 
set forth who is eligible and the benefits for which they are 
eligible.
---------------------------------------------------------------------------

    With regard to the proposed ability to combine classes of employees 
more generally to create subclasses, some commenters supported the 
flexibility, but others expressed concern with the potential for risk 
segmentation. Some commenters recommended that the final rules not 
permit combinations of classes of employees or that, if permitted, the 
final rules apply certain additional safeguards, including a minimum 
class size requirement. Several commenters recommended not allowing 
combinations of classes of employees for small employers but permitting 
combinations of classes of employees for large employers, as long as 
the number of employees in a combined class satisfies a minimum. The 
Departments determined that it is important to provide employers with 
the flexibility to combine classes of employees but, as discussed later 
in this preamble, it is also appropriate to apply a minimum class size 
requirement in certain circumstances to mitigate adverse selection and 
health factor discrimination concerns. Therefore, the final rules 
continue to allow for the combination of classes of employees as 
proposed but, in certain circumstances, apply a minimum class size 
requirement. The final rules also include additional examples to 
illustrate the ability of plan sponsors to combine classes of 
employees.
c. Additional Classes
    Some commenters recommended against adding any classes to the list 
of proposed permitted classes of employees, stating that the proposed 
classes of employees were sufficient and that additional classes of 
employees could lead to an increased risk of adverse selection. 
However, as discussed in this section of the preamble, several other 
commenters requested that certain additional classes of employees be 
added to the final rules.
    In the proposed rules, the Departments acknowledged that permitting 
plan sponsors to treat salaried and hourly employees as different 
classes of employees was considered, but not proposed. The Departments 
noted that employers might easily be able to change an employee's 
status from salaried to hourly (and in certain circumstances, from 
hourly to salaried) with seemingly minimal economic or other 
consequences for either the employer or the employees. Some commenters 
agreed and strongly opposed adding hourly and salaried employees as 
classes of employees, expressing concern that classes of employees 
based on pay status could facilitate health status discrimination and 
be easily manipulated.
    However, several commenters requested that salaried and hourly 
employees be added as separate classes of employees. These commenters 
disagreed with the Departments' assertion that employers might be able 
to easily change employee status from salaried to hourly and vice 
versa. The commenters noted that changing status from salaried to 
hourly in particular has substantial economic and other consequences 
for both employers and employees and that doing so on the basis of the 
health of an employee could violate ERISA section 510. One commenter 
noted that employers historically have provided different benefits to 
hourly and salaried workers and that adding these as permitted classes 
of employees could facilitate increased use of individual coverage HRAs 
for employers that might otherwise decline to offer an individual 
coverage HRA. The Departments considered the issues raised in these 
comments. The Departments have concluded that the benefits of employer 
flexibility, increased utilization of individual coverage HRAs, and 
maximizing employee welfare outweigh the potential risk of adverse 
selection and health factor discrimination, due to a reconsideration of 
the extent to which these categories could be manipulated and because 
of the application of a minimum class size requirement, as described 
later in this preamble. Therefore, the final rules include salaried and 
non-salaried employees as permitted classes of employees.
    One commenter requested that employees employed by a staffing firm 
for temporary placement at entities unrelated to the staffing firm 
(temporary workers) be treated as a separate class. The commenter 
stated that this rule would facilitate offering of individual coverage 
HRAs by staffing firms to full-time temporary workers (while it is 
likely that regular full-time employees of the staffing firm would 
continue to receive an offer of a traditional group health plan). The 
commenter further stated that staffing firms historically have offered 
temporary workers different benefits than regular full-time employees 
for reasons other than to segment risk. The commenter further stated 
that it would be burdensome for staffing firms to shift workers between 
the temporary worker and regular employee classes merely to shift risk. 
The Departments agree that adding this class could increase the 
usability of HRAs for staffing firms and benefit their employees, that 
this class would be difficult to manipulate, and, that,

[[Page 28910]]

therefore, this class does not raise a substantial risk of adverse 
selection or health factor discrimination. Therefore, the final rules 
include as a permitted class of employees individuals who, under all 
the facts and circumstances, are the employees of an entity that hired 
the employees for temporary placement at an unrelated entity (that is, 
another entity that is not the common law employer of the employees and 
that is not treated as a single employer under Code section 414(b), 
(c), (m), or (o) with the entity that hired the employees for temporary 
placement).
    One commenter requested that independent contractors be permitted 
as a separate class of employees, and one commenter requested that the 
Departments allow self-employed business owners to participate in an 
individual coverage HRA. HRAs were established \99\ as a means for 
employers to provide tax-favored benefits to employees, but the 
exclusion from federal income tax for reimbursements of medical 
expenses by HRAs is set forth in Code sections 105 and 106, both of 
which generally are restricted to employer-provided coverage to 
employees. Moreover, Code section 105(g) specifically provides that the 
exclusion under Code section 105(b) is not available to an individual 
who is an employee within the meaning of Code section 401(c)(1) 
(relating to self-employed individuals). For these reasons, businesses 
that utilize the services of independent contractors cannot provide 
those self-employed individuals with a tax-favored individual coverage 
HRA nor may a self-employed business owner be provided a tax-favored 
individual coverage HRA. Therefore, the final rules do not adopt the 
suggestion to add independent contractors, or self-employed individuals 
more generally, as a permitted class of employees because these 
individuals cannot be provided tax-favored HRAs.
---------------------------------------------------------------------------

    \99\ See IRS Notice 2002-45.
---------------------------------------------------------------------------

    One commenter requested that employees eligible for Medicare and 
employees enrolled in Medicare be treated as two separate classes. The 
Departments decline to adopt this suggestion. Sections 1862(b)(1)(A), 
(B), and (C) of the Social Security Act (SSA) generally provide that an 
employer that is subject to its provisions may not take into account an 
employee's (or employee spouse's) eligibility for Medicare in the 
design or offering of its group health plan.\100\ Section 
1862(b)(1)(A)(i)(II) provides that a group health plan must provide to 
any employee or spouse age 65 or older the same benefits, under the 
same conditions, that it provides to employees and spouses under age 
65, regardless of whether the individual or spouse age 65 or older is 
entitled to Medicare. Because Medicare is also generally available to 
people with end-stage renal disease (ESRD) regardless of their age, SSA 
section 1862(b)(1)(C) further provides that a group health plan may not 
differentiate in the benefits it provides between individuals having 
ESRD and other individuals on the basis of the existence of ESRD, the 
need for dialysis, or in any other manner (except during a 30-month 
coordination period). Because these SSA provisions generally prohibit 
an employer that is subject to them from discriminating on the basis of 
an employee's (or the employee's spouse's) Medicare eligibility and 
treating Medicare employees (other than retirees) differently for 
benefits under the plan, the Departments decline to establish separate 
classes of employees for employees who are eligible for or enrolled in 
Medicare. However, see later in this preamble for a discussion of the 
conditions under which an individual coverage HRA may be integrated 
with Medicare.
---------------------------------------------------------------------------

    \100\ The applicability of the Medicare nondiscrimination rules 
depends on the size of the employer and the type of Medicare 
beneficiary. For working aged beneficiaries, the rules apply to 
employers with 20 or more employees. For disabled beneficiaries, the 
rules apply to employers with at least 100 employees. For ESRD 
beneficiaries, they rules apply to employers of any size. See 42 CFR 
411.100 et seq.
---------------------------------------------------------------------------

    Commenters also requested a number of other classes of employees, 
with different commenters suggesting different classes of employees, 
such as classes based on status as a field worker (such as craft 
workers and laborers), role or job title, employee tenure, being 
subject to the Davis Bacon Act and Related Acts or the Service Contract 
Act, exempt or non-exempt status under the Fair Labor Standards Act, 
and religion or status as a minister. The Departments considered each 
of these suggestions and have determined that these suggested classes 
of employees raise various issues including ease of manipulation and 
potential for adverse selection and health factor discrimination, 
industry-specificity, and administrability and definitional challenges. 
The Departments also took into account that, in general, the more 
classes that are permitted, the greater the risk of adverse selection 
and health factor discrimination. With respect to the requested class 
based on employee tenure, the Departments determined that such a class 
could be inconsistent with the prohibition on waiting periods that 
exceed 90 days under PHS Act section 2708, in addition to raising 
concerns regarding ease of manipulation and potential for adverse 
selection and health factor discrimination. Therefore, the Departments 
have determined that, on balance, for these suggested additional 
classes, the potential risks posed outweigh the potential benefits, and 
the Departments decline to add these suggested classes of employees to 
the final rules. However, see the discussion later in this preamble 
regarding the special rule for new hires, which is related in part to 
the comments suggesting a new class based on employee tenure.
d. Additional Safeguards
    In the preamble to the proposed rules, the Departments stated that 
to minimize burden and complexity, the Departments had not proposed a 
minimum employer size or employee class size. The Departments 
identified a concern that very small employers could manipulate the 
classes of employees, but noted that other economic incentives related 
to attracting and retaining talented workers would discourage employers 
from doing so. Accordingly, the Departments invited comments on whether 
employer size or employee class size should be considered in 
determining permissible classes of employees.
    With regard to employer size, some commenters stated that the risk 
of health factor discrimination is higher with small employers and that 
the final rules should prohibit small employers from using, or 
combining, classes of employees to make health coverage distinctions. 
However, other commenters asserted that the concern that small 
employers may discriminate based on health status is invalid, arguing 
that small employers are less likely to discriminate because of both 
the complexity required to design discriminatory programs and the 
minimal incentives that small employers have to remove risk from their 
small group market traditional group health plans that are part of a 
community rated single risk pool. For these reasons, one commenter 
requested that the final rules include less restrictive guardrails for 
small employers. The commenter also requested that large employers 
offering only an individual coverage HRA be permitted additional 
flexibility to structure their classes of employees because the risk of 
discrimination would be mitigated as the employer is not offering a 
traditional group health

[[Page 28911]]

plan and, therefore, would not have incentives to remove risk from its 
plan.
    With regard to minimum class size, a number of commenters requested 
that individual coverage HRAs only be available to classes of employees 
that include a minimum number of employees or are a minimum percentage 
of an employer's workforce. A few commenters noted that although a 
minimum class size requirement would be restrictive, and perhaps 
inhibit the use of individual coverage HRAs, it would be necessary to 
prevent risk segmentation. Some commenters supported applying a minimum 
class size requirement in all cases and some supported applying such a 
requirement only when separate classes of employees are combined to 
make smaller subclasses of employees. Some commenters made general 
requests for a minimum class size requirement (for example, requests 
for a meaningful threshold) and others included specific suggestions, 
such as requiring a minimum class size of 10 percent of employees, at 
least 10 percent of the employer's workforce or 100 workers, at least 
20 employees, or prohibiting employers with fewer than 10 employees 
from being able to create classes. One commenter requested that there 
be no minimum class size requirement, in particular to provide 
flexibility to small employers.
    In response to these comments, the Departments have concluded that 
it is appropriate to apply a minimum class size requirement under the 
final rules in certain circumstances. The Departments sought to develop 
a rule that is narrowly tailored both to mitigate the risk of adverse 
selection and health factor discrimination while also avoiding overly 
burdening employers or unnecessarily hampering the use and flexibility 
of HRAs to maximize employee welfare.
    In order to balance these various considerations, the final rules 
include a minimum class size requirement that varies based on employer 
size and that applies only to certain classes of employees in certain 
circumstances in which the potential for adverse selection is greatest. 
If a class of employees is subject to the minimum class size 
requirement, the class must include a minimum number of employees for 
the individual coverage HRA to be offered to that class. The final 
rules explain the circumstances in which the minimum class size 
requirement applies, how to determine the applicable class size 
minimum, and how an individual coverage HRA determines if a particular 
class of employees satisfies the applicable class size minimum. The 
final rules also provide a number of examples to illustrate each aspect 
of the minimum class size requirement.
    As to the circumstances in which the minimum class size requirement 
applies, it applies only if the plan sponsor offers a traditional group 
health plan to at least one other class of employees and offers an 
individual coverage HRA to at least one class of employees. To the 
extent the minimum class size requirement applies, it applies only to 
certain classes that are offered an individual coverage HRA. The 
minimum class size requirement does not apply to a class of employees 
offered a traditional group health plan or to a class of employees that 
is not offered any group health plan.
    Under the final rules, the minimum class size requirement generally 
applies to the following classes of employees offered an individual 
coverage HRA: (1) Salaried employees, (2) non-salaried employees, (3) 
full-time employees, (4) part-time employees, and (5) employees whose 
primary site of employment is in the same rating area (although the 
minimum class size requirement does not apply if the geographic area 
defining the class is a state or a combination of two or more entire 
states) (these classes are referred to collectively as the applicable 
classes). However, in the case of full-time employees and part-time 
employees, the minimum class size requirement applies only to those 
classes if the employees in either the part-time or full-time class are 
offered a traditional group health plan while the employees in the 
other class are offered an individual coverage HRA. The Departments 
considered each of the classes of employees permitted under the final 
rules to determine which classes, if any, present a risk of adverse 
selection sufficiently significant to justify the imposition of the 
minimum class size requirement. The Departments determined that classes 
composed of salaried employees, non-salaried employees, full-time 
employees, part-time employees, and employees whose primary site of 
employment is in the same rating area (except if the geographic area 
defining the class is a state or a combination of two or more entire 
states) present a substantial risk that employers could apply each of 
these classes in a way that targets certain higher-risk employees and, 
therefore, could lead to health factor discrimination and adverse 
selection. However, the Departments determined that the other permitted 
classes of employees (that is, the seasonal employee class, the CBA 
class, the waiting period class, the class based on non-resident aliens 
with no U.S.-based income, and the class of employees for temporary 
workers employed by a staffing firm) are unlikely to be manipulated by 
employers in a way that would lead to health factor discrimination or 
adverse selection.
    Under the final rules, the minimum class size requirement applies 
to a class of employees created by combining any of the applicable 
classes with any other class of employees, except that the minimum 
class size requirement does not apply to a class that is the result of 
any combination of an applicable class and the waiting period class. 
Waiting periods are most typically applied to new hires, and it is not 
uncommon for employers to hire new employees in small numbers, to 
respond to attrition and as workflow increases. Further, the 
Departments are of the view that combinations of classes that include 
the waiting period class do not raise a significant risk of 
manipulation that could lead to adverse selection or health factor 
discrimination. Therefore, taking these factors into account, the 
Departments have determined that applying the minimum class size 
requirement to a class comprised of an applicable class and a waiting 
period class is not warranted.
    Consistent with the comments received on this topic, the minimum 
number of employees that must be included in a class of employees 
subject to the minimum class size requirement (the applicable class 
size minimum) depends on the number of employees employed by the 
employer. The plan sponsor must determine the applicable class size 
minimum for each plan year of the individual coverage HRA. The 
applicable class size minimum is: (a) 10, for an employer with fewer 
than 100 employees; (b) a number, rounded down to a whole number, equal 
to 10 percent of the total number of employees, for an employer with 
100 to 200 employees; and (c) 20, for an employer that has more than 
200 employees. In selecting these thresholds, the Departments 
considered the suggestions made by commenters and sought to strike a 
balance between providing employers with flexibility to offer different 
healthcare packages as part of their compensation framework and design, 
and limiting employers' ability to use the classes in ways that would 
create adverse selection in the individual market. The Departments 
agree with commenters that small employers may not have significant 
incentives to establish classes in a way that would result in adverse 
selection or health discrimination, but also are of the view that it 
could be easier for smaller

[[Page 28912]]

employers to manipulate the classes of employees. Further, the 
Departments selected thresholds for larger employers taking into 
account that, despite their total size, the classes of employees could 
also be manipulated by larger employers in ways that could lead to 
adverse selection and health factor discrimination. Therefore, the 
minimum class size requirement applies to small employers and large 
employers, but at lower thresholds for smaller employers than for large 
employers. For the purpose of applying the minimum class size 
requirement, an employer must determine the number of its employees 
based on its reasonable expectation of the number of employees it 
expects to employ on the first day of the plan year of the individual 
coverage HRA.
    The annual determination of whether a class of employees satisfies 
the applicable class size minimum is based on the number of employees 
in the class who are offered the individual coverage HRA as of the 
first day of the plan year.\101\ Therefore, the determination of 
whether a class of employees satisfies the minimum class size 
requirement is not based on the number of employees who enroll in the 
individual coverage HRA and is not affected by changes that occur 
during the plan year.
---------------------------------------------------------------------------

    \101\ The Departments reiterate that under the same terms 
requirement, an employer offering an individual coverage HRA to any 
employee in a class of employees must offer the HRA, generally on 
the same terms and conditions, to all employees in the class.
---------------------------------------------------------------------------

    Some commenters requested that, in addition to, or instead of, a 
minimum class size requirement, the Departments should add an anti-
abuse rule that would give the Departments the discretion to determine 
whether an individual coverage HRA is offered in a manner that is 
intended to segment sicker workers based on all the facts and 
circumstances. Therefore, even if an employer followed the other rules 
set forth in the final rules, this additional rule would nevertheless 
permit the Departments to address instances of discrimination based on 
a health factor. The Departments decline to add a facts and 
circumstances test to the final rules because the Departments have 
concluded that the minimum class size requirement, as set forth in the 
final rules, adequately balances the need to prevent health factor 
discrimination with the need to provide employers with certainty in 
order to encourage expansion and use of individual coverage HRAs. 
Moreover, other applicable nondiscrimination laws continue to apply. 
Under the HIPAA nondiscrimination provisions, for example, a group 
health plan (including an individual coverage HRA) may not discriminate 
in eligibility for benefits, or in premiums or contributions, based on 
one or more health factors.\102\ In addition, for ERISA-covered plans, 
it is unlawful for any person to discriminate against a participant or 
beneficiary for the purpose of interfering with the attainment of any 
right to which the participant may become entitled under a health plan 
or ERISA.\103\ Further, under the SSA, an employer generally may not 
take into account that an individual is entitled to Medicare on the 
basis of age or disability, or eligible for, or entitled to Medicare on 
the basis of ESRD, and may not differentiate in the benefits it 
provides between individuals who have ESRD and other individuals 
covered under the plan.\104\ In addition, other nondiscrimination laws 
(such as the Americans with Disabilities Act) may also apply, and the 
Departments note that compliance with the final rules is not 
determinative of compliance with any other applicable law. A new facts 
and circumstances test would add significant uncertainty for employers 
while adding little additional protection mitigating adverse selection 
and health factor discrimination.
---------------------------------------------------------------------------

    \102\ Code section 9802, ERISA section 702, and PHS Act section 
2705. See also 26 CFR 54.9802-1, 29 CFR 2590.702, and 45 CFR 
146.121.
    \103\ ERISA section 510.
    \104\ SSA section 1862(b)(1)(A), (B), and (C) and 42 CFR 
411.102, 411.161, and 411.170.
---------------------------------------------------------------------------

e. Former Employees
    Under the proposed rules, if an individual coverage HRA were 
offered to former employees, former employees would be considered to be 
in the same class of employees in which they were included immediately 
before separation from service. While the plan sponsor would not be 
required to offer the individual coverage HRA to all former employees 
(or to all former employees in the applicable class of employees), if 
it did offer the HRA to a former employee, it would have to do so on 
the same terms as for the other employees in that class.
    A few commenters requested that employers be permitted to treat 
former employees as a separate class of employees, stating that the 
rule under the proposed rules treating former employees as part of the 
class of employees in which they would have been included immediately 
prior to separation from service will impose a barrier to offering 
individual coverage HRAs. These commenters stated that such a new class 
of employees would not raise manipulation concerns because whether to 
terminate employment generally is an independent decision made by the 
employee. Commenters further suggested that if a class of employees 
were created for former employees, the final rules should also permit 
subclasses within the class of former employees based on years of 
service.
    Some commenters supported the proposed treatment of former 
employees and commented that former employees should not be permitted 
as a separate class of employees under the final rules because the 
general age and health status of former employees would present adverse 
selection concerns. One commenter included a number of requests 
regarding retiree-only HRAs in the context of rehired employees.
    Notwithstanding that employers may continue to offer retiree-only 
HRAs that are not subject to the market requirements (and, therefore, 
are not subject to any integration requirements), the Departments 
understand the commenters' concern regarding adverse selection and are 
not aware of a compelling need to treat former employees as a separate 
class of employees under the final rules in light of the continued 
allowance of retiree-only HRAs that are not subject to any integration 
requirements. All of the rules and eligibility criteria related to 
retiree-only HRAs continue to apply without change.\105\ Therefore, the 
final rules provide that a former employee is considered to be a member 
of the same class of employees the former employee was in immediately 
before separation from service, as proposed.
---------------------------------------------------------------------------

    \105\ See Code section 9831(a)(2) and ERISA section 732(a). 
While title XXVII of the PHS Act, as amended by PPACA, no longer 
contains a parallel provision at PHS Act section 2721(a), HHS has 
explained that it will not enforce the requirements of title XXVII 
of the PHS Act with respect to non-federal governmental retiree-only 
plans and encourages states to adopt a similar approach with respect 
to retiree-only plans offered by health insurance issuers. See 75 FR 
34537, 34540 (June 17, 2010).
---------------------------------------------------------------------------

    Several commenters raised other classification and administration 
issues related to retirees. One commenter requested clarification that 
the final rules would not affect the status of former employees who 
participate in their employer's traditional group health plan through 
COBRA. The Departments note that the impact of the final rules on any 
former employee participating in an employer's traditional group health 
plan through COBRA continuation coverage depends on the facts and 
circumstances. For example, COBRA continuation coverage ends on the 
date the employer ceases to provide any group health plan (including 
successor plans). If a former employee is participating in a

[[Page 28913]]

traditional group health plan that is replaced by an individual 
coverage HRA, the former employee would have a right to elect to 
participate in the successor plan, the individual coverage HRA 
(conditioned on the payment of premiums and enrollment in individual 
health insurance coverage), but would generally not have a right to 
continue coverage in the traditional group health plan. One commenter 
requested that the final rules define ``former employee.'' The final 
rules provide that for purposes of this rule a former employee is an 
employee who is no longer performing services for the employer.
f. Controlled Group
    Commenters requested clarification as to whether the classes of 
employees are identified based on the employees of the common law 
employer or, rather, whether the determination is made at the 
controlled group level (generally referring to a group of employers 
treated as a single employer with the common law employer under Code 
section 414(b), (c), (m), or (o)), such that all employees of a 
controlled group of employers would be combined to create the classes 
of employees. Some commenters recommended that the Departments confirm 
that the controlled group rules do not apply for this purpose, and some 
recommended that the controlled group rules be used to determine the 
classes of employees as a way to reduce the number of small classes and 
prevent adverse selection.
    After consideration of these comments, the Departments have 
concluded that determining the classes of employees at the common law 
employer level will avoid complexity for employers and that applying 
the minimum class size requirement (to the extent applicable), as 
described earlier in this preamble, at the common law employer level, 
is a more straightforward way of addressing the adverse selection 
concerns raised by some commenters. Accordingly, the final rules 
clarify that the classes of employees are determined based on the 
employees of a common law employer, rather than the employees of a 
controlled group of employers.
g. Movement Among Classes
    A few commenters requested clarification regarding the application 
of the final rules in the situation in which an employee moves out of a 
class of employees that is offered an individual coverage HRA and into 
a different class of employees that is offered either a traditional 
group health plan, a different individual coverage HRA, or no coverage. 
As discussed earlier in this preamble, the Departments note that as 
group health plans, HRAs generally are subject to the COBRA or other 
group continuation of coverage rules. However, if the change in the 
employee's classification is not the result of termination of 
employment or reduction in hours, there generally is not a qualifying 
event resulting in a COBRA or other group continuation of coverage 
right.
    Even if an employee who ceases enrollment in an individual coverage 
HRA does not have a right to continuation of coverage, the HRA must 
allow the individual to submit for reimbursement substantiated medical 
care expenses that were incurred during the coverage period prior to 
the termination date of the individual coverage HRA. In this case, the 
individual coverage HRA may limit the period of time to submit expenses 
to a reasonable specified time period after termination of coverage 
under the individual coverage HRA during which the participant may 
submit those claims. Additionally, an employee who loses coverage under 
an individual coverage HRA may qualify for an SEP for loss of MEC to 
change his or her individual health insurance coverage either on or off 
an Exchange.
    One commenter asked whether an employee who changes classes of 
employees and loses coverage under an individual coverage HRA may 
convert unused amounts to another type of HRA. The Departments note 
that under existing rules, employers generally may provide employees 
enrolled in a traditional group health plan an HRA that is integrated 
with that traditional group health plan and in some circumstances may 
provide an HRA that can be integrated with TRICARE or Medicare. Nothing 
in the final rules or current guidance would prevent employers from 
basing the amount in these types of HRAs on unused amounts in an 
individual coverage HRA in which the individual was previously 
enrolled, nor are employers precluded from basing the amount of an 
individual coverage HRA on unused amounts in these types of HRAs in 
which the individual was previously enrolled. Also, if an employee 
moves from a class of employees offered an individual coverage HRA to a 
class of employees offered a different individual coverage HRA, nothing 
in the final rules would prevent the employer from permitting the 
unused amounts in the first individual coverage HRA to be considered 
transferred to the second. Therefore, the final rules are revised to 
clarify that amounts made available in an individual coverage HRA based 
on amounts remaining in another HRA under which the participant was 
previously covered are disregarded for purposes of determining whether 
the individual coverage HRA is offered on the same terms, provided that 
if the HRA takes these amounts into account, it does so on the same 
terms for all participants in the class of employees.\106\
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    \106\ However, employers may not permit unused amounts in an 
individual coverage HRA, or any other type of HRA, to be considered 
transferred to an excepted benefit HRA because amounts made 
available under an excepted benefit HRA are necessarily limited in 
order for the HRA to constitute an excepted benefit. Allowing 
amounts remaining in other types of HRAs to be transferred to an 
excepted benefit HRA could lead to significant circumvention of that 
limit. Also, note that under the final excepted benefit HRA rules, 
if the plan sponsor offers more than one HRA to the participant for 
the same time period, the amounts made available under all such 
plans are aggregated to determine whether the benefits are limited 
in amount, except that HRAs that reimburse only excepted benefits 
are not included in determining whether the benefits are limited in 
amount.
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    Further, with regard to amounts remaining in an individual coverage 
HRA after the individual is no longer covered by the HRA, the HRA must 
allow a participant (and the participant on behalf of dependents) to 
submit claims to the HRA for reimbursement of substantiated expenses 
that were incurred during the coverage period prior to the termination 
of the individual's coverage under the individual coverage HRA, even if 
the claim is submitted after the individual is no longer covered by the 
individual coverage HRA. However, the HRA may limit the period to 
submit expenses to a reasonable specified time period.
    One commenter requested guidance on situations in which employees 
are currently receiving treatment for health conditions when an 
employer switches from a traditional group health plan to an individual 
coverage HRA. The Departments note that a similar issue arises under 
existing rules when an employer switches from one group health plan to 
another group health plan with a different network of providers, so 
that providers participating under the first plan are no longer in 
network. The final rules do not address this issue because it is not 
specific to this rulemaking. To the extent an employee or dependent is 
switching from an insured traditional group health plan to individual 
health insurance coverage purchased with an individual coverage HRA, 
state ``succeeding carrier'' or ``extension of benefit'' laws may 
regulate the obligations of the prior or succeeding issuer to cover an 
individual's ongoing health conditions at the time of the coverage 
switch.

[[Page 28914]]

h. Definition of Full-Time Employee, Part-Time Employee, and Seasonal 
Employee
    For purposes of identifying classes of employees, the proposed 
rules provided that a plan sponsor may define full-time employees, 
part-time employees, and seasonal employees in accordance with either 
the applicable definitions under Code section 105(h) or those under 
Code section 4980H to avoid overlapping classes of employees. The 
proposed rules included a proposal that a plan sponsor's choice of 
which statutory definitions to apply must be consistent across these 
three classes of employees, to the extent the plan sponsor 
differentiates based on these classes.
    A few commenters requested that only one definition for each term 
be permitted and requested that the final rules adopt the definitions 
in Code section 4980H. One commenter recommended that only the 
definition of full-time employee under Code section 4980H (which is 
based on 30 hours per week) should be permitted. This commenter 
asserted that use of the definition under Code section 105(h) (which is 
based on 35 hours per week) could lead to adverse selection, because 
many plans currently offer traditional group health plan coverage to 
employees based on the Code section 4980H definition, and use of 
another definition could lead to subdivision of full-time employees. A 
few commenters supported the proposed ability to choose either set of 
definitions, including the requirement to use either the definitions 
under Code section 4980H or those under Code section 105(h) 
consistently across these classes of employees.
    The Departments considered these comments and have determined that 
the final rules should adopt the definitions provided in the proposed 
rules. This approach provides employers with flexibility, while 
limiting opportunities for risk segmentation. The Departments 
understand that, to avoid the inclusion of amounts in income, plan 
sponsors of self-insured plans subject to Code section 105(h) (in 
particular small employers not subject to Code section 4980H) may want 
to design their health plans to offer a traditional group health plan 
and individual coverage HRAs (or individual coverage HRAs in different 
amounts or under different terms and conditions) to different classes 
of employees that are identified in a manner that complies with the 
requirements of Code section 105(h). The Departments also acknowledge 
that certain larger employers have already determined how to apply the 
definitions under Code section 4980H to their workforces and using 
those same definitions for purposes of applying the integration rules 
may reduce burden for those employers. Therefore, the final rules 
include flexibility for each employer to determine which set of 
definitions is appropriate for its workforce, provided the employer 
uses the same set of definitions for classifying its full-time, part-
time, and seasonal employees to the extent it uses one or more of these 
classes of employees.
    The proposed rules further provided that the HRA plan document must 
set forth the applicable definitions of full-time employee, part-time 
employee, and seasonal employee prior to the beginning of the plan year 
in which the definitions will apply and that nothing would prevent an 
employer from changing the definitions for a subsequent plan year. Some 
commenters supported that provision, asserting that it minimizes the 
potential for adverse selection, with one requesting clarification 
whether it is permissible to change the definitions of the classes of 
employees during the plan year. One commenter stated that plan sponsors 
should not be allowed to change the definitions each plan year, 
asserting that this flexibility could allow small employers in 
particular to segment risk.
    The Departments have determined that in order to mitigate the risk 
of market segmentation and minimize disruption to employees with 
respect to a coverage period, it is important for plan sponsors to 
determine prior to the plan year which definitions will apply and to 
apply them consistently throughout the plan year. The Departments also 
have concluded that limiting an employer's ability to revise the 
definitions it applies from one plan year to the next would be 
unnecessarily restrictive. Accordingly, the final rules generally 
retain the rules in the proposed rules. However, the final rules 
clarify that adjustments during the plan year to the definitions used 
to identify the classes of employees are not permitted.
6. Special Rule for New Hires
    As explained earlier in this preamble, some commenters expressed 
concerns about the challenges employees may experience in transitioning 
from a traditional group health plan to individual health insurance 
coverage, with some stating that the proposed rules failed to 
adequately take into account the differences between the coverage types 
and the significance of the change from the employee's perspective. The 
Departments are aware that the transition from coverage under a 
traditional group health plan to coverage under an individual coverage 
HRA could represent a substantial change from an employee perspective, 
and, as a result, employers may want to phase in individual coverage 
HRAs. By allowing plan sponsors to offer traditional group health plans 
to some classes of employees while offering other classes of employees 
an individual coverage HRA, the final rules provide plan sponsors with 
some flexibility to manage the transition to individual coverage HRAs. 
However, in response to comments, including those expressing concern 
about the transition from traditional group health plans to individual 
coverage HRAs and those expressing interest in being able to provide 
different benefits based on employee tenure, the Departments have 
determined that it is appropriate to provide additional flexibility to 
plan sponsors, in particular for employers that offer traditional group 
health plans that would like to continue to offer that type of coverage 
to current employees who are accustomed to that coverage, but offer 
individual coverage HRAs to newly hired employees.
    Therefore, notwithstanding the general rule that a plan sponsor may 
only offer either a traditional group health plan or an individual 
coverage HRA to a class of employees, the final rules provide that a 
plan sponsor that offers a traditional group health plan to a class of 
employees may prospectively offer employees in that class hired on or 
after a certain date in the future (the new hire date) an individual 
coverage HRA (the new hire subclass), while continuing to offer 
employees in the class hired before the new hire date a traditional 
group health plan (the special rule for new hires). A plan sponsor may 
set the new hire date prospectively for a class of employees as any 
date on or after January 1, 2020. A plan sponsor may set different new 
hire dates prospectively for separate classes of employees.
    Although this special rule provides additional flexibility, it is 
still the case that for the new hire subclass, the individual coverage 
HRA must be offered on the same terms to all participants within the 
new hire subclass, in accordance with the generally applicable rules 
under the same terms requirement. Further, a plan sponsor may not offer 
a choice between an individual coverage HRA or a traditional group 
health plan to any participant, whether a current employee or a newly 
hired employee in the new hire subclass.

[[Page 28915]]

    A plan sponsor may discontinue the special rule for new hires at 
any time for a class of employees. In that case, the new hire subclass 
would no longer be treated as a separate subclass of employees, and 
each employee that was previously treated as part of the new hire 
subclass would then be treated as an employee in the class of which he 
or she would have otherwise belonged for purposes of the final rules. 
In that case, if the plan sponsor wanted to offer an individual 
coverage HRA, it would need to do so for all the employees in the class 
and generally on the same terms, as explained earlier in this preamble. 
It could also choose instead to offer a traditional group health plan 
to some or all of the employees \107\ in the class or to offer no 
coverage.
---------------------------------------------------------------------------

    \107\ To the extent such an arrangement is available to active 
employees it may be subject to restrictions under other laws, such 
as the MSP provisions.
---------------------------------------------------------------------------

    In the event a plan sponsor applies the special rule for new hires 
to a class of employees and later discontinues using the rule for the 
class of employees, the plan sponsor may apply the special rule for new 
hires to the class of employees again, at a later time, under the same 
rules as the initial application of the rule. For example, as under the 
basic requirements for the application of the special rule for new 
hires, the plan sponsor would only be allowed to apply the rule to a 
class to which it is offering a traditional group health plan. If a 
plan sponsor applies the special rule for new hires again, in 
accordance with the general rules under the special rule for new hires, 
the plan sponsor would choose a prospective new hire date. In no 
circumstances may the special rule for new hires be applied to a class 
of employees (including a new hire subclass) already being offered an 
individual coverage HRA, in an attempt to offer different HRA amounts 
or other different terms within a class of employees based on different 
hire dates.
    The minimum class size requirement described earlier in this 
preamble does not apply to a new hire subclass. This is because the 
Departments recognize that many employers hire only a few employees, or 
even only one employee, at a time and a subclass based on a new hire 
date does not present a high risk of manipulation that could lead to 
adverse selection. However, if a plan sponsor subdivides the new hire 
subclass based on a permissible class of employees subsequent to 
creating the new hire subclass, the minimum class size requirement 
applies to any class of employees created by subdividing the new hire 
subclass, if the minimum class size requirement otherwise applies. The 
text of the final rules includes examples to illustrate these rules.
7. Opt-Out Provision
    If an individual is covered by an HRA, including an individual 
coverage HRA, for a month, regardless of the amount of reimbursement 
available under the HRA, the individual is not eligible for the PTC for 
that month. Because in some circumstances an individual may benefit 
more from claiming the PTC than from having funds in an HRA available 
for reimbursement, the Departments' existing rules regarding 
integration with non-HRA group coverage and with Medicare require a 
plan sponsor that offers an HRA to allow participants to opt out of and 
waive future reimbursements from the HRA at least annually.\108\ The 
proposed rules also included this requirement with respect to the 
individual coverage HRA, so that employees would be allowed the PTC, if 
they are otherwise eligible, if they opt out of and waive future 
reimbursements from the HRA and the HRA is either unaffordable or does 
not provide MV.\109\ The Departments have concluded that this condition 
is important as a result of the PTC consequences of HRA coverage, and, 
therefore, the final rules retain this condition, with some 
clarifications.
---------------------------------------------------------------------------

    \108\ See 26 CFR 54.9815-2711(d)(2)(i)(E), (d)(2)(ii)(D), and 
(d)(5)(iv); 29 CFR 2590.715-2711(d)(2)(i)(E), (d)(2)(ii)(D), and 
(d)(5)(iv); and 45 CFR 147.126(d)(2)(i)(E), (d)(2)(ii)(D), and 
(d)(5)(iv).
    \109\ See later in this preamble for a discussion of the final 
rules regarding the circumstances in which an offer of an individual 
coverage HRA is affordable and provides MV for purposes of Code 
section 36B.
---------------------------------------------------------------------------

    Furthermore, consistent with the current rules for integration with 
a group health plan and with Medicare, the proposed rules required that 
upon termination of employment, either the remaining amounts in the HRA 
must be forfeited or the participant must be allowed to permanently opt 
out of and waive future reimbursements from the HRA. This requirement 
ensures that the HRA participant may choose whether to claim the PTC, 
if otherwise eligible, or to continue to participate in the HRA after 
the participant's separation from service.\110\
---------------------------------------------------------------------------

    \110\ Note that a former employee is only rendered ineligible 
for the PTC if the former employee enrolls in employer-sponsored 
coverage; an offer of coverage (even if it is affordable and 
provides MV) does not preclude a former employee from claiming the 
PTC. See 26 CFR 1.36B-2(c)(3)(iv).
---------------------------------------------------------------------------

    Commenters generally supported these opt-out requirements as 
necessary to protect PTC eligibility for employees. Some commenters 
expressed concern that due to the complexity of the PTC affordability 
rules, employees are likely to have difficulty understanding whether or 
not they should opt out of an individual coverage HRA. Similarly, some 
commenters expressed concern that some low- and moderate-income 
employees may opt into the individual coverage HRA although they may 
have been better off opting out of the HRA and receiving the PTC, while 
others expressed concern that some employees may opt out of the HRA 
based on the misimpression that they will receive the PTC, when 
actually they are ineligible for the PTC.
    The Departments appreciate the concerns expressed regarding the 
burden on employees to properly determine whether the individual 
coverage HRA they have been offered is affordable and provides MV and 
to determine whether they will be better off with the HRA or, if 
otherwise eligible, the PTC. These concerns are the primary reason that 
the Departments proposed and are finalizing the requirement for 
individual coverage HRAs to provide a written notice to each 
participant. Further, the Departments will work with the FFEs and State 
Exchanges to ensure that their applications and other relevant 
materials are updated to accommodate individuals who are offered an 
individual coverage HRA and are applying for individual health 
insurance coverage with APTC.
    Some commenters requested clarification regarding the timing of the 
annual opt-out condition. One commenter asked the Departments to 
clarify how the annual opt-out condition applies in the case of an HRA 
with a non-calendar year plan year. In response, the final rules 
clarify that an HRA may establish timeframes for enrollment in (and 
opting out of) the HRA, but participants generally \111\ must be 
provided an opportunity to opt out of the individual coverage HRA once 
for each plan year, which must occur in advance of, and with respect 
to, the plan year. That is, individual coverage HRAs must provide 
participants with one advance opportunity to accept, or opt out of, the 
individual coverage HRA for each plan year, but the individual coverage 
HRA may not provide participants with multiple opportunities

[[Page 28916]]

to opt into, or out of, the individual coverage HRA over the course of 
the plan year, except that the final rules require HRAs to provide an 
opt out opportunity upon termination of employment. This is generally 
consistent with employees' ability to decline traditional group health 
plan coverage that is not affordable or does not provide MV in order to 
claim the PTC, if otherwise eligible. See later in this preamble for a 
discussion of comments received on the proposed PTC rules and an 
explanation of the final PTC rules, including for additional discussion 
of the application of the PTC rules to an employee opting out of, or 
accepting, an individual coverage HRA with a non-calendar year plan 
year.
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    \111\ The final rules also clarify that for participants or 
dependents who become eligible for the individual coverage HRA on a 
date other than the first day of the plan year (or participants who 
are not required to be provided the HRA notice at least 90 days in 
advance of the plan year (that is, employees who become eligible 
less than 90 days prior to the plan year and employees of newly 
established employers)), the option to opt out must be provided 
during the HRA enrollment period established by the HRA for these 
individuals and then subsequently on an annual basis in advance of 
the plan year.
---------------------------------------------------------------------------

    One commenter requested clarification as to whether a former 
employee offered an individual coverage HRA must be provided the annual 
opportunity to opt out of the individual coverage HRA. The Departments 
clarify that the annual opt-out condition applies for all participants 
eligible to enroll in an individual coverage HRA, including former 
employees. Another commenter requested clarification whether an 
employee's choice to opt out of an individual coverage HRA also applies 
to the employee's dependents who are otherwise eligible for the 
individual coverage HRA. The Departments intend for the opt-out 
opportunity to extend to dependents, but expect that an employer would 
provide an individual coverage HRA to an employee's dependent only if 
the employee participates in the individual coverage HRA. Therefore, 
the final rules clarify that if an employee opts out of an individual 
coverage HRA, the individual coverage HRA is considered waived for the 
employee's eligible dependents as well.\112\ See later in this preamble 
for a discussion of the circumstance in which the offer of an 
individual coverage HRA to an employee's dependents will render the 
dependents ineligible for the PTC.
---------------------------------------------------------------------------

    \112\ The Departments note that this provision addresses the 
right of participants to opt out of the HRA generally, including for 
their dependents, and is not intended to preclude an HRA from 
allowing a participant who enrolls in the HRA from enrolling some, 
but not all, dependents (including new dependents added during the 
year). The Departments also clarify that in the event a participant 
gains a dependent during the year, the HRA must provide the 
participant the right to decline to enroll that dependent, if the 
participant had enrolled for the plan year.
---------------------------------------------------------------------------

    One commenter requested clarification as to whether, instead of 
permanently forfeiting an individual coverage HRA upon termination of 
employment, an individual coverage HRA may be suspended for a period of 
time, allowing the individual to receive the PTC during that period of 
time if otherwise eligible, and then have the HRA amounts reinstated in 
the individual coverage HRA years in the future. Although the current 
rules for integration of an HRA with other group coverage allow certain 
HRA amounts that would otherwise be permanently forfeited to be 
reinstated in the future upon a fixed date, a participant's death, or 
the earlier of the two events, the final rules do not include a similar 
provision for individual coverage HRAs. The final rules do not include 
such a provision due to the Departments' concerns about complexity and 
burden on employers in needing to establish procedures for 
substantiation of enrollment in individual health insurance coverage 
upon reinstatement, and on an ongoing basis, possibly many years in the 
future; the lack of demand for such a rule from employers; and 
potential complexities related to the interaction with the PTC.\113\ 
However, as explained earlier in this section of the preamble, the 
final rules require an individual coverage HRA to provide an annual 
opportunity for participants to opt out of the HRA, which may, 
depending on the individual coverage HRA offered, allow the 
participant, if otherwise eligible, to claim the PTC.
---------------------------------------------------------------------------

    \113\ See 26 CFR 54.9815-2711(d)(3), 29 CFR 2590.715-2711(d)(3), 
and 45 CFR 147.126(d)(3).
---------------------------------------------------------------------------

8. Substantiation of Coverage Under Individual Health Insurance 
Coverage
a. In General
    The proposed rules required that individuals whose medical care 
expenses may be reimbursed under an individual coverage HRA must be 
enrolled in individual health insurance coverage. To facilitate the 
administration of this requirement, under the proposed rules, an 
individual coverage HRA would be required to implement, and comply 
with, reasonable procedures to verify that individuals whose medical 
care expenses are reimbursable by the individual coverage HRA are, or 
will be,\114\ enrolled in individual health insurance coverage during 
the plan year (annual coverage substantiation requirement).
---------------------------------------------------------------------------

    \114\ The Departments clarify that the reference to ``will be'' 
applies for participants who provide the substantiation in advance 
of when their individual coverage HRA coverage begins.
---------------------------------------------------------------------------

    Commenters generally supported the annual coverage substantiation 
requirement, asserting that it is necessary to ensure the effectiveness 
of the requirement that individuals covered by an individual coverage 
HRA must be enrolled in individual health insurance coverage. The 
Departments agree; therefore, the final rules adopt the annual coverage 
substantiation requirement, with minor clarifications described in this 
section of the preamble.\115\
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    \115\ One commenter asserted that the substantiation 
requirements in the proposed rules are not sufficient but the 
commenter appears to have understood that the annual coverage 
substantiation requirement is the sole substantiation requirement. 
The Departments note that the final rules, like the proposed rules, 
also require that the HRA satisfy the ongoing substantiation 
requirement. The Departments determined that both the annual 
coverage substantiation requirement and the ongoing substantiation 
requirement are necessary to ensure that individuals covered by an 
individual coverage HRA have individual health insurance coverage. 
Also, this commenter asserted that in the proposed rules the 
Departments acknowledged that employees may fail to obtain coverage, 
and cited to 83 FR 54445 (Oct. 29, 2018), where, in the regulatory 
impact analysis the Departments stated that loss of coverage could 
occur as a result of the integration rules ``if some previously 
covered employees do not accept the HRA and fail to obtain their own 
coverage.'' The Departments clarify that this statement related to 
individuals who opt out of the HRA and did not address the 
circumstance in which an individual with an individual coverage HRA 
does not have individual health insurance coverage.
---------------------------------------------------------------------------

    Some commenters asked the Departments to clarify the timeframe 
within which the substantiation must be provided, including requests 
for clarification as to whether it would be acceptable for the 
substantiation to occur during the individual coverage HRA enrollment 
period or prior to the first request for reimbursement under the 
individual coverage HRA, which commenters stated would be consistent 
with typical administrative procedures for HRAs. For individuals who 
seek enrollment in an individual coverage HRA for the entire HRA plan 
year, the Departments intend for the annual coverage substantiation 
requirement to provide verification of an individual's enrollment in 
individual health insurance coverage for the entire HRA plan year (and, 
therefore, that coverage is in effect as of the first day of the HRA 
plan year). Accordingly, the final rules clarify that the HRA may 
establish the date by which the annual coverage substantiation 
requirement must be satisfied, but, in general, the date may be no 
later than the first day of the HRA plan year. Nothing in the final 
rules prevents an HRA from setting reasonable parameters for when the 
substantiation must be provided to the HRA (for example, by the end of 
the individual coverage HRA open enrollment period).\116\
---------------------------------------------------------------------------

    \116\ The Departments note that in establishing the enrollment 
period for an individual coverage HRA, plan sponsors should consider 
the timeframes for the relevant individual market enrollment 
periods.

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[[Page 28917]]

    However, for individuals who become eligible for the HRA during the 
HRA plan year, including dependents, or who otherwise are not required 
to be provided the HRA notice described later in this preamble 90 days 
prior to the plan year (that is, employees who become eligible fewer 
than 90 days prior to the plan year or employees of newly established 
employers), the HRA may establish the date by which the substantiation 
must be provided, but the date may be no later than the date the HRA 
coverage begins. These individuals may not have sufficient time to 
enroll in individual health insurance coverage that is effective on or 
before the first day of the HRA plan year. Thus, the final rules 
provide a timing requirement that is consistent with the annual 
coverage substantiation requirement to provide verification of an 
individual's enrollment in individual health insurance coverage for the 
portion of the HRA plan year during which the individual is covered by 
the HRA. The final rules also clarify that, for these individuals, 
whether the individual is a participant or a dependent, the annual 
coverage substantiation requirement requires substantiation that the 
individual will have individual health insurance coverage for the 
portion of the HRA plan year during which the individual is covered by 
the HRA (rather than requiring substantiation of coverage for the 
entire plan year). The final rules also clarify that to the extent a 
new dependent's coverage is effective retroactively, the HRA may 
establish any reasonable timeframe for the annual coverage 
substantiation but must require it be provided before the HRA will 
reimburse medical care expenses for the newly added dependent.
    In addition to the annual coverage substantiation requirement, the 
proposed rules provided that an individual coverage HRA may not 
reimburse a participant for any medical care expenses unless, prior to 
each reimbursement, the participant provides substantiation that the 
participant and, if applicable, any dependent(s) whose medical care 
expenses are requested to be reimbursed, continues to be enrolled in 
individual health insurance coverage for the month during which the 
medical care expenses were incurred (ongoing substantiation 
requirement).
    Several commenters expressed support for the ongoing substantiation 
requirement, as necessary to ensure the effectiveness of the 
requirement that individuals covered by an individual coverage HRA must 
be enrolled in individual health insurance coverage. Several 
commenters, however, were concerned about what they characterized as 
the complexity, burdens, and liabilities associated with the ongoing 
substantiation requirement, in particular for smaller employers, and 
noted that those burdens could deter employers from adopting individual 
coverage HRAs. Some commenters asserted that the annual coverage 
substantiation requirement would be sufficient to verify enrollment in 
individual health insurance coverage and, therefore, ongoing 
substantiation would be unnecessary.
    The Departments note that currently, separate from the market 
requirements or integration rules, HRAs are subject to substantiation 
requirements with respect to each request for reimbursement. This is 
because in order to provide a benefit excludable from income for 
federal tax purposes, employer-provided accident or health plans, 
including HRAs, may only reimburse medical care expenses that have been 
substantiated as an expense for medical care.\117\ Consequently, each 
reimbursement for medical care expenses by an HRA may only be paid 
after the expense has been substantiated as being for medical 
care.\118\ Each claim for reimbursement also generally must include the 
employee's certification that the expense has not otherwise been 
reimbursed and that the employee will not seek reimbursement for the 
expense from any other plan.\119\
---------------------------------------------------------------------------

    \117\ See Code section 105(b), 26 CFR 1.105-2, and IRS Notice 
2002-45.
    \118\ See Prop. Treas. Reg. 1.125-6(d) for rules regarding 
reimbursement of medical care expenses through electronic methods, 
including some debit cards that satisfy certain requirements.
    \119\ See IRS Notice 2006-69, 2006-31 IRB 107; Revenue Ruling 
2003-43, 2003-1 CB 935; and Prop. Treas. Reg. 1.125-6(b)(3)(ii), 
(d)(i).
---------------------------------------------------------------------------

    The Departments have determined that requiring ongoing 
substantiation of an individual's continued enrollment in individual 
health insurance coverage for the month in which the expense was 
incurred is not unduly burdensome because of these existing 
substantiation requirements. Further, the Departments have determined 
that the ongoing substantiation requirement is essential to ensure 
compliance with the requirement that an individual covered by an 
individual coverage HRA be enrolled in individual health insurance 
coverage and, as explained later in this section of the preamble, will 
impose minimal burden because it can be satisfied by collecting a 
written attestation from the participant on the same form used for 
requesting reimbursement. Thus, the final rules retain the ongoing 
substantiation requirement.\120\
---------------------------------------------------------------------------

    \120\ The Departments note that the final rules clarify that the 
ongoing substantiation requirement applies with respect to the 
individual on whose behalf reimbursement is being sought.
---------------------------------------------------------------------------

    Commenters requested that the Departments confirm the entity to 
which the substantiation requirements apply. Under the final rules, the 
substantiation requirements (both the annual coverage substantiation 
requirement and the ongoing substantiation requirement) apply to the 
individual coverage HRA, rather than to any other entity or individual, 
such as an issuer or employee, because the requirements relate to 
compliance of the individual coverage HRA with PHS Act sections 2711 
and 2713. The substantiation requirements do not impose any new 
requirements on issuers, although individual coverage HRAs may accept 
certain documentation provided by issuers in the normal course of 
business to verify individual health insurance coverage enrollment.
b. Methods of Substantiation
    The proposed rules included a proposal that the reasonable 
procedures an individual coverage HRA may use to verify enrollment in 
individual health insurance coverage for purposes of the annual 
coverage substantiation requirement include the individual coverage HRA 
requiring the participant to provide either: (1) A document from a 
third party (for example, the issuer or Exchange) showing that the 
participant and any dependent(s) covered by the individual coverage HRA 
are, or will be, enrolled in individual health insurance coverage 
during the plan year (for example, an insurance card or an explanation 
of benefits pertaining to the plan year or relevant month, as 
applicable); \121\ or (2) an attestation by the participant stating 
that the participant and any dependent(s) are, or will be, enrolled in 
individual health insurance coverage, the date coverage began or will 
begin, and the name of the provider of the coverage. For the ongoing 
substantiation requirement, the

[[Page 28918]]

proposed rules permitted that substantiation could be in the form of a 
written attestation by the participant, which could be part of the form 
used for requesting reimbursement.
---------------------------------------------------------------------------

    \121\ The Departments are aware that in the case of an 
individual coverage HRA with a non-calendar year plan year, the 
individual may not have documentation showing an individual health 
insurance policy that spans the entire plan year as individual 
health insurance policy years are based on the calendar year. 
However, such an HRA may establish reasonable procedures to 
implement the annual coverage substantiation requirement, including 
documentation showing coverage for the first part of the plan year 
combined with an attestation that the participant intends to obtain 
individual health insurance coverage for the second part of the plan 
year or an attestation with respect to the full plan year.
---------------------------------------------------------------------------

    Commenters generally supported that the proposed rules provided 
that attestation by a participant would be sufficient to satisfy both 
the annual coverage substantiation requirement and the ongoing 
substantiation requirement. However, one commenter stated that allowing 
attestation to be used to satisfy the annual coverage substantiation 
requirement is not sufficient to ensure that individuals covered by an 
individual coverage HRA have individual health insurance coverage. The 
Departments acknowledge the importance of the requirement under the 
final rules that individuals with an individual coverage HRA be 
enrolled in individual health insurance coverage and, therefore, the 
need for related substantiation requirements that ensure that 
requirement is satisfied. The Departments note that attestation is 
permitted to be used to satisfy similar requirements in related 
contexts and that the Departments generally are not aware of issues 
with regard to the accuracy of attestations used to satisfy those 
rules.\122\ Further, in setting out one type of attestation that is 
sufficient to satisfy the annual coverage substantiation requirement, 
the final rules state that, in addition to providing that the 
individual is (or will be) enrolled in individual health insurance 
coverage, the attestation would also provide the date coverage began or 
will begin and the name of the provider of the coverage. Moreover, HRAs 
can use other reasonable methods to satisfy the substantiation 
requirements and, in fact, the Departments generally expect that 
employees will use individual coverage HRAs to reimburse premiums for 
the individual health insurance coverage in which they are enrolled 
and, therefore, employers will be able to confirm enrollment in 
individual health insurance coverage by virtue of reimbursing the 
premiums for such coverage (or paying the premiums for such coverage 
directly). Taking these factors into consideration, the Departments 
have determined that allowing participant attestation, among other 
options, to satisfy the substantiation requirements strikes the 
appropriate balance between ensuring individuals with individual 
coverage HRAs are enrolled in individual health insurance coverage and 
minimizing burdens on employers and employees. Accordingly, the final 
rules retain this provision and permit substantiation by participant 
attestation.
---------------------------------------------------------------------------

    \122\ See IRS Notice 2013-54, Q&A-4 (providing that attestation 
is sufficient to show that an individual is enrolled in group 
coverage, as required by the rules allowing HRA integration with a 
traditional group health plan) and IRS Notice 2017-67, Q&A-41 
(providing that attestation is sufficient to satisfy the QSEHRA 
requirement that individuals provide proof that they are covered by 
MEC).
---------------------------------------------------------------------------

    Some commenters requested that the final rules provide a model 
attestation. In response, to reduce burden on individual coverage HRAs 
and their participants, the Departments are providing model attestation 
language contemporaneously with, but separate from, the final rules. 
However, the Departments note that individual coverage HRAs will not be 
required to use the model attestation.
    Some commenters requested clarification as to whether other 
substantiation methods, in addition to collection of an attestation, 
would satisfy the substantiation requirements. One commenter suggested 
that a list of covered individuals provided by the insurance carrier 
should be sufficient. The Departments agree that this would generally 
be a type of third-party document that could be used to verify 
enrollment, assuming the individual coverage HRA timely receives the 
substantiation. However, the Departments note that the final rules do 
not require issuers to provide individual coverage HRAs with lists of 
covered individuals nor are individual coverage HRAs required to 
contact issuers to substantiate an individual's enrollment in 
individual health insurance coverage. In addition, the final rules 
clarify that a document from an Exchange showing that the individual 
has completed the application and plan selection would be sufficient to 
satisfy the annual coverage substantiation requirement. This 
clarification is intended to address the situation in which, due to the 
SEP verification process, an individual is not yet enrolled in 
individual health insurance coverage but will be enrolled with a 
retroactive start date upon successful completion of the SEP 
verification.\123\ See later in this preamble for a discussion of SEPs, 
including a new SEP for individuals who newly gain access to an 
individual coverage HRA.
---------------------------------------------------------------------------

    \123\ The Departments note that a document from an Exchange 
showing that the individual has completed the application and plan 
selection would not be sufficient to satisfy the ongoing 
substantiation requirement; to satisfy that requirement the 
individual on whose behalf reimbursement is sought must be enrolled 
in individual health insurance coverage. Therefore, individual 
health insurance coverage must become effective, including 
retroactively in the case of delayed SEP verification, in which case 
reimbursement can then be sought for expenses incurred during the 
coverage period (including during the period to which the individual 
health insurance coverage applies retroactively, assuming the 
individual was covered by the HRA during that time).
---------------------------------------------------------------------------

    One commenter requested that the final rules adopt a requirement 
for issuers similar to the creditable coverage certification 
requirement created by HIPAA, under which, as suggested by the 
commenter, issuers would be required to generate a letter for all 
individuals covered by individual health insurance coverage for each 
month showing payment was made and that the individual had the coverage 
for the month.\124\ The Departments decline to impose such a 
requirement because it would increase burden and other reasonable 
substantiation methods are available. One commenter suggested that the 
ongoing substantiation requirement should be considered satisfied so 
long as the employer sends a notice to employees advising them to 
contact the employer if they no longer are enrolled in individual 
health insurance coverage. The Departments decline to adopt this 
suggestion because this method of substantiation would be insufficient 
to ensure with reasonable accuracy that a participant had continued 
enrollment in individual health insurance coverage.
---------------------------------------------------------------------------

    \124\ Code section 9801(e), ERISA section 701(e), and PHS Act 
section 2704(e).
---------------------------------------------------------------------------

    Several commenters requested that individual coverage HRAs be 
permitted to comply with the substantiation requirements 
electronically, such as through debit card technology.\125\ Some 
commenters noted this would provide consistency with current rules that 
allow HRAs to satisfy the current requirement to substantiate that an 
expense is for medical care using debit cards and other electronic 
means.\126\ Nothing in the final rules would prohibit an individual 
coverage HRA from establishing procedures to comply with the 
substantiation requirements through electronic means, so long as the 
procedures are reasonable to verify enrollment.\127\ See also the 
discussion

[[Page 28919]]

later in this preamble regarding the interaction of these rules with 
the safe harbor that DOL is finalizing, to clarify that individual 
health insurance coverage will not be treated as part of an ERISA-
covered group health plan so long as certain conditions (including the 
prohibition on endorsement) are satisfied.
---------------------------------------------------------------------------

    \125\ A couple of commenters requested clarification that funds 
in an individual coverage HRA could be accessed via debit cards. The 
final rules do not change the methods currently allowed for 
facilitating reimbursements of HRA amounts, electronic or otherwise.
    \126\ See IRS Notice 2006-69 and Revenue Ruling 2003-43, 2003-1 
CB 935.
    \127\ For purposes of the Code provisions affected by the final 
rules, the otherwise generally applicable substantiation and 
recordkeeping requirements under Code section 6001 apply, including 
the requirements specified in Revenue Procedure 98-25, 1998-1 CB 
689, for records maintained within an Automated Data Processing 
system.
---------------------------------------------------------------------------

c. Reliance on Documentation or Attestation
    The proposed rules provided that, for both the annual coverage 
substantiation requirement and the ongoing substantiation requirement, 
an individual coverage HRA may rely on the documentation or attestation 
provided by the participant unless the individual coverage HRA has 
actual knowledge that any participant or dependent covered by the 
individual coverage HRA is not, or will not be, enrolled in individual 
health insurance coverage for the plan year or the month, as 
applicable.
    Despite this provision in the proposed rules, some commenters 
expressed concern, and requested clarification, regarding liability of 
an individual coverage HRA if it relies on a participant's 
misrepresentation regarding enrollment in individual health insurance 
coverage. In response to these comments, the final rules provide that 
an individual coverage HRA may rely on the documentation or attestation 
provided by the participant unless the HRA has actual knowledge that 
any participant or dependent covered by the individual coverage HRA is 
not, or will not be, enrolled in individual health insurance coverage 
for the plan year (or the applicable portion of the plan year) or the 
month, as applicable. Therefore, the final rules provide that an 
inaccurate attestation or document will not cause an individual 
coverage HRA to fail to be considered integrated with individual health 
insurance coverage unless the HRA has actual knowledge that the 
attestation or document is inaccurate. The Departments clarify that in 
the event an individual coverage HRA subsequently gains actual 
knowledge that the attestation or document was inaccurate, the HRA may 
not provide further reimbursement on behalf of the individual for 
expenses incurred during the period to which the inaccurate attestation 
relates.
    One commenter requested that the final rules clarify whose 
knowledge can be imputed to the individual coverage HRA for purposes of 
liability and one commenter requested clarification that vendors 
contracted by the HRA could rely on coverage information provided by 
the HRA. The individual coverage HRA will be considered to have actual 
knowledge that a participant or dependent is not, or will not be, 
enrolled in individual health insurance coverage for the plan year or 
the month, as applicable, if the HRA, its plan sponsor, or any other 
entity acting in an official capacity on behalf of the HRA has such 
actual knowledge.
    One commenter suggested that the final rules apply penalties to 
individual participants for an inaccurate attestation. The final rules 
do not impose penalties on participants. Instead, the final rules, like 
the proposed rules, provide conditions under which an HRA will be 
considered integrated with individual health insurance coverage and, 
therefore, in compliance with PHS Act sections 2711 and 2713. Failing 
to properly integrate will cause an HRA to run afoul of PHS Act 
sections 2711 and 2713. Therefore, the responsibility to have 
reasonable procedures in place to ensure coverage is integrated falls 
on the HRA, not the participants.
    One commenter asked that individual coverage HRA amounts made 
available for a month be treated as taxable income for individuals who 
do not have individual health insurance coverage for the month and that 
the attestation requirement and required notice include a related 
warning. The Departments decline to adopt this suggestion. Whether an 
individual is enrolled in individual health insurance coverage for a 
month relates to whether the individual coverage HRA satisfies the 
conditions for integration for the month and does not affect the tax 
treatment of reimbursements provided to a participant under the 
individual coverage HRA.\128\
---------------------------------------------------------------------------

    \128\ However, see Code section 106(g) regarding the taxation of 
QSEHRA reimbursements if an individual fails to have MEC.
---------------------------------------------------------------------------

    One commenter suggested that the final rules address substantiation 
requirements relative to a private exchange. The Departments note that 
the substantiation requirements set forth in the final rules apply to 
all individual coverage HRAs, regardless of the manner in which the 
individual health insurance coverage is purchased. See later in this 
preamble for a discussion of private exchanges and the DOL 
clarification regarding the application of ERISA to individual health 
insurance coverage purchased through an individual coverage HRA.
    To mitigate discrimination concerns, one commenter requested that 
the substantiation requirements be consistent across all classes of 
employees. The Departments note that the substantiation requirements 
set forth in the final rules apply to all individual coverage HRAs, 
including different individual coverage HRAs offered to different 
classes of employees. The Departments generally expect plan sponsors to 
establish similar procedures to satisfy the substantiation requirements 
for different individual coverage HRAs they may offer. However, the 
Departments decline to adopt the commenter's specific recommendation in 
order to allow plan sponsors the flexibility to establish reasonable 
procedures to satisfy the substantiation requirements, which presumably 
could differ across the employer's workforce, depending on the 
characteristics of the workforce or for other legitimate business 
reasons.
    One commenter requested that employers offering an individual 
coverage HRA to employees or former employees who are either eligible 
for or enrolled in Medicare should be exempt from the substantiation 
requirement. However, as discussed in more detail later in this 
preamble, the final rules permit integration of an individual coverage 
HRA with Medicare, and the substantiation requirements apply to 
enrollment in Medicare in the same manner as they apply to enrollment 
in individual health insurance coverage. Therefore, the final rules do 
not adopt this suggestion.
9. Notice Requirement
    Because HRAs are different from traditional group health plans in 
many respects, in the preamble to the proposed rules, the Departments 
expressed a concern that individuals eligible for individual coverage 
HRAs might not recognize that the offer or acceptance of the individual 
coverage HRA may have consequences for APTC and PTC eligibility, as 
described elsewhere in this preamble. In order to ensure that employees 
who are eligible to participate in an individual coverage HRA 
understand the potential effect that the offer of and enrollment in the 
HRA might have on their ability to receive the benefit of APTC and 
claim the PTC, the proposed rules included a requirement that an 
individual coverage HRA provide written notice to eligible 
participants.
    Commenters generally supported the notice requirement, sharing the 
Departments' determination that many individuals will need the 
information to understand the PTC consequences of the individual 
coverage HRA. However, a number of commenters expressed concerns about 
the potential for consumer confusion, notwithstanding

[[Page 28920]]

the notice requirement, and some suggested ways to strengthen the 
notice. Other commenters expressed concern that the notice requirement 
could burden employers, with one noting in particular the burden of 
providing notices to former employees.
    The Departments have considered these comments and agree with the 
commenters that assert that the notice is necessary and appropriate for 
individuals offered an individual coverage HRA to understand the 
consequences of the offer. Although the Departments also considered the 
burden on employers identified by commenters, the Departments have 
determined that the notice requirement is essential to implementation 
of the final rules. Along with updates to Exchanges' application 
processes, the notice, which will include information that individuals 
will be instructed to provide to Exchanges during the application 
process, is key to ensuring that APTC and PTC are properly allowed and 
that improper APTC payments are prevented. The notice will also aid 
implementation of the new individual market SEP, as explained later in 
this preamble. Therefore, the final rules retain this requirement, with 
a number of revisions made in response to comments, including that the 
Departments are providing model notice language, separate from, but 
contemporaneously with the final rules, in order to address commenters' 
concerns about burden on employers. The comments received and changes 
made in the final rules are described in the remainder of this section 
of the preamble.
a. Notice Content
    As proposed, the notice was required to include certain relevant 
information, including a description of the terms of the individual 
coverage HRA (including the self-only maximum dollar amount made 
available, which is used in the affordability determination under the 
proposed PTC rules); a statement of the right of the participant to opt 
out of and waive future reimbursement under the HRA; a description of 
the potential availability of the PTC if the participant opts out of 
and waives the HRA and the HRA is not affordable under the proposed PTC 
rules; a description of the PTC eligibility consequences for a 
participant who accepts the HRA; a statement that the participant must 
inform any Exchange to which they apply for APTC of certain relevant 
information; and a statement that the individual coverage HRA is not a 
QSEHRA.
    Commenters generally supported the notice content elements, and the 
final rules include each of the proposed notice content elements, some 
with clarifications. Some commenters requested that the notice be 
required to include additional content, as explained in this section of 
the preamble, and some commenters requested that the notice be as 
simple as possible. Some commenters requested that the notice explain 
the differences between an employer's traditional group health plan and 
alternative health insurance products. And one commenter requested that 
the specific dollar amount made available be included in the notice. 
The Departments note that under the final rules, the notice is required 
to provide the amount(s) made available under the individual coverage 
HRA. As to the suggestion that the notice explain common differences 
between traditional group health plans and individual coverage HRAs and 
other insurance products, the Departments decline to adopt the 
suggestion due to concerns that it would cause confusion for 
participants, as participants are prohibited from being offered both a 
traditional group health plan and an individual coverage HRA under the 
final rules. The intent of the notice is to explain the individual 
coverage HRA that the employee is being offered to avoid consumer 
confusion. Adding information about other types of coverage would 
undermine that goal. Further, traditional group health plans differ in 
cost-sharing structures, network rules, and benefits covered, and any 
standardized language in the notice would have to be general and would 
not capture these elements, as standardized language about traditional 
group health plans would not be describing any particular plan. 
Moreover, the individual coverage HRA must provide a summary of 
benefits and coverage (SBC), which will include a description of the 
coverage, including cost sharing; the exceptions, reductions and 
limitations on coverage; and other information.\129\
---------------------------------------------------------------------------

    \129\ See PHS Act section 2715(b)(3) (incorporated in Code 
section 9815 and ERISA section 715). See also 26 CFR 54.9815-2715, 
29 CFR 2590.715-2715, and 45 CFR 147.200.
---------------------------------------------------------------------------

    One commenter requested that the notice be required to contain 
contact information for a specific person that participants can contact 
with questions. The Departments agree that this could be useful 
information for participants, without imposing significant additional 
burden on employers, and therefore the final rules add a requirement 
that the notice include contact information of an individual or a group 
of individuals who participants may contact with questions regarding 
their individual coverage HRA. For purposes of this new requirement, 
the plan sponsor may determine which individual or group of individuals 
is in the best position to answer these questions. The final rules 
provide that the contact information provided in the notice must, at 
least, include a telephone number.
    The final rules also newly require that the notice include a 
statement of availability of an SEP for employees and dependents who 
newly gain access to the HRA. This is in part in response to a 
commenter who suggested that the notice could be used to improve 
Exchange program integrity by making it easier for Exchanges that 
require pre-enrollment verification to use the notice to confirm 
enrollees' SEP eligibility. Separate from, but contemporaneously with 
the final rules, HHS is providing model language that will be relevant 
to employees purchasing coverage through or outside an Exchange, 
including a State Exchange, which HRAs may use to satisfy this 
requirement. The final rules also clarify that, to facilitate 
participants' timely enrollment in individual health insurance coverage 
using the new SEP described later in this preamble, the notice must 
also indicate the date as of which coverage under the HRA may first 
become effective and the date on which the HRA plan year begins and 
ends. The notice must also include information on when amounts will be 
made available (for example, monthly or annually).
    Commenters also requested that the notice explain the extent to 
which individuals enrolled in Medicare may use an individual coverage 
HRA. In response to these comments, and to reflect the content of the 
final rules, the notice content requirements have been updated to 
reflect that individual coverage HRAs may be integrated with Medicare 
and to require inclusion of a statement in that notice that Medicare 
beneficiaries are ineligible for the PTC, without regard to whether the 
individual coverage HRA the individual is offered is affordable or 
provides MV or whether the individual accepts the HRA.
    Further, the Departments note that, as under the proposed rules, 
while the written notice must include the information required by the 
final rules, it may include other information, as long as the 
additional content does not conflict with the required information.
b. Notice Individualization
    The proposed rules did not include a requirement that the notice be

[[Page 28921]]

individualized for each participant. Although the notice would have 
been required to include a description of the potential availability of 
the PTC for a participant who opts out of and waives an unaffordable 
individual coverage HRA, and the individual coverage HRA amount that is 
relevant for determining affordability, the proposed rules did not 
require that the HRA include in the notice a determination of whether 
the HRA is considered affordable for the specific participant.
    Some commenters agreed that the notice should not be required to be 
tailored to each participant. However, others stated that the notice 
would be insufficient if not individualized and requested that the 
final rules require that the notice provide information specific to 
each participant, including the premium for the relevant lowest cost 
silver plan, or, at a minimum, detailed instructions for where to find 
information on the lowest cost silver plan, while others requested that 
the notice include a completed affordability and MV calculation 
specific to each participant.
    While the Departments understand the concerns about consumer 
confusion, under the final rules, the notice is not required to include 
a determination of whether the offer of an individual coverage HRA is 
affordable for a particular participant. Plan sponsors are not in a 
position to make this determination for, or provide it to, each 
participant because it would require information that plan sponsors do 
not possess (for example, the participant's household income). In 
addition, requiring a plan sponsor to determine the cost of the lowest 
cost silver plan that will apply for a specific participant to 
determine affordability under the PTC rules would be burdensome, and 
the information is available to the participant through other means. 
Specifically, by November 1, 2019, HHS will provide resources to assist 
individuals offered an individual coverage HRA and using the Federal 
HealthCare.gov platform with determining their PTC eligibility based on 
whether the individual coverage HRA is considered affordable, and with 
understanding when they must enroll in individual health insurance 
coverage based on their individual coverage HRA effective date, 
including whether they may qualify for an SEP. HHS will also begin 
working with State Exchanges immediately to assist with the development 
of resources for individuals using State Exchanges' applications for 
coverage. Further, although some plan sponsors will need to determine 
whether the offer of the individual coverage HRA is affordable for 
purposes of the employer shared responsibility provisions under Code 
section 4980H, smaller employers are not subject to Code section 4980H. 
Moreover, the Treasury Department and the IRS intend to issue guidance 
in the near term providing safe harbors or other methods intended to 
reduce burdens and provide more predictability regarding the 
application of Code section 4980H to these arrangements.\130\
---------------------------------------------------------------------------

    \130\ See IRS Notice 2018-88. Further, lowest cost silver plan 
data will be made available by HHS for employers in all states that 
use the Federal HealthCare.gov platform to determine whether the 
individual coverage HRA offer is affordable for purposes of the 
employer shared responsibility provisions under Code section 4980H.
---------------------------------------------------------------------------

    The Departments acknowledge that it is critical that participants 
have the information that they need to determine the affordability of 
their individual coverage HRA under the PTC rules, and, accordingly, 
the final rules add a requirement that the notice include a statement 
about how the participant may find assistance for determining their 
individual coverage HRA affordability. The model language that the 
Departments are providing contemporaneously with the final rules 
includes language that can be used to satisfy this requirement.
    One commenter requested that the notice be required to be tailored 
for each class of employees offered the individual coverage HRA, in 
cases in which different classes are provided different HRA amounts, 
rather than allowing an employer to provide one notice for several or 
all classes. The final rules do not adopt this suggestion because the 
Departments have concluded any marginal advantages would be outweighed 
by the additional employer burdens of creating and distributing 
multiple versions of the notice. However, the Departments note that the 
final rules do not prohibit an employer from providing more 
individualized notices, such as different notices for different classes 
of employees, if the employer so chooses.
c. Model Notice
    Many commenters requested that the Departments provide a model 
notice or model language for certain parts of the notice, such as model 
language to describe the consequences of opting into or out of the 
individual coverage HRA and language describing the related PTC 
consequences. One commenter suggested that the Departments provide 
translations of the model notice into languages other than English.
    In response to these requests, and published separately from the 
final rules, the Departments are providing model language 
contemporaneously on certain aspects of the notice that are not 
employer-specific, including model language describing the PTC 
consequences of being offered and accepting an individual coverage HRA. 
In addition, HHS is providing, contemporaneously, model language that 
relates to all Exchanges that can be used to satisfy the SEP-related 
notice content requirement and model language that can be used to 
satisfy the requirement that the notice include a statement describing 
how the participant may find assistance with determining affordability. 
While the Departments hope it will be useful, plan sponsors are not 
required to use the model language.
    For individual coverage HRAs, including ERISA-covered plans, other 
disclosure requirements may require participants to be provided with a 
reasonable opportunity to become informed as to their rights and 
obligations under the individual coverage HRA.\131\ Those requirements 
are of general applicability, and the Departments decline to adopt a 
special requirement, or model non-English translation, here.\132\
---------------------------------------------------------------------------

    \131\ See, e.g., ERISA sections 102, 104(b), and 503 and PHS Act 
sections 2715 and 2719 (incorporated in Code section 9815 and ERISA 
section 715). See also 26 CFR 54.9815-2715 and 54.9815-2719; 29 CFR 
2520.102-3, 2520.104b-1, 2560.503-1, 2590.715-2715, and 2590.715-
2719; and 45 CFR 147.136 and 147.200.
    \132\ But see 29 CFR 2520.102-2(c) (requiring that plans where 
either 500 participants or at least 10 percent of all participants 
(or for plans with fewer than 100 participants, 25 percent of 
participants) are literate in the same non-English language provide 
those literate only in a non-English language a reasonable 
opportunity to become informed as to their rights and obligations 
under the plan).
---------------------------------------------------------------------------

d. Notice Timing and Delivery
    Under the proposed rules, the individual coverage HRA generally 
would be required to provide a written notice to each participant at 
least 90 days before the beginning of each plan year. The proposed 
rules also provided that for participants not eligible to participate 
at the beginning of the plan year (or not eligible when the notice is 
otherwise provided to plan participants), the individual coverage HRA 
would be required to provide the notice no later than the date on which 
the participant is first eligible to participate in the HRA.
    Some commenters supported the notice timing as proposed and others 
indicated that small employers will not be able to provide notices 90 
days prior to the plan year because they do not make benefit decisions 
that far in

[[Page 28922]]

advance. Several commenters requested that the notice delivery coincide 
with the annual Exchange open enrollment period, others requested it 
coincide with each employer's annual open enrollment period, and others 
requested that plan sponsors have the flexibility to provide the 
required notice at any time prior to the plan year, including upon 
initial enrollment in an individual coverage HRA. One commenter 
requested the notice be required to be provided within 60 days, instead 
of 90 days, prior to the start of the plan year. One commenter 
requested that the Departments apply the distribution requirements that 
apply for purposes of SBCs and the uniform glossary. One commenter also 
asked the Departments to clarify the notice timing requirement as 
applied to individual coverage HRAs that do not have a calendar year 
plan year.
    The Departments considered these comments, but have determined 
that, with the addition of a rule for newly established employers and 
certain other clarifications, the final rules should adopt the notice 
timing requirement as proposed, because, for a calendar year plan year, 
it ensures that participants who are current employees will receive the 
notice prior to the individual market annual open enrollment period, 
and for employers offering an individual coverage HRA on a non-calendar 
year plan year, it ensures participants who are current employees will 
receive the notice prior to the applicable individual market SEP. The 
Departments also clarify that the notice timing requirement applies in 
the same way to an individual coverage HRA with a calendar year plan 
year or with a non-calendar year plan year. The notice's primary 
purpose is to provide necessary information to participants that 
Exchanges will need in order to accurately determine eligibility for 
APTC. With that purpose in mind, the Departments have determined that a 
shorter timing requirement, including one mirroring the requirement for 
the SBC, or a timing requirement tied to the employer's open enrollment 
period, would not be sufficient.
    As previously noted, the proposed rules provided an exception to 
the 90 day notice requirement for participants who are not eligible to 
participate either at the beginning of the plan year or at the time the 
notice is provided at least 90 days prior to the plan year. For those 
participants, the proposed rules would allow the individual coverage 
HRA to provide the notice no later than the date on which the 
participants are first eligible to participate in the HRA. The final 
rules adopt this rule generally as proposed, but clarify the language 
to provide that the date by which the notice must be provided is the 
date on which the HRA may first take effect for the participant. 
Further, the Departments have determined that individual coverage HRAs 
sponsored by employers that are first established within a short period 
of time prior to the first plan year of the HRA may not have an 
adequate amount of time to provide a notice to participants at least 90 
days prior to beginning of the first plan year. Therefore, the final 
rules provide that in the case of an individual coverage HRA sponsored 
by an employer that is established less than 120 days prior to the 
beginning of the first plan year of the HRA, the notice may be provided 
no later than the date on which the HRA may first take effect for the 
participant, for that first plan year of the HRA.
    Moreover, although the final rules provide that for participants 
not eligible to participate in the individual coverage HRA at the 
beginning of the plan year (or not eligible when the notice is 
otherwise provided) and for participants of newly established 
employers, the HRA is not required to provide the notice until the date 
on which the HRA may first take effect for the participant, the 
Departments encourage HRAs to provide the notice as soon as 
practicable. As explained later in this preamble, individuals who newly 
gain access to an individual coverage HRA will have an individual 
market SEP that provides the chance to select an individual health 
insurance plan in advance of the date when the HRA may first take 
effect, so that individual health insurance coverage can be effective 
on the first date the individual is eligible to be covered by the HRA. 
If the notice is not provided until the day the HRA may first take 
effect for the participant, individuals may not be aware of the HRA 
offer and will not be able to enroll in individual health insurance 
coverage that has an effective date on the earliest effective date of 
their HRA coverage. However, the Departments are aware that in some 
circumstances it would not be reasonable to require HRAs to provide the 
notice well in advance of the date the HRA may first take effect for 
new employees. Therefore, the final rules continue to require that the 
notice be provided in these circumstances no later than the date on 
which the HRA may first take effect, but if possible, HRAs should 
provide the notice sooner. This will allow new employees to begin 
coverage in the HRA as soon as possible.
    With regard to delivery methods, the proposed rules provided that 
the notice must be a written notice but did not further address 
delivery or format. Several commenters requested that the final rules 
clarify the notice delivery procedures and requirements, including 
allowing for electronic delivery (through email delivery, internet/
intranet posting, or any other electronic means) if participants are 
provided the appropriate opportunity to opt out of electronic delivery. 
One commenter asked specifically if the notice delivery would be 
subject to ERISA's delivery rules.
    Under the final rules, individual coverage HRAs that are subject to 
ERISA, and individual coverage HRAs sponsored by nonfederal 
governmental plan sponsors, must provide the notice in a manner 
reasonably calculated to ensure actual receipt of the material by plan 
participants covered by the HRA. Additionally, individual coverage HRAs 
that are subject to ERISA must provide the notice in a manner that 
complies with the DOL's rules.\133\ For ERISA plans using electronic 
disclosure, the DOL has provided a safe harbor at 29 CFR 2520.104b-
1(c). This safe harbor is not intended to represent the exclusive means 
by which the requirements of 29 CFR 2520.104b-1 may be satisfied using 
electronic media.\134\ As to individual coverage HRAs sponsored by 
nonfederal governmental plan sponsors, HHS is revising the final rule 
to provide that the notice must be provided in a manner reasonably 
calculated to ensure actual receipt of the material by plan 
participants covered by the HRA, which HHS has determined is sufficient 
to ensure that participants receive the required notice.
---------------------------------------------------------------------------

    \133\ 29 CFR 2520.104b-1.
    \134\ 67 FR 17263, 17264 (April 9, 2002).
---------------------------------------------------------------------------

    Commenters also requested that the Departments confirm that the 
notice may be delivered along with other plan materials, including, but 
not limited to, annual enrollment materials or new hire benefit 
packages. The Departments confirm that the individual coverage HRA 
notice may be delivered with other plan materials, so long as it 
satisfies the content and timing requirements specific to the 
individual coverage HRA notice.
e. Other Notice Requirements and Consumer Assistance
    Some commenters suggested that all types of HRAs (including 
excepted benefit HRAs and HRAs integrated with traditional group health 
plans) should include notice requirements so that individuals 
understand which type of arrangement they have and the consequences of 
the arrangement. The Departments acknowledge the potential for consumer 
confusion as a result of the

[[Page 28923]]

existence of various types of health coverage, including various types 
of HRAs. However, the Departments generally decline the suggestion to 
impose new notice requirements under the final rules across all types 
of HRAs. The Departments note that this type of consumer information 
notice requirement is typically only imposed in situations in which 
there is a specific justification for it. For example, individual 
coverage HRAs are unique in that specific PTC rules apply, and for 
QSEHRAs, which also have specific PTC rules, notices are already 
required under the law.\135\
---------------------------------------------------------------------------

    \135\ Code section 9831(d)(4) and IRS Notice 2017-67.
---------------------------------------------------------------------------

    Further, the Departments note that the proposed rules would have 
required the notice to include a statement that the individual coverage 
HRA is not a QSEHRA, and the final rules revise the statement in 
response to comments to clarify further that there are multiple types 
of HRAs and the type the participant is being offered is an individual 
coverage HRA (rather than a QSEHRA or any other type).
    Moreover, HRAs that are ERISA-covered plans must provide a summary 
plan description (SPD), summaries of material modifications, and 
summaries of material reductions in covered services or benefits.\136\ 
The SPD must be sufficiently comprehensive to apprise the plan's 
participants and beneficiaries of their rights and obligations under 
the plan. It must also include, for example, the conditions pertaining 
to eligibility to receive benefits, and a description or summary of the 
benefits, the circumstances that may result in disqualification, 
ineligibility, or denial, loss, forfeiture, suspension, offset, 
reduction, or recovery (for example, by exercise of subrogation or 
reimbursement rights) of any benefits and the procedures governing 
claims for benefits under the plan. HRAs that are ERISA-covered plans 
are also required to provide the instruments under which the plan is 
established or operated and information relevant to a participant's 
adverse benefit determination upon request.\137\ This information 
should be adequate to enable individuals to understand which type of 
arrangement they have and the consequences of the arrangement.\138\
---------------------------------------------------------------------------

    \136\ See 29 CFR 2520.104b-2 and 29 CFR 2520.104b-3(a), (d)(3).
    \137\ See, e.g., ERISA sections 104(b), 502(c), and 503. See 
also 29 CFR 2520.104b-1 and 29 CFR 2560.503-1.
    \138\ The final excepted benefit HRA rules specifically note the 
ERISA disclosure obligations, and HHS intends to propose similar 
disclosure requirements for non-federal governmental plan excepted 
benefit HRAs.
---------------------------------------------------------------------------

    One commenter requested that the Departments clarify the 
interaction between the notice requirements associated with the Fair 
Labor Standards Act (FLSA) and the notice requirement for individual 
coverage HRAs. The Departments note that under FLSA section 18B, an 
applicable employer is required to provide notice to inform employees 
of coverage options, including the existence of an Exchange, and the 
availability of the PTC if the employer's plan does not provide MV. 
This notice is provided at the time of hiring. The FLSA section 18B 
requirement to provide a notice to employees of coverage options 
applies to employers to which the FLSA applies. An employer sponsoring 
an individual coverage HRA that provides the required notice under the 
final rules must also provide a notice that satisfies the FLSA notice 
requirement if the FLSA applies to the employer. However, nothing in 
the final rules prohibits an employer from combining the notices for 
employees eligible for the individual coverage HRA, provided that both 
notice requirements are satisfied.
    Commenters also urged the Departments more generally to create 
tools and resources for employees and employers that are easily 
accessible to help determine PTC eligibility and to dedicate additional 
funding to the State Exchanges for increased administration and 
assistance to individuals trying to determine APTC eligibility. A few 
commenters suggested that more education for consumers, enrollment 
assisters, and agents and brokers would be necessary. The Departments 
acknowledge the crucial role that the Exchanges have in implementation 
and operationalization of individual coverage HRAs, and the Departments 
will work closely with the Exchanges on the implementation of the final 
rules. The Departments note that language will be added to the 
HealthCare.gov application to help consumers understand that if they 
are eligible for an individual coverage HRA, this offer may affect 
their APTC eligibility. As discussed elsewhere in this preamble, HHS 
also intends to provide technical assistance materials for consumers in 
HealthCare.gov states, as well as for enrollment assisters and agents 
and brokers participating in Exchanges that use HealthCare.gov, so they 
may help consumers understand the implications of their individual 
coverage HRA offer. The Departments are also continuing to consider 
other ways to provide outreach and assistance to stakeholders regarding 
individual coverage HRAs.
10. Student Health Insurance Coverage
    Federal rules under PPACA define student health insurance coverage 
as a type of individual health insurance coverage.\139\ Although those 
rules exempt student health insurance coverage from certain provisions 
of PPACA and HIPAA,\140\ they do not exempt this coverage from PHS Act 
sections 2711 and 2713. Therefore, given that student health insurance 
coverage is a type of individual health insurance coverage, and is 
subject to PHS Act sections 2711 and 2713, in the preamble to the 
proposed rules, the Departments clarified that an HRA may be integrated 
with student health insurance coverage that satisfies the requirements 
in 45 CFR 147.145.
---------------------------------------------------------------------------

    \139\ Under this definition, student health insurance coverage 
must be provided pursuant to a written agreement between an 
institution of higher education (as defined in the Higher Education 
Act of 1965) and a health insurance issuer, and provided to students 
enrolled in that institution and their dependents, and does not make 
health insurance coverage available other than in connection with 
enrollment as a student (or as a dependent of a student) in the 
institution, does not condition eligibility for the health insurance 
coverage on any health status-related factor (as defined in 45 CFR 
146.121(a)) relating to a student (or a dependent of a student), and 
satisfies any additional requirements that may be imposed under 
state law. See 45 CFR 147.145(a).
    \140\ See 45 CFR 147.145(b).
---------------------------------------------------------------------------

    One commenter expressed support for allowing integration of HRAs 
with student health insurance coverage. Another commenter requested 
that integration with student health insurance coverage not be 
permitted due to concerns that HRA plan sponsors would be required to 
confirm that the student health insurance coverage complies with the 
market requirements. The final rules permit HRA integration with 
student health insurance coverage because student health insurance 
coverage is individual health insurance coverage that is subject to PHS 
Act sections 2711 and 2713. In response to concerns about the 
difficulty of determining the compliance of individual health insurance 
coverage policies with the market requirements generally for all 
individual health insurance coverage, under the final rules, all 
individual health insurance coverage is treated as compliant with PHS 
Act sections 2711 and 2713. Therefore, plan sponsors are not required 
to confirm that any particular student health insurance policy (or any 
other individual health insurance policy) complies with PHS Act 
sections 2711 and 2713.
    Further, in the preamble to the proposed rules, the Departments 
noted that self-insured student health plans

[[Page 28924]]

are not a form of individual health insurance coverage.\141\ Therefore, 
the proposed rules did not provide for HRA integration with self-
insured student health plans. One commenter expressed concern that it 
may be difficult for employers to verify whether an individual with 
student health plan coverage has insured or self-insured coverage. The 
Departments appreciate the comment and recognize that employers and 
employees may not know whether a student health plan is insured or 
self-insured, but expect that employers will take reasonable steps to 
ensure compliance with the final rules. This includes making reasonable 
efforts to ensure that, when employees substantiate enrollment in 
student health coverage, they are correctly substantiating enrollment 
in a student health plan provided through insurance by a licensed 
issuer. If a student enrolled in an institution of higher education has 
questions about the type of student health coverage that is offered by 
the institution, this information should be available in the governing 
plan document or by contacting the plan administrator for the student 
health plan.
---------------------------------------------------------------------------

    \141\ See 77 FR 16453, 16455 (March 21, 2012).
---------------------------------------------------------------------------

    The Departments also confirmed in the preamble to the proposed 
rules that prior guidance,\142\ which provided enforcement relief to 
institutions of higher education for certain healthcare premium 
reduction arrangements offered to student employees in connection with 
insured or self-insured student health coverage (student premium 
reduction arrangements) remains in effect, pending any further 
guidance. One commenter expressed support for keeping the current 
enforcement relief in effect.
---------------------------------------------------------------------------

    \142\ See FAQs About Affordable Care Act Implementation Part 33, 
available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-33.pdf or https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/ACA-FAQ-Set-33-Final.pdf. See also IRS Notice 2016-17; DOL Technical Release 
2016-1; and CMS Insurance Standards Bulletin, Application of the 
Market Reforms and Other Provisions of the Affordable Care Act to 
Student Health Coverage, February 5, 2016.
---------------------------------------------------------------------------

    The Departments reiterate that the previously provided enforcement 
relief remains in effect for institutions of higher education, pending 
any future guidance, and the final rules clarify that a student 
employee who is offered a student premium reduction arrangement is not 
considered part of the class of employees of which the employee would 
otherwise be a part for purposes of the final integration rules. This 
provision applies only for plan sponsors that are institutions of 
higher education. For this purpose, a student premium reduction 
arrangement is defined as any program offered by an institution of 
higher education where the cost of insured or self-insured student 
health coverage is reduced for certain students through a credit, 
offset, reimbursement, stipend or similar arrangement.\143\ Therefore, 
the offer of that type of arrangement to student employees will not 
affect the compliance of an individual coverage HRA that the 
institution of higher education may offer to other employees. The final 
rules also clarify that a student employee offered a student premium 
reduction arrangement is not counted for purposes of determining 
whether the minimum class size requirement is satisfied. The text of 
the final rules includes examples.
---------------------------------------------------------------------------

    \143\ Id.
---------------------------------------------------------------------------

    However, if a student employee is not offered a student premium 
reduction arrangement (including if, instead, the student employee is 
offered an individual coverage HRA), the student employee is considered 
to be part of the class of employees to which he or she otherwise 
belongs, and the student employee is counted in determining whether the 
minimum class size requirement is satisfied. Further, if an individual 
coverage HRA is offered to student employees, the final integration 
rules apply to such an arrangement as they would any other individual 
coverage HRA.
11. Integration With Certain Other Types of Coverage
a. Short-Term, Limited-Duration Insurance
    The Departments considered whether to propose a rule to permit 
individual coverage HRAs to be integrated with types of non-group 
coverage other than individual health insurance coverage, such as 
STLDI.\144\ The Departments declined to do so in the proposed rules 
because STLDI is not subject to PHS Act sections 2711 and 2713 and, 
therefore, might not be compliant with these market requirements. 
However, the Departments requested comments on whether integration with 
STLDI should be permitted and, if so, what potential advantages and 
problems might arise.
---------------------------------------------------------------------------

    \144\ See 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 
144.103 for the definition of STLDI.
---------------------------------------------------------------------------

    Most commenters strongly opposed allowing integration with STLDI, 
expressing concerns that it would cause significant adverse selection 
in the individual market, which would lead to increased premiums and 
increased federal spending (through increased PTCs). Some of these 
commenters asserted that prohibiting integration with STLDI is 
necessary to ensure the integrity and sustainability of the individual 
market and that to allow integration with STLDI would run counter to, 
and negate, the various other provisions in the proposed rules intended 
to prevent adverse selection. Some commenters expressed concern that 
STLDI provides insufficient coverage and consumer protections, that 
individuals would unknowingly enroll, and that brokers would have 
incentives to encourage STLDI enrollment. Some commenters raised legal 
concerns with allowing integration of HRAs with STLDI, noting that 
STLDI is not subject to, or generally compliant with, PHS Act sections 
2711 and 2713 and, therefore, would not be sufficient to ensure that an 
individual with an HRA integrated with STLDI had coverage that was 
compliant with these market requirements. One commenter asserted that 
an HRA integrated with STLDI would fail to comply with the health 
nondiscrimination rules under HIPAA because STLDI is allowed to 
discriminate based on health status.
    A few commenters supported allowing integration of an individual 
coverage HRA with STLDI, noting that STLDI is an option that could 
provide relief to individuals unable to afford individual health 
insurance coverage and, for some lower-income individuals, such as 
those in states that did not expand Medicaid under PPACA, may be the 
only affordable alternative. One commenter supported integration with 
STLDI as long as additional guardrails were established and another 
requested additional notice requirements if integration of individual 
coverage HRAs were to be permitted with STLDI.
    The Departments note that STLDI can be a useful option for certain 
individuals otherwise unable to afford or obtain PPACA-compliant health 
insurance. The final rules, however, do not allow integration with 
STLDI because of the concerns raised by commenters, including that the 
combined arrangement would not necessarily satisfy PHS Act sections 
2711 and 2713 and that adverse selection could result. The Departments 
note that the new excepted benefit HRA finalized elsewhere in the final 
rules, which is not subject to PHS Act sections 2711 and 2713, 
generally may be used to reimburse premiums for STLDI. See later in 
this preamble for a discussion of the excepted benefit HRA, including a 
discussion of the limited circumstance in which an excepted benefit HRA 
may not be used to reimburse STLDI premiums.

[[Page 28925]]

b. Spousal Coverage
    In developing the proposed rules, the Departments considered 
whether to allow individual coverage HRAs to be integrated with group 
health plan coverage, such as a group health plan maintained by the 
employer of the participant's spouse, in addition to individual health 
insurance coverage. Like individual health insurance coverage, group 
health plan coverage generally is subject to and compliant with PHS Act 
sections 2711 and 2713. The Departments indicated they did not propose 
such a rule because to do so would add significant complexity to the 
individual health insurance coverage integration test.\145\ However, 
the Departments requested comments, including on the demand for such a 
rule, and any problems such a rule may raise.
---------------------------------------------------------------------------

    \145\ PHS Act section 2711 applies with respect to the coverage 
of EHBs. Because large group market and self-insured group health 
plans are not required to cover EHBs, unlike individual health 
insurance coverage which generally is required to cover all EHBs, in 
the group health plan integration context, situations may arise 
where non-HRA group coverage with which the HRA is integrated does 
not cover every category of EHBs that the HRA covers. In that case, 
the HRA applies an annual dollar limit to a category of EHBs and the 
non-HRA group coverage with which it is integrated does not cure 
that limit by providing unlimited coverage of that category of EHBs. 
In the 2015 rules under PHS Act section 2711, and in subregulatory 
guidance that preceded the 2015 rules, the Departments addressed 
this issue by providing two tests. Specifically, if the non-HRA 
group coverage with which an HRA is integrated provides MV, the HRA 
will not be considered to fail to comply with PHS Act section 2711, 
even though the HRA might provide reimbursement of an EHB that the 
plan with which the HRA is integrated does not. If an HRA is 
integrated with non-HRA group coverage that does not provide MV, the 
2015 rules limit the types of expenses that an HRA may reimburse to 
reimbursement of co-payments, co-insurance, deductibles, and 
premiums under the non-HRA group coverage, as well as medical care 
that does not constitute an EHB. For additional discussion of the 
current rules under PHS Act section 2711, see the discussion earlier 
in this preamble.
---------------------------------------------------------------------------

    Several commenters requested that integration with spousal coverage 
be permitted under the individual health insurance coverage integration 
test, with one stating that most group coverage is likely to cover all 
EHBs and therefore the issue of an HRA that covers all EHBs being 
integrated with coverage that does not cover all EHBs is unlikely to 
arise. One commenter suggested that the Departments allow an employee 
to be covered by a group health plan and also have access to an HRA 
that can be used to purchase individual health insurance coverage for a 
spouse. Other commenters requested that integration of an individual 
coverage HRA with spousal coverage be prohibited, expressing skepticism 
that employers would take advantage of this option and noting that the 
arrangement would add little value. In light of the Departments' 
continued concern with the added complexity that would be required and 
the response from commenters, the final rules do not allow an 
individual coverage HRA to also be integrated with other group health 
plan coverage, such as spousal coverage. This is an area that the 
Departments may explore in future rulemaking. The Departments reiterate 
that the current rules under PHS Act section 2711 allow HRAs to be 
integrated with other non-HRA group health plan coverage, including 
spousal coverage, subject to certain conditions.\146\ However, amounts 
made available under such an HRA may not be used to purchase individual 
health insurance coverage.\147\
---------------------------------------------------------------------------

    \146\ 26 CFR 54.9815-2711(d)(2), 29 CFR 2590.715-2711(d)(2), and 
45 CFR 147.126(d)(2).
    \147\ IRS Notice 2015-87, Q&A-2.
---------------------------------------------------------------------------

    Commenters also requested clarification as to whether two spouses, 
each offered an individual coverage HRA from their respective 
employers, may use the separate individual coverage HRAs to buy a 
single individual health insurance policy that covers both spouses (and 
any dependents). Nothing in the final rules would prohibit this, if the 
separate individual coverage HRAs are each in compliance with the final 
rules. However, under the generally applicable rules for HRAs under the 
Code, each individual may only seek reimbursement for the portion of a 
medical care expense that has not already been reimbursed by some other 
means, including from one of the individual coverage HRAs.
c. Health Care Sharing Ministries
    Several commenters requested that integration of HRAs with health 
care sharing ministries be permitted, in part to provide an alternative 
option that alleviates conscience issues faced by employers and 
employees with respect to individual health insurance coverage, and in 
part due to the success of health care sharing ministries in providing 
affordable, flexible choices.
    The Departments are of the view that HRAs cannot be integrated with 
health care sharing ministries, consistent with PHS Act sections 2711 
and 2713. Under current law, health care sharing ministries are not 
subject to those provisions, nor are they required to comply with other 
market requirements that apply to individual health insurance coverage. 
Health care sharing ministry arrangements are also not MEC.\148\ 
Therefore, the integration of an individual coverage HRA with these 
arrangements would not result in a combined arrangement sufficient to 
satisfy PHS Act sections 2711 and 2713, which means that such a 
combined arrangement would not provide the protections afforded by 
those provisions.
---------------------------------------------------------------------------

    \148\ See Code section 5000A(d)(2)(B) and 5000A(f).
---------------------------------------------------------------------------

    One commenter asserted that the proposed rules would impermissibly 
burden the exercise of religion for purposes of the Religious Freedom 
Restoration Act of 1993 (RFRA) \149\ because they would not allow 
individual coverage HRAs to be integrated with health care sharing 
ministries and thus would make participation in health care sharing 
ministries more expensive relative to individual coverage HRAs. 
Specifically, the commenter asserted that the proposed rules would 
impermissibly burden the free exercise of religion because, by not 
allowing HRAs to be integrated with health care sharing ministries, the 
rules would extend certain tax advantages to individual coverage HRAs 
that are not extended to participants in health care sharing 
ministries. However, although the RFRA provides a claim to persons 
whose religious exercise is substantially burdened by government, the 
Supreme Court has held that ``a generally applicable tax [that] merely 
decreases the amount of money [an individual or entity] has to spend on 
its religious activities'' does not impose a substantial burden on the 
exercise of religion.\150\ Consequently, the final rules do not allow 
individual coverage HRAs to be integrated with health care sharing 
ministries.
---------------------------------------------------------------------------

    \149\ 42 U.S.C. 2000bb(b).
    \150\ Jimmy Swaggart Ministries v. Bd. of Equalization of 
California, 493 U.S. 378, 391 (1990).
---------------------------------------------------------------------------

d. Multiple Employer Welfare Arrangements (Including Association Health 
Plans)
    One commenter requested that integration of HRAs be permitted with 
association health plans (AHPs) \151\ and another commenter opposed 
allowing integration with AHPs, because coverage offered by an AHP is 
not required to cover all EHBs, to the extent

[[Page 28926]]

the coverage is offered through a large group market or self-insured 
group health plan. AHPs are a type of Multiple Employer Welfare 
Arrangement (MEWA) that are group health plans. The Departments 
current, final regulations at 26 CFR 54.9815-2711(d)(2), 29 CFR 
2590.715-2711(d)(2), and 45 CFR 147.126(d)(2) set forth criteria for 
HRAs to be integrated with other group health plan coverage (including 
MEWAs).
---------------------------------------------------------------------------

    \151\ On June 21, 2018, DOL published a final rule establishing 
a new test as an alternative to that described in prior DOL sub-
regulatory guidance for determining who can sponsor an ERISA-covered 
AHP as an ``employer.'' See 83 FR 28912 (June 21, 2018). The AHP 
rule was intended to expand access to affordable, high-quality 
healthcare options, particularly for employees of small employers 
and some self-employed individuals. On March 28, 2019, in State of 
New York v. United States Department of Labor, the United States 
District Court for the District of Columbia vacated most of the DOL 
rule. On April 26, 2019, the Department of Justice filed a notice of 
appeal.
---------------------------------------------------------------------------

e. TRICARE
    The Departments note that, under the final rules, individual 
coverage HRAs may not be integrated with TRICARE.\152\ However, for the 
sake of clarity, the Departments note that nothing in the final rules 
prevents an employer from offering an individual coverage HRA to an 
individual covered by TRICARE, subject to the provisions of the final 
rules, including that if an individual coverage HRA is offered to an 
employee in a class of employees, the HRA must generally be offered on 
the same terms to all the employees in the class. Further, nothing in 
the final rules prevents an individual covered by TRICARE from 
enrolling in an individual coverage HRA, if offered, subject to the 
conditions in the final rules, including that all individuals covered 
by an individual coverage HRA must be enrolled in either individual 
health insurance coverage or Medicare.\153\ Consequently, an individual 
covered by TRICARE who is offered an individual coverage HRA will be 
enrolled in TRICARE and must also be enrolled in an individual health 
insurance policy (or Medicare, if applicable) in order to be enrolled 
in the individual coverage HRA. The individual may not enroll in the 
individual coverage HRA and only TRICARE without enrolling in an 
individual health insurance policy (or Medicare). Further, as explained 
later in this preamble, HRAs may reimburse medical care expenses and 
the HRA plan sponsor determines which medical care expenses a 
particular HRA may reimburse, consistent with the discussion later in 
this preamble. It may be the case that an HRA will be available to pay 
both the premiums and cost-sharing for individual health insurance 
coverage as well as any medical care expenses related to TRICARE, 
subject to the terms of the HRA.
---------------------------------------------------------------------------

    \152\ See chapter 55 of title 10, United States Code.
    \153\ IRS Notice 2015-17, Q&A-3, provides that an arrangement 
under which an employer reimburses certain medical care expenses for 
employees covered by TRICARE may be considered integrated with a 
traditional group health plan offered by the employer (even though 
the employee is not enrolled in the traditional group health plan), 
subject to certain conditions. The final rules do not affect this 
guidance provided under Notice 2015-17.
---------------------------------------------------------------------------

12. Expenses Eligible for Reimbursement by an Individual Coverage HRA
    A number of commenters requested clarification of the expenses that 
may be reimbursed under an individual coverage HRA, such as whether 
expenses for premiums for excepted benefit coverage, cost sharing under 
excepted benefit coverage, and cost sharing under individual health 
insurance coverage may be reimbursed. One commenter recommended that 
the final rules require individual coverage HRAs to provide 
reimbursement for cost sharing in addition to premiums, and another 
asked for clarification that an individual coverage HRA is not required 
to be used to reimburse premiums for individual health insurance 
coverage, so long as the individual coverage HRA otherwise satisfies 
the requirements under the final rules.
    An HRA may provide for reimbursement of expenses for medical care, 
as defined under Code section 213(d). Consistent with the current rules 
that apply to HRAs generally, under the final rules, a plan sponsor has 
discretion to specify which medical care expenses are eligible for 
reimbursement from an individual coverage HRA it establishes. A plan 
sponsor may allow an HRA to reimburse all medical care expenses, may 
limit an HRA to allow reimbursements only for premiums, may limit an 
HRA to allow reimbursements only for non-premium medical care expenses 
(such as cost sharing), or may decide which particular medical care 
expenses will be reimbursable and which will not be reimbursable. 
However, in the latter case, the designation of the reimbursable 
expenses must not violate other rules applicable to group health plans, 
such as the HIPAA nondiscrimination rules or the MSP provisions. The 
final rules do not require that an individual coverage HRA be used (or 
be allowed to be used) for reimbursement of premiums for individual 
health insurance coverage (or Medicare). However, as detailed earlier 
in this preamble, the final rules require that individuals covered by 
an individual coverage HRA be enrolled in individual health insurance 
coverage (or Medicare). Thus, the Departments generally anticipate that 
employers will allow individual coverage HRAs to reimburse premiums for 
such coverage.
    Some commenters requested that the Departments confirm that certain 
excepted benefits, including standalone dental coverage, hospital 
indemnity or other fixed indemnity coverage, and coverage for a 
specific disease or illness, provide medical care within the meaning of 
Code section 213(d) and, therefore, that expenses for these types of 
coverage are reimbursable by an individual coverage HRA. Some 
commenters requested that expenses paid with regard to direct primary 
care arrangements be recognized as expenses for medical care under Code 
section 213(d). In addition, one commenter requested clarification of 
whether payments for participation in health care sharing ministries 
qualify as medical care expenses under Code section 213(d).
    An HRA, including an individual coverage HRA, generally may 
reimburse expenses for medical care, as defined under Code section 
213(d), of an employee and certain members of the employee's family. 
Under Code section 213(d), medical care expenses generally include 
amounts paid (1) for the diagnosis, cure, mitigation, treatment, or 
prevention of disease, or for the purpose of affecting any structure of 
function of the body; (2) for transportation primarily for and 
essential to medical care; (3) for certain qualified long-term care 
services; and (4) for insurance covering medical care. Neither the 
proposed rules nor the final rules make any changes to the rules under 
Code section 213. Thus, any issues arising under Code section 213, and 
any guidance requested by commenters to address those issues, are 
beyond the scope of this rulemaking. The Treasury Department and the 
IRS, however, appreciate the comments and plan to address some of these 
issues in future rulemaking or guidance.
13. Interaction of Individual Coverage HRAs and HSAs
    Commenters raised various issues related to the interaction between 
individual coverage HRAs and HSAs. Section 1201 of the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003, Public 
Law 108-173, added section 223 to the Code to allow eligible 
individuals to establish HSAs. Among the requirements for an individual 
to qualify as an eligible individual under Code section 223(c)(1) is 
that the individual must be covered under a high deductible health plan 
(HDHP) and have no disqualifying health coverage. If an individual 
fails to satisfy the requirements to be an eligible individual, 
contributions to an HSA are disallowed.
    Several commenters asked that the Treasury Department and the IRS 
clarify

[[Page 28927]]

whether an individual covered by an individual coverage HRA may 
contribute to an HSA. Some commenters specifically asked the Treasury 
Department and the IRS to address the application of prior guidance 
under the Code, which provides that certain types of HRAs do not render 
an individual ineligible to contribute to an HSA. Several commenters 
expressed support for HSAs and emphasized the importance of allowing 
individuals who have individual coverage HRAs to contribute to HSAs.
    In Revenue Ruling 2004-45,\154\ the Treasury Department and the IRS 
clarified that an otherwise eligible individual (that is, an individual 
with coverage under an HDHP and no other disqualifying coverage) 
remains an eligible individual for purposes of making contributions to 
an HSA for periods during which the individual is covered by, among 
other things, a limited-purpose HRA, a post-deductible HRA, or 
combinations of these arrangements.\155\ Subsequently, Q&A-1 of IRS 
Notice 2008-59 \156\ stated that a limited-purpose HRA that is also 
available to pay premiums for health coverage does not disqualify an 
otherwise eligible individual from contributing to an HSA, provided the 
individual does not use the HRA to, or otherwise, obtain coverage that 
is not HSA-compatible. This prior guidance applies to all HRAs, 
including individual coverage HRAs. Therefore, for example, an 
individual coverage HRA that solely makes available reimbursements of 
individual health insurance coverage premiums does not disqualify an 
otherwise eligible individual covered under an HDHP and no other 
disqualifying coverage from making contributions to an HSA. However, an 
individual coverage HRA that is not limited in accordance with the 
relevant guidance under the Code would not be HSA-compatible (for 
example, an HRA that can reimburse first dollar cost sharing).
---------------------------------------------------------------------------

    \154\ Revenue Ruling 2004-45, 2004-1 IRB 971.
    \155\ See Revenue Ruling 2004-45, which defines a limited-
purpose HRA as an HRA that pays or reimburses benefits for 
``permitted insurance'' (for a specific disease or illness or that 
provides a fixed amount per day (or other period) of 
hospitalization) or ``permitted coverage'' (for example, vision or 
dental coverage), but not for long-term care services. In addition, 
the limited-purpose HRA may pay or reimburse preventive care 
benefits. The ruling also defines a post-deductible HRA as an HRA 
that does not pay or reimburse any medical expense incurred before 
the minimum annual deductible under Code section 223(c)(2)(A)(i) is 
satisfied.
    \156\ IRS Notice 2008-59, 2008-29 IRB 123.
---------------------------------------------------------------------------

    One commenter asked whether employers are allowed, or required, to 
offer both an HSA-compatible individual coverage HRA and an individual 
coverage HRA that is not HSA compatible to a class of employees. The 
Departments recognize that some employees offered an individual 
coverage HRA may choose individual health insurance coverage that is an 
HDHP and other employees may choose non-HDHP individual health 
insurance coverage that is not HSA compatible. While some employers may 
offer all employees in a class of employees an HSA-compatible 
individual coverage HRA, some employers may want to offer employees in 
a class of employees a choice between an HSA-compatible individual 
coverage HRA and an individual coverage HRA that is not HSA compatible. 
In response to this comment, the final rules clarify that an employer 
that offers employees in a class of employees a choice between an HSA-
compatible individual coverage HRA and an individual coverage HRA that 
is not HSA compatible does not fail to satisfy the same terms 
requirement provided both types of individual coverage HRAs are offered 
to all employees in the class on the same terms.\157\ The final rules 
have been revised to reflect this rule.
---------------------------------------------------------------------------

    \157\ The Departments note that under the opt out requirement, 
described later in this preamble, each participant must be given the 
chance to opt out of (or into) an individual coverage HRA once, and 
only once, with respect to a plan year and to the extent a 
participant is offered a choice between an HSA-compatible HRA and a 
non-HSA-compatible HRA, the participant will opt into either one or 
the other, for the plan year (or for the portion of the plan year 
during which the participant is covered by the HRA). (Note that 
participants are also generally given the chance to waive the HRA 
upon termination of employment).
---------------------------------------------------------------------------

    With respect to the post-deductible feature of certain HSA-
compatible HRAs, one commenter suggested that the final rules provide 
that employees may self-administer the post-deductible restriction by 
tracking medical expenses incurred during the year and refraining from 
submitting medical expenses to the post-deductible HRA until the 
minimum deductible is satisfied. The Treasury Department and the IRS 
decline to adopt this approach because it would be inconsistent with 
the rules for the administration of HDHPs.\158\ If a plan sponsor 
chooses to offer an HSA-compatible individual coverage HRA that 
reimburses medical care expenses after the minimum deductible under 
Code section 223(c)(2)(A)(i) is satisfied, it is the employer's 
responsibility to track medical care expenses incurred during the year 
and ensure that the individual coverage HRA does not reimburse medical 
care expenses (other than premiums or expenses allowed as limited 
purpose) incurred prior to the satisfaction of the minimum 
deductible.\159\
---------------------------------------------------------------------------

    \158\ See Revenue Ruling 2004-45.
    \159\ Another commenter inquired about the interaction of 
individual coverage HRAs and HSAs and the rules for cafeteria plans 
under Code section 125. These issues are outside the scope of this 
rulemaking, and the Treasury Department and the IRS are continuing 
to consider whether future guidance is needed.
---------------------------------------------------------------------------

    The commenter further requested clarification as to whether unused 
amounts in an individual coverage HRA at the end of the plan year may 
be transferred to the employee's HSA. The Treasury Department and the 
IRS note that amounts available under an HRA, whether an individual 
coverage HRA or another type of HRA, may not be funded by salary 
reduction amounts. Moreover, the amounts are available only to 
reimburse Code section 213(d) medical care expenses and may not be 
cashed out.\160\ However, amounts in an HSA may be withdrawn for non-
medical purposes, subject to inclusion in income and an additional 
tax.\161\ In addition, Congress previously provided for one-time 
distributions from HRAs to HSAs, in certain circumstances, subject to 
the annual HSA contribution limits, but this special rule was only made 
available on a temporary basis, and the rule sunset at the end of 
2011.\162\ Therefore, allowing unused amounts in an individual coverage 
HRA to be transferred to an HSA would be inconsistent with the relevant 
provisions of the Code and is not permitted.
---------------------------------------------------------------------------

    \160\ See IRS Notice 2002-45.
    \161\ See Code section 223(f). Notwithstanding that HSA amounts 
may be withdrawn for non-medical purposes, subject to inclusion in 
income and additional tax, Code section 106(d) provides that in the 
case of amounts contributed by an employer to the HSA of an eligible 
individual, those amounts are treated as employer-provided coverage 
for medical care expenses under an accident or health plan to the 
extent the amounts do not exceed the annual limits on contributions 
to an HSA.
    \162\ See Code section 106(e).
---------------------------------------------------------------------------

    Finally, some commenters requested that direct primary care 
arrangements not be treated as a health plan or coverage under Code 
section 223, so that an individual may have a direct primary care 
arrangement without becoming ineligible for HSA contributions. Similar 
to the discussion of Code section 213 in the preceding section of this 
preamble, neither the proposed rules nor the final rules make any 
changes to the rules under Code section 223. Thus, any issues arising 
under Code section 223, and any guidance requested by commenters to 
address those issues, are beyond the scope of this rulemaking.

[[Page 28928]]

14. Interaction of Individual Coverage HRAs and Medicare
    Commenters raised various issues related to the interaction between 
individual coverage HRAs and Medicare. The comments focused on the 
interaction with the Medicare anti-duplication provision under SSA 
section 1882(d)(3)(A)(i)(I) and the MSP provisions under SSA section 
1862(b). In response to these comments, the final rules have been 
revised to provide that an individual coverage HRA may be integrated 
with either individual health insurance coverage or Medicare Part A and 
B or Part C. Also, the Departments clarify that an individual coverage 
HRA may be used to reimburse premiums for Medicare and Medicare 
supplemental health insurance (Medigap), as well as other medical care 
expenses, as discussed in more detail in this section of the preamble.
a. Background
    Comments regarding the interaction between individual coverage HRAs 
and Medicare addressed a number of federal laws and rules governing the 
relationship between group health plans and the Medicare program. This 
section of the preamble briefly summarizes these laws to provide 
context for comments received on the proposed rules and the provisions 
of the final rules related to integration of an individual coverage HRA 
with Medicare.
    Under SSA section 1882(d)(3)(A)(i)(I), it is unlawful for any 
person to issue or sell to an individual entitled to benefits under 
Medicare Part A or enrolled in Medicare Part B (including an individual 
electing a Medicare Part C plan) an individual health insurance policy 
with the knowledge that the policy duplicates \163\ health benefits to 
which the individual is otherwise entitled under Medicare or 
Medicaid.\164\ Persons who violate SSA section 1882(d)(3)(A)(i)(I) are 
subject to criminal fines and imprisonment, as well as civil monetary 
penalties.\165\
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    \163\ If benefits under an individual health insurance policy 
are payable without regard to other health benefit coverage of such 
individual, the policy is not considered to ``duplicate'' any health 
benefits to which the individual is otherwise entitled under 
Medicare or Medicaid, and therefore, the statutory prohibition on 
the sale of such coverage does not apply. See SSA section 
1882(d)(3)(A)(iv).
    \164\ Group health plans, including HRAs, are generally exempt 
from this Medicare anti-duplication provision. See SSA section 
1882(d)(3)(C).
    \165\ SSA section 1882(d)(3)(A)(ii).
---------------------------------------------------------------------------

    The MSP provisions in SSA section 1862(b) make Medicare the 
secondary payer to certain other health plans and coverage, including 
group health plans. These provisions protect the Medicare trust funds 
by ensuring that Medicare does not pay for items and services that 
certain health insurance or coverage is primarily responsible for 
paying. In general, the MSP provisions describe when Medicare is 
secondary in relation to other health plans or coverage and prohibit 
Medicare from making payment for an item or service if payment has been 
made, or can reasonably be expected to be made, by a primary plan when 
certain conditions are satisfied.\166\
---------------------------------------------------------------------------

    \166\ See CMS Publication #100-05, Medicare Secondary Payer 
Manual, available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/internet-Only-Manuals-IOMs-Items/CMS019017.html?DLPage=1&DLEntries=10&DLSort=0&DLSortDir=ascending.
---------------------------------------------------------------------------

    SSA section 1862(b) and 42 CFR 411.20 et seq. provide, in part, 
that Medicare is the secondary payer, under specified conditions, for 
services covered under any of the following:
     Group health plans of employers that employ at least 20 
employees and that cover Medicare beneficiaries age 65 or older who are 
covered under the plan by virtue of the individual's current employment 
status \167\ with an employer or the current employment status of a 
spouse of any age.\168\
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    \167\ An individual has current employment status if the 
individual is actively working as an employee or is otherwise 
described in 42 CFR 411.104.
    \168\ SSA section 1862(b)(1)(A), 42 CFR 411.20(a)(1)(ii), and 42 
CFR 411.100(a)(1)(i).
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     Group health plans (without regard to the number of 
individuals employed and irrespective of current employment status) 
that cover individuals who have ESRD. Except as provided in 42 CFR 
411.163, group health plans are always primary payers throughout the 
first 30 months of ESRD-based Medicare eligibility or entitlement.\169\
---------------------------------------------------------------------------

    \169\ SSA section 1862(b)(1)(C).
---------------------------------------------------------------------------

     Large group health plans, as defined by Code section 
5000(b)(2) without regard to Code section 5000(d) (that is, plans of 
employers that employ at least 100 employees), that cover Medicare 
beneficiaries who are under age 65, entitled to Medicare on the basis 
of disability, and covered under the plan by virtue of the individual's 
or a family member's current employment status with an employer.\170\
---------------------------------------------------------------------------

    \170\ SSA section 1862(b)(1)(B).
---------------------------------------------------------------------------

    Generally, under SSA section 1862(b)(1)(A), (B), and (C), a group 
health plan may not take into account that individuals are entitled to 
Medicare on the basis of age or disability, or that individuals are 
eligible for or entitled to Medicare on the basis of ESRD, in the 
design or offering of the plan. The provisions at SSA section 
1862(b)(1)(A), (B), and (C) (including subsections (b)(1)(A)(i)(II) and 
(b)(1)(C)(ii)) are collectively referred to as the Medicare 
nondiscrimination provisions. Examples of actions that constitute 
taking into account Medicare entitlement are listed in 42 CFR 411.108.
    SSA section 1862(b)(1)(A)(i)(II) and (ii) provides that group 
health plans of employers of 20 or more employees must provide to any 
employee or spouse age 65 or older the same benefits, under the same 
conditions, that the plan provides to those individuals under age 65 
(equal benefit rule). For example, a group health plan of an employer 
with 20 or more employees may not provide lesser benefits to 
individuals age 65 or over, or charge higher premiums for individuals 
age 65 or over, because these actions would take into account 
employees' entitlement to Medicare on the basis of age and would 
provide different benefits based on whether an employee is under or 
over age 65. This requirement applies regardless of whether the 
individual or spouse age 65 or older is entitled to Medicare.
    SSA section 1862(b)(1)(C)(ii) provides that group health plans may 
not differentiate in the benefits they provide between individuals who 
have ESRD and other individuals covered under the plan on the basis of 
the existence of ESRD, the need for renal dialysis, or in any other 
manner. Actions that constitute ``differentiating'' are listed in 42 
CFR 411.161(b).
    SSA section 1862(b)(3)(C) and 42 CFR 411.103 provide that it is 
unlawful for an employer or other entity (for example, an issuer) to 
offer any financial or other benefits as incentives for an individual 
entitled to Medicare not to enroll in, or to terminate enrollment in, a 
group health plan that is, or would be, primary to Medicare. For 
example, employers may not offer benefits to Medicare beneficiaries 
that are available only as alternatives to the employer's primary group 
health plan (for example, prescription drug benefits) unless the 
beneficiary has primary coverage other than Medicare (for example, 
primary plan coverage through his or her spouse's employer).
b. Integration of Individual Coverage HRAs With Medicare
    Several commenters requested clarification generally about how 
employees who are enrolled in Medicare may use amounts in an individual 
coverage HRA. Some commenters explained that because of the Medicare 
anti-duplication provision applicable to individual health insurance 
coverage, employees who are Medicare beneficiaries may not be able to 
purchase individual health insurance

[[Page 28929]]

coverage and, therefore, would be unable to enroll in an individual 
coverage HRA. One commenter suggested that issuers should have to make 
their individual health insurance policies available to employees 
eligible for or enrolled in Medicare, if they are offered an individual 
coverage HRA.
    Some commenters sought clarification about the relationship between 
the Medicare anti-duplication provision and the Medicare 
nondiscrimination provisions as they relate to individual coverage 
HRAs. Specifically, some commenters asked HHS to clarify that the 
inability of employees who are Medicare beneficiaries to obtain 
individual health insurance coverage due to the Medicare anti-
duplication provision will not cause the individual coverage HRA or its 
plan sponsor to violate rules prohibiting discrimination based on 
Medicare status, age, disability, or other factors. One commenter 
suggested that employers that otherwise comply with the proposed rules 
should not be precluded from offering an individual coverage HRA 
because a class of employees includes a Medicare beneficiary who cannot 
obtain individual health insurance coverage. Another commenter asked 
whether employers would be required to offer Medicare-eligible 
employees the same HRA contribution as non-Medicare-eligible employees 
in the same class even though Medicare beneficiaries may not be able to 
purchase individual health insurance coverage.
    In response to these comments, HHS notes that there is no exception 
to the Medicare anti-duplication provision under SSA section 
1882(d)(3)(A)(i)(I) for individual health insurance coverage purchased 
with an HRA. Therefore, neither the proposed rules nor the final rules 
make any changes related to the application of the Medicare anti-
duplication provision. Thus, the statutory prohibition against selling 
an individual health insurance policy to a Medicare beneficiary with 
knowledge that the policy duplicates benefits under Medicare continues 
to apply, regardless of whether the individual is offered an individual 
coverage HRA. However, the Departments have considered commenters' 
concerns about individual coverage HRAs and the potential effects of 
the Medicare anti-duplication provision, as well as those related to 
the interaction of the MSP provisions, and have determined that 
revisions to the final rules are warranted.
    HHS recognizes that, for an individual coverage HRA, it is 
necessary to address how the Medicare anti-duplication provision 
interacts with the rules under SSA section 1862(b)(1) that generally 
provide that group health plans may not take into account entitlement 
to Medicare and must provide to any employee or spouse age 65 or older 
the same benefits, under the same conditions, that the group health 
plan provides to individuals under age 65. If an employer offers an 
individual coverage HRA, some employees who are Medicare beneficiaries 
may not be able to obtain individual health insurance coverage due to 
the anti-duplication provision at SSA section 1882(d)(3)(A)(i)(I). This 
might cause such employees to be unable to enroll in the individual 
coverage HRA, effectively treating them differently in violation of the 
SSA's equal benefit rule.
    To address these comments, the final rules permit an individual 
coverage HRA to be integrated with either individual health insurance 
coverage or Medicare for a participant or dependent who is enrolled in 
Medicare Part A and B or Part C (and the HRA will be deemed to comply 
with PHS Act sections 2711 and 2713), if certain conditions are 
satisfied. Under the final rules, an individual coverage HRA may be 
integrated with Medicare regardless of whether the HRA is subject to 
the MSP provisions, because the Medicare anti-duplication provision 
applies without regard to whether the HRA plan sponsor is subject to 
the MSP provisions.\171\
---------------------------------------------------------------------------

    \171\ For group health plans not subject to the MSP provisions, 
the existing integration rules permit integration with Medicare Part 
B and D if certain conditions are satisfied, including that the 
employer offer traditional group health plan coverage to its non-
Medicare employees. See 26 CFR 54.9815-2711(d)(5), 29 CFR 2590.715-
2711(d)(5), and 45 CFR 147.126(d)(5).
---------------------------------------------------------------------------

    The Departments are adopting this approach due to the challenges 
presented by the intersection of the requirements that apply to 
individual coverage HRAs, the MSP requirements applicable to group 
health plans, and the Medicare anti-duplication provision applicable to 
individual health insurance coverage. The Departments have determined 
that it is appropriate to permit an individual coverage HRA to 
integrate with Medicare coverage, and therefore, be considered 
compliant with PHS Act sections 2711 and 2713, because individuals 
enrolled in Medicare Part A and B or Part C have the comprehensive 
benefit packages established by Congress, generally with no annual 
dollar limits and with coverage of preventive services without cost 
sharing.\172\ An individual coverage HRA that helps pay premiums for, 
or supplements, the Medicare benefit package established by Congress 
will not be considered by the Departments to fail to satisfy PHS Act 
sections 2711 and 2713. Further, the Departments determined in the 2015 
rules under PHS Act 2711 that allowing Medicare Part B and D 
reimbursement arrangements to be integrated with Medicare was 
sufficient to constitute compliance with PHS Act sections 2711 and 2713 
in the circumstances described in that guidance, as discussed earlier 
in this preamble.
---------------------------------------------------------------------------

    \172\ See, e.g., SSA sections 1861 and 1833, as added by PPACA 
sections 4103 and 4104.
---------------------------------------------------------------------------

    The final integration rules generally apply in the same manner to 
Medicare coverage as they apply to individual health insurance 
coverage. Thus, under the final rules, an individual coverage HRA must 
require individuals whose medical care expenses may be reimbursed under 
the HRA to be enrolled in either individual health insurance coverage 
or Medicare Part A and B or Part C for each month such individuals are 
covered by the HRA. The individual coverage HRA also must implement, 
and comply with, reasonable procedures to substantiate enrollment in 
either individual health insurance coverage or Medicare Part A and B or 
Part C for the HRA plan year (or for the portion of the plan year the 
individual is covered by the individual coverage HRA) and with each new 
request for reimbursement of an incurred medical care expense. The 
Departments clarify that the final rules do not require that a 
participant and his or her dependents all have the same type of 
coverage (that is, either individual health insurance coverage or 
Medicare). Therefore, an individual coverage HRA may be integrated with 
Medicare for some individuals in a family or household and with 
individual health insurance coverage for others in the same family or 
household.
    In addition, under the final rules, an individual coverage HRA must 
be offered on the same terms to all employees within a class of 
employees, regardless of Medicare eligibility or entitlement, including 
that the individual coverage HRA must make the same amount available to 
all employees in the class, subject to the exceptions provided in the 
final rules under the same terms requirement.\173\ Moreover,

[[Page 28930]]

no employee may be offered a choice between an individual coverage HRA 
and a traditional group health plan, including an employee enrolled in 
or eligible for Medicare. The individual coverage HRA must also allow 
participants, whether or not covered by Medicare, to opt-out of and 
waive future reimbursements from the individual coverage HRA annually 
and upon termination of employment. Finally, the individual coverage 
HRA must provide the notice required by the final rules to all 
individuals eligible for the HRA, including those for whom the HRA 
would be integrated with Medicare. Relatedly, in the final rules, the 
Departments clarify the notice content requirements to reflect that an 
individual coverage HRA may be integrated with Medicare and to include 
a statement regarding PTC eligibility for Medicare beneficiaries.\174\ 
The final rules also clarify that some of the notice content elements 
relate only to individual health insurance coverage and not to 
Medicare.
---------------------------------------------------------------------------

    \173\ The Departments note that although there is an exception 
to the same terms requirement that allows a plan sponsor to offer 
both an HSA-compatible individual coverage HRA and an individual 
coverage HRA that is not HSA compatible, Code section 223(b)(7) 
provides that an individual ceases to be an eligible individual for 
HSA purposes starting with the month he or she is entitled to 
benefits under Medicare. IRS Notice 2004-50, 2004-33 IRB 196, Q&A-2, 
clarifies that mere eligibility for Medicare does not make an 
individual ineligible to contribute to an HSA. Rather, the term 
``entitled to benefits under Medicare,'' for purposes of an HSA, 
means both eligibility for, and enrollment in, Medicare.
    \174\ Although individuals enrolled in Medicare may not be able 
to purchase individual health insurance coverage for themselves 
through the Exchange, individuals who do so are not eligible for the 
PTC for their Exchange coverage in any event. See Code section 
36B(c)(2)(B) and 26 CFR 1.36B-2(a)(2).
---------------------------------------------------------------------------

c. Reimbursement of Expenses Under Individual Coverage HRAs for 
Medicare Beneficiaries
    One commenter requested clarification that offering an individual 
coverage HRA to Medicare-eligible employees will not be considered an 
improper financial incentive for those individuals to select Medicare 
as their primary payer. The commenter also suggested that employees be 
able to use amounts in an individual coverage HRA to pay for medical 
care expenses not covered by Medicare, such as dental, vision, and 
other out-of-pocket expenses, including Medicare Part D premiums, as 
well as premiums for Medigap, without it being viewed as offering an 
improper incentive.
    For group health plans subject to the MSP provisions, offering an 
HRA to reimburse Medicare premiums is impermissible if it provides a 
financial incentive for Medicare beneficiaries to decline enrollment in 
the employer's group health plan and make Medicare the primary payer. 
Under the final rules, the employer would not be offering Medicare 
beneficiaries a financial incentive as an inducement to decline group 
health plan coverage. Rather, the individual coverage HRA would be the 
group health plan coverage offered to a class of employees that 
includes Medicare beneficiaries. Under these circumstances, unless the 
employer could offer an individual coverage HRA that may be integrated 
with Medicare, the employer would risk running afoul of the equal 
benefit rule under SSA section 1862(b)(1)(A)(i). This is because 
employees who are Medicare beneficiaries who are unable to purchase 
individual health insurance coverage would be ineligible for the 
employer's group health plan (that is, the individual coverage HRA) as 
a result of the Medicare anti-duplication provision.
    HHS recognizes that in other circumstances, offering an HRA to 
reimburse Medicare premiums might be viewed as impermissible because it 
would have the effect of making Medicare the primary payer in relation 
to a group health plan.\175\ Nevertheless, for purposes of the final 
rules, HHS has concluded that employers need the flexibility to offer 
individual coverage HRAs that may be integrated with Medicare, and that 
may provide for reimbursement of Medicare premiums. This flexibility 
does not violate the prohibition against financial incentives under SSA 
section 1862(b)(3)(C). Where a group health plan is an individual 
coverage HRA that can be used to pay Medicare premiums or other medical 
care expenses,\176\ there is no incentive for a Medicare beneficiary to 
decline or terminate enrollment under the group health plan (that is, 
the individual coverage HRA). Thus, there is no violation of the SSA's 
financial incentive prohibition.
---------------------------------------------------------------------------

    \175\ Under IRS Notice 2015-17, an arrangement under which an 
employer reimburses (or pays directly) Medicare Part B or D premiums 
may be considered integrated with the group health plan coverage 
offered to the employee by the employer although the employee is not 
enrolled in that group coverage and is instead enrolled in Medicare, 
subject to certain conditions. IRS Notice 2015-17 also states that 
to the extent such an arrangement is available to active employees, 
it may be subject to restrictions under other laws, such as the 
Medicare secondary payer provisions. For clarity, the Departments 
confirm that reimbursement of Medicare Part B and D premiums under 
IRS Notice 2015-17 is permitted only for such arrangements not 
subject to the MSP provisions.
    \176\ However, as discussed later in this section of the 
preamble, an individual coverage HRA may not, under its terms, limit 
reimbursement only to expenses not covered by Medicare.
---------------------------------------------------------------------------

    Therefore, under the final rules, an individual coverage HRA that 
is integrated with Medicare may reimburse premiums for Medicare Part A, 
B, C, or D, as well as premiums for Medigap policies. The individual 
coverage HRA may also reimburse other medical care expenses as defined 
under Code section 213(d) (subject to the exception discussed later in 
this section of the preamble regarding taking Medicare entitlement into 
account). Thus, an individual coverage HRA will not be considered to 
provide unequal benefits to participants who are eligible for Medicare 
because those participants will be able to receive the same benefits 
under the HRA regardless of whether they are able to purchase 
individual health insurance coverage.\177\ However, as explained 
earlier in this preamble, the plan sponsor generally has discretion to 
specify which medical care expenses (premiums, cost sharing, or 
otherwise) are eligible for reimbursement under the terms of an 
individual coverage HRA, as long as the HRA offers the same benefits, 
on the same terms and conditions, to a class of employees, subject to 
the exceptions under the same terms requirement in the final rules. In 
addition, as discussed earlier in this preamble, the designation of the 
reimbursable expenses must not violate other rules applicable to group 
health plans, such as the HIPAA nondiscrimination rules or the MSP 
provisions.
---------------------------------------------------------------------------

    \177\ The fact that a participant or dependent in a class of 
employees may not be able to enroll in individual health insurance 
coverage or Medicare due to the operation of federal law does not 
mean the individual coverage HRA that is offered to that class of 
employees violates the same terms requirement under the final rules 
or the equal benefit rule under the SSA.
---------------------------------------------------------------------------

    To ensure that an individual coverage HRA that is subject to the 
MSP provisions does not violate those rules, an individual coverage HRA 
may not, under its terms, limit reimbursement only to expenses not 
covered by Medicare, as HHS has determined this could amount to a group 
health plan taking into account entitlement to Medicare in violation of 
the MSP provisions. However, an individual coverage HRA may limit 
reimbursement to only premiums or non-premium medical care expenses 
(such as cost sharing), or may decide which particular medical care 
expenses will be reimbursable and which will not be reimbursable under 
the terms of the HRA.
d. Other Medicare Issues
    Some commenters sought assurance that a health insurance issuer 
providing individual health insurance coverage purchased with an 
individual coverage HRA would not be required to comply with MSP 
reporting requirements or pay for benefits primary to Medicare where 
MSP provisions might apply to the

[[Page 28931]]

individual's HRA. These commenters recommended clarifying that an HRA 
plan sponsor's failure to satisfy the conditions of the ERISA safe 
harbor described later in this preamble will have no effect on the MSP 
status of the individual health insurance coverage.
    HHS notes that individual health insurance coverage is not subject 
to the MSP provisions, including the reporting, nondiscrimination, and 
``primary plan'' requirements described earlier in this section of the 
preamble.\178\ Nothing in the final rules changes the application of 
the MSP provisions. This is true even where individual health insurance 
coverage is integrated with an HRA as allowed under the final 
rules.\179\ However, an individual coverage HRA will generally pay 
primary to Medicare, consistent with the MSP provisions applicable to 
group health plans. HHS intends to issue further guidance clarifying 
the primary versus secondary payer responsibility of individual 
coverage HRAs for plan sponsors subject to the MSP provisions.
---------------------------------------------------------------------------

    \178\ See SSA section 1862(b)(1) and (2) (MSP rules apply only 
to certain group health plans).
    \179\ The term ``group health plan'' for purposes of the MSP 
provisions is not defined by reference to ERISA; therefore, this 
section of the preamble does not address the application of the 
ERISA safe harbor described later in this preamble.
---------------------------------------------------------------------------

    One commenter requested guidance about the MSP reporting 
requirements that apply to individual coverage HRAs. Section 111 of the 
Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA), Public Law 
110-173, established mandatory reporting requirements with respect to 
Medicare beneficiaries who have coverage under group health plan 
arrangements, as well as for Medicare beneficiaries who receive 
settlements, judgments, awards, or other payment from liability 
insurance (including self-insurance), no-fault insurance, or workers' 
compensation.\180\ The purpose of this reporting is to ensure that 
Medicare correctly pays for covered services provided to Medicare 
beneficiaries consistent with Medicare payment rules. HRAs (including 
individual coverage HRAs) are group health plans and, therefore, 
generally trigger the MMSEA section 111 reporting requirements.\181\ 
HHS will provide future guidance regarding MMSEA section 111 reporting 
requirements and individual coverage HRAs. HHS notes that entities that 
currently do not offer a group health plan and therefore do not have 
reporting obligations may be required to report if they elect to offer 
individual coverage HRAs, similar to if they elected to offer other 
group health plan coverage.
---------------------------------------------------------------------------

    \180\ See also SSA section 1862(b)(7) and (8).
    \181\ For information about mandatory MMSEA section 111 
reporting for group health plans, see https://www.cms.gov/Medicare/Coordination-of-Benefits-and-Recovery/Mandatory-Insurer-Reporting-For-Group-Health-Plans/Overview.html and https://www.cms.gov/Medicare/Coordination-of-Benefits-and-Recovery/Mandatory-Insurer-Reporting-For-Group-Health-Plans/GHP-Training-Material/Downloads/Health-Reimbursement-Arrangement-HRA.pdf.
---------------------------------------------------------------------------

15. Other Integration Issues
    Some comments were received regarding dollar limits on individual 
coverage HRAs. One commenter supported that the proposed rules did not 
impose any specific dollar limit on the amount that an employer may 
contribute to an individual coverage HRA. The commenter noted that this 
is a welcome difference from QSEHRAs, to which a statutory dollar limit 
applies, and stated that this flexibility will help encourage employers 
to offer individual coverage HRAs. One commenter requested that the 
Departments place a limit on contributions to an individual coverage 
HRA to prevent adverse selection. A few commenters asked that the 
Departments require employers to make certain minimum amounts available 
under an individual coverage HRA to approximate the amount the employer 
generally would contribute to a traditional group health plan as a way 
to maintain availability and generosity of coverage.
    In previous guidance on HRAs, including on integration of HRAs with 
other coverage, the Departments provided no minimum or maximum 
contribution amount. Similarly, the Departments decline to impose a 
minimum or maximum contribution amount on individual coverage HRAs 
under the final rules, in order to provide employers with flexibility 
and because the Departments have imposed other conditions to address 
the potential for adverse selection. However, the Treasury Department 
and the IRS note that employers subject to the employer shared 
responsibility provisions under Code section 4980H may want to make 
sufficient amounts available to employees in order to avoid a potential 
employer shared responsibility payment. The Treasury Department and the 
IRS intend to propose separate rules regarding the interaction of 
individual coverage HRAs and Code section 4980H that will be available 
for public comment.
    Some commenters addressed which employers should be permitted to 
offer an individual coverage HRA. One commenter applauded the proposed 
rules for allowing employers of all sizes to offer an individual 
coverage HRA. One commenter requested that the Departments only permit 
individual coverage HRAs to be offered by small employers, because, the 
commenter asserted, small employers have less incentive to segment risk 
and are less likely to create classes of employees leading to adverse 
selection. One commenter asked that the Departments only permit large 
employers to offer an individual coverage HRA, asserting that small 
employers would be able to manipulate the rules to create small classes 
and segment risk. Another commenter requested that only employers that 
do not currently offer coverage be allowed to offer an individual 
coverage HRA.
    The Departments considered these suggestions and determined that 
limiting the ability of one or more categories of employers to offer an 
individual coverage HRA in these ways would unnecessarily restrict the 
rules and could decrease the usability of individual coverage HRAs and 
harm employee welfare without a compelling reason for these 
limitations. Therefore, under the final rules, any employer may offer 
an individual coverage HRA, subject to compliance with the conditions 
in the final rules. However, the Departments note that the final rules 
include a minimum class size requirement which applies in certain 
instances, to address the issue identified regarding the ability to 
create small classes and segment risk.
    One commenter urged HHS to allow for wellness program demonstration 
projects in the individual market under PHS Act section 2705(l) because 
the commenter asserted wellness programs are a popular aspect of 
traditional employer coverage. Because this comment is outside the 
scope of this rulemaking, it is not addressed in the final rules. 
However, HHS appreciates the comment and may consider addressing this 
issue in future guidance.
    Several commenters emphasized the importance of strong enforcement 
of the conditions in the final rules and requested that the Departments 
issue guidance detailing how the Departments would enforce the final 
rules. DOL has enforcement jurisdiction over private sector employer-
sponsored group health plans, and HHS has enforcement jurisdiction over 
public sector group health plans, such as those sponsored by state and 
local governments. Individual coverage HRAs are group health plans, and 
DOL and HHS will monitor individual coverage HRAs' compliance with 
applicable requirements, consistent with the general approach to 
enforcement with respect to other group health plans. The

[[Page 28932]]

Departments believe that it is unnecessary to include specific 
enforcement guidance for individual coverage HRAs in the final rules. 
The Departments may provide additional guidance if the Departments 
become aware of arrangements that are inconsistent with the final 
rules.
    One commenter requested that employers be permitted to pay issuers 
directly for individual health insurance coverage in which individual 
coverage HRA participants are enrolled. The Departments note that 
existing guidance for health plans generally allows employers to pay 
health insurance premiums to issuers directly,\182\ so this is already 
permitted. Also, see the discussion later in this preamble regarding a 
safe harbor for determining whether an individual health insurance 
policy purchased with funds from an individual coverage HRA will be 
treated as part of an ERISA-covered employee welfare benefit plan.
---------------------------------------------------------------------------

    \182\ See Revenue Ruling 61-146, 1961-2 CB 25.
---------------------------------------------------------------------------

    One commenter requested that the Departments clarify that a plan 
sponsor may make amounts in an individual coverage HRA available either 
monthly or annually at the beginning of the plan year. The Departments 
clarify that the final rules do not change existing rules for HRAs, 
which do not require the entire annual amount to be available at the 
beginning of the year and would allow the HRA to only make amounts 
available pro rata over the 12 months of the year.\183\ However, the 
Departments note that the amounts made available under an individual 
coverage HRA, including when they will be made available, must be 
described in the notice that is required under the final rules.\184\ 
The Departments also note that within a class of employees, the terms 
and conditions of an individual coverage HRA generally must be the 
same, including the timing of how amounts are made available.
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    \183\ See IRS Notice 2002-45.
    \184\ Also see the discussion later in the preamble regarding 
the final PTC rules, under which amounts newly made available for an 
HRA plan year must be determinable within a reasonable time before 
the beginning of the plan year in order to be considered in 
determining affordability of the offer of the individual coverage 
HRA.
---------------------------------------------------------------------------

    One commenter requested that the Departments interpret ``employer'' 
to include non-employer plan sponsors such as boards of trustees for 
multiemployer plans. The final rules allow plan sponsors to offer an 
individual coverage HRA, and plan sponsors include, but are not limited 
to, employers and could include a board of trustees for a multiemployer 
plan.
    Various commenters requested additional reporting requirements or 
other types of mandatory data collection regarding individual coverage 
HRAs. The Departments have not identified a compelling need for this 
information that would justify the significant additional burden this 
would place on each employer offering this type of coverage. 
Accordingly, the final rules do not adopt these suggestions. However, 
to the extent an individual coverage HRA is otherwise subject to 
reporting requirements under other rules, including PPACA, the Code, 
the SSA, or ERISA, the final rules do not affect the application of 
those reporting requirements.\185\
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    \185\ See e.g., ERISA sections 101, 103, and 104 and PHS Act 
section 2715 (incorporated in Code section 9815 and ERISA section 
715).
---------------------------------------------------------------------------

    One commenter requested additional time to comment on the proposal. 
The Administrative Procedure Act grants Executive Agencies discretion 
to set the timeframe during which public comments will be received and 
considered. Interested stakeholders were given 60 days from the 
publication of the proposed rules to submit comments for consideration. 
Many comments were received and considered by the Departments. This 
solicitation for public comments allowed the Departments to gather 
sufficient information from interested stakeholders. The Departments, 
therefore, declined to extend the timeframe to comment on the proposed 
rules.
    One commenter requested that the final rules consider enrollment in 
an individual coverage HRA as other group coverage for purposes of 
determining whether employers satisfy minimum participation thresholds 
for guaranteed availability. In the large group market, issuers may not 
apply minimum participation rules to deny guaranteed availability of 
coverage. In the small group market, issuers may apply minimum 
participation rules, as allowed under applicable state law. However, 
failure to satisfy an issuer's minimum participation rules may not be 
used to deny guaranteed availability of coverage between November 15 
and December 15 of each year. The Departments clarify that in both the 
large and small group markets, issuers may apply minimum participation 
rules, pursuant to applicable state law, as an exception to guaranteed 
renewability of coverage requirements.\186\ State law may determine 
which individuals to include in the minimum participation calculation, 
including whether issuers are allowed to include individuals who have 
other coverage within the total number of eligible individuals and 
which types of coverage may be counted as other coverage.\187\ Neither 
the proposed rules nor the final rules make changes to these existing, 
separate requirements.
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    \186\ See 78 FR 13406, 13416 (Feb. 27, 2013).
    \187\ See Health Care Financing Administration Insurance 
Standards Bulletin 00-05, Guaranteed Availability Under Title XXVII 
of the Public Health Service Act--Applicability of Group 
Participation Rules (Nov. 2000), available at https://www.cms.gov/CCIIO/Resources/Files/Downloads/hipaa_00_05_508.pdf. However, for 
purposes of participation in a Federally-facilitated Small Business 
Health Options Program (FF-SHOP), see the methodology for 
calculating a minimum participation rate specified in 45 CFR 
155.706(b)(10)(i).
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    One commenter requested that the Departments provide information 
about how an employer would transition from offering a QSEHRA to 
offering an individual coverage HRA. The Departments note that IRS 
Notice 2017-67 provides guidance on the requirements for providing a 
QSEHRA. The guidance in Notice 2017-67 remains unaffected by the final 
rules. Additional QSEHRA guidance generally is outside of the scope of 
these final rules, and to the extent an employer wants to transition 
from offering a QSEHRA to offering an individual coverage HRA, the 
individual coverage HRA must comply with the requirements set forth in 
the final rules.
    One commenter asked the Departments to clarify that individual 
coverage HRA participants may contribute to a health FSA even if their 
employer does not offer traditional group health plan coverage. The 
Departments note that employers generally may provide excepted benefits 
(other than an excepted benefit HRA \188\) to employees in a class 
offered an individual coverage HRA. In addition, the Departments 
clarify that the individual coverage HRA would qualify as ``other group 
health plan coverage not limited to excepted benefits'' under the 
requirements for the health FSA to qualify as an excepted benefit.\189\ 
Thus, nothing in the final rules prohibits employees in a class of 
employees offered an individual coverage HRA from participating in a 
health FSA through salary reduction in a cafeteria plan.
---------------------------------------------------------------------------

    \188\ See later in this preamble for a discussion of the 
interaction of individual coverage HRAs and excepted benefit HRAs.
    \189\ 26 CFR 54.9831-1(c)(3)(v)(A), 29 CFR 2590.732(c)(3)(v)(A), 
and 45 CFR 146.145(b)(3)(v)(A).
---------------------------------------------------------------------------

    Other comments not responsive to the provisions and topics 
addressed by the proposed rules, or otherwise beyond the

[[Page 28933]]

scope of the proposed and final rules, are not summarized or addressed.
16. Revisions to Current PHS Act Section 2711 Rules Regarding 
Integration With Other Group Health Plan Coverage and Medicare
    The 2015 rules under PHS Act section 2711 provide methods for 
integrating HRAs with coverage under another group health plan, and, in 
certain circumstances, with Medicare Part B and D. The proposed rules 
did not include a proposal to substantively change the current group 
health plan or Medicare integration tests under the existing PHS Act 
section 2711 rules. However, the proposed rules included minor proposed 
revisions to those rules, including changing the term ``account-based 
plan'' to ``account-based group health plan'' and moving defined terms 
to a definitions section. The proposed rules also proposed to amend the 
rules under PHS Act section 2711 to reflect that HRAs may be integrated 
with individual health insurance coverage subject to the requirements 
of 26 CFR 54.9802-4, 29 CFR 2590.702-2, and 45 CFR 146.123. The final 
rules adopt these changes as proposed, except that the final rules have 
been updated to reflect that individual coverage HRAs may be integrated 
with Medicare, for purposes of compliance with PHS Act sections 2711 
and 2713, if certain conditions are satisfied.\190\
---------------------------------------------------------------------------

    \190\ The Departments further note that, unless the final rules 
conflict with the subregulatory guidance that has been issued under 
PHS Act section 2711, that guidance remains in effect.
---------------------------------------------------------------------------

    In addition, the proposed rules included a proposal to update the 
definition of EHBs set forth in paragraph (c) of the rules under PHS 
Act section 2711, which applies for a group health plan or health 
insurance issuer not required to cover EHBs. The update in the proposed 
rules reflected the revision to the EHB-benchmark plan selection 
process that was promulgated in the HHS Notice of Benefit and Payment 
Parameters for 2019 Final Rule (2019 Payment Notice) and that applies 
for plan years beginning on or after January 1, 2020.\191\ The 2019 
Payment Notice revisions provide states with additional choices with 
respect to the selection of benefits and promote affordable coverage 
through offering states additional flexibility in their selection of an 
EHB-benchmark plan for plan years beginning on or after January 1, 
2020. The state's existing EHB-benchmark plan will continue to apply 
for any year for which a state does not select a new EHB-benchmark plan 
from the available EHB-benchmark plan selection options finalized in 
the 2019 Payment Notice.\192\ The Departments are finalizing as 
proposed the update to the definition of EHB under the PHS Act section 
2711 rules.
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    \191\ See 83 FR 16930 (April 17, 2018). The definition of EHB 
that applies under the PHS Act section 2711 rules for plan years 
beginning before January 1, 2020 is not substantively changed by the 
final rules.
    \192\ For more information on the revised EHB standard, refer to 
the preamble to the 2019 Payment Notice (83 FR 16930, 17007 (April 
17, 2018)).
---------------------------------------------------------------------------

    One commenter expressed concern with the change made by HHS to the 
definition of EHB in the 2019 Payment Notice and requested that the 
Departments decline to update the rules under PHS Act section 2711 to 
reflect the revised EHB definition. The Departments clarify that PHS 
Act section 2711 defines EHB by reference to PPACA section 1302(b), 
under which HHS has the authority to define EHB. The update to the 
definition of EHB in the PHS Act section 2711 rules is a technical 
update made to avoid applying an out-of-date definition and is the 
result of the change HHS finalized in the 2019 Payment Notice. Issues 
regarding EHBs more generally, as well as the specific changes made in 
the 2019 Payment Notice, are outside of the scope of this rulemaking.

B. Excepted Benefit HRAs

1. In General
    As the Departments noted in the preamble to the proposed rules, 
there may be scenarios in which an employer wants to offer an HRA that 
might not be integrated with individual health insurance coverage, non-
HRA group coverage, Medicare, or TRICARE. For example, some employers 
may want to offer an HRA without regard to whether their employees have 
other coverage at all, or without regard to whether their employees 
have coverage that is subject to and satisfies the market requirements. 
Therefore, the proposed rules utilized the Departments' discretion 
under Code section 9832(c)(2)(C), ERISA section 733(c)(2)(C), and PHS 
Act section 2791(c)(2)(C), and included an amendment to the prior rules 
that would recognize certain limited HRAs as excepted benefits 
(excepted benefit HRAs), if specific conditions were satisfied.\193\
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    \193\ The proposed rules, and the final rules, do not apply to 
health FSAs. For a health FSA to qualify as an excepted benefit, the 
rules at 26 CFR 54.9831-1(c)(3)(v), 29 CFR 2590.732(c)(3)(v), and 45 
CFR 146.145(b)(3)(v) continue to apply.
---------------------------------------------------------------------------

    As explained earlier in this preamble, the Departments have the 
authority and discretion to specify in rules additional limited 
excepted benefits that are similar to the limited benefits specified in 
the statutes and that either are insured under a separate policy, 
certificate, or contract of insurance, or are otherwise not an integral 
part of a plan. The proposed rules included a proposal for an excepted 
benefit HRA that is consistent with both this statutory framework and 
the Departments' objective of expanding the availability and usability 
of HRAs to maximize employee welfare. Specifically, the proposed rules 
provided that, to be recognized as an excepted benefit, the HRA: (1) 
Must not be an integral part of the plan, (2) must provide benefits 
that are limited in amount, (3) cannot provide reimbursement for 
premiums for certain health insurance coverage, and (4) must be made 
available under the same terms to all similarly situated individuals.
    A number of commenters generally expressed support for the proposed 
excepted benefit HRA rule as a way to expand the availability and use 
of HRAs. Some of the commenters who supported the proposed excepted 
benefit HRA rule opposed allowing the purchase of STLDI. Also, a number 
of commenters opposed the proposed excepted benefit HRA rule, 
expressing concerns that the excepted benefit HRA could incentivize 
individuals to obtain STLDI, cause adverse selection in the small group 
and individual market risk pools, and increase complexity and the 
potential for confusion.
    The Departments considered these comments and agree that the 
excepted benefit HRA is a way to expand the availability and use of 
HRAs, thereby providing increased options for healthcare coverage to 
employers and employees. Therefore, the final rules recognize certain 
HRAs as limited excepted benefits, with some changes from the proposed 
rule, which are intended to address concerns raised by commenters 
regarding the potential for adverse selection and confusion.
    A few commenters questioned the Departments' legal authority for 
establishing the excepted benefit HRA, with one requesting that the 
proposed excepted benefit HRA rules be withdrawn. These commenters 
stated that the excepted benefit HRA is not similar to the other 
limited excepted benefits because it does not provide insurance that is 
limited in scope for a particular medical condition. The Departments 
disagree. As stated earlier in this section of the preamble, Code 
section 9832(c)(2)(C), ERISA section 733(c)(2)(C), and PHS Act section 
2791(c)(2)(C) authorize the Secretaries of the Treasury, Labor, and HHS 
to issue rules establishing other, similar limited benefits as excepted 
benefits. Similar to

[[Page 28934]]

the exercise of authority with respect to certain health FSAs, limited 
wraparound coverage,\194\ and employee assistance programs, the 
Departments utilized this authority to propose rules to permit HRAs as 
limited excepted benefits, if certain conditions are satisfied. The 
Departments have determined that the conditions that apply to excepted 
benefit HRAs under the final rules result in such an arrangement being 
sufficiently limited and sufficiently similar to other limited excepted 
benefits. The Departments are now adopting these final rules on 
excepted benefit HRAs, subject to clarifications, described later in 
this section of the preamble.
---------------------------------------------------------------------------

    \194\ The Departments note that limited wraparound coverage was 
permitted as an excepted benefit under a temporary pilot program. 
Specifically, limited wraparound coverage could be offered as 
excepted benefits if it was first offered no earlier than January 1, 
2016, and no later than December 31, 2018, and would end no later 
than on the later of: (1) The date that is 3 years after the date 
limited wraparound coverage is first offered, or (2) the date on 
which the last collective bargaining agreement relating to the plan 
terminates after the date limited wraparound coverage is first 
offered (determined without regard to any extension agreed to after 
the date limited wraparound coverage is first offered). See 26 CFR 
54.9831-1(c)(3)(vii)(F), 29 CFR 2590.732(c)(3)(vii)(F), and 45 CFR 
146.145(b)(3)(vii)(F).
---------------------------------------------------------------------------

    As a general matter, some commenters expressed confusion and asked 
for clarification regarding the difference, if any, between the 
proposed excepted benefit HRA and an HRA that only reimburses expenses 
for excepted benefits. In IRS Notice 2015-87, Q&A-5, the Treasury 
Department and the IRS explained that an HRA or employer payment plan 
that, by its terms, reimburses (including paying directly for) premiums 
for individual health insurance coverage solely to the extent that the 
individual health insurance coverage covers excepted benefits would not 
fail to satisfy the market requirements because those requirements do 
not apply to a group health plan that is designed to provide only 
excepted benefits, either through reimbursement of premiums or cost 
sharing (referred to in this preamble as an HRA that provides only 
excepted benefits). Excepted benefit HRAs, on the other hand, can 
provide reimbursement for costs incurred related to coverage that is 
not limited to excepted benefits (for example, cost sharing for 
individual health insurance coverage). Several commenters asked the 
Departments to confirm that an HRA that provides only excepted benefits 
is not subject to the conditions that apply to an excepted benefit HRA. 
One commenter was concerned that if an HRA that provides only excepted 
benefits must satisfy the conditions that apply to an excepted benefit 
HRA, the proposed rules would inadvertently reduce employers' ability 
to fund excepted benefits.
    The final rules establish a new excepted benefit HRA under Code 
section 9832(c)(2)(C), ERISA section 733(c)(2)(C), and PHS Act section 
2791(c)(2)(C), which can be used to reimburse certain medical care 
expenses incurred with respect to coverage that is not limited to other 
types of excepted benefits. If a plan sponsor offers an HRA that only 
provides reimbursement for other types of excepted benefits (for 
example, limited-scope vision and limited-scope dental benefits), that 
arrangement is, itself, already an excepted benefit and need not 
satisfy the criteria of the final excepted benefit HRA rules. Instead, 
the final rules provide that an additional type of HRA, specifically, 
one that reimburses benefits not limited to other types of excepted 
benefits, can also qualify as an excepted benefit.\195\ Excepted 
benefit HRAs may reimburse medical care expenses, such as cost sharing 
for individual health insurance coverage or group health plan coverage 
that would not otherwise qualify as excepted benefits, if the 
conditions of the final rules are satisfied.
---------------------------------------------------------------------------

    \195\ That is, the excepted benefit HRA may reimburse expenses 
for excepted benefits, as well as other types of medical expenses 
that do not qualify as excepted benefits.
---------------------------------------------------------------------------

2. Otherwise Not an Integral Part of the Plan
    Among other things, to be a limited excepted benefit under Code 
section 9831(c)(1), ERISA section 732(c)(1), and PHS Act section 
2722(c)(1), benefits must: (1) Be provided under a separate policy, 
certificate, or contract of insurance; or (2) otherwise not be an 
integral part of the plan.\196\ HRAs are self-insured group health 
plans and, therefore, are not insurance coverage that can be provided 
under a separate policy, certificate, or contract of insurance. 
Accordingly, to satisfy the statutory requirement to be a limited 
excepted benefit, among other things, an HRA must not be an integral 
part of the plan.
---------------------------------------------------------------------------

    \196\ Code section 9831(c)(1), ERISA section 732(c)(1), and PHS 
Act section 2722(c)(1).
---------------------------------------------------------------------------

    To satisfy this condition, the proposed rules specified that other 
group health plan coverage (other than an account-based group health 
plan or coverage consisting solely of excepted benefits) must be made 
available by the same plan sponsor for the plan year to the 
participants offered the excepted benefit HRA. Only individuals 
eligible to participate in the traditional group health plan would be 
eligible to participate in the excepted benefit HRA. However, while the 
plan sponsor would be required to make an offer of a traditional group 
health plan, HRA participants (and their dependents) would not be 
required to enroll in the traditional group health plan for the HRA to 
be an excepted benefit HRA. In the preamble to the proposed rules, the 
Departments noted that this provision is similar to the requirement 
that applies under the limited excepted benefits rules for health FSAs 
at 26 CFR 54.9831-1(c)(3)(v), 29 CFR 2590.732(c)(3)(v), and 45 CFR 
146.145(b)(3)(v).
    Commenters generally supported this requirement and suggested that 
it be retained in the final rules. Some commenters suggested that the 
Departments should go further and permit employers to offer an excepted 
benefit HRA only to individuals who are actually enrolled in a 
traditional group health plan.\197\ These commenters argued that 
without such a requirement, healthy employees would decline their 
employer's traditional group health plan and only participate in the 
excepted benefit HRA. These commenters speculated this might lead to a 
less stable small group market risk pool and higher premiums for 
employees who remain in the traditional group health plan. One 
commenter was concerned that if some employers offer traditional group 
health plans that are exorbitantly expensive, many employees would 
decline to enroll and rely on their excepted benefit HRA as their only 
source of coverage. One commenter disagreed with the Departments' 
assertion that the requirement to offer a traditional group health plan 
satisfies the requirement that limited excepted benefits not be an 
integral part of the plan. Another commenter stated that individuals 
could be without comprehensive coverage if they do not enroll in the 
employer's traditional

[[Page 28935]]

group health plan and rely instead on an excepted benefit HRA, or a 
combination of the excepted benefit HRA and other excepted benefits, 
without understanding the limited nature of excepted benefits. The 
commenter also represented that there is a long history of unscrupulous 
promoters cobbling together different types of excepted benefits and 
fraudulently marketing them as major medical insurance, leaving 
thousands of participants and beneficiaries with unpaid claims. One 
commenter urged the Departments to add a requirement that employers 
offering an excepted benefit HRA must maintain their traditional group 
health plan at an equivalent level of coverage, actuarial value, and 
premium affordability relative to the coverage offered prior to 
offering the excepted benefit HRA.
---------------------------------------------------------------------------

    \197\ One commenter opposed the requirement that traditional 
group health plan coverage be made available to the participants 
offered the excepted benefit HRA, but the comment was based on the 
misunderstanding that the proposed conditions that apply to the 
excepted benefit HRA apply to an HRA that provides only excepted 
benefits. The commenter was concerned that an employer that did not 
previously offer a traditional group health plan, but did previously 
offer an HRA that provides only excepted benefits, might discontinue 
offering that HRA if the final rules were to apply to the HRA that 
provides only excepted benefits. As explained earlier in this 
preamble, the final rules do not apply to HRAs that provide only 
excepted benefits. Therefore, if an employer offers an HRA that 
provides only excepted benefits, such an arrangement would not be 
subject to the requirements of the final rules, including the 
requirement that the plan sponsor must offer a traditional group 
health plan.
---------------------------------------------------------------------------

    The final rules do not adopt a requirement that excepted benefit 
HRAs be limited to employees who are enrolled in the employer's 
traditional group health plan or impose a maintenance of effort 
requirement. First, the condition that employees must be offered (but 
not necessarily enrolled) in the employer's traditional group health 
plan is similar to that for excepted benefits health FSAs, pursuant to 
the same statutory authority.\198\ Second, limiting eligibility to 
employees enrolled in their employer's traditional group health plan 
would make employees covered under other primary coverage, such as a 
spouse's plan, ineligible for the excepted benefit HRA. Applying such a 
restrictive requirement would unduly limit some employees' access to 
excepted benefit HRAs and reduce their welfare if they choose a 
different primary health coverage option to best meet their needs.\199\ 
Third, other factors will likely prevent most employees from relying on 
an excepted benefit HRA as their primary form of coverage. For example, 
the dollar limit imposed on excepted benefit HRAs (discussed later in 
this preamble) will likely make it apparent that an excepted benefit 
HRA does not provide adequate financial protection against unexpected 
health costs, even for the healthiest individuals. Moreover, as 
discussed later in this preamble, in general, excepted benefit HRAs 
must provide notice of the dollar limits and other limitations on 
coverage under the plan. Finally, as to the concern that employers will 
offer traditional group health plans that are very expensive, thereby 
encouraging employees to enroll only in the excepted benefit HRA, the 
employer shared responsibility provisions of Code section 4980H (for 
ALEs), and employers' desire to offer affordable health coverage as a 
means to attract and retain talented workers, are strong incentives for 
employers to offer affordable, quality health coverage.
---------------------------------------------------------------------------

    \198\ See 26 CFR 54.9831-1(c)(3)(v), 29 CFR 2590.732(c)(3)(v), 
and 45 CFR 146.145(b)(3)(v). See also 62 FR 67688 (Dec. 29, 1997).
    \199\ In the context of other HRA integration rules, the 
Departments have recognized and supported employee choice to enroll 
in primary coverage other than the employer's group health plan 
(such as a spouse's plan or Medicare), without these types of 
limitations. See, e.g., 26 CFR 54.9815-2711(d)(2) and (d)(5), 29 CFR 
2590.715-2711(d)(2) and (d)(5), and 45 CFR 147.126(d)(2) and (d)(5).
---------------------------------------------------------------------------

3. Limited in Amount
    Under the Code, ERISA and the PHS Act, limited excepted benefits 
may include limited scope vision or dental benefits, benefits for long-
term care, nursing home care, home healthcare, or community-based care, 
or any combination thereof and may include ``such other similar, 
limited benefits as are specified in regulations'' by the 
Departments.\200\ Thus, in creating the excepted benefit HRA, the 
Departments had to determine what type of HRA would be sufficiently 
limited to qualify as a limited excepted benefit.
---------------------------------------------------------------------------

    \200\ Code section 9832(c)(2)(C), ERISA section 733(c)(2)(C), 
and PHS Act section 2791(c)(2)(C).
---------------------------------------------------------------------------

    The Departments have applied limiting principles consistently in 
prior rulemakings under which discretion was exercised to establish 
additional types of limited excepted benefits.\201\ For example, a 
health FSA is an excepted benefit only if the arrangement is structured 
so that the maximum benefit payable to any participant in the class for 
a year does not exceed two times the participant's salary reduction 
election under the arrangement for the year (or, if greater, $500 plus 
the amount of the participant's salary reduction election).\202\ 
Additionally, limited wraparound coverage is a limited excepted benefit 
only if it is limited in amount, such that the cost of coverage per 
employee (and any covered dependents) under the limited wraparound 
coverage does not exceed the greater of the maximum permitted annual 
salary reduction contribution toward a health FSA or 15 percent of the 
cost of coverage under the primary plan.
---------------------------------------------------------------------------

    \201\ See the discussion in the preamble to the proposed rules 
at 83 FR 54420, 54437 (Oct. 29, 2018).
    \202\ 26 CFR 54.9831-1(c)(3)(v), 29 CFR 2590.732(c)(3)(v), and 
45 CFR 146.145(b)(3)(v).
---------------------------------------------------------------------------

    The Departments recognize that limited excepted benefits that are 
not limited in scope by benefit type (such as limited-scope dental or 
limited-scope vision benefits) must be limited in amount to constitute 
the type of ancillary benefit contemplated by the statutes within the 
meaning of a ``similar, limited benefit'' under Code section 
9832(c)(2), ERISA section 733(c)(2), and PHS Act section 
2791(c)(2).\203\
---------------------------------------------------------------------------

    \203\ See also 80 FR 13995, 13997 (March 18, 2015).
---------------------------------------------------------------------------

    Accordingly, the Departments proposed that amounts newly made 
available for a plan year in an excepted benefit HRA may not exceed 
$1,800, indexed for inflation for plan years beginning after December 
31, 2020. For this purpose, inflation was defined in the proposed rules 
by reference to the Chained Consumer Price Index for All Urban 
Consumers, unadjusted (C-CPI-U), published by DOL. Also, the 
Departments stated that the adjusted limit for plan years beginning in 
a particular calendar year would be published early in the fall of the 
prior calendar year.
a. Dollar Limit on the Amount That May Be Made Newly Available During a 
Plan Year
    Many commenters supported the proposed dollar limit as a reasonable 
mid-point of the different limits that would result in applying various 
methodologies. Several noted it was sufficient because excepted 
benefits are meant to provide ancillary coverage, and the proposed 
amount is comparable to the cost of other excepted benefits, such as 
stand-alone dental and vision plans. One commenter noted that $1,800 
would be a generous level of reimbursement for excepted benefits, but 
only a modest support to participants and beneficiaries seeking 
reimbursement for COBRA premiums. Another commenter asserted that it 
was a reasonable middle ground relative to the various alternatives 
that the Departments considered and discussed in the preamble to the 
proposed rules.\204\ A few commenters supported the proposed dollar 
limit due to their opposition to allowing excepted benefit HRAs to 
provide reimbursement for STLDI premiums, arguing that if the limit 
were any higher some participants could be more likely to rely on STLDI

[[Page 28936]]

as their primary form of coverage. In expressing their support for the 
proposed dollar limit, a number of commenters stated that the limit 
should not be any higher, due to adverse selection concerns and 
concerns about disincentivizing comprehensive coverage.
---------------------------------------------------------------------------

    \204\ The Departments stated in the preamble to the proposed 
rules that a range of options were considered, such as a limit that 
would mirror the cap on employer contributions for excepted benefit 
health FSAs, a fixed percentage of the cost of coverage under the 
plan sponsor's primary group health plan, and the cost of coverage 
under the second lowest cost silver plan in various markets. 
However, consistent with the principle of promoting HRA usability 
and availability, rather than proposing a complex test for the limit 
on amounts newly made available in the excepted benefit HRA, the 
Departments proposed a maximum of $1,800 because it approximated the 
midpoint amount yielded by the various methodologies considered. 83 
FR 54420, 54437 (Oct. 29, 2018).
---------------------------------------------------------------------------

    Other commenters requested that excepted benefit HRAs not be 
subject to any dollar limit because a limit would restrict 
participants' ability to choose the types of treatment or coverage that 
is best suited to their needs. Some commenters argued that the proposed 
dollar limit should be higher. Some of these commenters favored a 
higher limit for excepted benefit HRAs based on age and number of 
dependents to reflect that participants who are older or have 
dependents are likely to have higher healthcare costs. Some commenters 
suggested specific higher limits that, in their view, would be 
appropriate, such as the maximum annual permitted benefit for QSEHRAs, 
the maximum out-of-pocket limit for HDHPs, the annual salary reduction 
contribution limit for health FSAs, the greater of 15 percent of the 
cost of coverage under the employer's primary group health plan or the 
health FSA salary reduction contribution limit (which is the threshold 
for limited wraparound coverage), \205\ or 15 percent of the cost of 
coverage under the employer's primary group health plan (which is the 
threshold for certain supplemental excepted benefits). \206\ The 
commenters asserted that the limit should be increased for various 
reasons, including to enable employees to pay for premiums and cost 
sharing for excepted benefit policies, to approximate the limits 
allowed for limited wraparound coverage, to reduce administrative 
complexity for plan sponsors by aligning the limit with a limit that 
already exists, to help employees bypass insurance and pay directly for 
medical care, and to enable employees to pay for more expensive STLDI 
plans that may, in some cases, provide comprehensive, high-quality 
coverage. Some commenters noted that setting the limit as a percentage 
of the cost of the employer's primary group health plan could partially 
account for regional differences for healthcare services.
---------------------------------------------------------------------------

    \205\ See 26 CFR 54.9831-1(c)(3)(vii)(B), 29 CFR 
2590.732(c)(3)(vii)(B), and 45 CFR 146.145(b)(3)(vii)(B).
    \206\ See EBSA Field Assistance Bulletin No. 2007- 04 (available 
at https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2007-04); CMS Insurance 
Standards Bulletin 08-01 (available at https://www.cms.gov/CCIIO/Resources/Files/Downloads/hipaa_08_01_508.pdf); and IRS Notice 2008-
23.
---------------------------------------------------------------------------

    One commenter stated that a dollar limit is not sufficient to cause 
the excepted benefit HRA to be a limited excepted benefit and also 
stated that the proposed dollar limit was too high, with the result 
that the excepted benefit HRA is not a limited excepted benefit because 
the dollar limit is significantly more than the premium value of the 
other limited excepted benefits; therefore, according to the commenter, 
the excepted benefit HRA is not similar to other limited excepted 
benefits.
    The final rules do not remove or change the dollar limit for the 
excepted benefit HRA. The Departments agree that significantly 
increasing the dollar limit could encourage certain participants to 
rely solely on benefits reimbursed through the excepted benefit HRA and 
could lead to adverse selection. Also, as stated earlier in this 
preamble, if a benefit that is generally not otherwise limited in scope 
is too large, it would not constitute a ``similar, limited benefit'' 
under Code section 9832(c)(2), ERISA section 733(c)(2), and PHS Act 
section 2791(c)(2). These governing statutes require that these 
benefits be limited, which the Departments interpret to require a 
strict dollar limit because the excepted benefit HRA is not restricted 
to reimbursing specific, limited types of medical expenses.\207\ 
Further, the Departments are cognizant that an excepted benefit HRA, 
like all excepted benefits, does not render an individual ineligible 
for the PTC and, therefore, a higher dollar limit on the excepted 
benefit HRA could result in individuals being eligible for both 
subsidized coverage through the Exchanges and a higher employer 
provided HRA benefit, which would increase the cost to the federal 
government. To the extent commenters advocated for a higher dollar 
limit in order to allow HRAs to be used to purchase excepted benefits, 
HRAs that provide only excepted benefits may be an alternative option 
because those HRAs are not subject to the excepted benefit HRA rules, 
including the dollar limit.
---------------------------------------------------------------------------

    \207\ The Departments note, however, that an excepted benefit 
HRA is also limited, to some extent, in scope of reimbursable 
expenses in that it may not reimburse premiums for individual health 
insurance coverage (other than excepted benefits); group health 
coverage (other than COBRA or other continuation coverage or 
excepted benefits); Medicare Part A, B, C, or D; and under certain 
circumstances, it cannot reimburse STLDI premiums.
---------------------------------------------------------------------------

    In determining the appropriate dollar limit for excepted benefit 
HRAs, the Departments considered other, similar limited excepted 
benefits. The Departments agree with commenters' assertions that the 
proposed limit was reasonable and rational, especially considering the 
relatively low cost of excepted benefits coverage, such as dental or 
vision coverage. While limited wraparound coverage and similar 
supplemental coverage may have higher overall dollar limits, they are 
also limited in additional ways. Limited wraparound coverage must 
provide meaningful benefits beyond coverage of cost sharing (such as 
coverage for expanded in-network medical clinics or providers, or 
provide benefits that are not EHBs and that are not covered by the 
eligible health insurance) and, in general, may only be offered to 
part-time employees and retirees (and their dependents), and only if 
the employer makes certain offers of coverage to full-time 
employees.\208\ Further, similar supplemental coverage is restricted to 
coverage ``specifically designed to fill gaps in the primary 
coverage.'' \209\ On the other hand, employee salary reduction 
contributions to health FSAs, which will vary by employee and cannot 
exceed $2,700 (adjusted for inflation), cannot be used to pay premiums, 
and generally may not be rolled over from year to year, except for a 
limited runout period or limited amount.\210\ Excepted benefit HRAs are 
not subject to all the limitations that apply to these other limited 
excepted benefits; thus, a lower dollar amount is appropriate for 
excepted benefit HRAs.
---------------------------------------------------------------------------

    \208\ See 26 CFR 54.9831-1(c)(3)(vii)(A) and (D), 29 CFR 
2590.732(c)(3)(vii)(A) and (D), and 45 CFR 146.145(b)(3)(vii)(A) and 
(D). See also 80 FR 13995, 13997 (March 18, 2015).
    \209\ See 26 CFR 54.9831-1(c)(5)(i)(C), 29 CFR 
2590.732(c)(5)(i)(C), and 45 CFR 146.145(b)(5)(i)(C).
    \210\ IRS Notice 2005-42, 2005-1 CB 1204 and IRS Notice 2013-71, 
2013-47 IRB 532.
---------------------------------------------------------------------------

    Additionally, although the Departments recognize that healthcare 
expenses may be higher for participants who are older or have 
dependents, adopting a higher limit to account for a combination of 
factors like age and family size could allow an excepted benefit HRA to 
be too large and to resemble major medical coverage. Moreover, these 
factors were already considered and accounted for in developing the 
$1,800 limit. Accordingly, the final rules adopt, without change, the 
proposed maximum that can be newly made available for a plan year of 
$1,800.
b. Indexing for Inflation
    Many commenters supported the proposed rule's approach to indexing 
for inflation the amount that may be made newly available to 
participants during a plan year, though some suggested alternative 
methods of indexing may be more appropriate.

[[Page 28937]]

Several commenters suggested that the chained CPI-U does not accurately 
reflect the increases in the cost of medical care over time because 
healthcare prices consistently increase at a greater rate than prices 
in the economy as a whole. Several commenters suggested that the 
appropriate measure of inflation would be the Consumer Price Index 
overall medical care component because it focuses on consumers' out-of-
pocket medical expenses, while another suggested unchained CPI-U. 
Another commenter, however, suggested that the measure selected in the 
proposed rules would be the most appropriate measure, as other types of 
excepted benefits, such as limited-scope dental, limited-scope vision, 
and fixed indemnity plans, do not typically have cost trends (that is, 
inflation) similar to products that provide comprehensive medical care. 
One commenter expressed support for the proposed adjustment because it 
is consistent with the adjustment of various other amounts under the 
Code.
    The final excepted benefit HRA rules index the annual dollar limit 
of $1,800 to inflation for plan years beginning after December 31, 
2020, and define inflation by reference to the C-CPI-U, as was 
proposed. This index strikes a reasonable balance among a number of 
factors, including balancing the decreasing real value of a static 
excepted benefit HRA annual maximum contribution amount and the ability 
of an employer to maintain a meaningful, yet limited, excepted benefit 
HRA that can carry over unused amounts and accumulate to higher account 
balances over time. Also, C-CPI-U is used to index most other amounts 
under the Code with which employers are familiar, such as the annual 
limit on employee salary reduction contributions to health FSAs, annual 
HSA contributions amounts, and annual HDHP minimum deductible amounts 
and maximum HDHP out-of-pocket amounts.\211\ Therefore, this inflation 
adjustment should be familiar to plan sponsors. Using the same indexing 
method is less likely to result in confusion and will make 
implementation and compliance easier.
---------------------------------------------------------------------------

    \211\ See Code sections 125(i) and 223(g).
---------------------------------------------------------------------------

    One commenter urged that the annual amount should be announced at 
the same time that other account-based plan limits, such as the limits 
for HSAs and HSA-eligible HDHPs, are announced, as employers and plan 
administrators need to know these amounts in advance to set their 
benefit levels and communicate them to employees. The Departments agree 
that it is essential that the annual adjustment be made available 
sufficiently in advance of the upcoming plan year to allow plan 
sponsors to make benefit determinations. Therefore, the Departments are 
revising the final rules to provide that the C-CPI-U for any calendar 
year is the average of the C-CPI-U as of the close of the 12 month 
period ending on March 31 of that calendar year and that the Treasury 
Department and the IRS will publish the adjusted amount for plan years 
beginning in any calendar year no later than June 1 of the preceding 
calendar year, which is the same timing rule that applies for HSAs and 
HSA-eligible HDHPs.
c. Roll-Overs and Aggregation Rules
    The proposed rules provided that if a participant or beneficiary in 
an excepted benefit HRA does not use all of the amounts made available 
for a plan year, and the excepted benefit HRA allows for these amounts 
to be carried over to later plan years, then these carryover amounts 
would be disregarded for purposes of determining whether the $1,800 
limit is exceeded.\212\ One commenter specifically expressed support 
for this aspect of the proposed rules, and this feature is retained in 
the final rules.
---------------------------------------------------------------------------

    \212\ Transfers, however, from other HRAs are not permitted. See 
the discussion earlier in this preamble.
---------------------------------------------------------------------------

    In addition, the proposed rules provided that if the plan sponsor 
provides more than one HRA to a participant for the same time period, 
the amounts made available under all such plans would be aggregated to 
determine whether the $1,800 limit has been exceeded. One commenter 
opposed this aspect of the rule. However, the Departments retain this 
provision in the final rules in order to avoid circumvention of the 
$1,800 limit, which provides the statutory basis for recognizing this 
type of HRA as a limited excepted benefit. However, the final rules 
clarify that the aggregation rules do not take into account amounts 
made available under HRAs that reimburse only excepted benefits 
(including premiums for individual health insurance coverage that 
consists solely of excepted benefits). An HRA that reimburses only 
excepted benefits is exempt from the provisions of the final rules, 
including those provisions that apply to individual coverage HRAs and 
excepted benefit HRAs.
4. Prohibition on Reimbursement of Premiums for Certain Types of 
Coverage
a. In General
    To be an excepted benefit HRA, the proposed rules provided that the 
HRA could not reimburse premiums for Medicare Part B or D, individual 
health insurance coverage, or coverage under a group health plan (other 
than COBRA or other group continuation coverage), except that the HRA 
could reimburse premiums for individual health insurance coverage or 
group health plan coverage that consists solely of excepted benefits. 
An excepted benefit HRA would be permitted to reimburse any other 
medical care expenses, including STLDI premiums.
    Commenters generally supported the proposed requirement that an 
excepted benefit HRA would not be permitted to reimburse premiums for 
individual health insurance coverage (other than for such coverage 
consisting solely of excepted benefits). These commenters contended 
that to allow reimbursement of individual health insurance coverage 
premiums would undermine the basis for recognizing the HRAs as limited 
excepted benefits, and would enhance employers' ability to move their 
higher-risk employees into the individual market. The Departments agree 
that maintaining the prohibition on the use of the excepted benefit HRA 
for individual health insurance coverage premiums is one way in which 
the HRA is limited, in order to qualify as a limited excepted benefit, 
and that the prohibition mitigates the risk that excepted benefit HRAs 
could cause adverse selection in the individual market.
    In addition, the Departments have concluded that the prohibition on 
the reimbursement of premiums for group health plan coverage (other 
than COBRA or other continuation coverage and excepted benefits) and 
individual health insurance coverage (other than excepted benefits), is 
appropriate because other final rules that are part of this rulemaking 
permit individual coverage HRAs and other rules allow HRAs to be 
integrated with non-HRA group health plan. Further, current guidance 
allows HRAs to reimburse premiums for Medicare Part B and D in certain 
circumstances and under the final rules, individual coverage HRAs that 
are integrated with Medicare may be allowed to reimburse premiums for 
Medicare Part A, B, C, or D. Therefore, an employer that wants to 
provide an HRA that reimburses premiums for individual health insurance 
coverage, Medicare Part A, B, C or D, or group health plan coverage, 
may do so under

[[Page 28938]]

the applicable integration rules. Accordingly, the final rules retain 
the proposed prohibition on reimbursing premiums for individual health 
insurance coverage (other than for such coverage consisting solely of 
excepted benefits) and group health insurance coverage (other than for 
such coverage consisting solely of excepted benefits and COBRA or other 
continuation coverage). Moreover, because the excepted benefit HRA 
generally is not intended to reimburse premiums that may be reimbursed 
under the individual coverage HRA, the final rules also provide that 
the excepted benefit HRA may not reimburse premiums for Medicare Part A 
or C, in addition to Medicare Part B and D, as provided for in the 
proposed rules. This approach ensures that, similar to other limited 
excepted benefits, excepted benefit HRAs provide limited benefits 
different from those typically provided by a traditional group health 
plan.
    Some commenters requested clarification regarding the medical care 
expenses an excepted benefit HRA may reimburse. In particular, a few 
commenters requested that the Departments clarify that an excepted 
benefit HRA can reimburse individuals for cost sharing under individual 
health insurance coverage or group health plans, although excepted 
benefit HRAs may not be used to reimburse premiums for that coverage. 
Some commenters inquired whether an employer could place limits on the 
medical care expenses it allows to be reimbursed by the excepted 
benefit HRA, in addition to those limits imposed by the excepted 
benefit HRA rules. In particular, a few commenters asked whether an 
employer could choose not to provide any reimbursement of certain 
premiums or medical care expenses otherwise allowed under Code section 
213(d).
    In general, an HRA may provide for reimbursement for medical care 
expenses. Consistent with the current rules that apply to HRAs 
generally, a plan sponsor has discretion to specify which medical care 
expenses are eligible for reimbursement from an excepted benefit HRA it 
establishes, in addition to the limits under the excepted benefit HRA 
rules. For example, a plan sponsor may permit an excepted benefit HRA 
to reimburse all medical care expenses not otherwise disallowed by the 
excepted benefit HRA rules, it may permit reimbursements for non-
premium medical care expenses only (such as cost sharing), or it may 
otherwise decide which particular medical care expenses will be 
reimbursable and which will not be reimbursable. An excepted benefit 
HRA may allow for reimbursement of cost sharing under individual health 
insurance coverage or group health insurance coverage, although the 
excepted benefit HRA may not reimburse the premiums for that coverage. 
Further, a plan sponsor generally may, but need not, allow 
reimbursement of STLDI premiums or cost sharing under the excepted 
benefit HRA. Also, see later in this section of the preamble for a 
discussion of the special circumstance in which excepted benefit HRAs 
may not be used to reimburse STLDI premiums.
    Several commenters inquired whether an excepted benefit HRA could 
reimburse expenses related to participation in a health care sharing 
ministry or a direct primary care arrangement. One commenter asked 
whether reimbursement could be provided for categories of excepted 
benefits other than ``limited excepted benefits,'' such as those in 
which benefits for medical care are secondary or incidental (for 
example, travel insurance). This commenter expressed concern that there 
could be potential conflicts under rules regarding taxable fringe 
benefits under the Code. Some commenters requested clarification more 
generally regarding whether an excepted benefit HRA may only reimburse 
excepted benefits that pay health benefits or all excepted benefits, 
with some advocating that excepted benefit HRAs be allowed to reimburse 
all expenses for all excepted benefits and some advocating that the 
excepted benefit HRA only be allowed to reimburse expenses for excepted 
benefits that are medical care. The Departments clarify that an HRA, 
including an excepted benefit HRA, generally may reimburse medical care 
expenses of an employee and certain of the employee's family members 
(subject to the prohibition on the reimbursement of certain premiums 
that apply for excepted benefit HRAs).\213\ Neither the proposed nor 
the final rules make any changes to the rules under Code section 213. 
Thus, any issues arising under Code section 213, and any guidance 
requested by commenters to address those issues, are beyond the scope 
of this rulemaking. The Treasury Department and the IRS, however, 
appreciate the comments and anticipate addressing some of these issues 
in future rulemaking or guidance.
---------------------------------------------------------------------------

    \213\ See Notice 2002-45 which states ``[a]n HRA does not 
qualify for the exclusion under [Code section] 105(b) if any person 
has the right to receive cash or any other taxable or non-taxable 
benefit under the arrangement other than the reimbursement of 
medical care expenses. If any person has such a right under an 
arrangement currently or for any future year, all distributions to 
all persons made from the arrangement in the current tax year are 
included in gross income, even amounts paid to reimburse medical 
care expenses.''
---------------------------------------------------------------------------

    One commenter stated that excepted benefit HRAs should not be 
permitted to reimburse COBRA premiums because COBRA generally is more 
expensive than other coverage options and the Departments should not 
incentivize individuals to elect COBRA when more affordable coverage 
options may be available. Another commenter opposed allowing 
reimbursement for COBRA premiums because COBRA generally provides 
comprehensive coverage and, to the extent an HRA can be used to 
reimburse such coverage, it should not be considered to be providing 
limited benefits within the meaning of the statutes.
    The Departments decline to prohibit reimbursement for COBRA 
premiums under excepted benefit HRAs in the final rules. Excepted 
benefit HRA participants or beneficiaries may choose to elect COBRA or 
other group continuation coverage, even if other more affordable 
coverage options are available. For example, they may want to ensure 
they are still able to see their preferred doctors or maintain coverage 
for certain prescription drugs. Furthermore, nothing in the final rules 
requires an employer to make an excepted benefit HRA available for the 
reimbursement of COBRA (or other group continuation coverage) premiums. 
The Departments also do not agree that an HRA that provides 
reimbursement for COBRA (or other group continuation coverage) premiums 
would not be providing limited benefits, consistent with Code section 
9832(c)(2)(C), ERISA section 733(c)(2)(C), and PHS Act section 
2791(c)(2)(C). As explained earlier in this preamble, the restriction 
on annual contributions to the excepted benefit HRA ensures this HRA is 
limited.
b. Reimbursement of STLDI Premiums
    Many commenters requested that excepted benefit HRAs not be 
permitted to provide reimbursement of STLDI premiums. These commenters 
expressed concern that some participants may use excepted benefit HRA 
funds to purchase STLDI policies without understanding that STLDI might 
not provide comprehensive coverage and is not subject to the same 
federal consumer protections that apply to PPACA-compliant coverage. 
Some commenters expressed concerns that individuals with STLDI could be 
exposed to serious financial risk and others expressed concerns about 
specific benefits or conditions not generally covered by STLDI. One 
commenter represented that

[[Page 28939]]

in some states, individuals with an excepted benefit HRA and STLDI 
coverage would not satisfy state law requirements to maintain 
comprehensive coverage and would, therefore, incur state income tax 
penalties. A few commenters stated that they believed that permitting 
reimbursement for STLDI premiums would mean that the excepted benefit 
HRA would not be providing a limited benefit because STLDI policies 
typically cover at least some of the same benefits as individual health 
insurance coverage and because Congress exempted STLDI from the market 
requirements by distinguishing it from individual health insurance 
coverage rather than making it an excepted benefit. Other commenters 
were concerned that this rule would incentivize small employers to 
offer an excepted benefit HRA to purchase STLDI, instead of a QSEHRA to 
purchase individual health insurance coverage.
    Several commenters also claimed that permitting excepted benefit 
HRAs to reimburse STLDI premiums would lead to market segmentation, 
potentially negatively affecting the small group market. These 
commenters argued that healthier, lower-cost individuals who do not 
have preexisting conditions and who believe they do not need 
comprehensive benefits would enroll in STLDI, rather than in more 
comprehensive group or individual coverage. In the opinion of these 
commenters, this scenario is more likely to occur in the fully-insured 
small group market, where premiums do not vary based on an individual 
employer's claims experience.\214\ In contrast, large employers whose 
plans are experience-rated, or employers that offer self-insured plans, 
likely would not offer an excepted benefit HRA that could be used to 
reimburse STLDI premiums because, according to these commenters, 
healthy employees foregoing coverage under the employer's traditional 
group health plan could result in direct negative financial 
consequences on the cost of maintaining that plan; thus, the employer 
would have strong incentives not to offer an excepted benefit HRA that 
could be used to purchase STLDI. One commenter noted that the benefit 
of allowing HRAs to be used for STLDI is outweighed by the risks to the 
individual and small group markets. Other commenters supported making 
STLDI more available generally to consumers, citing choice and 
flexibility, as well as affordability.
---------------------------------------------------------------------------

    \214\ See PHS Act section 2701 and PPACA section 1312(c). See 
also 45 CFR 147.102 and 45 CFR 156.80.
---------------------------------------------------------------------------

    The final rules generally do not prohibit reimbursement of STLDI 
premiums by excepted benefit HRAs. Employees at small firms are 
increasingly turning down an offer of health coverage.\215\ Low-wage 
workers at small firms are especially likely to turn down such coverage 
when offered, particularly as a given premium is a larger share of 
income for a low-wage employee.\216\ Thus, low-wage workers at smaller 
firms who are turning down the employer offer of coverage are 
potentially likely to benefit from permitting the excepted benefit HRA 
to reimburse STLDI premiums. To the extent that people who would use 
the excepted benefit HRA to purchase STLDI would otherwise have been 
uninsured and, therefore, would not have been part of the small group 
single risk pool, the small group market is unaffected by the 
introduction of an excepted benefit HRA that may be used to purchase 
STLDI. Moreover, the impact of any adverse selection is likely to be 
small because the small group market is much larger than the STLDI 
market. Thus, any potential expansion of the number of healthier-than-
average STLDI enrollees will have a smaller proportional impact on 
expected claims in the small group market.
---------------------------------------------------------------------------

    \215\ In 1999, 17 percent of workers eligible for employer 
coverage at small firms (those with 3 to 199 workers) turned down 
the offer of employer coverage. By 2011, this share had climbed to 
22 percent, and in 2018 it was 27 percent. See Kaiser Family 
Foundation, ``Employer Health Benefits 2018 Annual Survey,'' Figure 
3.1, available at https://files.kff.org/attachment/Report-Employer-Health-Benefits-Annual-Survey-2018.
    \216\ Id.
---------------------------------------------------------------------------

    While the final rules do not prohibit reimbursement of STLDI 
premiums by excepted benefit HRAs, the final rules include a special 
rule in response to commenters' concerns about the potential for 
adverse selection in the small group markets, as discussed later in 
this preamble.\217\ Further, because individuals offered an excepted 
benefit HRA must be offered a traditional group health plan, 
individuals with an excepted benefit HRA who are considering STLDI will 
likely be deciding between STLDI and the traditional group health plan, 
rather than individual health insurance coverage, premiums for which 
may not be reimbursed by an excepted benefit HRA. Therefore, adverse 
selection in the individual market is mitigated.
---------------------------------------------------------------------------

    \217\ To the extent an excepted benefit HRA reimburses premiums 
for STLDI, the insurance, which is not individual health insurance 
coverage, will not be eligible for the safe harbor under 29 CFR 
2510.3-1(l). Accordingly, to the extent offered in connection with a 
group health plan, the benefits could be subject to those provisions 
of ERISA that apply to excepted benefits (for example, ERISA parts 
1, 4, and 5).
---------------------------------------------------------------------------

    STLDI may not be suitable coverage for all individuals in all 
circumstances and in many instances it might not provide coverage that 
is as comprehensive as individual health insurance coverage. However, 
STLDI can be a viable health insurance option for many people in many 
circumstances. Also, no individual is required to enroll in STLDI; 
rather, it is simply an additional (and in some circumstances, more 
affordable), option that may be available to them. With respect to 
concerns that some excepted benefit HRA participants may not understand 
the limited nature of STLDI, a notice is required to be prominently 
displayed in STLDI contracts and enrollment application materials 
advising consumers of the differences between STLDI and other health 
insurance coverage. Among other things, the notice must state that the 
coverage: (1) Is not required to comply with certain federal market 
requirements for health insurance; (2) may exclude or limit coverage 
for preexisting conditions; (3) may not include coverage for 
hospitalization, emergency services, maternity care, preventive care, 
prescription drugs, and mental health and substance use disorder 
services; and (4) may have lifetime or annual dollar limits on health 
benefits.\218\
---------------------------------------------------------------------------

    \218\ See 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 
144.103.
---------------------------------------------------------------------------

    The Departments disagree with commenters' assertions that 
permitting excepted benefit HRAs to reimburse STLDI would not be 
providing limited excepted benefits because STLDI is not an excepted 
benefit and often covers some of the same benefits as individual health 
insurance coverage. Nothing in these final rules would designate STLDI 
as a limited excepted benefit. Rather, it is the HRAs that must satisfy 
certain conditions to be recognized as limited excepted benefits, and 
the HRAs must be limited as to amount and are substantially limited as 
to the types of premiums they may reimburse. Further, STLDI coverage 
often provides much more limited benefits than coverage that is subject 
to the market requirements. Taking all of this into account, the 
Departments have determined that excepted benefit HRAs are sufficiently 
limited to constitute a limited excepted benefit, notwithstanding that 
employers may generally elect to permit HRA reimbursement of STLDI 
premiums.
    One commenter noted that the excepted benefit HRA rules do not 
preempt state regulation of STLDI and

[[Page 28940]]

so do not inhibit a state from prohibiting the sale of STLDI. The 
Departments agree with the commenter that nothing in the final rules 
affects state regulation of STLDI.
5. Uniform Availability
    To prevent an excepted benefit HRA from intentionally or 
unintentionally, directly or indirectly, steering participants or 
dependents with adverse health factors away from the sponsor's 
traditional group health plan, the proposed rules provided that an 
excepted benefit HRA must be made available under the same terms to all 
similarly situated individuals, regardless of any health factor.\219\ 
The Departments proposed and are finalizing this condition to prevent 
discrimination based on health status and to preclude opportunities for 
an employer to offer a more generous excepted benefit HRA to 
individuals with an adverse health factor, such as an illness or a 
disability, as an incentive not to enroll in the plan sponsor's 
traditional group health plan.\220\ Consistent with the approach 
outlined in the proposed rules, under the final rules, an excepted 
benefit HRA may not, for example, be offered only to employees who have 
cancer or fail a physical examination, just as the excepted benefit HRA 
may not be offered only to employees who are cancer-free or who pass a 
physical examination. Similarly, an employer may not make greater 
amounts available in an excepted benefit HRA for employees who have 
cancer or who fail a physical examination, just as an employer may not 
make greater amounts available in an excepted benefit HRA for employees 
who are cancer-free or who pass a physical examination.
---------------------------------------------------------------------------

    \219\ See Code section 9802(a)(1), ERISA section 702(a)(1) and 
PHS Act 2705(a)(1). See also 26 CFR 54.9802-1(a)(1) and (d), 29 CFR 
2590.702(a)(1) and (d), and 45 CFR 146.121(a)(1) and (d).
    \220\ See 83 FR 54420, 54438 (Oct. 29, 2018).
---------------------------------------------------------------------------

    Commenters generally supported this requirement and asserted that 
it is necessary to prevent discrimination based on health status. Two 
commenters sought confirmation that an excepted benefit HRA would not 
violate the uniform availability requirement if it were made available 
to only certain individuals, such as pre-Medicare eligible retirees who 
decline coverage under the former employer's traditional group health 
plan and purchase coverage through the individual market, so long as 
those eligibility conditions are not based on a health factor. In the 
Departments' view, a plan design that permits enrollment in an excepted 
benefit HRA only if coverage is declined under the traditional group 
health plan is inconsistent with the uniform availability requirement 
and with the basic premise that an excepted benefit HRA must be 
ancillary to the employer's traditional group health plan. HHS further 
notes that structuring the offering or design of a group health plan 
based on pre-Medicare status would generally run afoul of the Medicare 
nondiscrimination provisions described earlier in this preamble.\221\ 
Therefore, an employer may not condition enrollment in an excepted 
benefit HRA on declining to enroll in the traditional group health 
plan.
---------------------------------------------------------------------------

    \221\ SSA sections 1862(b)(1)(A)(i)(I), (b)(1)(B)(i), and 
(b)(1)(C)(i).
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    As noted earlier in this preamble, Code section 9831(a) and ERISA 
section 732(a) generally provide that chapter 100 of the Code and part 
7 of ERISA, respectively, do not apply to plans, including HRAs, with 
fewer than two participants who are current employees on the first day 
of the plan year (including retiree-only plans that cover fewer than 
two participants who are current employees).\222\ Therefore, a retiree-
only HRA is not subject to the market requirements and would not need 
to qualify as an excepted benefit in order to avoid the application of 
PHS Act sections 2711 and 2713. However, a retiree-only HRA that does 
not qualify as an excepted benefit would qualify as MEC,\223\ and, 
therefore, a retiree who accepted such an HRA could not claim the 
PTC.\224\
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    \222\ While title XXVII of the PHS Act, as amended by PPACA, no 
longer contains a parallel provision at PHS Act section 2721(a), HHS 
has explained that it will not enforce the requirements of title 
XXVII of the PHS Act with respect to nonfederal governmental 
retiree-only plans and generally encourages states to adopt a 
similar approach with respect to retiree-only plans offered by 
issuers. See 75 FR 34538, 34540 (June 17, 2010).
    \223\ 26 CFR 1.5000A-2(c).
    \224\ 26 CFR 1.36B-2(c)(3). Note that a former employee is only 
rendered ineligible for the PTC if the former employee enrolls in 
employer-sponsored coverage; an offer of coverage (even if it is 
affordable and provides MV) does not preclude a former employee from 
claiming the PTC. See 26 CFR 1.36B-2(c)(3)(iv).
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    One commenter suggested that the Departments should issue 
additional guidance and resources about the definition of similarly 
situated individuals to ensure that this requirement is properly 
implemented. In response to these comments, the final rules define 
similarly situated individuals by reference to the definition found in 
the HIPAA nondiscrimination rules, as was proposed.\225\ Those rules 
generally provide that group health plans may, subject to an anti-abuse 
provision for discrimination directed at individuals, treat groups of 
participants as distinct groups if the distinction is based on a bona 
fide employment-based classification consistent with the employer's 
usual business practice. Whether an employment-based classification is 
bona fide is determined based on all the relevant facts and 
circumstances, including whether the employer uses the classification 
for purposes independent of qualification for health coverage (such as, 
determining eligibility for other employee benefits or determining 
other terms of employment). Examples in the HIPAA nondiscrimination 
rules of classifications that may be bona fide, based on all the 
relevant facts and circumstances, include full-time versus part-time 
status, different geographic location, membership in a collective 
bargaining unit, date of hire, current employee versus former employee 
status, and different occupations. Under the anti-abuse provision, 
however, a distinction between groups of individuals is not permitted 
if the creation or modification of an employment or coverage 
classification is directed at individual participants or beneficiaries 
based on any health factor of the participants or beneficiaries. In 
addition, a plan may, subject to certain anti-abuse provisions for 
discrimination directed at individuals, treat beneficiaries as distinct 
groups based on the bona fide employment-based classification of the 
participant through whom the beneficiary is receiving coverage; the 
relationship to the participant; marital status; with respect to 
children of a participant, age or student status; and other factors if 
the factor is not a health factor. Finally, the HIPAA nondiscrimination 
rules generally allow group health plans to treat participants and 
beneficiaries as distinct groups. Additional guidance on similarly 
situated individuals is available on DOL's website.\226\ The final 
rules define similarly situated individuals by reference to the 
definition in the HIPAA

[[Page 28941]]

nondiscrimination rules, which are also designed to prevent 
discrimination in group health plans based on health status. These 
standards are already familiar to stakeholders and therefore use of the 
existing definition will reduce complexity and the potential burden of 
having to use a different definition.
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    \225\ See 26 CFR 54.9802-1(d), 29 CFR 2590.702(d), and 45 CFR 
146.121(d).
    \226\ See Compliance Assistance Guide--Health Benefits Coverage 
Under Federal Law, available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/compliance-assistance-guide.pdf; Self-Compliance Tool for Part 7 of 
ERISA: Health Care-Related Provisions, available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/compliance-assistance-guide-appendix-a.pdf; and FAQs on HIPAA Portability and Nondiscrimination 
Requirements for Employers and Advisers, available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/hipaa-compliance.pdf.
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6. Coordination With HSAs
    Commenters asked for clarification regarding the circumstances in 
which participation in an excepted benefit HRA might preclude an 
individual from being eligible for an HSA. These commenters expressed 
concern that, because HSA eligibility is restricted if an individual 
has certain other types of health coverage, a loss of HSA eligibility 
could occur for some individuals enrolled in excepted benefit HRAs.
    As explained earlier in this preamble, among the requirements for 
an individual to qualify as an eligible individual under Code section 
223(c)(1) for purposes of HSA eligibility is that the individual must 
be covered under an HDHP and have no disqualifying health coverage. If 
an individual fails to satisfy the requirements to be an eligible 
individual, then contributions to an HSA are disallowed. The Treasury 
Department and the IRS have provided some guidance on the interaction 
between HRAs and the requirements of Code section 223 in Revenue Ruling 
2004-45 and IRS Notice 2008-59. More specifically, as explained earlier 
in this preamble, in Revenue Ruling 2004-45, the Treasury Department 
and the IRS clarified that an otherwise eligible individual (that is, 
an individual with coverage under an HDHP and no disqualifying 
coverage) remains an eligible individual for purposes of making 
contributions to an HSA for periods during which the individual is 
covered by a limited-purpose HRA, a post-deductible HRA, or 
combinations of these arrangements. Subsequently, Q&A-1 of IRS Notice 
2008-59 stated that a limited-purpose HRA that is also available to pay 
premiums for health coverage does not disqualify an eligible individual 
from contributing to an HSA, provided the individual does not use the 
HRA to, or otherwise, obtain coverage that is not HSA-compatible.
    This prior guidance applies to all HRAs, including excepted benefit 
HRAs.\227\ Therefore, for example, an individual covered by an excepted 
benefit HRA that is available to pay premiums for STLDI is an eligible 
individual for purposes of making contributions to an HSA, assuming the 
HRA is used to purchase STLDI that qualifies as an HDHP (and so, for 
example, the STLDI does not pay benefits prior to satisfying the 
minimum required deductible),\228\ and the individual has no 
disqualifying coverage.
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    \227\ To be an eligible individual under Code section 223(c)(1), 
an individual may not be covered by a health plan that is not an 
HDHP, except for certain coverage which is disregarded, as 
enumerated in Code section 223(c)(1)(B). Code section 223(c)(1)(B) 
does not disregard all excepted benefits, and an excepted benefit 
HRA is not disregarded coverage. Therefore, an excepted benefit HRA 
must be HSA-compatible under the relevant Code section 223 guidance 
in order to allow an otherwise eligible individual to remain an 
eligible individual under Code section 223.
    \228\ See Code section 223(c)(2). See also Notice 2008-59, Q&A-
14, which provides that to be an HDHP a plan must provide 
significant benefits, and if a plan only provides benefits for 
hospitalization or in-patient care, the plan would not qualify as an 
HDHP.
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7. Notice Requirements
    Several commenters suggested that the Departments impose certain 
notice requirements for excepted benefit HRAs in the final rules. 
Commenters stated that the required notice should be similar to the 
notice required for individual coverage HRAs, or should, at a minimum, 
inform participants and beneficiaries of the annual dollar limit for 
benefits under the excepted benefit HRA, other terms and conditions of 
the excepted benefit HRA, and participants' and beneficiaries' rights 
under the excepted benefit HRA.
    However, the Departments note that for private-sector, employment-
based plans, other long-standing notice requirements under Part 1 of 
ERISA already apply. ERISA-covered plans, including excepted benefit 
HRAs, must provide an SPD, summaries of material modifications, and 
summaries of material reductions in covered services or benefits.\229\ 
Under ERISA sections 102 and 104 and their implementing regulations, an 
excepted benefit HRA's SPD must include, for example, the conditions 
pertaining to eligibility to receive benefits; a description or summary 
of the benefits; the circumstances that may result in disqualification, 
ineligibility, or denial, loss, forfeiture, suspension, offset, 
reduction, or recovery (for example, by exercise of subrogation or 
reimbursement rights) of any benefits; and the procedures governing 
claims for benefits under the excepted benefit HRA. Excepted benefit 
HRAs that are ERISA-covered plans are subject to additional disclosure 
requirements to provide instruments under which the excepted benefit 
HRA is established or operated and information relevant to a 
participant's adverse benefit determination upon request.\230\
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    \229\ See ERISA sections 102 and 104. See also 29 CFR 2520.104b-
2 and 2520.104b-3(a) and (d)(3).
    \230\ See, e.g., ERISA sections 104(b), 502(c), and 503. See 
also 29 CFR 2520.104b-1 and 2560.503-1.
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    Under these disclosure provisions, excepted benefit HRAs that are 
ERISA-covered plans should generally provide information on eligibility 
to receive benefits, annual or lifetime caps or other limits on 
benefits under the plan, and a description or summary of the benefits. 
Accordingly, for excepted benefit HRAs that are subject to ERISA, the 
final rules include a cross reference to existing ERISA notice 
provisions in order to ensure that excepted benefit HRA plan sponsors 
are aware of their obligations under those provisions. However, the 
final rules do not include any additional notice requirements for 
ERISA-covered plans.
    In response to commenters' concerns, HHS intends to propose in 
future rulemaking a notice requirement with respect to non-federal 
governmental plan excepted benefit HRAs. HHS anticipates proposing that 
a non-federal governmental plan excepted benefit HRA would be required 
to provide a notice that states conditions pertaining to eligibility to 
receive benefits, annual or lifetime caps or other limits on benefits 
under the excepted benefit HRA, and a description of, or summary of, 
the benefits consistent with the requirements of 29 CFR 2520.102-
3(j)(2) and (3). HHS anticipates that, under the proposal, this notice 
would be required to be provided in a time and manner consistent with 
the requirements of 29 CFR 2520.104b-2(a).
8. Special Rule To Address the Potential Impact on the Small Group 
Market of the Reimbursement of STLDI Premiums Through Excepted Benefit 
HRAs
    As discussed earlier in this preamble, the final rules include a 
special rule in response to comments regarding the potential for 
adverse selection in the small group market if small, insured employers 
also sponsor excepted benefit HRAs that reimburse STLDI premiums. 
Specifically, the final rules provide that the Departments may restrict 
excepted benefit HRAs from reimbursing STLDI premiums, for certain 
employers in a state, if five criteria are satisfied.
    First, the restriction applies only to excepted benefit HRAs 
offered by small employers, as defined in PHS Act section 2791(e)(4), 
to respond to concerns by commenters about adverse selection in the 
small group market. Second, the restriction applies only in situations 
in which the other group health plan coverage offered by the

[[Page 28942]]

small employer is either fully-insured or partially-insured. This focus 
on insured coverage again is designed to narrowly address the potential 
for adverse selection by small, insured employers that was identified 
by commenters. Third, the restriction applies only if the Secretary of 
HHS makes a finding, in consultation with the Secretaries of Labor and 
the Treasury, that the reimbursement of premiums for STLDI by excepted 
benefit HRAs in a state has caused significant harm to the small group 
market in the state that is the principal place of business of the 
small employer.
    Fourth, this finding may be made only after submission of a written 
recommendation by the applicable state regulatory authority of such 
state, in the form and manner specified by HHS. The written 
recommendation must include evidence that the reimbursement of STLDI 
premiums by excepted benefit HRAs established by insured or partially-
insured small employers in the state has caused significant harm to the 
state's small group market, including on small group market premiums. 
The evidence may include the State Insurance Commissioner's documented 
overall assessment of the small group market in the state. It may also 
include representations made by small group market issuers that an 
increase in the purchase of STLDI coverage by employees of small 
employers has caused issuers to increase premiums for small group 
market insurance, due to the issuers' reasonable belief about adverse 
selection. HHS will evaluate each recommendation on a case-by-case 
basis. Factors that HHS may consider in determining whether significant 
harm had occurred include, but are not limited to, the impact on 
issuers' presence in the small group market, whether there has been 
more than a de minimis increase in premiums in the small group market, 
enrollment declines in the small group market related to individuals 
purchasing STLDI, and changes to the health of the small group market 
risk pool.
    Finally, the restriction (or discontinuance of the restriction) 
must be imposed by publication of a notice by the Secretary of HHS in 
the Federal Register and will be effective prospectively only, and with 
a reasonable time for plan sponsors to comply.
9. Other Comments on Excepted Benefit HRAs and Comments Outside the 
Scope of This Rulemaking
    Some commenters raised issues that relate to types of excepted 
benefits other than excepted benefit HRAs. For example, several 
commenters requested that the Departments extend the pilot program for 
limited wraparound coverage.\231\ One commenter requested that the 
Departments amend the criteria for health FSAs to incorporate the 
excepted benefit HRA, instead of adding a new excepted benefit HRA, to 
avoid the appearance of too many limited excepted benefits. Other 
commenters requested that the Departments address questions regarding 
fixed indemnity and hospital indemnity insurance. However, the proposed 
excepted benefit rules were limited to establishing criteria for 
certain HRAs to qualify as excepted benefits and, therefore, those 
comments are outside the scope of this rulemaking.
---------------------------------------------------------------------------

    \231\ See 26 CFR 54.9831-1(c)(3)(vii), 29 CFR 
2590.732(c)(3)(vii), and 45 CFR 146.145(b)(3)(vii).
---------------------------------------------------------------------------

    Notwithstanding that fact, the Departments do not intend to extend 
the pilot program for limited wraparound coverage, due to minimal take 
up and overlap with various other benefit options, including the new 
excepted benefit HRA, which, like the limited wraparound coverage 
excepted benefit, can be used for cost sharing under and expenses for 
services not covered by individual health insurance coverage, while not 
causing covered individuals to be ineligible for the PTC.
    One commenter suggested that the excepted benefit HRA should only 
be allowed to be offered by an employer that has not previously offered 
health coverage, which the commenter appears to have suggested due to a 
concern about employers offering an excepted benefit HRA instead of 
comprehensive coverage. The Departments decline to limit excepted 
benefit HRAs in this way as the excepted benefit HRA is intended to 
provide flexibility and additional healthcare options to all employers 
and their employees. However, to the extent the commenter is concerned 
about plan sponsors no longer offering traditional group health plans, 
the Departments reiterate that in order to offer the excepted benefit 
HRA, a plan sponsor must also offer those eligible for the HRA a 
traditional group health plan.
    Some commenters expressed confusion regarding the interaction of 
the excepted benefit HRA and the employer shared responsibility 
provisions under Code section 4980H. The Departments note for the sake 
of clarity, as explained earlier in this preamble, that coverage that 
consists solely of excepted benefits is not MEC.\232\ Therefore, the 
offer of an excepted benefit by an employer is not considered to be an 
offer of MEC under an eligible employer-sponsored plan for purposes of 
Code section 4980H. Although an employer will not avoid potential 
liability for a payment under Code section 4980H by virtue of an offer 
of an excepted benefit, including an excepted benefit HRA, the 
traditional group health plan that is required to be offered in order 
to offer the excepted benefit HRA would constitute an offer of MEC 
under an eligible employer-sponsored plan.\233\
---------------------------------------------------------------------------

    \232\ See Code section 5000A(f)(3).
    \233\ See Code section 4980H(a)(1) and (b)(1). See also 26 CFR 
54.4980H-1(a)(14).
---------------------------------------------------------------------------

    One commenter inquired whether an individual enrolled in an 
excepted benefit HRA would have a special enrollment right in the 
employer's traditional group health plan if the individual had enrolled 
in STLDI and then coverage under the STLDI was rescinded because the 
individual became sick. The Departments clarify that under the special 
enrollment rules for group health plans, in general, an employee or 
dependent is eligible for special enrollment if they are otherwise 
eligible for the benefit package; when coverage under the plan was 
previously offered, the employee had group health plan or health 
insurance coverage; and then the employee loses eligibility for other 
coverage.\234\ STLDI is health insurance coverage and, therefore, loss 
of eligibility for STLDI will create a special enrollment opportunity 
to enroll in a group health plan, if the employee otherwise satisfies 
the special enrollment opportunity requirements. However, under the 
special enrollment rules for individual market coverage, loss of 
eligibility for STLDI will not trigger an SEP in the individual 
market.\235\
---------------------------------------------------------------------------

    \234\ See Code section 9801(f), ERISA section 701(f), and PHS 
Act section 2704(f). See also 26 CFR 54.9801-6(a)(2)(i) and (3)(i), 
29 CFR 2590.701-6(a)(2)(i) and (3)(i), and 45 CFR 146.117(a)(2)(i) 
and (3)(i).
    \235\ See 45 CFR 155.420(d)(1)(i), which provides an SEP in the 
individual market only for loss of coverage that constitutes MEC. 
See also 45 CFR 147.104(b)(2) and 83 FR 38212, 38225 (Aug. 3, 2018) 
(stating that STLDI ``. . . is not individual health insurance 
coverage, nor is it MEC.'').
---------------------------------------------------------------------------

    Other comments not responsive to the provisions and topics 
addressed by the proposed rules, or otherwise beyond the scope of the 
proposed and final rules, are not addressed.

C. Interaction Between Individual Coverage HRAs and Excepted Benefit 
HRAs

    Under the final rules, as under the proposed rules, a plan sponsor 
is permitted to offer an individual coverage HRA to a class of 
employees so long as it does not also offer a traditional group health 
plan to the same class of employees, subject to

[[Page 28943]]

additional applicable conditions discussed elsewhere in this preamble. 
However, a plan sponsor may only offer an excepted benefit HRA if 
traditional group health plan coverage is also made available to the 
employees who are eligible to participate in the excepted benefit HRA. 
Thus, a plan sponsor cannot offer both an individual coverage HRA and 
an excepted benefit HRA to any employee.\236\
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    \236\ The Departments note that an employer may not provide a 
QSEHRA to any employee if it offers any employee a group health 
plan. Accordingly, an employer may not provide a QSEHRA to any 
employee if it offers any employee an individual coverage HRA (which 
is a group health plan) or an excepted benefit HRA (which is a group 
health plan and which requires an offer of a traditional group 
health plan). See Code section 9831(d)(3)(B)(ii).
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III. Overview of Final Rules Regarding the Premium Tax Credit--
Department of the Treasury and the IRS

A. In General

    Consistent with the objectives in Executive Order 13813 to expand 
the use of HRAs, the proposed rules included an amendment to the rules 
under Code section 36B to provide guidance for individuals who are 
offered or covered by an individual coverage HRA and who otherwise may 
be eligible for the PTC. As explained earlier in this preamble, an 
employee who is offered coverage under an eligible employer-sponsored 
plan, and an individual who may enroll in the coverage because of a 
relationship to the employee (a related individual), are not eligible 
for a PTC for any month the eligible employer-sponsored plan is 
affordable and provides MV.\237\ Further, an employee or related 
individual who enrolls in an eligible employer-sponsored plan for a 
month is ineligible for a PTC for that month regardless of whether the 
coverage is affordable or provides MV.\238\
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    \237\ Code section 36B and 26 CFR 1.36B-2(c)(3)(i).
    \238\ 26 CFR 1.36B-2(c)(3)(vii)(A).
---------------------------------------------------------------------------

    Because an HRA is a self-insured group health plan, under existing 
rules, an individual who is covered by an individual coverage HRA is 
ineligible for the PTC.\239\ However, guidance was needed regarding the 
PTC eligibility of an individual who is offered, but opts out of, an 
individual coverage HRA, and, therefore, the Treasury Department and 
the IRS issued the proposed PTC rules.
---------------------------------------------------------------------------

    \239\ See the discussion earlier in this preamble of the related 
requirement under the final integration rules that plan sponsors 
provide participants with an annual opportunity to opt-out of and 
waive future reimbursements under an individual coverage HRA.
---------------------------------------------------------------------------

    Consistent with the rule for traditional group health plans under 
Code section 36B and the existing rules thereunder, the proposed rules 
provided that an employee and a related individual offered an 
individual coverage HRA (a related HRA individual) would not be 
eligible for a PTC for any month the individual coverage HRA is 
affordable. Relatedly, the proposed rules provided that an affordable 
individual coverage HRA would be deemed to provide MV. Therefore, under 
the proposed rules, if an employee and a related HRA individual are 
offered an individual coverage HRA that is affordable, the employee and 
related HRA individual are ineligible for a PTC even if the employee 
opts out of the individual coverage HRA. However, an employee and a 
related HRA individual offered an individual coverage HRA that is not 
affordable will be eligible for the PTC (assuming they are otherwise 
eligible) if the employee opts out of the individual coverage HRA.
    Commenters generally acknowledged that guidance was needed, and 
some commenters agreed with the proposed rules relating to the effect 
of an individual coverage HRA offer on an individual's PTC eligibility. 
However, a number of commenters expressed concern that the proposed 
rules would adversely affect lower-paid employees and their ability to 
obtain adequate subsidies for their healthcare coverage. The commenters 
pointed out that the PTC generally is more valuable than the individual 
coverage HRA would be for lower-paid employees. These commenters 
suggested that the individual coverage HRA would subsidize the cost of 
coverage for higher paid employees while making coverage more 
expensive, and likely out of reach, for the lower-paid employees who 
would have been eligible for a PTC but for the offer of an individual 
coverage HRA. Some commenters expressed a concern that the complexity 
of the rules would make it difficult for employees to make optimal 
decisions about their coverage and whether to opt out of the individual 
coverage HRA, with some noting a concern that employees may mistakenly 
opt out of an affordable individual coverage HRA because they believe 
that the opt-out preserves their PTC eligibility, only to find out that 
they have lost both PTC eligibility and the right to reimbursements 
under the individual coverage HRA. Some commenters expressed concern 
that employers might inadvertently offer an individual coverage HRA 
that leaves employees worse off than they would have been had the 
employer not offered the HRA, whether or not the employees opt out of 
the arrangement. The Departments note that this concern, however, is 
mitigated by the fact that employers seek to maximize overall employee 
welfare in order to recruit and retain talented workers.
    To address these concerns, some commenters suggested that employees 
who are otherwise eligible for the PTC should be allowed both the PTC 
and the individual coverage HRA offered to them by their employers. 
Other commenters suggested a rule to allow employees to choose between 
an individual coverage HRA and the PTC. Under this suggested rule, an 
employee would be able to opt out of the individual coverage HRA and 
receive the PTC in situations in which the PTC would provide a more 
generous subsidy than the individual coverage HRA. Employees would have 
this choice regardless of whether the individual coverage HRA was 
affordable or provided MV.
    The final rules retain the rule as proposed that an employee and a 
related HRA individual are not eligible for a PTC for any month the 
employee is offered an individual coverage HRA that is affordable, even 
if the employee opts out of the arrangement. An individual coverage HRA 
is an eligible employer-sponsored plan for purposes of Code section 
36B. Code section 36B(c)(2)(B) and 26 CFR 1.36B-2(a)(2) provide that an 
employee and a related individual who are offered coverage under an 
eligible employer-sponsored plan are not eligible for a PTC for any 
month that the eligible employer-sponsored coverage is affordable and 
provides MV. Under these provisions, an individual generally is 
ineligible for a PTC for a month in which the individual had an 
opportunity to enroll in affordable, MV employer-sponsored coverage, 
regardless of whether the individual actually chose to enroll. 
Therefore, Code section 36B and the applicable rules do not allow 
individuals to choose between an offer of employer-sponsored coverage 
that is affordable and that provides MV or Exchange coverage with a 
PTC. Furthermore, many of the concerns raised by commenters also apply 
to traditional group health plans; for example, lower-income 
individuals may be better off with the PTC than a traditional group 
health plan. Thus, consistent with the rules for traditional group 
health plans, the final rules retain the rule that a PTC is not allowed 
for any month in which the individual coverage HRA is affordable.
    As to the suggestion by commenters that individuals should be 
allowed to both enroll in the individual coverage HRA and claim the PTC 
if otherwise

[[Page 28944]]

eligible, this is precluded by Code section 36B(c)(2)(C)(iii). Under 
that Code section, and as noted earlier in this preamble, an individual 
who is covered for one or more months by a group health plan, including 
an individual coverage HRA, is ineligible for the PTC for his or her 
Exchange coverage for those months. Therefore, the final PTC rules do 
not adopt this suggestion.
    The Treasury Department and the IRS agree with commenters that some 
lower-paid employees may be adversely affected by an employer's offer 
of an individual coverage HRA because the PTC, if available, could 
provide a larger subsidy for the employee's Exchange coverage as 
compared to the individual coverage HRA. However, this dynamic already 
exists under current rules, as an individual may be required to pay a 
greater portion of his or her household income for a traditional group 
health plan than the individual would, in the absence of an offer of 
employer-sponsored coverage, have to pay for Exchange coverage with a 
PTC. Under Code section 36B(b)(3)(A) and current PTC rules, an 
individual's contribution amount for 2019 Exchange coverage may be as 
little as 2.08 percent of household income for an individual who claims 
the PTC whereas the same individual may have to pay up to 9.86 percent 
of household income for coverage offered by the individual's employer 
and still be considered to have an affordable offer and therefore 
ineligible for the PTC. Nevertheless, an employee in this situation is 
not permitted to forego the employer coverage and choose the Exchange 
coverage with a PTC to take advantage of the smaller contribution 
amount. Under the final rules, the same treatment applies to offers of 
an individual coverage HRA: That is, individuals are not allowed to 
forego an individual coverage HRA that is affordable (and thus deemed 
to provide MV) and instead choose the Exchange coverage with a PTC.
    The Departments also appreciate the concerns expressed by 
commenters regarding the burden on employees to properly determine 
whether the HRA they have been offered is affordable and provides MV 
and whether they should opt out of the individual coverage HRA. These 
concerns are the primary reason that the Departments proposed to 
require employers that offer individual coverage HRAs to provide a 
written notice to each participant. The final rules strengthen the 
notice requirement and the Departments are providing model notice 
language regarding the PTC, separate from, but contemporaneous with, 
the final rules. Further, the Departments will work closely with the 
State Exchanges to ensure that Exchanges' applications and other 
relevant materials are updated to assist individuals with an individual 
coverage HRA offer who are applying for, or considering applying for, 
individual health insurance coverage, in determining whether they are 
eligible for APTC.
    Lastly, the Treasury Department and the IRS note that under the 
final rules, an individual coverage HRA may be integrated with 
Medicare, if certain conditions are satisfied. Individuals who are 
enrolled in Medicare for one or more months during the calendar year 
are not eligible for the PTC for their Exchange coverage for those 
months.\240\ Therefore, the final PTC rules regarding when an offer of 
an individual coverage HRA is considered affordable are not relevant 
for individuals enrolled in Medicare. Those individuals are ineligible 
for the PTC without regard to whether they are offered or covered by an 
individual coverage HRA.\241\
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    \240\ See Code section 36B(c)(2)(B) and 26 CFR 1.36B-2(a)(2). An 
individual generally is eligible for Medicare if the individual 
meets the criteria for coverage under the program as of the first 
day of the first full month the individual may receive benefits 
under the program. See 26 CFR 1.36B-2(c)(2)(i). However, an 
individual who meets the criteria for eligibility for Medicare must 
complete the requirements necessary to receive benefits. See 26 CFR 
1.36B-2(c)(2)(ii). An individual who fails by the last day of the 
third full calendar month following the event that establishes 
eligibility for Medicare to complete the requirements to obtain that 
coverage is treated as eligible for Medicare as of the first day of 
the fourth calendar month following the event that establishes 
eligibility. Id.
    \241\ The Treasury Department and the IRS are considering 
whether clarification is needed regarding how to determine whether 
an offer of an individual coverage HRA to an employee enrolled in 
Medicare is considered affordable and to provide MV for purposes of 
Code section 4980H. The Treasury Department and the IRS anticipate 
addressing that issue in guidance in the near term.
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B. Use of Lowest Cost Silver Plan To Determine Affordability of an 
Individual Coverage HRA

    The proposed rules provided that an individual coverage HRA is 
affordable for an employee and a related HRA individual for a month if 
the employee's required HRA contribution does not exceed \1/12\ of the 
product of the employee's household income and the required 
contribution percentage (defined in 26 CFR 1.36B-2(c)(3)(v)(C)). The 
proposed rules defined an employee's required HRA contribution as the 
excess of: (1) The monthly premium for the lowest cost silver plan for 
self-only coverage available to the employee through the Exchange for 
the rating area in which the employee resides; over (2) the monthly 
self-only HRA amount provided by the employee's employer.\242\ The 
monthly self-only HRA amount was proposed to be the self-only HRA 
amount newly made available to the employee under the individual 
coverage HRA for the plan year, divided by the number of months in the 
plan year the individual coverage HRA is available to the employee.
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    \242\ If the employer offers an HRA that provides for a single 
dollar amount regardless of whether an employee has self-only or 
other-than-self-only coverage, the monthly maximum amount available 
to the employee is used to determine affordability. The monthly 
maximum amount was proposed to be the maximum amount available to 
the employee divided by the number of months in the plan year the 
individual coverage HRA is available to the employee.
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    In the preamble to the proposed rules, the Treasury Department and 
the IRS explained that the lowest cost silver plan was chosen because, 
in the individual market, the lowest cost silver plan is the lowest 
cost Exchange plan for which the plan's share of the total allowed 
costs of benefits provided under the plan is certain to be at least 60 
percent of such costs, as required by Code section 36B(c)(2)(C)(ii) for 
a plan to provide MV. In selecting the lowest cost plan for which it is 
certain that the plan's share of the total allowed costs of benefits 
provided under the plan will be at least 60 percent of such costs, the 
proposed rules sought to most closely approximate the PTC eligibility 
rules that apply to offers of eligible-employer sponsored coverage that 
is not an HRA.\243\ The proposed rules also provided that an individual 
coverage HRA that is affordable is treated as providing MV, because the 
plan used to determine affordability will always provide MV and so an 
employee who is offered an affordable individual coverage HRA has the 
ability to purchase affordable coverage that provides MV. In the 
preamble to the proposed rules, the Treasury Department and the IRS 
requested comments on whether the lowest cost silver plan is the 
appropriate metal-level plan to use to determine affordability of an 
individual coverage HRA for PTC eligibility purposes.
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    \243\ With regard to an offer of eligible employer-sponsored 
coverage that is not an HRA, an individual is eligible for the PTC 
for his or her Exchange coverage only if the employee's required 
contribution, which is the portion of the annual premium that would 
be paid for the lowest cost self-only MV coverage offered by the 
employer to the employee, exceeds a certain percentage of the 
employee's household income. See Code section 36B(c)(2)(C).
---------------------------------------------------------------------------

    A number of commenters advocated for retaining the proposed rule's 
use of the lowest cost silver plan as the

[[Page 28945]]

appropriate plan to determine affordability and MV of an individual 
coverage HRA for PTC eligibility. These commenters stated that although 
the lowest cost silver plan generally would have an actuarial value 
that is higher than is required to provide MV under a traditional group 
health plan, a bronze-level plan would not always be sufficient to 
provide MV.\244\ Therefore, the commenters found the use of the lowest 
cost silver plan to be a reasonable approximation of the PTC 
eligibility rules that apply to offers of traditional group health 
plans.
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    \244\ In the individual market, a bronze plan may have an 
actuarial value of 56 percent, which would not ensure the plan's 
share of the total allowed costs of benefits provided under the plan 
is at least 60 percent of such costs, as required by Code section 
36B(c)(2)(C)(ii) for a plan to provide MV. See 45 CFR 156.140.
---------------------------------------------------------------------------

    Some commenters suggested using a gold-level plan to determine 
affordability, contending that the coverage benefits provided by a 
gold-level plan more closely resemble the coverage benefits under a 
traditional group health plan. According to these commenters, using a 
gold-level plan for the affordability determination would ensure that 
an employee who is offered an individual coverage HRA would not pay 
more for health coverage that provides fewer benefits than the employee 
would have paid for under either a traditional group health plan or 
Exchange coverage with a PTC.
    Other commenters suggested that a bronze-level plan should be used 
for determining affordability of an individual coverage HRA, arguing 
that a bronze-level plan is comparable to coverage under a traditional 
group health plan which provides MV because a bronze-level plan 
generally has an actuarial value of 60 percent. According to these 
commenters, using a silver-level plan to determine affordability and MV 
for PTC eligibility would provide employees (and related HRA 
individuals) with greater coverage benefits than required under 
traditional group health plans.
    A plurality of the commenters on the issue of the appropriate 
affordability plan suggested that the second lowest cost silver plan 
(SLCSP) should be used to determine the affordability of an individual 
coverage HRA. These commenters generally pointed to administrative ease 
and the affordability rules for QSEHRAs as the reasons for modifying 
the proposed rule. Under Code section 36B, a taxpayer who is eligible 
for the PTC computes his or her PTC amount using the premiums for the 
SLCSP available to the taxpayer. Therefore, the commenters asserted 
that information concerning the premiums for a taxpayer's applicable 
SLCSP is already readily available to taxpayers and providing this 
information to taxpayers for their individual coverage HRA 
affordability determinations would not require additional Exchange 
resources. In addition, in light of the fact that the SLCSP is already 
used for certain PTC purposes, the commenters expressed concern that 
using premiums for the lowest cost silver plan instead of the SLCSP 
could lead to confusion and miscalculations. Commenters also noted that 
the premiums for the SLCSP are used to determine affordability for 
QSEHRAs. Some commenters expressed concern that using the lowest cost 
silver plan for affordability would result in three different 
affordability calculations depending on whether an employee was offered 
a traditional group health plan, a QSEHRA, or an individual coverage 
HRA. However, some commenters opposed the use of the SLCSP, contending 
that the higher premiums for a SLCSP, which may not always provide 
greater benefits than the lowest cost silver plan, do not warrant 
modifying the proposed rule's use of the lowest cost silver plan to 
determine affordability of an individual coverage HRA.
    After consideration of the comments, the final rules adopt as 
proposed the use of the lowest cost silver plan for self-only coverage 
available through the Exchange in the rating area in which the employee 
resides to determine whether an individual coverage HRA is affordable. 
As explained in the preamble to the proposed rules, using the lowest 
cost silver plan to determine the affordability of an individual 
coverage HRA is consistent with, and most closely approximates, the 
rules that apply to an offer of a traditional group health plan, under 
which an offer is affordable if the employee's required contribution 
for the lowest cost, self-only MV coverage offered by the employer to 
the employee does not exceed a specified percentage of the employee's 
household income. Further, using the lowest cost silver plan, which 
will not have an actuarial value lower than 66 percent, to determine 
affordability of an individual coverage HRA ensures that the plan used 
to determine affordability will always provide MV. As a result, a 
determination that an individual coverage HRA is affordable, using this 
standard, is sufficient to ensure that an employee who is offered an 
affordable individual coverage HRA has the ability to purchase 
affordable coverage that provides MV. Therefore, the Treasury 
Department and the IRS are also adopting as proposed the rule that an 
individual coverage HRA that is affordable is treated as providing MV.
    The final rules result in consistent treatment for purposes of Code 
section 36B for employees offered an individual coverage HRA and 
employees offered a traditional group health plan. In both instances, 
the employees may be allowed the PTC if they decline the offer and the 
coverage is either unaffordable or does not provide MV. Further, in 
both instances, the employee's required contribution is based on the 
amount the employee must pay for self-only coverage that provides MV 
because under the final rules affordability is determined based on the 
lowest cost silver plan offered in the Exchange for the rating area in 
which the employee resides (which, by definition, will always provide 
MV). If the amount the employee must pay is more than the product of 
the required contribution percentage and the employee's household 
income, the employee may be allowed the PTC. As such, the final rules 
are consistent with the affordability and MV rules that apply to offers 
of traditional group health plans.
    Although commenters suggested using a bronze-level or gold-level 
plan for the affordability determination, the final rules do not adopt 
either of those suggestions. Using a bronze-level plan could result in 
individuals being determined ineligible for the PTC based on the cost 
of a plan that does not provide MV under Code section 36B(c)(2)(C)(ii) 
(because a bronze plan may have an actuarial value as low as 56 
percent). While use of a gold-level plan (which generally has an 
actuarial value no lower than 76 percent) would ensure that the plan 
used to determine affordability provides MV, it would be inconsistent 
with, and require the use of, a plan with a higher actuarial value than 
in the rules that apply for a traditional group health plan.
    The final rules do not adopt the suggestion that the SLCSP plan be 
used for the affordability determination. The Treasury Department and 
the IRS acknowledge that the SLCSP applies for other PTC purposes, 
including calculation of the PTC amount and the determination of 
affordability of a QSEHRA. However, affordability for a traditional 
group health plan is based on the amount an employee would pay for a 
plan for which the share of the total allowed costs of benefits 
provided under the plan is at least 60 percent of such costs and the 
lowest cost silver plan, not the SLCSP, is the plan that most closely 
approximates that rule and provides consistency with these same

[[Page 28946]]

rules as applied to traditional group health plans under Code section 
36B. Consequently, the final rules provide a rule that is comparable to 
the affordability and MV rules that apply for traditional group health 
plans.
    As to the concerns expressed by commenters regarding the potential 
for confusion for individuals due to the different health coverage 
arrangements that exist and the different PTC eligibility rules that 
apply, see earlier in this preamble for a discussion of the steps the 
Departments are taking to address those concerns, including providing a 
model notice that will explain the PTC consequences of an individual 
coverage HRA.

C. Other Issues Under the PTC Rules

    The proposed rules provided that the affordability of an individual 
coverage HRA for a related HRA individual would be based on the cost of 
self-only, not family, coverage available to the employee through the 
Exchange for the rating area in which the employee resides. One 
commenter stated that affordability of an individual coverage HRA 
should be based on the cost of Exchange coverage for all members of the 
employee's family offered the individual coverage HRA, not just the 
self-only cost. The final rules do not adopt this suggestion. Under 26 
CFR 1.36B-2(c)(3)(v)(A)(2), an eligible employer-sponsored plan is 
affordable for a related individual if the portion of the annual 
premium the employee must pay for self-only coverage does not exceed a 
percentage of the employee's household income. Similarly, under Code 
section 36B(c)(4), the affordability of a QSEHRA for a spouse or 
dependent of an employee is based on the cost of self-only Exchange 
coverage to the employee. Consequently, the final rules are consistent 
with the existing rules for other types of employer coverage in 
providing that affordability of an individual coverage HRA for 
employees and related HRA individuals is based on the cost of self-only 
coverage.
    One commenter stated that because of the likelihood of confusion in 
the early years on the part of taxpayers whose employers offer 
individual coverage HRAs, the IRS should waive the requirement that 
taxpayers increase their tax liability for excess APTC (the excess of a 
taxpayer's APTC over his or her allowed PTC) resulting from an offer of 
an affordable individual coverage HRA. Under Code section 36B(f)(2), a 
taxpayer must increase his or her tax liability for a taxable year by 
the excess of the APTC paid on the taxpayer's behalf over the PTC the 
taxpayer is allowed for the year, subject to a limitation for taxpayers 
with household income less than 400 percent of the applicable federal 
poverty line for the taxpayer's family size. The Treasury Department 
and the IRS do not have the authority to suspend this statutory rule. 
Thus, the final rules do not adopt this suggestion. The Departments 
understand, however, that there is potential for taxpayer confusion 
about individual coverage HRAs and have taken measures to ensure that 
taxpayers are aware of the PTC implications of accepting or opting out 
of an individual coverage HRA. In particular, as described earlier in 
this preamble, the final integration rules require that an individual 
coverage HRA provide eligible participants with a written notice 
setting forth certain information about the individual coverage HRA, 
including the potential availability of PTC if they opt out of the HRA 
and the PTC eligibility consequences if they accept the HRA. 
Individuals applying for Exchange coverage will provide information 
about the individual coverage HRA they have been offered to the 
Exchange during the application process, which will help prevent the 
improper payment of APTC.
    A few commenters raised issues regarding the application of the PTC 
rules to individual coverage HRAs that are negotiated pursuant to a 
CBA, with the commenters asking for special rules to account for the 
fact that CBAs are often negotiated over multiple years, including that 
the affordability status that is determined as of the effective date of 
a CBA should apply for all years covered by the CBA. The final rules do 
not adopt the suggestion that special rules should apply to employees 
covered by CBAs. The existing rules under Code section 36B do not 
include special rules for determining the affordability of traditional 
group health plans for employees covered by CBAs. In addition, such 
special rules would likely result in undue complexities for Exchanges 
and others. Thus, employees covered by CBAs must determine 
affordability consistent with the rules that apply to individuals not 
covered by such agreements.
    A number of comments were received expressing concerns about the 
effective date for the final rules generally, but many with a specific 
focus on issues related to implementing the final PTC rules by 2020. 
These comments are addressed later in this preamble.
    Also, commenters expressed concern about the availability of 
resources for verifying eligibility for APTC for individuals who are 
offered an individual coverage HRA. While Exchanges are required to 
verify certain eligibility requirements that affect Exchange enrollees' 
APTC eligibility with electronic data sources, commenters stated that 
electronic data sources are not available to allow State Exchanges to 
verify APTC eligibility based on an offer of an individual coverage 
HRA. Commenters urged the Departments to dedicate additional funding to 
the State Exchanges for electronic verification of information about 
individual coverage HRA offers that consumers will be required to 
provide to Exchanges. In response to these comments, the Departments 
note that Congress generally appropriates funding for the federal 
government. The Departments do not generally have the authority to 
determine additional uses of funds beyond those established by 
Congress, including with respect to additional funding for State 
Exchanges.
    One commenter asked that the Treasury Department and the IRS 
confirm which premium applies in determining the affordability of an 
individual coverage HRA if more than one premium is available for the 
lowest cost silver plan, for example, because there is one rate for 
tobacco users and one rate for non-tobacco users. Existing rules at 26 
CFR 1.36B-3(e) provide that, in determining a taxpayer's SLCSP premium, 
a monthly premium may not include any adjustments for tobacco use. 
Consequently, in response to the commenter, the final rules provide 
that if there is a silver-level plan that has one rate for tobacco 
users and one rate for non-tobacco users, the rate for non-tobacco 
users will apply to determine affordability of the individual coverage 
HRA.
    In addition, in the context of a traditional group health plan, 
existing rules at 26 CFR 1.36B-2(c)(3)(v)(A)(4) provide that 
nondiscriminatory wellness program incentives \245\ that affect 
premiums are treated as earned in determining an employee's required 
contribution for purposes of affordability to the extent the incentives 
relate exclusively to tobacco use. The rules further provide that 
wellness program incentives that do not relate to tobacco use or that 
include a component unrelated to tobacco use are treated as not earned 
for this purpose. Consequently, the Treasury Department and the IRS are 
clarifying in these final rules that similar rules apply for purposes 
of determining the affordability of an individual coverage HRA. Thus, 
if a wellness program incentive is allowed in the individual

[[Page 28947]]

market, the lowest cost silver plan premium will be determined without 
regard to any premium discount or rebate under that program unless the 
wellness program incentive relates exclusively to tobacco use.
---------------------------------------------------------------------------

    \245\ For this purpose, the term ``wellness program incentive'' 
has the same meaning as the term ``reward'' in 26 CFR 54.9802-
1(f)(1)(i).
---------------------------------------------------------------------------

    The final rules also address a situation in which the silver-level 
QHP used to determine a taxpayer's lowest cost silver plan at 
enrollment later terminates or closes to enrollment during the plan 
year. Specifically, the final rules provide that, in such a case, the 
silver-level QHP that is used to determine a taxpayer's lowest cost 
silver plan will not cease to be the taxpayer's lowest cost silver plan 
solely because the plan later terminates or closes to enrollment. 
However, a taxpayer's lowest cost silver plan used to determine 
affordability could change during the tax year under other 
circumstances, such as if the taxpayer moves into a different rating 
area.
    With respect to which HRA amounts are taken into account in 
determining affordability, the proposed rules provided that only 
amounts that are newly made available and that are determinable within 
a reasonable period of time before the beginning of the plan year of 
the HRA are considered. The proposed rules further provided that 
amounts made available from a prior plan year that carry over to the 
current plan year are not taken into account. The final rules retain 
these provisions and also provide that, similarly, amounts made 
available under an HRA to account for amounts remaining in a different 
HRA the employer previously provided to the employee and under which 
the employee is no longer covered are not taken into account for 
purposes of determining affordability. This clarification is generally 
intended to address the situation in which an employee moves between 
classes of employees and, as a result, moves between different HRAs, as 
discussed earlier in this preamble.
    One commenter asked the Treasury Department and the IRS to clarify 
the application of the PTC rules to an employee opting out of, or 
accepting, an individual coverage HRA with a non-calendar year plan 
year.\246\ As noted earlier in this preamble, the final integration 
rules clarify that individual coverage HRAs must provide participants 
with one advance opportunity to opt into, or out of, the individual 
coverage HRA for each plan year, but generally may not provide 
participants multiple opportunities to opt into, or out of, the 
individual coverage HRA over the course of the plan year. In addition, 
the final PTC rules provide specific rules to determine affordability 
of an individual coverage HRA for each employment period that is less 
than a full calendar year or for the portions of the plan year of an 
individual coverage HRA that fall in different taxable years of a 
taxpayer. Although affordability of an individual coverage HRA and thus 
eligibility for PTC generally are determined on a monthly basis, the 
opt-out rules and the part-year affordability rules work in conjunction 
with the employee safe harbor to provide a taxpayer with an 
affordability determination that generally will apply for the entire 
plan year of the individual coverage HRA, barring any change in 
circumstance of the taxpayer. For example, if a taxpayer opts out of an 
individual coverage HRA that begins on July 1, 2020, and an Exchange 
determines that the HRA is unaffordable and the taxpayer is eligible 
for APTC, the employee safe harbor in the final rules provides that the 
HRA generally will be treated as unaffordable for the entire plan year 
of the HRA (from July 1, 2020-June 30, 2021). If the taxpayer decides 
to forego both APTC and the individual coverage HRA and pay the 
enrollment premium out-of-pocket, the taxpayer still may claim PTC on a 
tax return for the months the individual coverage HRA was unaffordable 
if the taxpayer otherwise is eligible for PTC.\247\
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    \246\ An employee who opts out of a non-calendar year individual 
coverage HRA, like an employee who opts out of a non-calendar year 
traditional group health plan, may qualify for an individual market 
SEP based on the employee's enrollment in a non-calendar year plan 
that is ending, regardless of whether he or she has the option to 
renew, per 45 CFR 155.420(d)(1)(ii). The employee may, therefore, 
choose to change his or her individual health insurance plan, though 
his or her plan options may be restricted based on 45 CFR 
155.420(a)(4)(iii). Regardless of whether an employee changes his or 
her plan, an employee who is enrolled in Exchange coverage and opts 
out of an HRA when permitted to do so may apply to the Exchange for 
a redetermination of APTC eligibility.
    \247\ The proposed rules also clarified how the generally 
applicable employer-sponsored coverage PTC eligibility rules apply 
to individual coverage HRAs. The Treasury Department and the IRS are 
finalizing those rules as proposed. Further, existing guidance 
addresses when amounts newly made available under an HRA count 
toward the affordability or MV of another group health plan offered 
by the same employer. See 26 CFR 1.36B-2(c)(3)(v)(A)(5) and 26 CFR 
1.36B-6(c)(4). See also IRS Notice 2015-87, Q&A-7. As under the 
proposed rules, the final rules do not make substantive revisions to 
those rules but do make clarifying updates to 26 CFR 1.36B-
2(c)(3)(v)(A)(5), mainly to incorporate a reference to more recent 
guidance.
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D. Employer Shared Responsibility Provisions Under Code Section 4980H

    As part of implementing the objectives of Executive Order 13813, 
the Treasury Department and the IRS are considering how Code section 
4980H applies to an employer offering an individual coverage HRA.
    Only ALEs are subject to Code section 4980H.\248\ For an employer 
that is an ALE, the employer may owe a payment for a month under Code 
section 4980H(a) or Code section 4980H(b) or neither. In general, an 
ALE will owe a payment under Code section 4980H(a) if it fails to offer 
an eligible employer-sponsored plan to at least 95 percent of its full-
time employees and their dependents and at least one full-time employee 
is allowed the PTC for the month.\249\ An ALE that offers an eligible 
employer-sponsored plan to at least 95 percent of its full-time 
employees and their dependents (and therefore is not liable for a 
payment under Code section 4980H(a)) may be liable for a payment under 
Code section 4980H(b) if at least one full-time employee is allowed the 
PTC, which may occur if the eligible employer-sponsored plan offered is 
not affordable or does not provide MV, or if the employee was not 
offered coverage.
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    \248\ The explanation of Code section 4980H provided here is a 
summary. For a complete explanation of the rules, including for 
definitions of terms used in this summary, see 26 CFR 54.4980H-1, et 
seq. (79 FR 8544 (Feb. 12, 2014)).
    \249\ Note that if an ALE offered coverage to all but five of 
its full-time employees (and their dependents), and five is greater 
than 5 percent of the employer's full-time employees, the employer 
will not owe an employer shared responsibility payment under Code 
section 4980H(a). See 26 CFR 54.4980H-4(a).
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    On November 19, 2018, the Treasury Department and the IRS released 
Notice 2018-88 which addressed the application of Code section 4980H to 
ALEs offering individual coverage HRAs. In order to provide clarity to 
stakeholders, Notice 2018-88 explained how Code section 4980H would 
apply to an ALE that offers an individual coverage HRA, described 
potential additional affordability safe harbors, requested comments, 
and provided examples.
    The Treasury Department and the IRS intend to propose rules under 
Code section 4980H on the issues addressed in Notice 2018-88, taking 
into account the comments received. To the extent comments were 
received on the proposed integration rules specific to the application 
of Code section 4980H to employers offering individual coverage HRAs, 
those comments will be addressed in the preamble to the proposed rules 
under Code section 4980H.

[[Page 28948]]

IV. Overview of the Final Rules Regarding Individual Health Insurance 
Coverage and ERISA Plan Status

A. In General

    The proposed rules included an amendment to DOL rules defining the 
ERISA terms ``employee welfare benefit plan,'' ``welfare plan,'' and, 
derivatively ``group health plan,'' so that these terms would not 
include individual health insurance coverage, the premiums of which are 
reimbursed by an HRA and certain other arrangements, under certain 
conditions. As explained in the preamble to the proposed rules, the 
objective in proposing this clarification was to provide clarity and 
assurance to employees; employers, employee organizations, and other 
plan sponsors; health insurance issuers; state insurance regulators; 
and other stakeholders. Specifically, the objective was to provide 
assurance that the insurance policies sold as individual health 
insurance coverage (that is, policies generally subject to 
comprehensive federal and state individual market rules for minimum and 
uniform coverage, standardized rating requirements, guaranteed 
availability, and guaranteed renewability) would not be treated as part 
of an HRA or certain other arrangements for purposes of ERISA if 
certain conditions were satisfied.\250\ Specifically, DOL proposed an 
amendment to 29 CFR 2510.3-1 on the definition of ``employee welfare 
benefit plan'' in ERISA section 3(1).\251\ This proposed amendment 
would apply to individual health insurance coverage purchased through 
individual coverage HRAs. It would also apply to individual health 
insurance coverage purchased through certain other arrangements that 
reimburse participants for the purchase of individual health insurance 
coverage that are not subject to the market requirements (including 
QSEHRAs and HRAs that have fewer than two participants who are current 
employees on the first day of the plan year). Further, this proposed 
amendment would apply to an arrangement under which an employer allows 
employees to pay the portion of the premium for off-Exchange individual 
health insurance coverage that is not covered by the HRA with which the 
coverage is integrated by using a salary reduction arrangement under a 
cafeteria plan (supplemental salary reduction arrangement).\252\
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    \250\ 83 FR 54420, 54440 (Oct. 29, 2018). For examples of other 
circumstances under which DOL has determined an arrangement is not a 
plan within the meaning of ERISA, see 29 CFR 2510.3-1(j), 29 CFR 
2510.3-2(f), and 29 CFR 2509.99-1. See also DOL Field Assistance 
Bulletins No. 2004-01 and No. 2006-02.
    \251\ In light of the fact that ``group health plan'' is defined 
derivatively in ERISA section 733(a)(1), in relevant part, as an 
``employee welfare benefit plan to the extent that the plan provides 
medical care . . . directly or through insurance, reimbursement, or 
otherwise[,]'' DOL has concluded that a separate rule relating to 
the definition of group health plan is not required.
    \252\ While the proposed rule under 29 CFR 2510.3-1(l) included 
in the term ``supplemental salary reduction arrangement'' cafeteria 
plan salary reduction arrangements paying premium amounts not 
covered by a QSEHRA, these final rules do not. See Code section 
9831(d)(3)(B)(ii) and IRS Notice 2017-67, Q&A-55 (employer may allow 
employee to pay the excess of a health insurance premium over the 
amount paid by the QSEHRA with an after-tax payroll deduction (in 
contrast to a pre-tax salary reduction)).
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    ERISA section 3(1) broadly defines ERISA-covered welfare plans to 
include ``any plan, fund, or program'' that is ``established or 
maintained by an employer or employee organization'' for the provision 
of health benefits ``through the purchase of insurance or otherwise.'' 
At the same time, however, provisions in the PHS Act generally treat 
individual health insurance and group health insurance as mutually 
exclusive categories.\253\ If individual health insurance coverage were 
considered to be a group health plan or part of a group health plan, 
the individual health insurance coverage typically would violate some 
of the group market requirements (for example, the single risk pool 
requirement for the small group market; the rating rules for the small 
group market; or the separate medical loss ratio requirements for large 
group insurance coverage, which is lower than that for individual or 
small group insurance).\254\ As explained in the preamble to the 
proposed rules, treatment of such individual health insurance coverage 
as subject to both individual market and group market requirements thus 
would likely result in conflicting requirements, uncertainty and 
confusion which could inhibit or, in some instances, even preclude, the 
ability to integrate HRAs with individual health insurance coverage as 
contemplated by other provisions in the proposed rules.\255\ 
Accordingly, DOL concluded that the ERISA status of this type of 
individual health insurance coverage should be clarified. Under the 
proposed rules, the individual health insurance coverage that is paid 
for by the HRA \256\ is not covered by ERISA Title I if all of the 
conditions of the safe harbor are satisfied. The conditions in the safe 
harbor incorporate criteria well-recognized under similar ERISA safe 
harbor rules and under case law, where similar arrangements are 
considered to be exempt from ERISA Title I.
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    \253\ See ERISA section 733(b)(4) and PHS Act sections 
2791(b)(4), (5), and (e)(1). See also 26 CFR 54.9801-2, 29 CFR 
2590.701-2, and 45 CFR 144.103.
    \254\ See PPACA section 1312 (which defines each issuer's 
enrollees in the individual market to be members of a single risk 
pool, and each issuer's enrollees in the small group market to be 
members of a separate single risk pool, unless a state has opted to 
merge the risk pools), PHS Act section 2701 (which sets forth 
maximum age rating ratios in the individual and small group 
markets), and PHS Act section 2718 (which sets forth medical loss 
ratio requirements that differ based on market).
    \255\ 83 FR 54420, 54441 (Oct. 29, 2018).
    \256\ For simplicity and readability, the discussion in this 
section IV of the preamble generally refers simply to HRAs, although 
it is intended to also capture other account-based group health 
plans, QSEHRAs and supplemental salary reduction arrangements. If 
the term HRA is intended to refer only to HRAs in this section IV, 
it will be clear from context. Moreover, the title of paragraph (l) 
of the DOL final rule is amended to refer to a ``Safe harbor for 
health reimbursement arrangements (HRAs) and certain other 
arrangements that reimburse individual health insurance coverage,'' 
to better reflect the regulatory text that follows.
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    Under the proposed rules, the status under ERISA of an HRA, QSEHRA, 
or supplemental salary reduction arrangement would remain unaffected. 
Rather, the proposed rules clarified that individual health insurance 
coverage selected by the employee in the individual market and 
reimbursed by such a plan is not part of a group health plan, is not 
health insurance coverage offered in connection with a group health 
plan, and is not a part of any employee welfare benefit plan for 
purposes of ERISA Title I, provided all the following conditions are 
satisfied:
    1. The purchase of any individual health insurance coverage is 
completely voluntary for employees.\257\
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    \257\ The fact that a plan sponsor requires the coverage to be 
purchased as a condition for participation in an HRA or supplemental 
salary reduction arrangement does not make the purchase involuntary. 
This issue should not arise in the context of a QSEHRA because in 
that case, although individuals must be enrolled in MEC, employers 
may not require employees to enroll in individual health insurance 
coverage.
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    2. The employer, employee organization, or other plan sponsor does 
not select or endorse any particular issuer or insurance coverage.
    3. Reimbursement for non-group health insurance premiums is limited 
solely to individual health insurance coverage.
    4. The employer, employee organization, or other plan sponsor 
receives no consideration in the form of cash or otherwise in 
connection with the employee's selection or renewal of any individual 
health insurance coverage.\258\
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    \258\ The limitation on employers, employee organizations, and 
other plan sponsors receiving consideration from an issuer or person 
affiliated with an issuer in connection with any participant's 
purchase or renewal of individual health insurance coverage was not 
intended to change any ERISA requirements governing the 
circumstances under which plans, including HRAs, may reimburse 
employers, employee organizations and other plan sponsors for 
certain expenses associated with administration of the plan.

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[[Page 28949]]

    5. Each plan participant is notified annually that the individual 
health insurance coverage is not subject to ERISA.
    Current rules issued by the Departments define ``group health 
insurance coverage'' as health insurance coverage offered in connection 
with a group health plan.\259\ The proposed rules included an amendment 
to clarify that--subject to certain conditions--individual health 
insurance coverage is not group health insurance coverage (or ``health 
insurance offered in connection with a group health plan''). This 
amendment was intended to ensure consistency and avoid any potential 
conflicting interpretations regarding individual health insurance 
coverage. Accordingly, if the conditions in 29 CFR 2510.3-1(1) were 
satisfied, the individual health insurance coverage would not be 
``health insurance coverage offered in connection with a group health 
plan'' for purposes of ERISA, the PHS Act, the Code, and PPACA, even 
though the premiums are reimbursed by an HRA.\260\
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    \259\ 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103.
    \260\ Note that the clarification with respect to the meaning of 
group health insurance coverage is not relevant for QSEHRAs because 
QSEHRAs generally are not group health plans. See Code section 
9831(d)(1), ERISA section 733(a)(1), and PHS Act section 2791(a)(1).
---------------------------------------------------------------------------

    After consideration of the comments, the conditions set forth in 
the proposed amendment to 29 CFR 2510.3-1, and the proposed amendment 
to the Departments' rules defining ``group health insurance coverage,'' 
are being finalized without significant change, but with minor 
clarifications in response to comments.

B. Safe Harbor

    The preamble to the proposed rules referred to the proposed 
amendment as a clarification. Some commenters asked DOL to clarify 
whether the conditions established in the proposed amendment would be 
considered a safe harbor, or absolute requirements for plan sponsors. 
These commenters asserted that it was unclear and expressed concern 
about the potential unintended consequences of non-compliance and 
confusion if all individual health insurance coverage reimbursed under 
an arrangement that did not satisfy the proposed criteria of the rule 
was treated as being subject to ERISA. Examples highlighted by 
commenters include how requirements under other federal laws such as 
HIPAA, the Paul Wellstone and Pete Domenici Mental Health Parity and 
Addiction Equity Act of 2008, and PPACA would apply to the coverage 
(including the single risk pool requirement, the rating rules for the 
small group market, or the medical loss ratio requirements, as well as 
the PPACA section 9010 health insurance fee), whether health insurance 
issuers could be considered plan fiduciaries, and whether participants 
could bring legal actions against health insurance issuers under 
ERISA's private right of action provisions. They also stated that 
factors outside of a plan sponsor's control could result in the 
employer not satisfying the conditions of the rules. As one example, a 
commenter suggested that an insurance broker could endorse an insurance 
product in the context of a private exchange without the employer's 
knowledge, possibly resulting in a failure to satisfy the condition 
that the plan sponsor not select or endorse any particular issuer or 
insurance coverage.\261\ These commenters suggested that flexibility 
would be appropriate to account for plan sponsors that make reasonable, 
good faith efforts to comply with the conditions in the proposed 
amendment but make de minimis errors.
---------------------------------------------------------------------------

    \261\ DOL notes that ``private exchange'' is a term that was not 
specifically defined in any public comments and is similarly 
undefined in this preamble. It is generally meant to refer to a tool 
or web-based platform that facilitates individuals' enrollment in 
the coverage of their choice. The term does not include any entity 
that meets the definition of an ``Exchange'' in 45 CFR 155.20.
---------------------------------------------------------------------------

    As noted earlier in this section of the preamble, DOL has set forth 
several safe harbors in other rules and guidance under which DOL has 
determined an arrangement is not a plan within the meaning of 
ERISA.\262\ These safe harbors are intended to clearly define 
circumstances in which a workplace arrangement falls outside of the 
scope of a plan under ERISA without necessarily specifying all the 
circumstances under which a workplace arrangement could avoid ERISA 
plan status. Here, too, DOL intended the proposed rules to constitute a 
safe harbor, as reflected in language in the proposed amendment 
providing that an ERISA plan ``shall not include'' individual health 
insurance coverage. The final rules make clear that the rule is a safe 
harbor.
---------------------------------------------------------------------------

    \262\ See 29 CFR 2510.3-1(j), 29 CFR 2510.3-2(f), and 29 CFR 
2509.99-1. See also DOL Field Assistance Bulletins No. 2004-01 and 
No. 2006-02.
---------------------------------------------------------------------------

    The conditions of the various regulatory safe harbors noted earlier 
in this preamble are highly sensitive to the particular type of plan at 
issue, and the particular legal and factual context associated with 
that type of plan. Accordingly, DOL cautions that the particular 
conditions of the safe harbor provided here are not directly relevant 
to other types of plan arrangements, such as retirement plans, life 
insurance plans, or disability plans. In particular, the employer's 
funding of a benefit arrangement, in most circumstances, is sufficient 
to preclude the grant of a safe harbor. In the particular context of 
the individual health insurance policies at issue here, however, DOL 
has concluded that employer funding is not disqualifying based on its 
conclusion that Congress generally intended that individual and group 
health insurance coverage be regulated as mutually exclusive 
categories. In this unique context, DOL has concluded that employer 
funding, by itself, is an insufficient basis for treating the 
individual health insurance policy, as opposed to the HRA, as part of 
an ERISA-covered plan.

C. An Employer, Employee Organization, or Other Plan Sponsor May Not 
Select or Endorse Any Particular Issuer or Insurance Coverage

    Paragraph (l)(2) of the proposed amendment required that the 
employer, employee organization, or other plan sponsor may not select 
or endorse any particular issuer or insurance coverage. The proposed 
rules clarified that an HRA plan sponsor would not be considered to 
have endorsed a particular issuer or insurance coverage if, for 
example, the plan sponsor offered general contact information regarding 
availability of health insurance in a state (such as providing 
information regarding HealthCare.gov or contact information for a state 
insurance commissioner's office) or providing general health insurance 
educational information (such as the uniform glossary of health 
coverage and medical terms available at: https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/laws/affordable-care-act/for-employers-and-advisers/sbc-uniform-glossary-of-coverage-and-medical-terms-final.pdf).
    Some commenters asked DOL to provide additional guidance on what 
types of activities would or would not constitute endorsement. These 
commenters stated that it would be important to provide HRA plan 
sponsors with flexibility to permit them to help employees shop for 
coverage, especially because many might be unfamiliar with the 
processes associated with obtaining health insurance in the individual 
market. Several commenters asked whether there would be circumstances 
in which a plan sponsor could connect participants or beneficiaries 
with an insurance agent or

[[Page 28950]]

broker without running afoul of the prohibition on endorsement. A few 
commenters asked whether, or under what circumstances, an HRA could be 
offered in connection with a private exchange where participants could 
make a selection from a set of coverage options. One commenter stated 
that without an ability to use a private exchange model, most employers 
will be reluctant to offer an individual coverage HRA over a 
traditional group health plan, thereby undermining the purpose of the 
proposed rules to expand use and availability of HRAs. One commenter 
stated that DOL should incentivize the use of private exchanges that 
would provide price and quality transparency as well as navigational 
support for plan participants shopping for individual health insurance 
coverage, and possibly even require that private exchanges offer QHPs. 
Another commenter urged DOL to ensure that private exchanges could not 
be used in a manner that harms the risk pools or that is anti-
competitive and promotes one issuer over another. This commenter 
suggested that the final rules specify that an employer cannot use an 
individual coverage HRA in conjunction with a plan purchased through a 
private exchange unless the private exchange is designed in such a way 
as not to constitute selection or endorsement by the employer.
    A plan sponsor may provide assistance to participants and 
beneficiaries in shopping for individual health insurance coverage 
without being considered to endorse any particular coverage if that 
assistance is unbiased, neutral, uniformly available, and does not 
steer participants and beneficiaries towards a particular health 
insurance issuer or coverage. For example, an HRA plan sponsor could 
accommodate requests from insurance brokers to speak with employees or 
distribute informational materials at their worksite, so long as such 
accommodations are granted on an equal basis and also without any 
preference for brokers that represent a particular firm or have a 
relationship with a certain health insurance issuer.
    DOL agrees with commenters that the use of private exchanges may be 
a helpful tool in shopping for coverage. However, DOL declines to adopt 
suggestions regarding adding incentives or requirements with respect to 
transparency standards, navigational support, or offering QHPs because 
any such rules are beyond the scope of this rulemaking.
    Moreover, a private exchange may be designed in a way that 
satisfies the conditions of 29 CFR 2510.3-1(l), in which case 
individual health insurance coverage purchased through the private 
exchange would not be considered group health plan coverage. 
Alternatively, a private exchange could be designed in a way that 
limits employees' choice of issuer, or promotes certain issuers or 
coverage options over others. In that case, coverage offered through 
the private exchange would not satisfy the prohibition on endorsement 
in the safe harbor. The final rules provide a new option for employers 
to offer individual coverage HRAs together with private exchanges that 
work with all individual market insurance issuers in a neutral and 
unbiased fashion, and maintain the individual insurance nature of the 
individual health insurance coverage.
    For example, under the final rules, an employer could maintain (or 
contract with) a tool or web-based platform that displays information 
about all coverage options in a state and facilitates enrollment. 
However, to be eligible for the safe harbor, the platform would be 
required to present all available coverage options in a way that is 
entirely neutral. The platform could not be designed or operated in a 
way that limits users' ability to select a coverage option that would 
otherwise be available to them or that promotes one option over another 
(for example, with ``recommended'' or ``starred'' listings), or the 
prohibition on endorsement would not be satisfied. However, an 
otherwise neutral platform that allows users to select certain criteria 
(such as a platform that allows participants to search for an HDHP or 
plans that contained specific providers in their network) and search 
for coverage options that fulfilled these criteria would not be 
considered to be an endorsement by the employer of any particular 
coverage, and would not violate this requirement of the final rule.

D. Reimbursement for Non-Group Health Insurance Premiums Must Be 
Limited Solely to Individual Health Insurance Coverage

    Paragraph (l)(3) of the proposed amendment would require that 
reimbursement for non-group health insurance premiums must be limited 
solely to individual health insurance coverage, as defined in 29 
CFR[thinsp]2590.701-2.\263\ DOL included this condition in order to 
limit the application of the proposed safe harbor to determining 
whether insurance policies sold as individual health insurance coverage 
would be treated as part of an employee welfare benefit plan subject to 
ERISA.
---------------------------------------------------------------------------

    \263\ While the HRA's reimbursement of non-group health 
insurance premiums is limited solely to individual health insurance 
coverage that does not consist solely of excepted benefits, the HRA 
may reimburse Medicare premiums for Medicare beneficiaries as 
permitted under 29 CFR 2590.702-2 without causing the reimbursement 
of individual health insurance coverage premiums for other 
individuals to fall outside the safe harbor.
---------------------------------------------------------------------------

    Several commenters asked DOL to clarify whether arrangements that 
provide reimbursement for individual health insurance coverage that 
consists solely of excepted benefits (for example, standalone limited-
scope dental benefits) could be considered to satisfy the proposed safe 
harbor. For the reasons explained earlier in this section of the 
preamble, in DOL's view, the proposed safe harbor was a necessary 
clarification for the types of individual health insurance coverage 
that might be reimbursed by an individual coverage HRA or QSEHRA. 
However, coverage that is sold in the individual market that provides 
only excepted benefits is not subject to the market requirements and 
does not present the same concerns about incompatible individual and 
group market regulatory regimes. Thus, the proposed safe harbor was not 
intended to address excepted benefit policies sold in the individual 
market. The final rules include additional language to make this 
clearer.
    In the preamble to the proposed rules, DOL also invited comments 
regarding which forms of payment are appropriately treated as 
``reimbursement'' to participants for this purpose. DOL asked whether, 
for example, ``reimbursement'' should be interpreted to include direct 
payments, individual or aggregate, by the employer, employee 
organization, or other plan sponsor to the insurance company.
    Commenters generally favored an expansive interpretation of the 
types of payments that should be treated as reimbursements. These 
commenters argued that permitting employers to pay health insurance 
issuers directly would promote administrative simplicity, and would 
enable plan sponsors to substantiate that participants and 
beneficiaries are enrolled in individual health insurance coverage, as 
the final integration rules require. Some commenters asserted that 
``reimbursement'' should be interpreted in a manner consistent with 
current industry practices for account-based plans, which permit the 
transfer of employer funds to debit cards that can be used to pay for 
certain qualified medical expenses. One commenter also stated that it 
should not matter whether

[[Page 28951]]

employer funds paid from an HRA go directly to a participant or a 
health insurance issuer because the economic substance of the 
transaction is the same--that is, the funds are being used to discharge 
an employee's premium payment obligations.
    DOL agrees with these commenters and, under the final rules, 
``reimbursement'' may include employee-initiated payments made through 
use of financial instruments, such as pre-paid debit cards, as well as 
direct payments, individual or aggregate, by the employer, employee 
organization, or other plan sponsor to the health insurance 
issuer.\264\ However, DOL cautions that plan sponsors should take care 
to ensure that payment practices do not violate the prohibition on 
endorsements by effectively limiting participants' and beneficiaries' 
ability to select certain coverage options or favoring certain issuers 
or coverage options. For example, if a plan sponsor were to establish 
procedures for sending direct payments to health insurance issuers, but 
those procedures excluded certain health insurance issuers, or placed 
additional burdens on HRA participants if they chose health insurance 
coverage offered by some health insurance issuers, rather than others, 
the procedure would be considered an endorsement, and the criteria of 
the safe harbor would not be satisfied.
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    \264\ Any direct payment should include an affirmative act by 
the employee requesting that the employer or plan administrator make 
the payment, as part of the enrollment process or otherwise. For 
example, as part of the insurance enrollment process, the employee 
might direct the employer or plan administrator to begin making 
monthly premium payments for so long as the employee remains 
enrolled in the individual health insurance coverage and remains 
eligible for HRA benefits.
---------------------------------------------------------------------------

E. The Employer, Employee Organization, or Other Plan Sponsor Receives 
No Consideration in Connection With the Employee's Selection or Renewal 
of Any Individual Health Insurance Coverage

    Paragraph (l)(4) of the proposed amendment would require that an 
employer, employee organization, or other plan sponsor receive no 
consideration in the form of cash or otherwise in connection with the 
employee's selection or renewal of any individual health insurance 
coverage. Commenters requested more specific guidance on how a plan may 
comply with this condition.
    As stated in the preamble to the proposed rules, this limitation in 
the DOL safe harbor rule for HRAs was focused on employers, employee 
organizations, and other plan sponsors receiving consideration, 
including from an issuer or person affiliated with an issuer in 
connection with any participant's purchase or renewal of individual 
health insurance coverage. The preamble to the proposed rules also 
explained that the provision was not intended to change any ERISA 
requirements governing the circumstances under which ERISA plans, 
including HRAs, may reimburse employers, employee organizations and 
other plan sponsors for certain expenses associated with administration 
of the plan.\265\
---------------------------------------------------------------------------

    \265\ 83 FR 54420, 54442 (Oct. 29, 2018).
---------------------------------------------------------------------------

    The requirement in the DOL final rule is different from the ``no 
compensation'' criteria established in the safe harbor rules regarding 
certain group or group-type insurance programs established at 29 CFR 
2510.3-1(j)(4) and individual retirement accounts (IRAs) established at 
29 CFR 2510.3-2(d)(iv). In the case of those rules, there is no ERISA 
plan, and the rules limit permissible compensation that an employer can 
receive, including from third parties, to reasonable compensation, 
excluding any profit, for administrative services actually rendered in 
connection with forwarding employee contributions to the insurer or IRA 
provider through payroll deductions or dues checkoffs.
    In the context of the DOL final rule, the HRA is generally an 
ERISA-covered plan and the issue is the extent to which the plan 
sponsor of the HRA could receive payments from the HRA or third 
parties. As noted above, the preamble to the proposed rules explained 
that the rule was not intended to change any ERISA requirements 
governing the circumstances under which ERISA plans, including HRAs, 
may reimburse employers, employee organizations and other plan sponsors 
for expenses associated with administration of a plan. Thus, in the 
case of plan assets being used for HRA related payments, reimbursement 
could not be made for expenses associated with settlor functions and 
activities.\266\ The fiduciary prohibitions in ERISA section 406(a) and 
406(b) also would apply in such cases, so that any reimbursements would 
need to be permissible under ERISA section 408(b)(2) and 29 CFR 
2550.408b-2(e). Subparagraph (e)(3) of those rules states: ``If a 
fiduciary provides services to a plan without the receipt of 
compensation or other consideration (other than reimbursement of direct 
expenses properly and actually incurred in the performance of such 
services within the meaning of 2550.408c-2(b)(3)), the provision of 
such services does not, in and of itself, constitute an act described 
in section 406(b) of the Act.'' ERISA section 408(c) and 29 CFR 
2550.408c-2 place additional restrictions on compensation for services 
in the case of a fiduciary who is already receiving full-time pay from 
an employer or employee organization sponsoring the plan. However, in 
the case of an unfunded HRA, with payments from the HRA made solely out 
of an employer's general assets, there would not be any plan assets; 
thus, there could be no payments to the employer from plan assets. 
Moreover, in the case of such an unfunded HRA, it seems extremely 
unlikely that an employer would apply debits to the notional employee 
accounts that are part of the HRA to ``reimburse'' itself from the HRA 
for expenses associated with sponsoring the HRA. Finally, in DOL's 
view, receipt of compensation from third parties to cover the cost of 
operating the HRA would be prohibited payments in connection with the 
employee's selection or renewal of any individual health insurance 
coverage, and, therefore, not permissible under paragraph (l)(4) of the 
final rules. Accordingly, such receipt of compensation would not be 
permissible under paragraph (l)(4) of the final rules.
---------------------------------------------------------------------------

    \266\ See DOL Advisory Opinion 2001-01A.
---------------------------------------------------------------------------

F. Each Plan Participant Must Be Notified Annually That the Individual 
Health Insurance Coverage Is Not Subject to ERISA

    Paragraph (l)(5) of the proposed amendment included a requirement 
that plans provide an annual notice to participants stating that 
individual health insurance coverage funded through an HRA is not 
subject to the requirements of ERISA. For an individual coverage HRA, 
the notice must satisfy the requirements set forth in the final 
integration rules at 29 CFR 2590.702-2(c)(6), discussed earlier in this 
preamble. For a QSEHRA or an HRA that is not subject to 29 CFR 
2590.702-2(c)(6) (such as a retiree-only HRA), the proposal set forth 
model language to satisfy the condition.\267\ The preamble to the 
proposed rules also explained that a supplemental salary reduction 
arrangement need not provide the required notice; instead, the notice

[[Page 28952]]

could be provided by the HRA that the salary reduction arrangement 
supplements.\268\ DOL invited comment on whether it would be helpful to 
issue additional rules or guidance addressing the application of ERISA 
reporting and disclosure requirements to HRAs integrated with such non-
ERISA individual health insurance coverage (for example, SPD content 
and Form 5500 annual reporting requirements).
---------------------------------------------------------------------------

    \267\ As stated in the preamble to the proposed rules, in DOL's 
view, the SPD for the HRA, QSEHRA, or other ERISA plan would fail to 
satisfy the style, format, and content requirements in 29 CFR 
2520.102-3 unless it contained a discussion of the status of the HRA 
or QSEHRA and the individual health insurance coverage under ERISA 
sufficient to apprise the HRA or QSEHRA plan participants and 
beneficiaries of their rights and obligations under the plan and 
ERISA Title I. 83 FR 54420 at 54441 (Oct. 29, 2018).
    \268\ 83 FR 54420, 54441 (Oct. 29, 2018).
---------------------------------------------------------------------------

    Commenters requested that DOL confirm that HRAs are subject to the 
reporting and disclosure requirements of ERISA, such as the SBC or (for 
plans of applicable size) the Form 5500 Annual Report. These commenters 
said that reporting and disclosure should be revised to allow state 
regulators and Exchanges to gather necessary information about the use 
of HRAs. One commenter also urged DOL to ensure that these requirements 
did not discourage employers from offering individual coverage HRAs to 
their employees by preserving, for example, any exemptions from filing 
reports for small businesses, or allowing the filing of simpler 
reports, such as the Form 5500-SF. Another commenter urged DOL to 
review the current required information, notices and disclosures that 
plan sponsors must convey to plan participants and beneficiaries and to 
simplify, combine or eliminate unnecessary or redundant material.
    After considering the comments and feedback received from 
stakeholders, DOL has determined that adding additional new, 
potentially redundant \269\ disclosure requirements beyond the scope of 
the proposed rules is not necessary. For example, individual coverage 
HRAs are group health plans and must, therefore, provide participants 
with an SBC.\270\ ERISA also contains comprehensive reporting 
requirements that apply to group health plans, such as HRAs,\271\ and 
DOL has determined that adding or changing those reporting requirements 
with respect to HRAs is not necessary at this time. In certain 
situations, DOL has provided for exemptions or reporting exemptions and 
simplified disclosure requirements.\272\ Provided they satisfy the 
requirements under applicable DOL rules, HRAs and their administrators 
remain eligible for this relief.
---------------------------------------------------------------------------

    \269\ See e.g., 29 CFR 2520.104b-2 and 2520.104b-3(a) and 
(d)(3).
    \270\ See PHS Act section 2715. See also 26 CFR 54.9815-2715, 29 
CFR 2590.715-2715, and 45 CFR 147.200.
    \271\ See e.g., ERISA sections 101, 103, and 104; and PHS Act 
section 2715A (incorporated in Code section 9815 and ERISA section 
715).
    \272\ See ERISA sections 104(a)(3) and PHS Act section 2715 
(incorporated in Code section 9815 and ERISA section 715). See also 
26 CFR 54.9815-2715(a)(1)(iii); 29 CFR 2520.104-20, 2520.104-44, and 
2590.715-2715(a)(1)(iii); and 45 CFR 147.200(a)(1)(iii).
---------------------------------------------------------------------------

G. Comments Outside the Scope

    Some commenters raised issues relating to the separate safe harbor 
for certain group or group-type insurance programs at 29 CFR 2510.3-
1(j).\273\ Several commenters asked DOL to clarify whether other types 
of coverage, such as health care sharing ministries, might be 
considered part of an employee welfare benefit plan subject to ERISA if 
they were paid for through an HRA, QSEHRA, or supplemental salary 
reduction arrangement. The safe harbor is intended to provide assurance 
to stakeholders that insurance policies sold as individual health 
insurance coverage, and that are generally subject to comprehensive 
federal (and state) individual market rules, would not be treated as 
part of an employee welfare benefit plan subject to ERISA so long as 
the conditions of the safe harbor are satisfied. DOL has concluded that 
the safe harbor is appropriate because of the significant differences 
in legal requirements that would apply to health insurance coverage 
based on whether it is considered individual health insurance or group 
coverage. However, the safe harbor was not intended to address all 
circumstances in which health insurance coverage may be treated as part 
of an employee welfare benefit plan subject to ERISA. DOL may provide 
additional clarification in the future regarding other types of 
coverage.\274\
---------------------------------------------------------------------------

    \273\ This safe harbor does not relate to HRAs, QSEHRAs, or 
other arrangements that constitute an employee welfare plan that 
provides reimbursement for premiums for individual health insurance 
coverage because it is limited to arrangements without employer 
contributions.
    \274\ As noted earlier in this preamble, an HRA generally may 
reimburse expenses for medical care, as defined under Code section 
213(d), of an employee and certain of the employee's family members. 
Neither the proposed rules nor the final rules make any changes to 
the rules under Code section 213. Thus, any issues arising under 
Code section 213, and any guidance requested by commenters to 
address those issues, are beyond the scope of this rulemaking.
---------------------------------------------------------------------------

V. Overview of Final Rules Regarding Individual Market Special 
Enrollment Periods--Department of Health and Human Services

A. In General

    With the ability to integrate HRAs with individual health insurance 
coverage, many employees may need access to individual health insurance 
coverage, or may want to change to other individual health insurance 
coverage in order to maximize the use of their individual coverage HRA. 
Therefore, HHS proposed a new SEP to allow employees and their 
dependents to enroll in individual health insurance coverage, or to 
change from one individual health insurance plan to another, outside of 
the individual market annual open enrollment period if they gain access 
to an individual coverage HRA.
    In addition, because employees and dependents with a QSEHRA 
generally must be enrolled in MEC,\275\ and one category of MEC is 
individual health insurance coverage, the proposed rules also applied 
the new SEP to individuals who are provided QSEHRAs.\276\ Because the 
proposed rules allowed for HRAs to be integrated with individual health 
insurance coverage both on- and off-Exchange (and because individuals 
with QSEHRAs may enroll in individual health insurance coverage on- or 
off-Exchange), the proposed rules included this new SEP in the limited 
open enrollment periods available off-Exchange, in accordance with 
current rules at 45 CFR 147.104(b)(2).\277\
---------------------------------------------------------------------------

    \275\ Generally, payments from a QSEHRA to reimburse an eligible 
employee's medical care expenses are not includible in the 
employee's gross income if the employee has coverage that provides 
MEC as defined in Code section 5000A(f), which includes individual 
health insurance coverage.
    \276\ This preamble refers to a QSEHRA being ``provided'' as 
opposed to being ``offered'' because employees and dependents cannot 
opt out of a QSEHRA.
    \277\ The Departments note that the new SEP would not apply to 
individuals who gain access to an excepted benefit HRA, as those 
individuals are not required to be enrolled in individual health 
insurance coverage, and those HRAs are generally prohibited from 
reimbursing premiums for individual health insurance coverage.
---------------------------------------------------------------------------

    After considering the comments, HHS is adopting the proposed SEP 
parameters in these final rules, with some changes and clarifications 
in response to comments, as explained in more detail later in this 
section of the preamble.
1. SEP Triggering Event and Availability
    The proposed rules included a new paragraph 45 CFR 155.420(d)(14) 
that would establish an SEP for when an employee or his or her 
dependent(s) gains access to and enrolls in an individual coverage HRA 
or is provided a QSEHRA, so that he or she may enroll in or change his 
or her enrollment in individual health insurance coverage. The proposed 
rules also offered the existing option for advanced availability to 
those enrolling through the new SEP. That is, per 45 CFR 155.420(c)(2), 
qualifying individuals would have the option to apply for coverage and 
select

[[Page 28953]]

a plan within 60 days before or after their SEP triggering event.
    Many commenters supported providing an SEP to allow individuals who 
newly gain access to an individual coverage HRA or who are newly 
provided a QSEHRA to enroll in or change their health insurance 
coverage. One commenter asked for clarification that individuals who 
are already enrolled in individual health insurance coverage would be 
eligible for the SEP if they newly gain access to an individual 
coverage HRA. The final rules clarify that employees and dependents may 
qualify for the new SEP regardless of whether they are currently 
enrolled in individual health insurance coverage, in order to allow all 
individuals who newly gain access to an individual coverage HRA or who 
are newly provided a QSEHRA the flexibility to take this into account 
when choosing an individual health insurance plan for themselves, and, 
if applicable, for their families.
    Additionally, the final rules include changes to the SEP triggering 
event at 45 CFR 155.420(d)(14) to reflect that employees and their 
dependents who had access to, but who were not enrolled in, an 
employer's individual coverage HRA during all or at the end of the 
preceding plan year may use the new SEP if they may newly enroll in an 
individual coverage HRA at the beginning of the subsequent HRA plan 
year. Similarly, employees and their dependents who at one time had an 
individual coverage HRA or a QSEHRA, but then had another type of 
health coverage (including but not limited to a different individual 
coverage HRA or a different QSEHRA), and are again newly offered an 
individual coverage HRA or newly provided a QSEHRA from the same 
employer (for example, because they moved from one class of employees 
to another, or because they were re-hired by a former employer), may 
qualify for this SEP, as they may need an opportunity to enroll in 
individual health insurance coverage, regardless of whether they were 
previously offered or enrolled in an individual coverage HRA or 
previously provided a QSEHRA by the same employer.
    In many cases like these, employees also will be eligible for an 
SEP due to a loss of MEC in accordance with 45 CFR 155.420(d)(1)--for 
example, due to a loss of coverage sponsored by a previous employer or 
other coverage that they may have had during that time, such as 
coverage from a spouse's employer. However, some employees and 
dependents may not be eligible for another SEP, such as those who did 
not previously have other coverage, or who previously chose to enroll 
in coverage that was not MEC, such as STLDI. The final rules, 
therefore, provide that the SEP at 45 CFR 155.420(d)(14) is available 
when a qualified individual, enrollee, or dependent newly gains access 
to an individual coverage HRA or is newly provided a QSEHRA, regardless 
of whether they were previously offered or enrolled in an individual 
coverage HRA or previously provided a QSEHRA, so long as the individual 
is not covered by the HRA or QSEHRA on the day immediately prior to the 
triggering event (that is, for an individual coverage HRA, the first 
day on which coverage under the individual coverage HRA can become 
effective or for a QSEHRA, the first day on which coverage under the 
QSEHRA is effective). In other words, the new SEP will be available to 
individuals who have not previously been offered an individual coverage 
HRA or provided a QSEHRA, as well as those who had access to the 
individual coverage HRA or were provided a QSEHRA during a prior plan 
year(s) or earlier during the current plan year, but are not currently 
covered by the individual coverage HRA or the QSEHRA.
    In order to clarify the specific date on which the coverage 
effective date and availability are based, as discussed later in this 
preamble, the final rules specify that the SEP triggering event at 45 
CFR 155.420(d)(14) is the first day on which coverage for the 
individual under the individual coverage HRA can take effect or the 
first day on which coverage for the individual under the QSEHRA takes 
effect, as applicable. The Departments anticipate that the first day on 
which an individual coverage HRA can become effective or the date on 
which a QSEHRA is effective will generally be the first day of the plan 
year. In either case, the triggering event is the first day of the plan 
year. However, an individual coverage HRA may offer more than one 
effective date option to accommodate an individual who, under the final 
integration rules, is not required to be sent the notice setting forth 
the terms of the HRA at least 90 days before the beginning of the 
individual coverage HRA plan year, as required by 26 CFR 54.9802-
4(c)(6), 29 CFR 2590.702-2(c)(6), and 45 CFR 146.123(c)(6) (for 
example, an individual who is newly hired and therefore newly offered 
the individual coverage HRA in the middle of the plan year).\278\ For 
individuals who are newly hired or who otherwise newly gain access to 
an individual coverage HRA during the plan year, the triggering event 
is the first day on which the individual coverage HRA can take effect 
for those who enroll in individual health insurance coverage that 
itself takes effect no later than that date.\279\ This is the case even 
for the individuals or dependents who do not actually enroll in the 
individual coverage HRA until a later date.
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    \278\ Because employees may not enroll in an individual coverage 
HRA if they are not enrolled in individual health insurance 
coverage, the Departments anticipate that some employers may want to 
provide employees who are not eligible to participate in the 
individual coverage HRA at least 90 days prior to the start of the 
HRA plan year with flexibility regarding the start date of their 
individual coverage HRA, so that the employees have sufficient time 
to enroll in individual health insurance coverage after receiving 
the notice.
    \279\ For individuals who are newly hired or who otherwise 
become newly eligible for a QSEHRA, the triggering event is the 
first day on which coverage under the QSEHRA is effective. However, 
a QSEHRA may not reimburse any incurred medical care expense until 
the participant substantiates that he or she (and the individuals 
whose expenses are being reimbursed) has MEC for the month during 
which the expense was incurred.
---------------------------------------------------------------------------

    For example, assume an employer hires a new employee on June 15 and 
offers an individual coverage HRA to the employee that may take effect 
on either (1) July 1, if the employee is enrolled in individual health 
insurance coverage that takes effect no later than that date; or (2) 
August 1, if the employee enrolls in individual health insurance 
coverage that will take effect no later than that date. In this case, 
the employee's triggering event is July 1 because that is the first day 
on which coverage under the individual coverage HRA can take effect.
    Several commenters supported applying the advanced availability 
rules at 45 CFR 155.420(c)(2) to the proposed new SEP in order to allow 
qualified individuals, enrollees, and dependents to enroll in or change 
to a different individual health insurance plan in advance of when 
their individual coverage HRA or QSEHRA would begin. As discussed 
earlier in this preamble in response to comments on the final 
integration rules, many commenters supported the requirement that 
individuals covered by an individual coverage HRA must be enrolled in 
individual health insurance coverage and that the HRA must implement 
reasonable procedures to substantiate that participants and dependents 
will be enrolled in individual health insurance coverage for the plan 
year, or for the portion of the plan year during which the individual 
is covered by the HRA, as applicable. Several commenters noted the 
importance that individuals be enrolled in individual health insurance 
coverage by the time that their individual coverage HRA takes effect to 
ensure that they have health

[[Page 28954]]

insurance coverage that complies with PHS Act sections 2711 and 2713 at 
all times during which they are covered by the individual coverage HRA. 
In order to avoid effectively forfeiting their HRA because they are not 
enrolled in individual health insurance coverage on the day that their 
individual coverage HRA can take effect, employees and dependents 
generally will need to make an individual health insurance plan 
selection before that date.
    The final SEP rules include several changes in response to these 
comments. First, the proposed rules stated that the SEP applies to an 
individual who ``gains access to and enrolls in'' an individual 
coverage HRA or QSEHRA. The final SEP rules remove the phrase ``and 
enrolls in'' to clarify that currently being covered by the individual 
coverage HRA or QSEHRA is not necessary to trigger the SEP. This change 
is intended to better align with the requirement that participants and 
any dependents must be enrolled in individual health insurance coverage 
that will take effect no later than the date their individual coverage 
HRA takes effect, by ensuring that individuals will be able to enroll 
in individual health insurance coverage using the new SEP prior to the 
first day that their individual coverage HRA may take effect.
    The final SEP rules also include changes to the advanced 
availability rules to ensure that, whenever possible, employees and 
their dependents are enrolled in individual health insurance coverage 
(which is generally a requirement for those with an individual coverage 
HRA and an option for satisfying the requirement to enroll in MEC for 
those with a QSEHRA) by the time coverage under their individual 
coverage HRA may take effect or that their QSEHRA takes effect. 
Specifically, the final rules include a new paragraph at 45 CFR 
155.420(c)(3) to provide that a qualified individual, enrollee, or his 
or her dependent who is described in paragraph (d)(14) has 60 days 
before the triggering event to select a QHP, unless the HRA or QSEHRA 
was not required to provide the notice setting forth its terms to such 
qualified individual or enrollee at least 90 days before the first day 
of the plan year, as specified in 26 CFR 54.9802-4(c)(6), 29 CFR 
2590.702-2(c)(6) and 45 CFR 146.123(c)(6) or Code section 9831(d)(4), 
as applicable, and therefore the qualified individual, enrollee, or his 
or her dependent(s) may not have received sufficient advance notice of 
eligibility for the individual coverage HRA or QSEHRA to enroll in 
individual health insurance coverage that takes effect by the time 
their individual coverage HRA may take effect or their QSEHRA takes 
effect, in which case the qualified individual, enrollee, or his or her 
dependent(s) has 60 days before or after the triggering event to select 
a QHP.
    In other words, qualified individuals and enrollees to whom 
employers must send a notice setting forth the terms of the individual 
coverage HRA at least 90 days before the first day of the individual 
coverage HRA plan year, and, if applicable, their dependents, must 
enroll in individual health insurance coverage within 60 days before 
the date the individual coverage HRA may take effect, which would be 
the first day of the individual coverage plan year. Similarly, 
employees, and, if applicable, their dependents, who will be provided a 
QSEHRA, and whose employer is required to send them a written notice at 
least 90 days before the beginning of the plan year, have 60 days prior 
to the first day of the QSEHRA plan year to enroll in individual health 
insurance coverage. This change will help ensure that the individual 
coverage HRA can comply with the annual coverage substantiation 
requirement by the time that an individual's or family member's 
individual coverage HRA takes effect, or that the QSEHRA satisfies the 
requirement that individuals who are provided the QSEHRA and who intend 
to satisfy their requirement to have MEC by enrolling in individual 
health insurance coverage have MEC. It will also reduce gaps in 
coverage by helping ensure that individuals and dependents who will be 
eligible for an individual coverage HRA and are notified at least 90 
days before the beginning of the individual coverage HRA plan year are 
covered by individual health insurance coverage for the full HRA plan 
year and do not inadvertently forfeit their HRA.
    In contrast, because individual coverage HRAs and QSEHRAs must only 
provide notice by the day that an individual coverage HRA may take 
effect or that a QSEHRA takes effect for employees who newly become 
eligible for an individual coverage HRA or are newly provided a QSEHRA 
less than 90 days prior to the beginning of the individual coverage HRA 
or QSEHRA plan year (or during the plan year), these employees are 
unlikely to receive this notice as far in advance of their SEP 
triggering event. Therefore, these employees may need time after their 
triggering event to select an individual health insurance plan for 
themselves, and, if applicable, for their dependent(s). To accommodate 
these employees and their dependents, the final SEP rules provide them 
with up to 60 days before or after their triggering event to enroll in 
individual health insurance coverage. Under this rule combined with the 
coverage effective date rules discussed in the next section of this 
preamble, newly hired employees and their dependents may enroll in 
individual health insurance coverage that does not take effect until up 
to 3 months after the earliest date that their individual coverage HRA 
may take effect, or up to 3 months after the date coverage begins under 
their QSEHRA.\280\ For example, an employee who starts work on July 25, 
and whose individual coverage HRA may take effect on August 1 (or whose 
QSEHRA does take effect on August 1), will have until September 30--60 
days following the triggering event date--to enroll in an individual 
health insurance plan. If the employee enrolls on September 30, then 
his or her individual health insurance coverage will take effect on 
October 1.\281\ The Departments encourage employers to work with 
employees who do not receive substantial advance notice of their 
individual coverage HRA to help them understand the latest date by 
which they must enroll themselves, and, if applicable, their 
dependents, in individual health insurance coverage to avoid 
effectively forfeiting their individual coverage HRA.
---------------------------------------------------------------------------

    \280\ The Departments note that nothing in the final SEP rules 
eliminates the requirement that individual coverage HRAs comply with 
the final integration rules. Individual coverage HRAs must be 
designed in accordance with all the applicable rules, including the 
final integration rules and the final SEP rules.
    \281\ Additionally, partial year individual coverage HRA or 
QSEHRA coverage may occur due to employees gaining new dependents 
during the plan year. 45 CFR 155.420(c)(1) provides qualified 
individuals who gain a new dependent due to the birth or adoption of 
a child, or due to a child support or other court order, and 
therefore qualify for the SEP at 45 CFR 155.420(d)(2)(i), with 60 
days to enroll their new dependent in individual health insurance 
coverage. As provided at 45 CFR 155.420(b)(2)(i), this coverage 
takes effect retroactively to the child's date of birth or adoption, 
or the date of the child support or other court order, or, at the 
option of the Exchange, the qualified individual may request that it 
take effect prospectively. To the extent the HIPAA special 
enrollment rules or other rules require group health plans to make 
such coverage available under such circumstances, either 
retroactively or prospectively, employers should ensure that 
employees understand how much time they have to enroll their new 
dependent in their individual coverage HRA, especially if they will 
have less than the 60 days post-SEP triggering event that they have 
to enroll their new dependent in individual health insurance 
coverage. See Code section 9801(f) and 26 CFR 54.9801-6; ERISA 
section 701(f) and 29 CFR 2590.701-6; and PHS Act section 2704(f) 
and 45 CFR 146.117. The Departments note that QSEHRAs are not 
subject to the HIPAA special enrollment rules. See Code section 
9831(d)(1).
---------------------------------------------------------------------------

2. Coverage Effective Dates
    The proposed rules added a new paragraph at 45 CFR 
155.420(b)(2)(vi) to

[[Page 28955]]

provide that if plan selection is made before the day of the triggering 
event, then the coverage effective date is either the first day of the 
first month following the SEP triggering event, or, if the triggering 
event is on the first day of a month, the date of the triggering event. 
Under the proposed rules, if plan selection is made on or after the day 
of the triggering event, coverage would take effect the first day of 
the month following the date of plan selection. For example, under the 
proposed rules, if an individual newly gains access to an individual 
coverage HRA or is provided a QSEHRA for a plan year starting April 1 
and enters April 1 in their application for individual health insurance 
coverage as their HRA or QSEHRA effective date, then so long as the 
individual selects an individual health insurance plan before April 1, 
the effective date of their new individual health insurance coverage 
will be April 1.
    Several commenters supported providing a coverage effective date of 
the first day of the first month following the individual's plan 
selection and SEP triggering event. One commenter agreed that a first-
of-the-month effective date was appropriate, but also stated that this 
may require issuers to allow an additional premium payment during an 
employee's first month of employment.\282\
---------------------------------------------------------------------------

    \282\ Under 45 CFR 155.400(e)(1)(ii), if an individual has a 
coverage effective date of April 1, for example, then the issuer 
could set a premium payment deadline as early as April 1, but may, 
instead, adopt a policy setting a later due date (either 30 days 
after the enrollment transaction was received, or 30 days after the 
policy start date, whichever is later). Therefore, the new enrollee 
might have a similar deadline for his or her initial payment that he 
or she has for his or her subsequent payment.
---------------------------------------------------------------------------

    The final rules include coverage effective dates for this SEP as 
proposed, with some edits to incorporate the changes at 45 CFR 
155.420(d)(14) and for clarity. Additionally, with regard to timing of 
premium payments for individual health insurance coverage, HHS notes 
that in other contexts individual market plans on- and off-Exchange 
regularly receive enrollment information within the same timeframe that 
will apply for the new SEP's coverage effective date rules. For 
example, under current rules, if a qualified individual or dependent is 
going to lose MEC on March 31 and enrolls in coverage during March, his 
or her coverage effective date is April 1. Therefore, issuers that 
already participate in the individual health insurance market will be 
accustomed to setting premium payment deadlines for enrollees in this 
situation.
3. Special Enrollment Period Verification
    Several commenters expressed support for verifying SEP eligibility 
for employees newly enrolling in individual health insurance coverage 
based on the new SEP, and one commenter requested additional guidance 
on how the verification would be administered. HHS confirms that 
Exchanges that use the Federal HealthCare.gov platform will require 
these individuals to submit documentation to confirm their SEP 
eligibility prior to effectuating their enrollment in individual health 
insurance coverage through the Exchange. More information on the 
process for submitting documents to verify SEP eligibility is available 
on HealthCare.gov, and HHS will provide additional guidance on how the 
FFEs and State Exchanges on the Federal platform will confirm 
eligibility for the new SEP.

B. Individuals Re-Enrolling in Individual Coverage HRA or Being 
Provided a QSEHRA From the Prior Plan Year

    The proposed rules requested comments on whether an employee who is 
enrolled in an individual coverage HRA or provided a QSEHRA should be 
eligible for the SEP at 45 CFR 155.420(d)(14) annually, at the 
beginning of each new plan year of the individual coverage HRA or 
QSEHRA, particularly if the new plan year is not aligned with the 
calendar year. The proposed rules noted that such annual availability 
would allow employees to change to new individual health insurance 
coverage in response to updated information about their individual 
coverage HRA or QSEHRA for each of their plan years, even if their 
individual coverage HRA or QSEHRA plan year is not based on a calendar 
year cycle. HHS notes that employees and dependents enrolled in an 
individual coverage HRA or provided a QSEHRA that has a calendar year 
plan year would have this option; that is, they would be able to change 
their individual health insurance plan in response to updated 
information about their individual coverage HRA or QSEHRA during the 
individual market open enrollment period.
    Some commenters supported providing the new SEP annually for 
employees and dependents enrolled in an individual coverage HRA or 
provided a QSEHRA and whose individual coverage HRA or QSEHRA has a 
non-calendar year plan year, in order to allow employees to enroll in 
or change to a new plan in response to updated information about their 
individual coverage HRA or QSEHRA each plan year. Several commenters 
emphasized the importance of providing employees and their dependents 
with the opportunity to re-evaluate their individual health insurance 
coverage options at the same time that their individual coverage HRA or 
QSEHRA is likely to change, with one commenter suggesting that 
employers should not be permitted to make changes to their individual 
coverage HRA unless employees may also make changes to their individual 
health insurance coverage during the calendar year. Another commenter 
suggested that providing the new SEP annually would offer convenience 
for employees and employers who choose to begin their individual 
coverage HRA plan year on a date other than January 1.
    However, some commenters opposed providing the new SEP on an annual 
basis due to concerns that allowing consumers to regularly change plans 
during the calendar year would harm the individual market risk pool. 
One commenter generally opposed providing the new SEP annually, but 
specified that if HHS chooses to do so, it should only be available to 
employees and dependents whose employer changes their individual 
coverage HRA contribution in excess of a certain amount, such as $100, 
and that this change be verified to prevent employees who do not 
qualify for the SEP from accessing it for reasons related to a health 
condition. To ensure that the SEP would not be available on an annual 
basis, one commenter suggested offering the SEP only after an employee 
becomes eligible for an individual coverage HRA following a period of 
at least 60 days during which they were not eligible for an HRA from 
the same employer.
    Other commenters opposed offering the new SEP annually based on 
concerns that employees who changed individual health insurance 
coverage during the calendar year would be harmed because their 
deductibles and other accumulators would reset twice per year: Once 
after the calendar year individual coverage open enrollment period, and 
then again after their SEP. One commenter suggested that this could 
negate the potential advantage to the employee of changing plans to 
take advantage of an update to their individual coverage HRA or QSEHRA.
    Several commenters suggested that to mitigate this challenge, 
employers should provide individual coverage HRAs on a calendar-year 
basis to align updates that they make to their individual coverage HRA 
with the

[[Page 28956]]

individual market open enrollment period, with one commenter 
recommending that the Departments require employers to do so. One 
commenter suggested that the final rules should permit employers to 
begin offering individual coverage HRAs at any time during the calendar 
year, and the Departments could then require these employers to 
transition to offering individual coverage HRAs based on a calendar 
plan year within a reasonable period of time, such as 5 years.
    HHS determined that employees who are enrolled in an individual 
coverage HRA or who are provided a QSEHRA should have the option to re-
evaluate their individual health insurance coverage options for each 
new individual coverage HRA or QSEHRA plan year, regardless of whether 
the HRA or QSEHRA is offered or provided (as applicable) on a calendar 
plan year basis. However, the final rules provide that the new SEP will 
not be available on an annual basis at the beginning of a new 
individual coverage HRA or QSEHRA plan year to individuals who are 
already enrolled in an individual coverage HRA or who are already 
provided a QSEHRA. This is because employees offered an individual 
coverage HRA or provided a QSEHRA with a calendar year plan year may 
re-evaluate their individual health insurance coverage options and 
change their individual health insurance plan, if they wish to do so, 
during the annual individual market open enrollment period. Further, 
individuals with an individual coverage HRA or QSEHRA with a non-
calendar year plan year will have an opportunity through an existing 
SEP to re-evaluate their coverage options.
    More specifically, because HRAs are group health plans, employees 
enrolled in an individual coverage HRA with a non-calendar year plan 
year may qualify for an SEP on an annual basis pursuant to existing 
rules at 45 CFR 155.420(d)(1)(ii) (the non-calendar year plan year 
SEP). This SEP applies to qualified individuals and dependents enrolled 
in a group health plan or an individual health insurance plan with a 
non-calendar year plan year, even if the qualified individual or his or 
her dependent has the option to renew the coverage. In addition, while 
Cures Act section 18001(c) provides that the term ``group health plan'' 
generally does not include a QSEHRA,\283\ HHS will treat a QSEHRA with 
a non-calendar year plan year as a group health plan for the limited 
purpose of the non-calendar year plan year SEP, and intends to codify 
this interpretation in future rulemaking. For the non-calendar year 
plan year SEP, the triggering event is the last day of the plan year.
---------------------------------------------------------------------------

    \283\ A QSEHRA continues to be treated as a group health plan 
under the PHS Act for purpose of Part C Title XI of the Social 
Security Act.
---------------------------------------------------------------------------

    HHS has determined that the availability of the non-calendar year 
plan year SEP achieves an appropriate balance between providing 
employers with flexibility to offer an individual coverage HRA or 
provide a QSEHRA on a 12-month cycle that meets their needs and 
allowing employees and their dependents the flexibility to re-assess 
their individual health insurance coverage options at the same time 
that the terms of their individual coverage HRA or QSEHRA may change. 
Additionally, per 45 CFR 155.420(a)(4), the non-calendar year plan year 
SEP is subject to plan category limitations for Exchange enrollees, 
which HHS has determined will mitigate commenters' concerns about the 
potential risks to individual market stability that providing employees 
with the flexibility to choose a different plan annually, outside of 
the annual individual market open enrollment period, could pose. 
Employers that want to ensure their employees have the ability to 
change to a different individual health insurance policy each 
individual coverage HRA or QSEHRA plan year without being subject to 
plan category limitations, and consider potential changes to their 
individual coverage HRA or to their QSEHRA at the same time that their 
costs for individual health insurance coverage may also change, can 
align their individual coverage HRA or QSEHRA plan year with the 
calendar year. HHS will incorporate messaging into the HealthCare.gov 
application for Exchange individual health insurance coverage and other 
technical assistance materials to help employees understand that 
changing individual health insurance coverage during the calendar year 
will reset their deductibles and other accumulators. HHS encourages 
State Exchanges to adopt similar messaging.

C. Plan Category Limitations

    To allow employees and their dependents the flexibility to 
adequately respond to newly gaining access to an individual coverage 
HRA or newly being provided a QSEHRA, the proposed rules included an 
amendment to 45 CFR 155.420(a)(4)(iii) to exclude Exchange enrollees 
who would qualify for the new SEP from plan category limitations.\284\ 
Therefore, under the proposed rules, individuals eligible for the new 
SEP who are currently enrolled in individual health insurance coverage 
on an Exchange would be able to select any available Exchange plan 
without regard to the metal level of their current coverage.
---------------------------------------------------------------------------

    \284\ 45 CFR 155.420(a)(4) does not apply to SEPs in the 
individual market off-Exchange.
---------------------------------------------------------------------------

    Several commenters expressed support for the proposal to exempt the 
new SEP from plan category limitations, noting the importance of 
providing access to individual health insurance coverage or flexibility 
to change their current individual health insurance plan to employees 
and dependents who qualify for this new SEP.
    HHS agrees with commenters about the importance of providing access 
to individual health insurance coverage or flexibility to change their 
current individual health insurance plan to employees and dependents 
who qualify for the new SEP, and is, therefore, finalizing the 
amendment to 45 CFR 155.420(a)(4)(iii) to exempt individuals eligible 
for the new SEP from plan category limitations. However, see the 
discussion earlier in this section of the preamble regarding the 
application of plan category limitations to individuals to whom the 
non-calendar year plan year SEP applies.

VI. Applicability Dates

    The proposed integration rules and proposed excepted benefit HRA 
rules, as well as the proposed DOL clarification and the proposed 
clarification by the Departments regarding the meaning of ``group 
health insurance coverage,'' were proposed to apply to group health 
plans and health insurance issuers for plan years beginning on or after 
January 1, 2020. The proposed PTC rules were proposed to apply for 
taxable years beginning on or after January 1, 2020, and the proposed 
SEP rules were proposed to apply January 1, 2020. The proposed rules 
also provided that taxpayers and others could not rely on the proposed 
rules. The Departments solicited comments on the proposed applicability 
date.
    Some commenters requested that the Departments either provide an 
earlier applicability date or maintain the proposed general 
applicability date of January 2020. Some urged finalization by the end 
of the first quarter of 2019 to account for the 2020 rate setting 
schedule and to allow for implementation by 2020.
    Many commenters expressed concern that issuers, state insurance 
regulators, the Exchanges, and employers would not be prepared for 
implementation of the final rules by 2020 and requested various 
applicability date delays, including a 2021 applicability date, an

[[Page 28957]]

applicability date of 12 or 18 months following finalization of the 
rule, and an indefinite delay to allow further time to study the 
market. These commenters focused on the significance of the changes 
made by the proposed rules and the anticipated complexity of 
implementation. Several State Exchanges submitted comments urging the 
Departments to delay the applicability date for several plan years or 
until further support for states is available. These commenters stated 
that it would be very difficult, and in some instances impossible, to 
implement the system changes required by the proposed integration, PTC, 
and SEP rules for the 2020 plan year. One commenter suggested that 
individual coverage HRAs be implemented on a small scale for only 
certain employers and employees or only for a very limited time period, 
such as 2 years. Another commenter requested that the Departments 
postpone finalization of the integration rules until the Departments 
develop a federally-hosted electronic data source to verify individual 
coverage HRA offer information required to determine APTC eligibility.
    The Departments considered the comments and the concerns raised by 
various State Exchanges, issuers, employers and other stakeholders 
related to the ability of the Exchanges to fully implement changes 
related to the final rules in time for open enrollment for the 2020 
plan year. In particular, the Departments acknowledge the crucial role 
that the Exchanges have in implementation and operationalization of the 
final rules, and the Departments will work closely with the Exchanges 
on implementation. The Departments recognize that Exchanges may be 
unable to fully implement changes related to the final rules in time 
for open enrollment for the 2020 plan year. However, prior to full 
implementation, the Departments will work with the Exchanges on their 
strategies to provide information to consumers about affordability of 
individual coverage HRAs and eligibility for APTC, including how 
employees can access individual health insurance coverage through the 
Exchanges and determine whether they should use APTC. Ongoing technical 
assistance will be provided related to the development of Exchanges' 
tools and functionality to support employers and employees with 
understanding HRA affordability determinations and their impact on APTC 
eligibility, as well as the SEP for those with an offer of an 
individual coverage HRA. HHS has already discussed with State Exchanges 
what changes would likely be necessary if the rule were finalized as 
proposed to assist with planning, as well as what kind of assistance 
would be most helpful during implementation. Specific assistance could 
include sharing technical and educational documentation from FFE 
implementation that can be leveraged to support State Exchange efforts. 
In addition, the Departments will provide assistance to Exchanges in 
developing information and tools that could be provided to employers 
and employees to help ensure smooth implementation before the full 
system changes are complete. This could include State Exchanges 
providing employees with information on how they can calculate HRA 
affordability and the impact on APTC in the absence of system changes 
that can make those calculations for the employee.
    The Departments have also considered that many individuals covered 
by an individual coverage HRA will prefer to select off-Exchange 
individual health insurance plans because salary reductions through a 
cafeteria plan may be used to pay premiums for off-Exchange coverage, 
if the employer so allows, and may not be used to pay premiums for 
Exchange coverage. To the extent a significant proportion of employees 
with individual coverage HRAs purchase individual health insurance 
coverage off the Exchange, concerns about burden on the Exchanges, and 
concerns regarding the effects of timely operationalization of the PTC 
rules, are mitigated.
    The Departments have also worked to release the final rules as 
early in 2019 as possible, in recognition of the implementation timing 
issues raised. With regard to the concerns expressed about the 
interaction of the release of the final rules with rate filing for 
2020, the Departments note that the proposed rules were published in 
October 2018, to provide sufficient notice of the Departments' 
proposals in advance of the 2020 plan year. While these final rules 
adopt some changes in response to comments, they are substantially 
similar to the proposed rules. Even though the proposed rules provided 
that taxpayers and others may not rely on the proposed rules, the 
Departments understand that issuers began considering the potential 
impact of the rules on rates well in advance of the final rules. 
Further, issuers generally will have an opportunity to make changes in 
response to the final rules before the rate filing deadlines for the 
2020 plan year.
    The Departments also note, and considered, that plan sponsors may 
choose if and when to offer an individual coverage HRA (or an excepted 
benefit HRA) and may do so any time on or after the applicability date. 
The Departments intend to provide the guidance necessary for plan 
sponsors to offer individual coverage HRAs and excepted benefit HRAs 
for the 2020 plan year, but the Departments also expect that plan 
sponsors will take the time they need to evaluate the final rules and 
to take advantage of these new coverage options if and when is best for 
their workforce.
    The Departments have also considered that Executive Order 13813, 
issued in October 2017, set forth HRA expansion as an Administration 
priority ``in the near term,'' in order to provide Americans with more 
options for financing their healthcare. Taking all of these 
considerations into account, the Departments have determined that it is 
appropriate to finalize the applicability date, as proposed.
    Relatedly, one commenter requested that a ``no inference'' standard 
be the benchmark for reliance prior to 2020 with regard to individual 
coverage HRAs, which the Departments understand to be a request that 
the Departments not take enforcement against HRAs that failed to comply 
with the market requirements prior to 2020, under the rules and 
guidance in effect prior to 2020. The Departments see no basis to 
provide such a rule and, therefore, the final rules do not include a 
``no inference'' standard for reliance prior to the applicability date.
    Finally, HHS clarifies that, while the new SEP generally provides 
advanced availability to allow eligible individuals to enroll in 
individual health insurance coverage up to 60 days prior to the first 
day of coverage under their HRA, employees who are offered an 
individual coverage HRA with a plan year that begins early in 2020 will 
not have the full 60 day advanced availability period to select 
individual health insurance coverage using an SEP because the new SEP 
rules take effect on January 1, 2020. Therefore, plan sponsors offering 
an individual coverage HRA with a plan year that begins on January 1, 
2020 should help eligible employees understand that they must enroll in 
individual health insurance coverage during the open enrollment period, 
November 1, 2019 through December 15, 2019, for individual health 
insurance coverage that takes effect on January 1, 2020.

[[Page 28958]]

VII. Economic Impact and Paperwork Burden

A. Summary

    The final rules remove the current prohibition on integrating HRAs 
with individual health insurance coverage, if certain conditions are 
satisfied. The final rules also set forth conditions under which 
certain HRAs will be recognized as limited excepted benefits. In 
addition, the Treasury Department and the IRS are finalizing rules 
regarding PTC eligibility for individuals offered an individual 
coverage HRA. Further, DOL is finalizing a safe-harbor clarification to 
provide assurance that the individual health insurance coverage the 
premiums of which are reimbursed by an HRA, a QSEHRA or a supplemental 
salary reduction arrangement does not become part of an ERISA plan, if 
certain safe harbor conditions are satisfied, and the Departments are 
finalizing a related clarification to the definition of group health 
insurance coverage. Finally, HHS is finalizing rules to provide an SEP 
in the individual market for individuals who newly gain access to an 
individual coverage HRA or who are newly provided a QSEHRA.
    The Departments have examined the effects of the final rules as 
required by Executive Order 13563 (76 FR 3821, January 21, 2011, 
Improving Regulation and Regulatory Review); Executive Order 12866 (58 
FR 51735, October 4, 1993, Regulatory Planning and Review); the 
Regulatory Flexibility Act (September 19, 1980, Pub. L. 96-354); 
section 1102(b) of the Social Security Act (42 U.S.C. 1102(b)); section 
202 of the Unfunded Mandates Reform Act of 1995 (March 22, 1995, Pub. 
L. 104-4); Executive Order 13132 (64 FR 43255, August 10, 1999, 
Federalism); the Congressional Review Act (5 U.S.C. 804(2)); and 
Executive Order 13771 (82 FR 9339, February 3, 2017, Reducing 
Regulation and Controlling Regulatory Costs).

B. Executive Orders 12866 and 13563

    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 is 
supplemental to and reaffirms the principles, structures, and 
definitions governing regulatory review as established in Executive 
Order 12866.
    Section 3(f) of Executive Order 12866 defines a ``significant 
regulatory action'' as an action that is likely to result in a rule: 
(1) Having an annual effect on the economy of $100 million or more in 
any one year, or adversely and materially affecting a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or state, local or tribal governments or communities 
(also referred to as ``economically significant''); (2) creating a 
serious inconsistency or otherwise interfering with an action taken or 
planned by another agency; (3) materially altering the budgetary 
impacts of entitlement grants, user fees, or loan programs or the 
rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order.
    A regulatory impact analysis must be prepared for major rules with 
economically significant effects (for example, $100 million or more in 
any one year), and a ``significant'' regulatory action is subject to 
review by the Office of Management and Budget (OMB). The Departments 
anticipate that this regulatory action is likely to have economic 
impacts of $100 million or more in at least one year, and thus meets 
the definition of a ``significant rule'' under Executive Order 12866. 
Therefore, the Departments have provided an assessment of the potential 
costs, benefits, and transfers associated with the final rules. In 
accordance with the provisions of Executive Order 12866, the final 
rules were reviewed by OMB.
1. Need for Regulatory Action
    This regulatory action is taken, in part, in light of Executive 
Order 13813 directing the Departments to consider proposing regulations 
or revising guidance to expand the flexibility and use of HRAs. In 
addition, this regulatory action is taken because, since the time that 
the Departments previously prohibited integration with individual 
health insurance coverage by regulation, the Departments have observed 
that many employers, especially small employers, continue to struggle 
to offer health insurance coverage to their employees. There has been a 
continued decline in the percentage of small firms offering health 
coverage \285\ as well as a decline in the percentage of workers at 
small firms receiving health insurance coverage from their 
employer.\286\ Moreover, 80 percent of firms that offer coverage only 
provide a single option,\287\ and economic research demonstrates that 
there is a significant benefit of additional choice for employees.\288\ 
Further, this regulatory action is being taken at this time because the 
Departments have had additional time to consider whether, and what type 
of, conditions would be sufficient to mitigate the risk of adverse 
selection and health factor discrimination that might otherwise result 
from allowing HRAs to be integrated with individual health insurance 
coverage, and the Departments expect that the conditions adopted in the 
final rules will significantly mitigate the risk of adverse selection. 
The final rules are intended to increase the usability of HRAs to 
provide more Americans, including employees who work at small 
businesses, with more healthcare options and to increase overall 
coverage. These changes will facilitate the development and operation 
of a healthcare system that provides high-quality care at affordable 
prices for the American people by increasing consumer choice for 
employees and promoting competition in healthcare markets by providing 
additional options for employers and employees.
---------------------------------------------------------------------------

    \285\ Between 2010 and 2018, there has been a significant 
decline in the number of small firms offering coverage. For firms 
with 3 to 9 workers, the decline has been from 59 percent to 47 
percent, for firms with 10 to 24 workers, the decline has been from 
76 percent to 64 percent, and for firms with 25 to 49 workers, the 
decline has been from 92 percent to 71 percent. See Kaiser Family 
Foundation, ``Employer Health Benefits 2018 Annual Survey'', Figure 
2.2, at https://files.kff.org/attachment/Report-Employer-Health-Benefits-Annual-Survey-2018.
    \286\ Between 2010 and 2018, there has been a significant 
decline in the number of workers covered by their firm's health 
benefits. For firms with 3 to 24 workers, the decline has been from 
44 percent to 30 percent and for firms with 25 to 49 workers, the 
decline has been from 59 percent to 44 percent. Id., Figure 3.9.
    \287\ Id., Figure 4.1
    \288\ An analysis of choices made in the large group market 
found that offering multiple plan choices (at large group prices) 
was as valuable to the median consumer as a 13 percent premium 
reduction. See Dafny, Leemore, Kate Ho and Mauricio Varela, ``Let 
Them Have Choice: Gains from Shifting Away from Employer-Sponsored 
Health Insurance and Toward an Individual Exchange,'' American 
Economic Journal: Economic Policy, 2013, 5(1):32-58.
---------------------------------------------------------------------------

    The Departments are of the view that the benefits of the final 
rules will substantially outweigh the costs of the rules. The final 
rules will increase flexibility and choices of health coverage options 
for employers and employees. The use of individual coverage HRAs could 
potentially reduce healthcare spending, particularly less efficient 
spending,\289\ and ultimately

[[Page 28959]]

result in increased taxable wages for workers currently in firms that 
offer traditional group health plans. The final rules are also expected 
to increase the number of low- and moderate-wage workers (and their 
family members) with health insurance coverage.
---------------------------------------------------------------------------

    \289\ By less efficient healthcare spending, the Departments 
generally mean spending that is of low value from the consumer's 
perspective, relative to the cost. The cost includes out-of-pocket 
spending such as copayments and deductibles plus amounts paid by the 
health plan.
---------------------------------------------------------------------------

2. Summary of Impacts of Individual Coverage HRAs
    The expected benefits, costs and transfers of the final rules are 
summarized in Table 1 and discussed in detail later in this section of 
the preamble.

                                            Table 1--Accounting Table
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Benefits:
----------------------------------------------------------------------------------------------------------------
Qualitative:
 Gain of health insurance and potentially improved financial or health outcomes for some employees who
 are newly offered or newly accept benefits.
 Increased choice and flexibility for employees and employers around compensation arrangements,
 potentially resulting in more efficient use of healthcare and more efficient labor markets (including higher
 taxable wages).
 Decreased administrative costs for some employers who no longer offer traditional group health plans
 for some, or all, employees.
----------------------------------------------------------------------------------------------------------------
Costs:
----------------------------------------------------------------------------------------------------------------
Qualitative:
     Loss of health insurance and potentially poorer financial or health outcomes for some individuals
     who experience premium increases...........................................................................
     Less comprehensive coverage and fewer health benefits for some individuals with individual health
     insurance coverage as compared to traditional group health plan coverage...................................
     Increased administrative costs for employers, employees, and government agencies to learn about and/
     or use a new health benefits option........................................................................
----------------------------------------------------------------------------------------------------------------
Transfers                                               Estimate            Year   Discount rate          Period
                                                       (billion)          dollar       (percent)         covered
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($/year)...................            $4.5            2020               7       2020-2029
(Net tax revenue loss)..........................             4.9            2020               3       2020-2029
----------------------------------------------------------------------------------------------------------------
Quantitative: \290\
     Reduced tax revenue as a result of
     new individual coverage HRAs offered by
     employers previously offering no health
     benefits, less reduced PTC from employees
     in such firms..............................
     Increase in average individual
     market premiums of about 1 percent and
     resulting increase in PTC..................
     Small decrease in per capita
     Medicare premiums and increase in net
     Medicare outlays...........................
----------------------------------------------------------------------------------------------------------------
Qualitative:
     Increased out-of-pocket costs for
     some employees who move from traditional
     group health plans to individual health
     insurance coverage and decreased costs for
     other employees who move from traditional
     group health plans to individual health
     insurance coverage (i.e., transfers from
     reduced within-firm cross-subsidization)...
     Reduced tax revenue as a result of
     new excepted benefit HRA...................
----------------------------------------------------------------------------------------------------------------

    In all cases, the counterfactual baseline for analysis is current 
law. That is, the analysis assumes as the baseline statutes enacted and 
regulations that are final as of date of issuance of the final rules.
---------------------------------------------------------------------------

    \290\ The monetized estimates are of the net tax revenue loss, 
including reduced income and payroll tax revenue from employees who 
would receive individual coverage HRAs and would not otherwise have 
a tax exclusion for a traditional group health plan, reduced PTC 
from individuals who would receive individual coverage HRAs and 
would otherwise receive PTC, and increased PTC due to the increase 
in Exchange premiums; plus the increased Medicare outlays net of 
increased total premiums paid. As noted in the text later in this 
section of the preamble, the quantitative estimates are subject to 
considerable uncertainty. For example, the rule could cause tax 
revenue to increase if the adoption of individual coverage HRAs 
leads to reduced healthcare spending and higher taxable wages. Or 
the rule could result in larger premium increases in the individual 
market, or in premium decreases, if the rule results in more 
substantial changes in the health of the individual market risk 
pool.
---------------------------------------------------------------------------

Benefits
    Gain of health insurance coverage. Some individuals could 
experience a gain in health insurance coverage, greater financial 
security and potentially improved health outcomes, if employees are 
newly offered and accept individual coverage HRAs. As explained in 
greater detail in the Transfers section later in this section of the 
preamble, the Departments estimate that, on net, the number of insured 
persons will increase by about 800,000 by 2029, due to the final rules. 
Most of these newly insured individuals are expected to be low- and 
moderate-income workers in firms that currently do not offer a 
traditional group health plan.
    Some commenters agreed that the allowance of individual coverage 
HRAs creates new options for small employers who have otherwise been 
unable to offer health insurance coverage. Some commenters mentioned 
that some segments of their workforce might particularly benefit. One 
commenter suggested that large employers might newly provide individual 
coverage HRAs to part-time or seasonal/temporary workers while 
maintaining

[[Page 28960]]

traditional benefits for their full-time employees.
    Increased choice and flexibility for employees and employers. As a 
result of the final rules, employees will be able to purchase insurance 
with a tax subsidy by use of an individual coverage HRA, without being 
locked into a specific plan or selection of plans chosen by their 
employer. As explained later in this section of the preamble, a 
relatively small number of employees could have fewer choices of plans 
in the individual market than the number of group health plan choices 
previously provided by their employer, and some might be unable to find 
a new individual health insurance plan that covers their preferred 
healthcare providers. However, small firms are more likely to offer 
individual coverage HRAs than large firms and small firms that offer a 
traditional group health plan typically offer a single option. 
Therefore, employees at the vast majority of firms are likely to have 
more options through an individual coverage HRA than through a 
traditional group plan. The expansion of enrollment in the individual 
market due to the final rules could also induce additional insurers to 
provide individual market coverage. The Departments are of the view 
that on net, the final rules will significantly increase choice and 
flexibility for employees. Employers also will benefit from having 
another choice of a tax-preferred health benefit to offer their 
employees, giving them another tool to attract and retain workers.
    Current compensation arrangements can result in less efficient 
labor markets and inefficient healthcare spending. Employees within a 
firm (or employees within certain classes of employees within a firm) 
are generally offered the same set of health benefits. As a result, 
some employees receive a greater share of compensation in the form of 
benefits than they would prefer, while others receive less. An 
individual coverage HRA will allow employees to choose coverage that 
better suits their preferences, allowing those who want a less 
comprehensive plan to select one and pay less, while allowing those who 
want a more comprehensive plan to pay more. In addition, some employers 
offer plans with a wide choice of providers, reflecting the diverse 
preferences and healthcare needs of their employees. While a broader 
network contains certain benefits, it also weakens the ability of 
employers and issuers to negotiate lower provider prices or otherwise 
manage employee care. In contrast, in the individual market insurers 
have an incentive to keep premiums low relative to the SLCSP, which is 
used to determine the PTC. Hence, insurers are more likely to have a 
narrower choice of providers in order to negotiate lower prices.
    By expanding the ability of consumers to choose coverage that fits 
their preferences, the final rules will reduce these inefficiencies in 
labor markets and healthcare spending. Some employees who will be 
offered individual coverage HRAs under the final rules might choose 
plans with lower premiums and higher deductibles and copayments (all of 
which could potentially be paid out of the HRA) and narrower provider 
networks than they would choose if offered a traditional group health 
plan. Employees facing higher cost sharing could become more cost-
conscious consumers of healthcare. Narrower provider networks could 
strengthen the ability of purchasers (through their insurers) to 
negotiate lower provider prices. Both effects could lead to reduced 
healthcare spending, which could in turn lead to reductions in amounts 
made available under individual coverage HRAs and corresponding 
increases in taxable wages. However, these benefits are uncertain and 
would take some time to occur.\291\ Moreover, the provision of a new 
health benefit that can be used to pay cost-sharing as well as premiums 
and that is available to employees who were previously uninsured or 
enrolled in unsubsidized coverage would be expected to increase, rather 
than decrease, healthcare utilization by some consumers.
---------------------------------------------------------------------------

    \291\ The individual coverage HRA provides an income and payroll 
tax exclusion that is available only to workers and, unlike the PTC, 
benefits workers at all income levels, including workers with 
incomes in excess of 400 percent of the federal poverty level. Thus, 
it is possible that the final rules could encourage individuals to 
join the labor force or to work more hours or seek higher-paying 
employment, generating further economic benefits. In addition, the 
final rules could increase labor force mobility (i.e., encourage 
workers to move more freely to employers where their productivity is 
highest), because workers enrolled in individual health insurance 
coverage could find it easier to retain their coverage when they 
change jobs. However, these effects are highly uncertain, are likely 
to be relatively small, and might take some time to occur. Labor 
supply changes are not reflected in the revenue estimates provided 
in the transfers section later in this section of the preamble.
---------------------------------------------------------------------------

    Individual coverage HRAs provide flexibility for small employers in 
particular that might have little expertise or skill in choosing 
traditional group health plans or in administering coverage effectively 
for employees. However, some small employers can already obtain lower-
cost coverage in the small group market or through AHPs than they could 
otherwise provide on their own. Small employers that are not ALEs can 
also forego offering health benefits and allow their employees to 
obtain individual health insurance coverage, often with PTC 
subsidization, without liability under Code section 4980H. Qualified 
small employers can also pursue establishment of QSEHRAs. Thus, small 
employers whose employees have particularly high healthcare costs or 
small employers that have little skill or interest in administering 
health benefits might use these other options to control costs even in 
the absence of the final rules. If so, the increased efficiency gain 
from providing an additional incentive for small employers to drop 
traditional group health plans in favor of individual coverage HRAs 
could be modest.
    Some commenters agreed that the proposed rules would enable 
employers to offer more affordable health coverage alternatives to 
employees. Some commenters expressed general support for allowing 
employers to move to a defined contribution approach for health 
insurance coverage. The Departments agree that a defined contribution 
approach is more flexible for employers because it is easier for 
employers to plan for the future. Furthermore a defined contribution 
approach reduces the risk that an employer's healthcare costs increase 
due to factors outside an employer's control.
    Reduced administrative costs for some employers. Employers that 
offer an individual coverage HRA rather than a traditional group health 
plan could experience reduced administrative costs. For example, such 
employers will no longer need to choose health insurance plans or self-
insured health benefits for their employees and manage those plans. 
Some of these costs will be borne by HRA recipients. However, overall 
costs may be lower, particularly for small employers and their 
employees, as loading fees (that is, premiums in excess of expected 
insurance claims) appear to be quite high for small firms that provide 
traditional group coverage.\292\
---------------------------------------------------------------------------

    \292\ One study using data for 1997 through 2001 finds that 
firms with 50 or fewer employees face loading fees of 42 percent of 
premiums, whereas firms with more than 10,000 employees pay loading 
fees of just 4 percent. The authors note that these estimates are 
roughly consistent with the findings of earlier research. The 
authors caution that the introduction of Exchanges and medical loss 
ratio requirements provided for under PPACA should reduce loading 
fees for small firms, but conclude that loading factors for small 
firms might still be quite high. See Karaca-Mandic, Pinar, Jean M. 
Abraham and Charles E. Phelps, ``How Do Health Insurance Fees Vary 
by Group Size? Implications for Healthcare Reform,'' International 
Journal of Health Care Finance and Economics (2011) 11: 181-207.

---------------------------------------------------------------------------

[[Page 28961]]

    Some commenters stated that the proposed rules would be simpler to 
administer than traditional group health plans, thereby reducing 
administrative cost for employers. One commenter noted that while the 
costs of administering an individual coverage HRA could be lower than 
the cost of administering a traditional group health plan, the 
difference is not likely to be large. The Departments are of the view 
that it is possible that there will be modest reductions in 
administrative costs for employers who offer an individual coverage HRA 
rather than a traditional group health plan.
Costs
    Loss of health insurance coverage. The Departments recognize that 
some individuals could experience a loss in health insurance coverage 
and that some of these people might experience worse financial or 
health outcomes as a result of the final rules.\293\ Loss of coverage 
could occur if employers drop traditional group health plans and if 
some previously covered employees do not accept the individual coverage 
HRA and fail to obtain their own coverage. Loss of coverage also could 
occur if the addition of new enrollees to the individual market causes 
premiums to rise, resulting in dropping of coverage by current 
individual market enrollees. Finally, loss of coverage could occur if 
employees who are currently purchasing coverage in the Exchange with 
the PTC become ineligible for the PTC by an offer of (or coverage 
under) an individual coverage HRA and experience increases in out-of-
pocket premiums.
---------------------------------------------------------------------------

    \293\ The Departments note however that increased insurance 
coverage does not necessarily result in better physical health. For 
example, Baicker et al. found that increased Medicaid coverage in 
Oregon ``generated no significant improvements in measured physical 
health outcomes in the first two years, but it did increase use of 
health care services, raise rates of diabetes detection and 
management, lower rates of depression, and reduce financial 
strain.'' See Baicker, K., S. Taubman, H. Allen, M. Bernstein, J. 
Gruber, J. Newhouse, E. Schneider, B. Wright, A. Zaslavsky, and A. 
Finkelstein. 2013. ``The Oregon Experiment: Effects of Medicaid on 
Clinical Outcomes.'' New England Journal of Medicine 368: 1713-22. 
https://www.nejm.org/doi/full/10.1056/NEJMsa1212321; and survey of 
the literature in Chapter 6 of Economic Report of the President, 
February 2018, https://www.whitehouse.gov/wp-content/uploads/2018/02/ERP_2018_Final-FINAL.pdf.
---------------------------------------------------------------------------

    In addition, while most employers that currently offer traditional 
group health plans offer only one type of plan, some employers offer 
more choices.\294\ As a result, a relatively small number of employees 
could have fewer choices of plans in the individual market than the 
number of group health plan choices previously provided by their 
employer, and some might be unable to find new individual health 
insurance coverage that covers their preferred healthcare providers. 
The Departments requested comments on this finding and the extent to 
which the proposed rules could reduce employee choice or cause some 
individuals to become uninsured.
---------------------------------------------------------------------------

    \294\ Among firms that offer traditional group coverage, an 
estimated 81 percent of firms with 3 to 199 employees offer only one 
type of plan, whereas 42 percent larger firms offer one plan, 45 
percent offer two and 13 percent offer three or more plans. See 
Kaiser Family Foundation Employer Health Benefits 2018 Annual 
Survey, Figure 4.1, at https://files.kff.org/attachment/Report-Employer-Health-Benefits-Annual-Survey-2018.
---------------------------------------------------------------------------

    Some commenters stated that the proposed rules would lead to 
adverse selection, increased premiums and overall destabilization of 
the individual market, causing some to become uninsured. (Adverse 
selection and resulting premium increases are discussed in greater 
detail in the Transfers section of this preamble.) Several commenters 
expressed concern that the offer of an individual coverage HRA could 
eliminate consumers' eligibility for the PTC, increasing the cost of 
coverage. Some commenters suggested that some of these consumers would 
become uninsured. One commenter noted that this problem would be 
magnified for families, since affordability is determined by comparing 
the HRA employer contribution amount to the cost of a self-only plan, 
rather than to a family plan. Several commenters suggested that 
increased administrative costs and confusion would cause some employees 
who are offered an individual coverage HRA to fail to enroll and become 
uninsured.
    The Departments acknowledge these concerns, but, as discussed later 
in this section of the preamble, estimate that the number of 
individuals with insurance coverage will be increased, rather than 
decreased, by adoption of the final rules. One reason for this is that 
the individual coverage HRA contribution that is offered will render an 
individual ineligible for the PTC only if it is of a sufficient size to 
make the offer affordable for the employee (and, in the case of ALEs, 
employers must make amounts available under an individual coverage HRA 
sufficient for the offer to be considered affordable in order to avoid 
liability under Code section 4980H). Thus, even if employees do 
transition from receiving PTC to receiving an offer of an individual 
coverage HRA, they are not necessarily expected to become uninsured. In 
addition, the final rules require employers to notify employees of the 
effect of individual coverage HRA offers and enrollment on PTC 
eligibility and require employees to substantiate enrollment in 
individual health insurance coverage in order to receive reimbursement 
from an individual coverage HRA, reducing the likelihood that confusion 
will lead to loss of insurance coverage.
    Less comprehensive coverage, fewer benefits. Some commenters 
suggested that some individuals with individual coverage HRAs, and, 
therefore, individual health insurance coverage, could experience a 
reduction in the comprehensiveness or affordability of healthcare 
benefits. For example, commenters noted that an employee might not be 
able to afford a policy with as high an actuarial value as their 
current traditional group health plan, or might be limited to narrower 
networks of providers in the individual market. Another commenter noted 
that patients may newly have limited choices, particularly among 
physician specialty care providers. Another commenter said that some 
employees could have fewer choices of plans in the individual market 
than the number of group health plan choices previously provided by 
their employer, or might be unable to find new individual health 
insurance coverage that covers their preferred healthcare providers. 
Another commenter stated that the proposed rules would result in poorer 
financial and health outcomes.
    The Departments recognize that some individuals who choose health 
plans with less comprehensive benefits or higher out-of-pocket payments 
could experience adverse health or financial outcomes. However, this is 
unlikely because an individual coverage HRA must be integrated with 
individual health insurance coverage, which generally is required to 
provide coverage of all essential health benefits and at least 60 
percent actuarial value (subject to a de minimis variation). Moreover, 
to the extent that commenters' assertions about narrower networks and 
higher cost sharing in the individual market are accurate, the 
Departments note that higher cost sharing and narrower networks could 
also be beneficial in that they encourage consumers to be more cost-
conscious, reducing unnecessary and potentially counterproductive 
health care utilization, and thereby reducing premiums. Such premium 
decreases could, in turn, lead to increased wages across employees in a 
firm. For example, an employee might currently

[[Page 28962]]

have access to only one 80 percent actuarial value traditional group 
health plan with a relatively broad network, but under an individual 
coverage HRA will have access to a choice of plans, with actuarial 
values generally ranging from 60 to 80 percent or higher. If he or she 
chooses a 60 or 70 percent actuarial value plan, he or she will have a 
greater incentive to be cost-conscious and will likely spend less on 
healthcare, leaving more resources for other forms of consumption or 
saving.
    Increased administrative costs. In the impact analysis of the 
proposed rules, the Departments noted that the proposed rules could 
increase some administrative costs for employers, employees, and 
government entities.
    Under the final rules, all employers will have a new health 
benefits option about which to learn. Employers who offer individual 
coverage HRAs but did not offer employer-sponsored health benefits 
before will face increased costs of administering a health benefit. In 
addition, all employers that offer individual coverage HRAs will be 
required to establish reasonable procedures to substantiate that 
individuals covered by the HRA are enrolled in individual health 
insurance coverage or Medicare; to provide a notice to all employees 
who are eligible for the HRA explaining the PTC eligibility 
consequences of the HRA offer and acceptance and other information; and 
to comply with various other generally applicable group health plan 
requirements, such as maintaining a plan document and complying with 
various reporting requirements. Employers offering individual coverage 
HRAs will need to establish systems to reimburse premiums and employee 
out-of-pocket medical care expenses, or hire third-party administrators 
to do so. In addition, to the extent an employer is subject to Code 
section 4980H, the employer will need to learn about the final PTC 
regulations and any other related guidance under Code section 4980H 
that the Treasury Department and the IRS may issue. As noted earlier in 
this preamble, administrative costs associated with individual coverage 
HRAs could be lower than costs for traditional group health plans for 
some employers. The Departments expect that third-party administrators 
and other benefit experts will work to minimize these costs for 
employers. Because offering an individual coverage HRA is voluntary, 
ultimately, employers that offer this benefit will do so only because 
they experience a net benefit from doing so.
    As to increased administrative burden and costs for employees, 
employees who previously enrolled in a traditional group health plan 
and who now receive an individual coverage HRA will need to shop for 
and choose their own insurance and learn new procedures for accessing 
their HRA benefits. In addition, employees who receive an individual 
coverage HRA will need to substantiate enrollment in individual health 
insurance coverage once per plan year and in connection with each 
request for reimbursement.
    Further, Exchange enrollees might experience increased compliance 
burdens, to the extent that they must become familiar with the 
circumstances in which an offer of an individual coverage HRA precludes 
them from claiming the PTC. For employees who previously did not 
receive an offer of a traditional group health plan, this may require 
learning some of the PTC eligibility rules, and for employees who 
previously received an offer of a traditional group health plan, this 
may require learning new or different rules for PTC eligibility. 
Specifically, an employee who is offered a traditional group health 
plan is not eligible to claim the PTC for his or her Exchange coverage 
unless the premium of the lowest cost employer plan providing MV for 
self-only coverage less the employer contribution for self-only 
coverage exceeds 9.5 percent (indexed for inflation after 2014) of the 
employee's household income (assuming the employee meets various other 
PTC eligibility requirements). In contrast, under the final PTC rules, 
an employee who is offered an individual coverage HRA will not be 
eligible to claim the PTC for his or her Exchange coverage unless the 
premium of the lowest cost silver plan for self-only coverage offered 
by the Exchange for the rating area in which the employee resides less 
the individual coverage HRA contribution amount exceeds 9.5 percent 
(indexed for inflation after 2014) of the employee's household income 
(assuming the employee meets various other PTC eligibility 
requirements). However, the Departments note that the final rules will 
require HRA plan sponsors to furnish a notice to participants providing 
some of the information necessary for an individual to determine if the 
offer of the HRA could render them ineligible for the PTC.
    In addition, if an enrollee in Exchange coverage is eligible for 
the PTC, the amount of the PTC is based, in part, on the premium for 
the SLCSP for the coverage unit offered in the Exchange for the rating 
area in which the employee resides. As noted earlier, the final PTC 
rules use the premium for the self-only lowest cost silver plan 
available to an employee in the Exchange for the rating area in which 
they reside solely for purposes of determining their individual 
coverage HRA affordability and the resulting impact on PTC eligibility. 
Therefore, Exchange enrollees may need to understand which silver level 
plan premium applies to them for APTC eligibility purposes and which 
silver level plan premium applies to their PTC calculation.
    Similarly, the FFEs and State Exchanges will incur one-time costs 
to incorporate the SEP and the PTC eligibility rules for individuals 
with an individual coverage HRA offer into their instructions for 
enrollees and Exchange employees, as well as in application system 
logic and automated calculations. HHS estimates that one-time costs to 
account for individual coverage HRAs for the FFEs will be approximately 
$3.9 million. HHS further estimates that the FFE call center, 
eligibility support contractors verifying SEP and application data, and 
other customer support functions will incur additional annual costs of 
approximately $56 million in 2020 to $243 million by 2022 to serve the 
expanded Exchange population. Assuming that State Exchanges will incur 
costs similar to the FFEs, total one-time costs incurred by the 12 
State Exchanges will be approximately $46.8 million. Total additional 
ongoing costs incurred by the call centers, eligibility support 
contractors verifying SEP and application data, and other customer 
support functions for the 12 State Exchanges will be approximately $20 
million in 2020 to $85 million by 2022.
    Under the final rules, the IRS also will need to add information 
regarding employees offered individual coverage HRAs to instructions 
for IRS forms for taxpayers, employee training materials, and 
calculation programs.
    In response to the Departments' request for comments on the extent 
to which employer administrative costs would be increased or decreased 
by the rule, some commenters stated that complying with the individual 
coverage HRA rules would be burdensome. Several commenters expressed 
particular concern about the ongoing substantiation requirement.
    Some commenters noted that the proposed rules would create consumer 
confusion. Another commenter noted that recent cutbacks in funding for 
outreach and assistance in the individual market could exacerbate the 
confusion. One commenter stated that most Americans need a large amount 
of professional support when making

[[Page 28963]]

sound health insurance purchasing decisions and they also need a degree 
of help to manage their medical claims and coverage during the plan 
year, particularly in the face of any complex medical issue.
    The Departments requested comments on the implementation and 
ongoing costs to State Exchanges of individual coverage HRAs, and 
several stakeholders expressed concerns about these increased 
administrative costs. Although commenters did not quantify the costs, 
one State Exchange said it estimates a significant expense given the 
scope and complexity of the proposal. Costs identified include 
administering a new SEP; making IT changes involving new definitions 
and explanation texts; user testing; adding a table for the lowest cost 
silver plan; delaying implementation of other functions; administering 
appeals; and adding additional staffing for administration, training 
and oversight such as for increased call center activity and increased 
complexity. Another Exchange noted the need to update Exchange 
eligibility software to account for new forms for HRAs, new rules 
affecting PTC eligibility and new SEPs. Several states requested that 
the effective date of the final rules be delayed until State Exchanges 
have had sufficient time to implement the new requirements.
    As noted earlier in this preamble, the Departments have included in 
the final rules some provisions to mitigate these concerns and 
associated costs. For example, to ensure that employees who are 
eligible to receive an individual coverage HRA understand the potential 
effect on PTC eligibility, employers must provide a written notice to 
eligible participants. To mitigate burden on employers, the Departments 
are providing model language contemporaneously on certain aspects of 
the notice, including model language describing the PTC consequences. 
In addition, ongoing technical assistance will be provided to State 
Exchanges related to system development activities that will support 
employers and employees with HRA affordability determinations and the 
impact on APTC eligibility, as well as the SEP for those with an offer 
of an individual coverage HRA. HHS has already discussed with State 
Exchanges what changes would likely be necessary if the rule were 
finalized as proposed to assist with planning, as well as what kind of 
assistance would be most helpful during implementation. Specific 
assistance could include sharing technical and educational 
documentation from FFE implementation that can be leveraged to support 
State Exchange efforts. This assistance could help State Exchanges 
implement changes related to the individual coverage HRA more quickly 
and with less overall cost. The Departments will also provide 
assistance to Exchanges in developing information and tools that could 
be provided to employers and employees to help ensure smooth 
implementation before the full system changes are complete. This could 
include State Exchanges providing employees with information on how 
they can calculate HRA affordability and the impact on APTC in the 
absence of system changes that can make those calculations for the 
employee.
Transfers
    The Treasury Department performed microsimulation modeling to 
evaluate the coverage changes and transfers that are likely to be 
induced by the final rules. The Treasury Department's model of health 
insurance coverage assumes that workers are paid the marginal product 
of their labor. Employers are assumed to be indifferent between paying 
wages and paying compensation in the form of benefits (as both expenses 
are deductible in computing employers' taxable incomes). The model 
therefore assumes that total compensation paid by a given firm is 
fixed, and the employer allocates this compensation between wages and 
benefits based on the aggregated preferences of their employees. As a 
result, employees bear the full cost of employer-sponsored health 
coverage (net of the value of any tax exclusion), in the form of 
reduced wages and the employee share of premiums.\295\
---------------------------------------------------------------------------

    \295\ Note that the wage reduction for an employee who is 
offered a health benefit may be greater or less than the expected 
cost of coverage for that particular employee. Because employees are 
generally paid the same regardless of age, health status, family 
size or acceptance of benefits, the model assumes that each employee 
bears the same share of the cost of the firm's coverage. The model 
allows for some limited variation of the wage reduction by wage 
class and educational status. All costs and benefits of coverage are 
taken into account and assumed to accrue to employees, including all 
income and employer and employee payroll tax exclusions and the 
avoidance of the employer shared responsibility payment under Code 
section 4980H by firms that offer coverage.
---------------------------------------------------------------------------

    The Treasury Department's model assumes that employees' preferences 
regarding the type of health coverage (or no coverage) are determined 
by their expected healthcare expenses and the after-tax cost of 
employer-sponsored insurance, Exchange coverage with the PTC, or 
Exchange or other individual health insurance coverage integrated with 
an individual coverage HRA, and the quality of different types of 
coverage (including actuarial value).\296\ The tax preference for the 
individual coverage HRA is the same as that for a traditional group 
health plan, and this estimate assumes that employers will contribute 
the same amount towards an individual coverage HRA as they would 
contribute for a traditional group health plan.\297\ Therefore, an 
employee will prefer an individual coverage HRA to a traditional group 
health plan if the price of individual health insurance coverage is 
lower than the price of traditional group health plan coverage, as long 
as the value of the higher quality of the traditional group health plan 
coverage (if any) does not outweigh the lower cost of individual health 
insurance coverage. The cost of individual health insurance coverage 
for an employee could be lower than the cost of the firm's traditional 
group health plan if the individual health insurance coverage is less 
generous, if the individual health insurance coverage risk pool is 
healthier than the firm's risk pool, or if the cost of individual 
health insurance coverage to a particular employee is lower than the 
cost of the firm's coverage (because, for example, the employee is 
younger than the average-age worker in the firm).\298\
---------------------------------------------------------------------------

    \296\ Expected healthcare expenses by type of coverage, age, 
family size and other characteristics are estimated using the 
Medical Expenditure Panel Survey--Household Component (MEPS-HC). 
These predictions are then statistically matched to the Treasury 
Department tax data. The MEPS-HC is conducted by the United States 
Census Bureau for the Agency for Healthcare Research and Quality 
(AHRQ), Department of Health and Human Services.
    \297\ It is possible that employers that switch from offering 
traditional group health plans to offering individual coverage HRAs 
will contribute less to individual coverage HRAs than they pay for 
group coverage, and increase taxable wages by a corresponding 
amount. This could happen because there is greater transparency 
around health care costs with an individual coverage HRA than with a 
traditional group health plan, and greater awareness of the cost 
will likely lower worker demand for health insurance benefits 
relative to wages. On the other hand, it is not clear why an 
employer that (based on the incomes and preferences of its 
workforce) wants to substitute contributions to health benefits for 
wages would not do so today, in the absence of the availability of 
individual coverage HRAs, particularly because the final rules 
generally require that individual coverage HRAs be offered on the 
same terms to all employees in a class of employees, as described 
earlier in this preamble.
    \298\ The Treasury Department model assumes that both the 
employee and employer shares of premiums for traditional group 
health plan coverage are fully tax exempt. In modeling the choice 
between an individual coverage HRA and traditional group health plan 
coverage, the Treasury Department assumes that the total amount 
currently paid for traditional group health plan coverage will 
continue to be tax preferred. If this amount exceeds the individual 
health insurance coverage premium, the excess is assumed to be used 
for copayments and deductibles. However, the Treasury Department 
does not increase the amount that is tax preferred in the case where 
the individual health insurance coverage premium exceeds the 
traditional group health plan premium.

---------------------------------------------------------------------------

[[Page 28964]]

    When evaluating the choice between an individual coverage HRA and 
the PTC for Exchange coverage, the available coverage is assumed to be 
the same but the tax preferences are different. Hence, an employee will 
prefer the individual coverage HRA if the value of the income and 
payroll tax exclusion (including both the employee and employer portion 
of payroll tax) is greater than the value of the PTC. In modeling this 
decision, the Departments assume that premiums paid by the employee are 
tax preferred through the reimbursement of premiums from the individual 
coverage HRA, with any additional premiums (up to the amount that would 
have been paid under a traditional group health plan) paid through a 
salary reduction arrangement.\299\
---------------------------------------------------------------------------

    \299\ The assumption that coverage subsidized by the PTC is the 
same as coverage subsidized by an individual coverage HRA may be 
incorrect to the extent that coverage on an Exchange differs from 
off-Exchange individual health insurance coverage. In addition, the 
assumption that the full premium for an employee with or without an 
individual coverage HRA is tax preferred may be incorrect if the 
employer does not offer a salary reduction arrangement, if the 
employee does not elect the salary reduction, or if the employee 
chooses on-Exchange rather than off-Exchange coverage. Salary 
reduction arrangements may not be used to pay premiums for Exchange 
coverage.
---------------------------------------------------------------------------

    In the Treasury Department's model, employees are aggregated into 
firms, based on tax data.\300\ The expected health expenses of 
employees in the firm determine the cost of employer-sponsored 
insurance for the firm.\301\ Employees effectively vote for their 
preferred coverage, and each employer's offered benefit is determined 
by the preferences of the majority of employees. Employees then decide 
whether to accept any offered coverage, and the resulting enrollment in 
traditional or individual health insurance coverage determines the risk 
pools and therefore premiums for both employer coverage and individual 
health insurance coverage. The Treasury Department's model, thus, 
predicts enrollment and premiums in each type of coverage.
---------------------------------------------------------------------------

    \300\ A crucial component of the model is the use of Form W-2, 
Wage and Tax Statement, filed by employers to report wages and other 
benefits of employees. Forms W-2 with the same employer 
identification number are grouped together to represent the 
employees of the firm.
    \301\ Some small firms--generally those with sicker than average 
employees--are able to purchase community rated coverage in the 
small group market at lower cost than they could obtain by self-
insuring or would pay if they had to purchase coverage in the 
underwritten large-group market. Firm coverage costs are over-
estimated in the Treasury Department's model for these firms. As a 
result, the Treasury Department model likely over-estimates the 
extent to which small firms will adopt individual coverage HRAs 
instead of traditional group health plan coverage and the premium 
increase from this rule.
---------------------------------------------------------------------------

    Transitions from traditional group health plans to individual 
coverage HRAs. Based on microsimulation modeling, the Departments 
expect that the final rules will cause some participants (and their 
dependents) to move from traditional group health plans to individual 
coverage HRAs. As previously noted, the estimates assume that for this 
group of firms and employees, employer contributions to individual 
coverage HRAs are the same as contributions to traditional group health 
plans would have been, and the estimates assume that tax-preferred 
salary reductions for individual health insurance coverage are the same 
as salary reductions for traditional group health plan coverage. Thus, 
by modeling construction there is no change in income or payroll tax 
revenues for this group of firms and employees (other than the changes 
in the PTC discussed later in this preamble). The Departments solicited 
comments on these assumptions, and comments received are summarized 
further below.
    While the tax preference is assumed to be unchanged for this group, 
after-tax out-of-pocket costs could increase for some employees (whose 
premiums or cost sharing are higher in the individual market than in a 
traditional group health plan) and decrease for others.
    A small number of employees who are currently offered a traditional 
group health plan nonetheless obtain individual health insurance 
coverage and the PTC, because the traditional group health plan is 
unaffordable to them or does not provide MV. Some of these employees 
would no longer be eligible for the PTC for their Exchange coverage 
when the employer switches from a traditional group health plan to an 
individual coverage HRA because the HRA is determined to be affordable 
under the final PTC rules.\302\ In addition, some employees who are 
offered individual coverage HRAs would not accept them, and would be 
newly able to obtain the PTC because the offer of the HRA would be 
considered to be unaffordable under the final PTC rules, even though 
the traditional group health plan they were previously offered is 
affordable under current rules.\303\
---------------------------------------------------------------------------

    \302\ As noted later in this section of the preamble, however, 
the Departments' estimates assume that individuals with incomes 
below 200 percent of the federal poverty level are not newly 
ineligible for the PTC by individual coverage HRA offers.
    \303\ The number of persons newly eligible for the PTC is 
expected to be very small. Under the assumption that employers 
contribute the same amount towards an individual coverage HRA as 
they would for traditional group health plan coverage, employees 
would become newly eligible for the PTC (if otherwise eligible) only 
if the lowest cost silver plan premium for self-only individual 
health insurance coverage is greater than the total cost of the 
lowest cost MV plan offered by the employer (including the employee 
and employer share of premiums).
---------------------------------------------------------------------------

    Transitions from no employer-sponsored health benefit to individual 
coverage HRAs. The Departments expect some employees to be offered 
individual coverage HRAs when they previously received no offer of an 
employer-sponsored health plan. As a result, taxable wages will fall 
and non-taxable wages will rise, reducing income tax and payroll tax 
revenues. Under this circumstance, some Exchange enrollees who 
previously claimed the PTC will be precluded from claiming the PTC as a 
result of the offer or acceptance of the HRA, reducing PTC transfers. 
As explained further below, the Departments assume that PTC spending is 
reduced only among Exchange enrollees with incomes greater than 200 
percent of the federal poverty level.
    Transitions from traditional group health plans to individual 
coverage HRAs integrated with Medicare. Currently, there are about 2.5 
million people for whom employer coverage is the primary payer and 
Medicare is secondary. Earlier in this preamble, the Departments 
clarify that plan sponsors may allow amounts made available under an 
individual coverage HRA to be used to pay for Medicare and Medigap 
premiums, as well as other medical care expenses.\304\ Once premiums 
(and deductibles for medical care expenses) are paid by the individual 
coverage HRA, there would be few funds available to pay for medical 
care expenses. Hence, Medicare would effectively become the primary 
payer in the vast majority of cases.
---------------------------------------------------------------------------

    \304\ Note, however, that an individual coverage HRA may not, 
under its terms, limit reimbursement only to expenses not covered by 
Medicare.
---------------------------------------------------------------------------

    The total costs to the Medicare Part A program will increase 
because Medicare Part A will effectively become the primary payer. 
Because enrollment in Medicare Part A and B or Part C \305\ is a 
requirement to be covered by an individual coverage HRA that is 
integrated with Medicare and because employees offered an individual 
coverage HRA will not have access to a traditional group health plan 
through their employer, the vast majority of employees are expected to 
enroll in Medicare Part B (and many in Part D).

[[Page 28965]]

Per enrollee premiums for Medicare Part B and D will be slightly lower 
due to the improved health of the Medicare risk pool; however, net 
costs to the Medicare program will increase due to increased enrollment 
and because premiums for Medicare Part B will not fully offset the 
costs of the program.\306\
---------------------------------------------------------------------------

    \305\ Currently, very few working aged Medicare enrollees have 
enrolled in Medicare Part C and these estimates are based on the 
assumption that this is not likely to change.
    \306\ Employees who are entitled to Medicare on the basis of age 
generally tend to have lower healthcare costs than the average 
Medicare beneficiary, improving the overall health of the Medicare 
risk pool.
---------------------------------------------------------------------------

    Summary of estimated transfers and coverage changes. The 
Departments estimate that once employers fully adjust to the final 
rules, roughly 800,000 firms will offer individual coverage HRAs. The 
Departments further estimate that it will take employers and employees 
about five years to fully adjust to the final rules, with about 10 
percent of take-up occurring in 2020 and the full effect realized in 
2024 and beyond.
    This would result in an estimated 1.1 million individuals receiving 
an individual coverage HRA in 2020, growing to 11.4 million in 2029. 
Conversely, the number of individuals in traditional group health plan 
coverage will fall by an estimated 0.6 million (0.4 percent) in 2020 
and 6.9 million (4.5 percent) in 2029. Similarly, the number of 
individuals in individual health insurance coverage without an 
individual coverage HRA will fall by an estimated 0.4 million (2.4 
percent) in 2020 and 3.8 million (24.8 percent) in 2029. The number of 
uninsured persons will fall by an estimated 0.1 million (0.1 percent) 
in 2020 and 0.8 million (1.4 percent) in 2029.\307\ See Table 2 for 
details.
---------------------------------------------------------------------------

    \307\ These estimates are annualized counts (e.g., two persons 
with six months of coverage each count as one covered person), and 
reflect only coverage for persons under age 65. For more information 
about the Treasury Department's baseline estimates, see ``Treasury's 
Baseline Estimates of Health Coverage, Fiscal Year 2019 Budget 
Exercise'' June 2018, available at https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/Treasury%27s-Baseline-Estimates-of-Health-Coverage-FY-2019.pdf.
---------------------------------------------------------------------------

    The modeling suggests that employees in firms that would switch 
from offering traditional group health plan coverage to offering an 
individual coverage HRA would have, on average, slightly higher 
expected healthcare expenses than employees in other firms and current 
individual market enrollees. As a result, premiums in the individual 
market would be expected to increase by about 1 percent as a result of 
the final rules, throughout the 2020-2029 period examined. The Treasury 
Department model is nationally representative and does not necessarily 
reflect the expected experience for every market. The premium increase 
could be larger in some markets if some adverse selection results, and 
premiums could fall in other markets. Furthermore, some employers might 
take longer to adopt the individual coverage HRA, preferring to wait to 
see how premiums change; and, this delay in adoption might be more 
likely in markets that are currently in worse condition. Such differing 
behavior adds uncertainty to the estimates.
    Income and payroll tax revenue is expected to fall by about $500 
million in fiscal year 2020 and $15.5 billion in 2029, as firms newly 
offer tax-preferred health benefits in the form of individual coverage 
HRAs. At the same time, total PTC (including the refundable and non-
refundable portion of the credit) is expected to fall by about $300 
million in 2020 and by about $6.2 billion in 2029. In total, the final 
rules are estimated to reduce tax revenue by about $200 million in 
fiscal year 2020, $9.3 billion in fiscal year 2029, and $51.2 billion 
over the 10-year period through fiscal year 2029.\308\
---------------------------------------------------------------------------

    \308\ These revenue estimates do not account for the possibility 
that the final rules could lead to increased taxable wages.
---------------------------------------------------------------------------

    The Departments assume that about 1 percent of the 2.5 million 
individuals for whom employer coverage is the primary payer and 
Medicare is the secondary payer will enroll in an individual coverage 
HRA integrated with Medicare by the end of the projection period. As a 
result, the final integration rules are estimated to increase costs to 
the Medicare trust funds by less than $50 million in 2020, $0.3 billion 
in 2029, and $1.9 billion over the ten-year period through fiscal year 
2029. The impacts for Medicare Part B and D reflect the net impact to 
the federal government after the payment of premiums.

                             Table 2--Estimated Effects of Individual Coverage HRAs on Insurance Coverage and Tax Revenues,
                                                                        2020-2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
                         Calendar year                            2020     2021     2022     2023     2024     2025     2026     2027     2028     2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
Change in Coverage [Millions]: \a\
    Individual health insurance coverage with HRA.............      1.1      2.7      5.3      8.1     10.9     11.0     11.2     11.4     11.4     11.4
    Traditional group health plan.............................     -0.6     -1.7     -3.3     -5.0     -6.7     -6.8     -6.8     -6.8     -6.9     -6.9
    Individual health insurance coverage without HRA..........     -0.4     -0.9     -1.8     -2.7     -3.6     -3.6     -3.7     -3.8     -3.8     -3.8
    Uninsured.................................................     -0.1     -0.2     -0.3     -0.5     -0.6     -0.7     -0.7     -0.7     -0.7     -0.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
                          Fiscal year                             2020     2021     2022     2023     2024     2025     2026     2027     2028     2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
Change in Revenue [Billions]:
    Premium Tax Credit Reduction..............................      0.3      0.8      1.8      3.0      4.4      4.7      5.4      5.7      6.0      6.2
    Other Income and Payroll Tax Reduction....................      0.5      1.7      3.8      6.4      9.4     10.9     12.6     13.9     14.7     15.5
    Net Revenue Reduction.....................................      0.2      1.0      1.9      3.4      5.0      6.2      7.2      8.3      8.8      9.3
    Medicare Part A \b\.......................................      0.0      0.0      0.0      0.1      0.1      0.1      0.1      0.1      0.1      0.1
    Medicare Part B...........................................      0.0      0.0      0.0      0.1      0.1      0.1      0.1      0.1      0.1      0.1
    Medicare Part D...........................................      0.0      0.0      0.0      0.0      0.0      0.1      0.1      0.1      0.1      0.1
                                                               -----------------------------------------------------------------------------------------
        Total Medicare Outlay Cost \c\........................      0.0      0.0      0.1      0.2      0.2      0.2      0.3      0.3      0.3      0.3
        Total Cost \d\........................................      0.2      1.0      2.0      3.6      5.2      6.4      7.5      8.5      9.1      9.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
a. Millions of covered lives, annualized.
b. 0 = less than $50 million.
c. Note that the sum of estimated impacts for Medicare Part A, B and D may not equal net Medicare Outlay Cost due to rounding.
d. May not add to sum, due to rounding.


[[Page 28966]]

    At least one commenter stated that the negative effects of the 
proposed rules, particularly the increase in the individual market 
premiums and the attendant fiscal costs, are likely to outweigh the 
benefits to employers and their employees. As noted earlier in the 
preamble, the increase in individual market premiums is a modest 1 
percent. While the net fiscal cost in 2025 is $6.2 billion, this 
includes the cost of new coverage for 0.7 million individuals. In 
addition, as discussed earlier, the integrated coverage HRA provides 
employers and employees with an additional option for providing health 
benefits, a benefit that the Departments have not quantified. 
Therefore, the Departments have concluded that the benefits of allowing 
integration of individual coverage with HRAs substantially outweigh the 
costs.
    The Departments acknowledge that the extent to which firms will 
offer individual coverage HRAs and the results on individual market 
risk pools and premiums, federal tax revenues, and private costs and 
benefits are highly uncertain. The Departments invited comments on the 
modeling assumptions and proposed estimates of the proposed rules and 
assumptions.
    Several commenters stated that the Departments' analysis failed to 
take account of variation in individual market risk across geographic 
areas. The Departments' acknowledge that the quantitative estimates are 
derived from a nationally representative model, largely because the 
MEPS-HC is a nationally representative survey. The Departments do not 
know of any readily available data on the distribution of health claims 
at the firm level for specific rating areas or states. If the health 
risk in the individual market relative to that of employer risk pools 
varies across geographic areas, a nationally based model will 
understate the extent to which employees might transition to individual 
markets with healthier risk pools and overstate movement into less 
healthy individual markets. This would understate potential premium 
increases in some markets and overstate them or understate premium 
decreases in others. To examine this possibility, the Departments 
estimated the correlation between individual market premiums and 
traditional group coverage premiums in all rating areas across the 
country.\309\ The Departments found that premiums in the two markets 
are positively correlated, and that the correlation is statistically 
significant. In other words, where premiums for individual health 
insurance coverage are higher, premiums in the traditional employer 
market also tend to be higher. The Departments also do not find any 
evidence that, to date, employers have substantially dropped coverage 
or disproportionately dropped coverage and sent less healthy employees 
to individual markets with healthier risk pools. Even if the difference 
between individual market health risk and group market health risk 
currently varies across location, there is no clear reason why that 
variation would not persist when the individual coverage HRA is 
available. As a result of these observations, the Departments conclude 
that there is little indication that the individual coverage HRA will 
be disproportionately used in areas with healthier individual market 
risk pools. Moreover, it is not evident that adverse selection into the 
individual market would be much more likely in these lower cost areas, 
or that those risk pools would not be able to absorb additional 
enrollees from the group market.
---------------------------------------------------------------------------

    \309\ Specifically, the Departments extracted premiums reported 
on the population of Forms W-2, and estimated per person annual 
premiums from this information using coverage data from Forms 1095-B 
and C. See https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/Treasury%27s-Baseline-Estimates-of-Health-Coverage-FY-2019.pdf for a description of this estimation process. 
The Departments then compared this to SLCSP premiums. The 
Departments specifically compared single plan premiums for firms 
including any 30-year old covered employee to SLCSP premiums for a 
30 year old, and did the same for firms including any 50-year old 
covered employee and SLCSP premiums for a 50 year old in the same 
rating area. In both cases the Departments estimated that 
traditional group coverage premiums increase by about 20 cents for 
every dollar increase in individual market premiums (p<01). The 
commenter provided some evidence of geographic variation in health 
claims in the individual market relative to claims in the small 
group insured market. This analysis is of limited use, because most 
employees who are expected to be offered an individual coverage HRA 
are in the large group market. The Treasury Department data for this 
sensitivity analysis includes premiums in firms of all sizes, but is 
heavily weighted to firms filing more than 250 Forms W-2, as these 
employers are required to report premium information.
---------------------------------------------------------------------------

    One commenter suggested that the Treasury Department model does not 
adequately account for variation in expected claims risk across 
employers, because it does not explicitly account for the tendency of 
sicker workers to work alongside otherwise sicker workers, and for 
healthy workers to work alongside other healthy workers. The Treasury 
Department model imputes the expected health care expenses of families 
from MEPS-HC data, controlling for type of coverage, age, gender, 
family size and type, employment status, education, race, health 
status, geographic characteristics and other characteristics. The 
Treasury Department constructed firms using Form W-2 and other tax 
data. The Treasury Department then matched the MEPS-HC health expenses 
of families to families in the tax data (and thereby to employees 
within firms), by income, family size and type, age, gender and other 
variables common to the MEPS-HC and tax data sets. The model should 
reflect the clustering of sicker or healthier workers within firms if 
such clustering is correlated with the characteristics used in the 
health expense imputation and matching of MEPS-HC and tax data. In 
addition to conducting a survey of households' health expenditures (the 
MEPS-HC), the U.S. Census Bureau conducts a survey of employers 
regarding their health insurance costs (the Medical Expenditure Panel 
Survey--Insurance Component, or MEPS-IC.) To evaluate whether the 
distribution of imputed healthcare costs within and across firms in the 
Treasury Department model is in fact reasonable, the Departments 
obtained MEPS-IC premiums for single and family plans at each 
percentile of the premium distribution, and compared these to premiums 
in the Treasury Department model. The Departments found that the 
distributions looked very similar. That is, the imputed premiums appear 
similar to those reported in the MEPS-IC, for both lower and higher 
cost firms. Therefore, the Departments conclude that there is no 
evidence to suggest that the Treasury Department model does not reflect 
clustering by health status or any other important determinants of 
health risk and premiums.
    As explained earlier in this section of the preamble, the 
Departments explicitly assume that persons with incomes below 200 
percent of the federal poverty level who are enrolled in subsidized 
individual health insurance coverage in the baseline do not move to an 
individual coverage HRA or to uninsured status as a result of the final 
rules. The Departments also assume that employees with incomes above 
400 percent of the federal poverty level who are currently enrolled in 
a traditional group health plan do not become uninsured as a result of 
his or her employer switching to an individual coverage HRA, even if 
individual health insurance coverage premiums are substantially higher 
than the cost of their traditional group health plan coverage. These 
assumptions are consistent with allowing the individual coverage HRA 
offer to vary across employees in certain cases, and are intended to 
provide estimates that reasonably reflect expected employer

[[Page 28967]]

and employee behavior. The Departments acknowledge that imposition of 
these assumptions reduces both the amount of estimated PTC savings and 
the amount of estimated individual coverage HRA revenue costs. In 
addition, by imposing this restriction, the analysis does not reflect 
the extent to which lower-income employees would face higher insurance 
costs if an individual coverage HRA offer renders them ineligible for 
the PTC.
    One commenter suggested that the Departments explicitly model 
coverage choices for individuals with incomes below 200 percent or 
above 400 percent of the federal poverty level. Other commenters 
expressed concern that low-income workers likely would face higher 
coverage costs (and perhaps take-up less coverage and face worse 
financial or health outcomes) because they will lose eligibility for 
PTC. One commenter suggested that the individual coverage HRA rules 
could only benefit families with incomes in excess of 400 percent of 
the federal poverty level. However this commenter did not take into 
account the decline in PTC as income rises as well as the tax benefit 
of employer-provided individual coverage HRAs. In order to consider 
these concerns more fully, the Departments performed additional 
analysis to evaluate the potential effect of the individual coverage 
HRA on receipt of PTC and changes in tax liability across income 
classes, under the Departments' preferred assumption that persons with 
low incomes do not lose PTC and an alternative scenario where the 
Departments do not impose this assumption.
    Under the Departments' preferred set of assumptions, the individual 
coverage HRA reduces tax revenues by a total of $6.2 billion in 
calendar year 2025, consisting of $10.9 billion in reduced income and 
payroll taxes partly offset by $4.7 billion in reduced PTC (including 
both the refundable and non-refundable portions of the credit). In 
comparison, the individual coverage HRA increases tax revenues $1.1 
billion among taxpayers who are enrolled in individual health insurance 
coverage in the Exchange in the baseline. Over 0.9 million families 
with incomes between 200 and 400 percent of the federal poverty level 
pay $2.1 billion more in taxes (that is, on net the loss in PTC exceeds 
the value of income and payroll tax exclusions received for the 
individual coverage HRA), or an average of nearly $2,300. However, they 
are not expected to become uninsured, because while the tax preference 
for the HRA is less than the PTC, the after-tax cost of coverage is 
less than the expected cost of healthcare. About 0.4 million families 
with incomes over 400 percent of the poverty level pay nearly $1.1 
billion less in taxes, with an average tax cut of nearly $2,900. Note 
that these estimates include only the effects on families with 
individuals currently enrolled in individual health insurance coverage 
in the Exchange, and do not reflect the tax decreases experienced by 
newly insured persons, or by persons currently enrolled in individual 
health insurance coverage outside of the Exchange. In addition, the 
estimates for families with incomes below 400 percent of the federal 
poverty level are net changes, and include gains for families for whom 
the tax exclusion value of the individual coverage HRA exceeds the PTC 
offset by losses for families for whom the PTC exceeds the value of tax 
exclusion gained.
    Under an alternative assumption where persons with incomes below 
200 percent of the federal poverty level also lose PTC if their 
employer offers an affordable individual coverage HRA, about 0.9 
million additional families would pay an additional $3.5 billion in 
taxes (in the form of lost PTC that is not offset by the value of 
income and payroll taxes received for individual coverage HRA), with an 
average tax increase of nearly $4,000. These families are not projected 
to become uninsured. The 10-year cost of the final rules would fall 
from an estimated $51.2 billion to $23.7 billion. However, as noted 
earlier, the Departments do not expect such large tax increases among 
lower-income families to occur. Rather, the Departments expect 
employees who currently receive substantial amounts of PTC but are in 
firms where employees overall are better off with an individual 
coverage HRA will seek out employers that do not offer an individual 
coverage HRA or traditional group health plan, or that employers will 
reduce individual coverage HRA offers or decide not to offer an 
individual coverage HRA, so as not to render all or certain classes of 
employees ineligible for the PTC. This may be particularly true for 
firms that do not offer a traditional group health plan in the 
baseline.
    In addition, the Departments performed an alternative analysis of 
the number of persons with incomes in excess of 400 percent of the 
federal poverty level who are predicted to become uninsured if 
employers do not vary contributions to individual coverage HRAs by age 
and employees do not switch employers to avoid an increase in health 
insurance costs. (In other words, in this scenario the Departments 
relax their assumption that no higher income persons become uninsured 
as a result of moving from traditional group health plan coverage to 
being offered an individual coverage HRA.) In this alternative 
simulation, about 1 percent of persons in families with incomes above 
400 percent of the federal poverty level with traditional group health 
plan coverage under the baseline become uninsured (or nearly 900,000 
individuals). However, as noted earlier in this section of the 
preamble, the Departments do not expect such transitions to occur. 
Under this alternative simulation, older individuals are more likely to 
become uninsured, in large part because the Treasury Department's model 
fails to account for the variation in individual coverage HRA 
contributions by age as permitted under the final rules. Under the 
final rules, we expect that employers will vary individual coverage HRA 
offers so as not to completely unwind the cross-subsidies of older 
employees by younger employees and avoid markedly increasing older 
employees' coverage costs. In the event that coverage costs for 
particular employees substantially increase, those employees are 
expected to seek employment at firms that continue to offer traditional 
group health plan coverage.
    Several commenters stated that employers would likely provide the 
same amount of individual coverage HRA contributions to all employees 
in a class of employees, without age variation. As a result, older 
workers could face higher coverage costs and younger workers could face 
lower costs when they move from traditional group health plan coverage 
to an age-rated individual health insurance plan. However, varying HRA 
amounts based on age is allowed under the final rules, subject to 
certain limits, and other commenters suggested that employers would 
utilize this option, thereby maintaining existing cross-subsidies of 
older workers, which clearly has economic utility to firms, to some 
extent.
    Several commenters suggested that the Departments' estimates of 
individual coverage HRA take-up are overstated, because the estimates 
do not account for increased hassle costs of enrolling in individual 
health insurance coverage, compared to the cost of enrolling in a 
traditional group health plan. The Departments acknowledge earlier in 
this section of the preamble that some individuals will face higher 
administrative costs associated with choosing individual health 
insurance plans and enrolling in coverage. This could result in fewer 
employers offering individual coverage HRAs and fewer

[[Page 28968]]

employees enrolling in individual health insurance coverage integrated 
with an HRA. However, commenters did not attempt to quantify such 
costs. Because the magnitude of these costs (in total and relative to 
the cost of enrolling in a traditional group health plan) is uncertain, 
the Departments are unable to quantify the likely effect on individual 
coverage HRA take-up.
    The Departments particularly emphasize that these estimates assume 
that every employee in a firm would be offered either an individual 
coverage HRA or a traditional group health plan (but not both and not a 
choice between the two), or no employer health benefit. The estimates 
further assume that a firm offering an individual coverage HRA would 
offer the same benefit to each employee in the firm, and would not vary 
the contribution by location, age, or other permitted factors other 
than self-only versus non-self-only benefits.\310\ In other words, the 
estimates assume that the final rules will be effective in preventing 
firms from dividing their employees by health status or other factors 
in a way that would allow firms to capture greater tax subsidies or 
increase individual market premiums or the PTC.
---------------------------------------------------------------------------

    \310\ The Departments imposed two constraints on the 
microsimulation that could be consistent with allowing the 
individual coverage HRA offer to vary across classes of employees 
within a firm. First, the Departments assume that persons with 
incomes below 200 percent of the federal poverty level who are 
enrolled in subsidized individual health insurance coverage in the 
baseline do not move to an individual coverage HRA or to uninsured 
status as a result of the final rules. This is consistent with 
assuming that employers with low-wage workers currently receiving 
Medicaid or the PTC do not begin to offer individual coverage HRAs 
large enough to render such employees ineligible for the PTC or from 
receiving public coverage. This constraint is also consistent with 
the assumption that employees who would experience a substantial 
subsidy loss will move to other jobs that allow them to retain their 
current coverage. This assumption reduces the amount of PTC savings 
generated by the final rules, and also reduces the tax revenue cost 
of providing individual coverage HRAs to such employees. Second, the 
Departments assume that employees with incomes above 400 percent of 
the federal poverty level who are enrolled in a traditional group 
health plan do not become uninsured as a result of the final rules, 
even if individual health insurance plan premiums are substantially 
higher than the cost of their traditional group health plan 
coverage. This is consistent with assuming that employers will 
provide larger individual coverage HRAs to older employees or to 
employees in higher-cost markets than they will provide to other 
employees in their firms, in order to ensure affordable coverage. It 
is also consistent with assuming that employees will move to other 
firms, if they face large premium or cost-sharing increases when 
their employers switch from traditional group health plan coverage 
to individual coverage HRAs.
---------------------------------------------------------------------------

    In estimating the impact of the final rules on individual coverage 
HRA participation and transfers, including individual market premium 
increases, it is important to take into account the relative sizes of 
the employer market and the individual health insurance market and the 
relative health risk of individuals that are likely to transition from 
group to individual market coverage. Because the number of individuals 
in traditional group health plans is large relative to the number of 
individuals in individual health insurance coverage, relatively small 
changes in employer offers of coverage can result in large changes in 
individual market premiums.\311\
---------------------------------------------------------------------------

    \311\ The Treasury Department projects that over 150 million 
persons under age 65 will be enrolled in employer-sponsored group 
health plans in 2020, compared to about 15 million in the individual 
market.
---------------------------------------------------------------------------

    The Departments invited comments on the extent to which firms with 
healthy or less healthy risk pools would utilize individual coverage 
HRAs. The Departments specifically sought comments on the extent to 
which employers would offer different benefits to different classes of 
employees, including the rating area class and combinations of the 
classes, and the resulting effect on individual market premiums. Many 
commenters responded, generally emphasizing the importance of a stable 
individual health insurance market and the need to maintain and, if 
possible, strengthen conditions to prevent adverse selection as a 
result of the individual coverage HRA.
    Many commenters noted that, because the employer group market is 
very large relative to the individual market, even a relatively minor 
shift of higher-cost individuals from traditional group health plans to 
the individual market would markedly increase individual market 
premiums. In a similar vein, one commenter noted that the individual 
market in their state is too small to absorb the high health costs from 
the few employers who have high enough health costs to make the 
individual coverage HRA strategy economically attractive. Commenters 
also noted that healthcare costs are distributed very unevenly, and 
that, as a result, moving a small number of the highest-cost employees 
to the individual market can have a large impact on premiums. Several 
commenters provided their own scenarios showing that if employers are 
able to send a relatively small number of high-cost individuals to the 
individual market it could result in a very large increase in premiums 
in the individual market. Under one example, if 1 percent to 4 percent 
of the employer market with various above-average-fractions of higher-
cost employees migrates to the individual market, premiums have the 
potential to increase 3 percent to 83 percent. In an example presented 
by another commenter, if as few as 5 percent of the persistent top 
spenders in the large group market move to individual market coverage, 
the average individual market claim would increase by 15 percent. Under 
a third example discussed by a third commenter, if 10 percent of 
employers designed individual coverage HRAs to shift the sickest 
individuals into the individual market, premiums would increase by 17.3 
percent. If however 100 percent of employers engage in shifting their 
sickest employees, premiums would increase by 93.1 percent in the 
individual market. The Departments note that these scenarios do not 
take into account the conditions in the proposed or final rules 
intended to prevent adverse selection. As such they help to illustrate 
why the Departments proposed, and are finalizing, conditions designed 
to prevent adverse selection. These examples are not inconsistent with 
the illustrative scenario presented by the Departments in the preamble 
to the proposed rules.
    Many commenters said it was important that the final rules not give 
employees a choice between a traditional group health plan and an 
individual coverage HRA in order to prevent adverse selection in the 
individual market, as was prohibited under the proposed rules. One 
commenter gave specifics noting that it is the employer that is 
empowered with deciding which health benefits to offer. Thus, according 
to the commenter, it is not likely that employers would offer both an 
individual coverage HRA and a traditional group health plan if the 
employer anticipated that such a choice would increase claims cost in 
its traditional group health plan. The commenter noted that without the 
condition in the proposed and final rules prohibiting plan sponsors 
from offering employees a choice between a traditional group health 
plan and an individual coverage HRA, there would be market segmentation 
caused by incenting high-cost individuals to enroll in individual 
market coverage as well as potential adverse selection based on 
difference in benefits, cost-sharing levels, and networks.
    Many commenters said that it is important that the final rules 
retain the condition that individuals be required to obtain individual 
health insurance coverage in order to be covered by an individual 
coverage HRA. One commenter suggested that, otherwise, healthy 
individuals might opt out of the individual market (comprehensive 
coverage) and use the individual

[[Page 28969]]

coverage HRA to cover out-of-pocket spending or for noncompliant 
coverage, potentially increasing adverse selection in the individual 
market. Relatedly, many commenters supported the prohibition on 
integration of an HRA with STLDI. If enrollees were given a choice of 
individual health insurance coverage or STLDI, in conjunction with an 
individual coverage HRA, commenters explained that healthy employees 
would be more likely to purchase the less expensive STLDI plans, 
creating adverse selection for the individual market.
    Commenters generally supported the condition that individual 
coverage HRAs be offered on the same terms to an entire class of 
employees and that the classes to which a plan sponsor may offer HRAs 
on different terms be limited to the classes enumerated in the proposed 
rules and any combinations of those classes. One commenter noted that 
the same terms requirement and the enumerated classes reduce the 
ability of employers to target high-cost workers by targeting 
particular worker classes. The commenter explained that allowing 
employers to define classes more narrowly would increase the 
opportunity for employers to target high-cost workers, thereby 
increasing the adverse selection risk in the individual market. Some 
commenters recommended that the number of permitted classes not be 
expanded in general to avoid increasing the risk of adverse selection 
in the individual market.
    One commenter noted that the proposed permitted classes of 
employees could be combined to offer employers opportunities to segment 
highly specific subsets of employees, including the more costly 
populations, resulting in higher premiums in the individual market. 
Several other commenters expressed concerns that the proposed 
integration conditions would not be adequate to protect against 
additional risk segmentation. Another commenter suggested that premiums 
in the individual market could rise because the proposed rules create 
uncertainty, causing insurers to include an additional risk factor when 
setting premiums. Further, the commenter urged that the proposed rules 
be withdrawn as they would be detrimental to consumers and health 
insurance markets in that particular state. One state with an approved 
PPACA section 1332 state innovation waiver authorizing a re-insurance 
program asserted that the proposed rules could dismantle the market 
stability that has been achieved through state based mechanisms and 
that states with re-insurance programs will unintentionally subsidize 
employer health plans due to the influx of people with high claims.
    After consideration of these comments and related economic 
literature,\312\ the Departments concluded that the conditions 
contained in the proposed rules intended to mitigate the risk of 
adverse selection (including the prohibition on offering an employee a 
choice between an individual coverage HRA or a traditional plan, the 
same terms requirement, the requirement that individuals with 
individual coverage HRAs be enrolled in individual health insurance 
coverage, and the prohibition on integration with STLDI) are necessary 
and, as retained in the final rules, support the Departments' finding 
that the effect of the rule on individual market premiums will be 
modest.
---------------------------------------------------------------------------

    \312\ Although adverse selection has been observed in many 
instances, relatively recent empirical research suggests that any 
harm from adverse selection could, in some circumstances, be modest. 
Most of the literature is related to choices between plans within a 
firm or other contexts that are not directly analogous to an 
employer's choice between offering a traditional group plan or an 
individual coverage HRA, and as a result the applicability of the 
research is somewhat unclear. Therefore the Departments are 
including in the final rule provisions specifically intended to 
mitigate against adverse selection while at the same time giving 
employers an important new way to provide health benefits. See e.g., 
Einav, Liran, Amy Finkelstein, and Jonathan Levin, ``Beyond Testing: 
Empirical Models of Insurance Markets,'' Annual Review of Economics, 
2010, 2: 311-326; Einav, Liran, Amy Finkelstein, and Mark Cullen, 
``Estimating Welfare in Insurance Markets Using Variation in 
Prices,'' Quarterly Journal of Economics, 2010, 125 (3): 877-921; 
Bundorf, M. Kate, Jonathan Levin, and Neale Mahoney, ``Pricing and 
Welfare in Health Plan Choice,'' American Economic Review, 2012, 102 
(7): 3214-3248; and Cardon, James H. and Igal Hendel, ``Asymmetric 
Information in Health Insurance: Evidence from the National Medical 
Expenditure Survey.'' RAND Journal of Economics, 2001, 32 (3): 408-
427.
---------------------------------------------------------------------------

    Several commenters suggested that additional rules should be 
adopted to prevent adverse selection. For example, one commenter stated 
that employers should be forbidden from using health status of any 
individual or class of employees as a factor when differentiating 
between classes of employees. Another encouraged strong federal 
oversight to ensure employer compliance with the conditions. Yet 
another commenter recommended the Departments use a facts and 
circumstances test to determine whether individual coverage HRAs are 
targeted to high cost employees, in addition to requiring compliance 
with the conditions in the final rules.
    The Departments decline to add a facts and circumstances test to 
the final rules. DOL has enforcement jurisdiction over private sector 
employer-sponsored group health plans, and HHS has enforcement 
jurisdiction over public sector group health plans, such as those 
sponsored by state and local governments. Individual coverage HRAs are 
group health plans, and DOL and HHS will monitor individual coverage 
HRAs' compliance with applicable requirements, consistent with the 
general approach to enforcement with respect to other group health 
plans. The Departments are of the view that it is unnecessary to 
include specific enforcement guidance for individual coverage HRAs in 
the final rules. However the Departments may provide additional 
guidance if the Departments become aware of arrangements that are 
inconsistent with the conditions of the final rules.
    One commenter noted that the lack of a limit on the maximum 
individual coverage HRA amount could result in more employers with 
older or sicker employee populations providing very large individual 
coverage HRAs and sending those high-cost individuals to the individual 
market. This commenter suggested limiting individual coverage HRA 
contributions to a maximum amount. Another commenter pointed out that 
an employer could provide an individual coverage HRA that covered both 
the premiums and cost-sharing expenses up to the maximum out-of-pocket 
limit ($7,900 in 2019) for an expensive employee and still reduce 
health costs. This commenter supported the same terms requirement and 
other rules preventing benign discrimination to shield against market 
segmentation. In previous guidance on HRAs, including on integration of 
HRAs with other coverage, the Departments provided no minimum or 
maximum contribution amount. Similarly, the Departments decline to 
impose a minimum or maximum contribution amount on individual coverage 
HRAs under the final rules, in order to provide employers with 
flexibility and because the Departments have imposed other conditions 
to address the potential for adverse selection.
    Commenters also recommended that the conditions to prevent adverse 
selection in the proposed rules be strengthened by applying the 
integration conditions to the aggregated controlled group of employers 
rather than to the common-law employer. The Departments have concluded 
that applying the classes of employees at the common law employer level 
will avoid complexity for employers and that applying a minimum class 
size requirement in certain circumstances, at the common law employer 
level, is a

[[Page 28970]]

more straightforward way of addressing the adverse selection concerns 
raised by some commenters. Therefore, the Departments are not adopting 
the suggestion.
    One commenter suggested the final rules should not allow using 
rating area as a separate class of employees because it presents risk 
for health factor discrimination, allowing employers to isolate an 
employee or a few employees with costly medical expenses who happen to 
work at the same primary site. While the Departments appreciate and 
considered the concern raised by commenters, the Departments have 
determined, based on information regarding the significant differences 
in individual market premiums between rating areas within some states 
and significant differences in the number of individual health 
insurance plans available between rating areas within some states, that 
it would be an unreasonable limitation on employer flexibility, and, 
thus, employee welfare, to prohibit employers from offering different 
benefits based on different work site rating areas.
    One commenter argued that the allowable variation in individual 
coverage HRA contributions by employee age and number of dependents 
would need to be parallel to the variation in premiums by age and 
family size in the individual market to avoid the risk that employers 
target large contributions to high-cost employees. Another commenter 
pointed out that employers' ability to vary individual coverage HRA 
amounts by age should not be limitless, but should be subject to sound 
actuarial guardrails, such as the 3 to 1 PPACA age band between the 
youngest and oldest employees. The Departments agree. In the final 
rules, employers are permitted to vary contributions based on the age 
of the participant as long as the contribution for the oldest 
participant is within a 3 to 1 ratio of the contribution for the 
youngest participant. Further, the same maximum dollar amount 
attributable to the increase in age must be made available to all 
participants of the same age in the same class of employees.
    Some commenters recommended removing as a permitted class of 
employees the class based on employees who have not yet attained 25 
years of age because this would enable employers to offer individual 
coverage HRAs to older employees while keeping young, generally 
healthier employees in a traditional group health plan, increasing 
adverse selection risk for the individual market. In addition, 
commenters noted that there is no clear need for this class of 
employees as employers do not typically vary current coverage offering 
for employees over and under age 25. After consideration of these 
comments, the Departments are omitting this class in the final rules.
    Several commenters suggested a minimum class size requirement so 
that employers cannot combine classes in a way that less healthy 
employees can be isolated into separate classes from healthy employees. 
According to these commenters, each classification should be required 
to include a certain minimum number and/or percentage of employees. The 
Departments agree and sought to develop a rule that is narrowly 
tailored to mitigate the risk of adverse selection, especially when 
combining classes, and to avoid overly burdening employers or 
unnecessarily hampering the increased use and flexibility of individual 
coverage HRAs. In order to balance these considerations, the final 
rules include a minimum class size requirement that varies based on 
employer size and that applies only to certain classes of employees in 
certain circumstances in which the potential for health factor 
discrimination is greatest. In general, the minimum is equal to 10 
employees for an employer with fewer than 100 employees; equal to 10 
percent of the total number of employees (rounded down to a whole 
number), for an employer with 100 to 200 employees; and equal to 20 
employees for an employer that has more than 200 employees. See earlier 
in this preamble and the final rules for more detail.
    Multiple commenters noted that large employers and self-insured 
employers with a greater share of less-healthy employees could be more 
likely to offer individual coverage HRAs than employers with healthier 
employees. The resulting adverse selection could worsen the individual 
market risk pool and increase premiums. The Departments acknowledge 
that the integration conditions generally do not address this potential 
problem. This effect has been included in the modeling and hence is 
reflected in the overall results. As discussed earlier in this 
preamble, this effect along with other effects of the final rules 
result in a premium increase of only about 1 percent, indicating a very 
small effect on the individual market risk pool.
    Other commenters thought individual coverage HRAs could reduce 
adverse selection in the individual market. Some commenters noted that 
the proposed rules would result in many employees moving to the 
individual market, thereby expanding the market and stabilizing 
premiums. One commenter argued that although some employers may have a 
higher-risk group of employees, in general, working employees are 
lower-risk than individuals in the individual market. Other commenters 
stated that employers may not necessarily be incentivized to segment 
their risk, that is, they may be interested in offering individual 
coverage HRAs for reasons unrelated to risk. Another commenter argued 
that commonly purchased stop-loss coverage mitigates the incentive to 
move individuals to the individual market; that HIPAA generally 
prohibits group health plans and health insurance issuers in the group 
market from discriminating against individuals based on health factors; 
that the requirement that to provide MV employer plans provide 
``substantial coverage'' of inpatient hospital services and physician 
services makes it hard for employers to incentivize high cost 
individuals to move to the individual market by providing limited 
benefits; and that the proposed rules' same terms requirement and the 
restriction on integration of individual coverage HRAs with STLDI all 
work together to eliminate the opportunities for employers to encourage 
higher-risk employees to obtain coverage in the individual market. One 
commenter noted that the Departments struck an important balance 
between providing additional alternatives for employers while 
curtailing the opportunity for some employers to selectively segment 
risk and shift their highest-cost employees to the already fragile 
individual market. The Departments agree that the final rules, with the 
integration conditions, strike the right balance and have the potential 
to strengthen the individual market.
    Several commenters further recommended that the Departments add as 
a permitted class to the final rules, salaried and hourly employees, so 
that employers may be permitted to make different offers of coverage, 
to salaried and non-salaried workers. Commenters in support of allowing 
salaried and hourly workers as permitted classes of employees explained 
that this would provide additional flexibility for employers without 
increasing the risk of adverse selection. Reasons for this conclusion 
included: The classification is used for a variety of purposes and 
reclassifying employees may violate the FLSA, ERISA and other laws that 
prohibit employers from reclassifying workers solely for the purposes 
of interfering with health benefits. One commenter stated that under 
such a rule employers would have more potential for risk selection than 
in the permitted

[[Page 28971]]

classes under the proposed rules. After consideration of these 
comments, the Departments are allowing employees who are paid on a 
salaried basis and non-salaried employees (such as hourly employees) as 
permitted classes of employees in the final rule, subject to the 
minimum class size requirement.
    The Departments also recognized that transition from coverage under 
a traditional group health plan to coverage under an individual 
coverage HRA could represent a substantial change from an employee 
perspective, and as a result employers may find it difficult to 
transition to individual coverage HRAs. Because new hires are unlikely 
to increase adverse selection in the individual market and, if added to 
the individual market, would likely lower average risk, the Departments 
have added flexibility for employers by allowing employers to continue 
to offer traditional group health plans to current employees while 
offering individual coverage HRAs to newly hired employees. Recognizing 
that the new hire subclass will start small as employees are hired 
after the employer-specified hiring date for a class of individuals, 
the new hire subclass is not subject to the minimum class size 
requirement. However, if an employer later chooses to further subdivide 
a new hire subclass, each subdivision would be subject to any minimum 
class size requirements that otherwise would apply.
    Several commenters suggested that the Departments delay 
implementation of the final rules until further analysis, particularly 
regarding risk segmentation, could be conducted. However, commenters 
offered few concrete suggestions to inform additional analysis. While 
the Departments acknowledge that the exact effects of the final rules 
are subject to uncertainty, the Departments conclude that the benefits 
of the rules will outweigh any costs, and that the benefits of 
promulgating the rules without further delay will outweigh the benefits 
of additional analysis. As recommended by a number of comments, the 
Departments will continue to closely monitor premiums and the stability 
of the individual market.
    The Departments also emphasize that these estimates assume that 
employers would contribute the same amount to individual coverage HRAs 
as they would to traditional group health plans and that employees 
would elect the same amount of salary reduction to pay for individual 
health plans and cost sharing as they would if they were enrolled in a 
traditional group health plan. But, as noted above, some employees who 
would be offered individual coverage HRAs under the proposed rules 
would choose plans with lower premiums and higher deductibles and 
copayments and narrower provider networks than they would choose if 
offered a traditional group health plan. However, some workers would 
probably choose more expansive coverage than what they were offered in 
a traditional group health plan, and a key benefit of this rule is that 
it expands workers' ability to choose coverage that best suits their 
preferences. Those workers who choose plans with higher cost sharing 
and narrower provider networks and become more cost-conscious consumers 
of healthcare will likely reduce healthcare costs and insurance 
premiums, eventually reducing average HRA amounts and salary 
reductions. The Departments requested comments on the assumption that 
employer and employee tax-preferred spending on healthcare would be the 
same for individual coverage HRAs as for traditional group health 
plans.
    One commenter questioned the Departments' basis for this 
assumption. Based on conversations with employers of all sizes and 
industries, the commenter concluded that it appears likely that a good 
portion of employers would contribute substantially less to individual 
coverage HRAs than what they are currently contributing to traditional 
group health plans. The commenter suggested that this would be 
particularly true for certain classes of employees, and that this may 
result in some employees and dependents becoming uninsured. Several 
commenters expressed concern that employers would contribute less to 
individual coverage HRAs than they currently contribute to their 
traditional group health plans, with the result that coverage would be 
less affordable for employees. One commenter suggested that employers 
offering an individual coverage HRA be required to provide a minimum 
amount to ensure that the HRAs are adequate for the purchase of 
individual health insurance coverage. As discussed above, the 
Departments decline to adopt this suggestion. In general, workers bear 
the cost of employer contributions to health benefits in the form of 
reductions in wages and non-health benefits. The current tax system 
subsidizes health benefits, and it is not clear that minimum employer 
contributions would improve employee welfare. Other commenters 
suggested that employers should be required to vary the amount of the 
individual coverage HRA by age, geographic region, and/or family size, 
as these factors result in variations in premiums for individual health 
insurance coverage. The Departments are not adopting this suggestion. 
The Departments recognize that the cost of individual health insurance 
coverage will vary across employees, and because the intent of the rule 
is to expand rather than restrict employer choices regarding how to 
provide coverage, the final rules allow (but do not require) employers 
to take these factors into account in certain circumstances and subject 
to certain conditions. After consideration of these comments, the 
Departments acknowledge that introduction of the individual coverage 
HRA could lead employers to provide lower health benefits and higher 
taxable wages than they would if they provided a traditional group 
plan. However, because the extent to which employers will do so is 
uncertain, this effect is not accounted for in the Departments' 
quantitative estimates of transfers (that is, the fiscal cost) arising 
from the rules. Moreover, the Departments are of the view that 
employers will design employee compensation packages to the benefit of 
employees since employers aim to attract and maintain talent.
    In addition, the estimates assume that the entire individual 
coverage HRA balance is spent on healthcare premiums and cost sharing 
each year. However, the Departments are of the view that many employers 
would allow employees to carry unspent individual coverage HRA balances 
over from year to year, and that some employers would allow employees 
to continue to spend accumulated individual coverage HRA funds even 
after separating from their employer. Moreover, individual coverage HRA 
benefits are generally subject to COBRA protections, such that, for 
example, some employees could elect to use accumulated funds for up to 
18 months after separation from service. The ability to carry over 
benefits from year to year could further encourage employees to curtail 
healthcare spending, particularly less efficient spending. This effect 
could be modest for several reasons. First, unlike HSA balances, which 
can be withdrawn for non-health purposes subject to tax but without 
penalty after age 65 and with a 20 percent penalty before age 65, 
individual coverage HRAs may only be used to reimburse expenses for 
medical care. In addition, unlike HSAs, individual coverage HRAs are 
not the property of the employee and employers may limit the amount 
that can be carried over from year-to-year or accessed by the employee 
after separation, subject to applicable COBRA

[[Page 28972]]

or other continuation of coverage requirements.
    These estimates further assume that all individual health insurance 
coverage integrated with an HRA would be treated as subject to and 
compliant with PHS Act sections 2711 and 2713. The proposed rules 
prohibit an individual coverage HRA from being integrated with STLDI 
and excepted benefits, which are not subject to or generally compliant 
with PHS Act sections 2711 and 2713. Grandfathered coverage in the 
individual market is not subject to the annual dollar prohibition in 
PHS Act section 2711 or to the preventive services requirements in PHS 
Act section 2713. However, the proposed rules provided that employees 
nor employers were required to confirm that individual health insurance 
coverage integrated with an HRA is not grandfathered coverage, as 
requiring such confirmation would be administratively burdensome and 
the Departments expected that the number of employees who might use an 
individual coverage HRA to buy such coverage would be extremely small, 
because individuals can only renew and cannot newly enroll in 
grandfathered individual health insurance coverage.
    Commenters generally agreed that the vast majority of individual 
health insurance coverage is compliant with PHS Act sections 2711 and 
2713. As noted earlier in the preamble, many commenters emphasized the 
importance of requiring individual coverage HRAs to be integrated with 
individual health insurance coverage, and not with STLDI, in order to 
ensure the health and stability of the individual market risk pool. The 
Departments considered these comments and are finalizing the 
requirement that individuals covered by an individual coverage HRA must 
be enrolled in individual health insurance coverage, as proposed. 
Further, under the final rules, an individual coverage HRA may not be 
integrated with STLDI.
    In summary, the Departments recognize that allowing HRAs to be 
integrated with individual health insurance coverage creates the 
potential for some adverse selection and increased premiums in the 
individual health insurance market. To prevent that occurrence, the 
Departments are retaining in the final rules the key conditions 
intended to prevent adverse selection and health factor discrimination. 
In addition, the Departments are strengthening the conditions intended 
to prevent of adverse selection, including by adding a minimum class 
size requirement that applies to certain classes of employees in 
certain circumstances and removing as a permitted class of employees 
the class of employees under age 25, which had the potential to 
increase adverse selection. The addition of the special rule for new 
hires could also improve the health of the overall individual market 
risk pool. While the Departments have also made changes in the final 
rules in order to provide employers with additional flexibility, such 
as adding as new permitted classes of employees non-salaried and 
salaried employees as well as staffing firm temporary employees (as 
well as adopting the special rule for new hires), the Departments have 
done so in a way that is narrowly tailored to avoid creating the risk 
of adverse selection. Therefore, after consideration of these changes 
and public comments, the Departments are finalizing the economic 
modeling of the individual coverage HRA without changing the key 
assumptions.
    In light of the Departments' quantitative estimates and qualitative 
analysis, the Departments conclude that the benefits of the individual 
coverage HRA outweigh the costs. In particular, the Departments 
estimate that the final rules will increase the number of individuals 
with health insurance and have only a small effect on individual market 
premiums. The final rules will significantly increase flexibility and 
choices of health coverage for employers and employees. As a result, 
employers will benefit from having another choice of a tax-preferred 
health benefit to offer their employees, potentially enabling them to 
attract and retain workers. In addition, the increased use of HRAs 
could potentially reduce healthcare spending and ultimately result in 
increased taxable wages.
3. Impact of Excepted Benefit HRA
    The final rules also provide for recognition of a new limited 
excepted benefit HRA under which amounts newly made available for each 
plan year are limited to $1,800 (indexed for inflation for plan years 
beginning after December 31, 2020). Among other conditions, to offer 
the excepted benefit HRA, the employer must offer the employee a group 
health plan that is not limited to excepted benefits and that is not an 
HRA or other account-based group health plan, but the employee would 
not need to enroll in this group health plan. The benefit would be 
funded by the employer, and in the Treasury Department's modeling, this 
means that it would be paid for by all employees in the firm through an 
overall reduction in wages. The benefit could be used to pay for any 
medical expense, other than premiums for individual health insurance 
coverage, group health plan coverage (other than COBRA or other 
continuation coverage), or Medicare Part B or D. The excepted benefit 
HRA could be used to pay premiums for coverage that consists solely of 
excepted benefits and for other premiums, such as premiums for STLDI 
(subject to the exception described later in this section of the 
preamble).
    Due to the availability of other tax preferences for health 
benefits, including the tax exclusion for employer-sponsored benefits, 
salary reductions for group and off-Exchange individual health 
insurance coverage premiums when integrated with an individual coverage 
HRA, health FSAs, and non-excepted benefit HRAs, the Departments are of 
the view that this new excepted benefit would be adopted by a small 
number of firms. However, it could provide flexibility for firms that 
want to provide a tax preference to employees that choose STLDI instead 
of the employer's traditional group health plan.
    Several commenters noted that the excepted benefit HRA could 
adversely impact the small employer group market as employers in the 
small group market would be more likely to offer an excepted benefit 
HRA that reimburses STLDI premiums (because these employers are less 
likely to be directly affected by the risk shifting due to the fact 
that the small group market is community rated) and healthier employees 
would be more likely to opt out of the traditional small employer group 
plan and use the excepted benefit to pay for health coverage out of 
pocket or purchase STLDI. Several commenters also expressed concern 
about the negative impact on the individual market, as the excepted 
benefit HRA could draw some enrollees away to STLDI plans. One 
commenter expressed concern that sicker employees within a firm, who 
could not obtain STLDI, would bear greater costs. As explained earlier 
in this preamble, the Departments do not believe that allowing the 
excepted benefit HRA to be used to purchase STLDI creates a significant 
risk pooling concern. However, to mitigate potential adverse selection 
affecting the small group market, the final rules provide that the 
Departments may restrict excepted benefit HRAs from being able to 
reimburse STLDI premiums for certain employers in a state, if certain 
criteria are satisfied.
    Several commenters opposed the new excepted benefit HRA because it 
would allow employers to provide a smaller health benefit. One 
commenter expressed particular concern that low-wage employers would be 
particularly

[[Page 28973]]

attracted to this option, to the detriment of employees. The 
Departments conclude that this is not an important risk or concern. 
First, employees must have the option to receive a traditional group 
health plan instead of the excepted benefit HRA, and ERISA-covered 
employers must provide a notice of the dollar limits and other 
limitations of the excepted benefit HRA. In addition, the costs of 
coverage are borne all or in part by employees, in the form of reduced 
wages, and any reduction in costly health benefits is expected to be 
offset by increased wages. Third, employees who decline an employer's 
offer of a traditional group health plan may obtain coverage through a 
spouse or the individual market, and this coverage may also be 
subsidized through a tax exclusion or PTC. Therefore, the availability 
of this new tax-preferred benefit is expected to benefit employees, not 
harm them.
    Several commenters expressed concern that adding another type of 
excepted benefit and another type of HRA would create confusion among 
employers and employees, potentially resulting in costly mistakes. Some 
commenters expressed concern that the excepted benefit HRA would 
increase uninsurance among employees who forego coverage or use the 
benefit to purchase STLDI (which need not provide comprehensive 
benefits), thus putting employees at risk or poor financial or health 
outcomes.
    Other commenters supported the provision of the excepted benefit 
HRA as proposed, including one who expressed support for providing 
employers with the greatest possible flexibility to provide health 
benefits on a tax preferred basis. The Departments agree that the 
excepted benefit HRA will provide additional flexibility for employers, 
and for employees who want to pay for their health care costs in ways 
other than enrolling in their employer-offered traditional group health 
plan. The Departments continue to expect that due to the availability 
of other tax preferences for health benefits, including larger tax 
preferences for employer-provided benefits and the PTC for individual 
health insurance coverage, that adoption of the excepted benefit HRA is 
likely to be modest, such that the risk of introducing adverse 
selection into other markets is low. The Departments conclude that the 
benefits of this additional choice and flexibility provided by this new 
tax preferred excepted benefit outweigh the likely costs.

C. Regulatory Alternatives

    In developing the final rules, the Departments considered various 
alternative approaches.
    Retaining prohibition on integration of HRAs with individual health 
insurance coverage. The Departments considered retaining the existing 
prohibition on integration of HRAs with individual health insurance 
coverage, in particular in light of commenters who raised concerns that 
allowing HRAs to be integrated with individual health insurance 
coverage could lead to adverse selection and health factor 
discrimination in the individual market. However, the Departments 
determined that the adverse selection concerns that gave rise to the 
prohibition, and which some commenters raised, can be adequately 
addressed by including appropriate mitigating conditions in the final 
rules. Moreover, the alternative approach of continuing to prohibit the 
integration of HRAs with individual health insurance coverage would 
foreclose the benefits that the Departments expect to result from 
allowing individual coverage HRAs, including increased flexibility and 
choices of health coverage options for employers and employees; 
possibly reduced healthcare spending and increased taxable wages for 
workers currently in firms that offer traditional group health plans; 
and increased numbers of low- and moderate-wage workers (and their 
family members) with health insurance coverage.
    Integration conditions to prevent against adverse selection. The 
proposed rules contained a number of conditions intended to mitigate 
the risk of adverse selection, including that an employer may not offer 
any employee a choice between a traditional group health plan and an 
individual coverage HRA and that, if an employer offers an individual 
coverage HRA, it must do so on the same terms and conditions for all 
the employees in the class of employees subject to certain exceptions. 
The Departments considered a number of alternatives related to these 
conditions in developing the final rules. As to the prohibition on 
choice between an individual coverage HRA and a traditional group 
health plan, the Departments considered the alternative of allowing all 
employers, or, employers that would qualify to participate in the small 
group market, to offer employees a choice between an individual 
coverage HRA and a traditional group health plan. However, the 
Departments determined that retaining this condition as proposed is 
important to prevent against adverse selection and commenters generally 
agreed. The Departments did consider that the incentives for employers 
in the small group market to segment risk are lower than for other 
employers offering experience-rated coverage or self-insured plans. 
However, the Departments would not expect many small employers to offer 
this choice because the coverage in the small group market and 
individual market is quite similar and because small employers that 
purchase health insurance would not have an incentive to segment their 
risk pool. Although allowing small employers to offer a choice would 
not provide small employers much benefit, it would increase the 
complexity of the final rules for entities involved in implementation, 
such as the Exchanges, and could cause uncertainty for issuers. 
Accordingly, the Departments decline to provide an exception for small 
employers to the condition that a plan sponsor may not offer an 
employee a choice between a traditional group health plan and an 
individual coverage HRA. However, the Departments are generally 
supportive of maximizing employee choice and employer flexibility and 
so may revisit this issue in future rulemaking once the Departments 
have had the opportunity to gauge the results of the initial 
implementation of individual coverage HRAs.
    With respect to the proposed condition that an employer must offer 
an individual coverage HRA on the same terms to all employees within a 
class of employees, the Departments considered whether to allow 
individual coverage HRAs to increase amounts based on age, without any 
related parameters, as proposed, or, as an alternative, whether to 
place an outer limit on the ability to age vary, as some commenters 
suggested the Departments should do to protect against adverse 
selection. Upon consideration of these comments, the Departments 
determined that imposing a limit on the ability to increase HRA amounts 
based on age is justified in order to protect against adverse 
selection. In designing that limitation on age variation, the 
Departments considered a number of alternatives, including 
incorporating the federal and state age curves and tying the variation 
to a specific premium for a specific policy that a participant in the 
class of employees could purchase. However, the Departments determined 
that these options would be unduly complex and that imposing the 3 to 1 
limit on the variation of HRA amounts within a class based on age, 
which is generally based on the degree of age

[[Page 28974]]

variation allowed in individual market premiums under PHS Act section 
2701, sufficiently limits the potential for abuse.
    The proposed rules provided that plan sponsors may apply the 
integration conditions on a class-by-class basis such that an employer 
may offer an individual coverage HRA to a class of employees while 
offering a traditional group health plan to another class of employees 
or may offer different individual coverage HRAs, with different terms, 
to different classes of employees. The Departments considered whether 
to retain the ability of employers to offer or vary individual coverage 
HRAs for different classes of employees or whether employers should be 
required to offer all employees an individual coverage HRA if any 
employee is offered an individual coverage HRA. Although some 
commenters raised concerns that the classes of employees could be 
manipulated leading to health factor discrimination and adverse 
selection, the Departments decided to finalize the ability to offer and 
vary individual coverage HRAs on a class-by-class basis because this 
aspect of the rule provides employers with the flexibility needed to 
achieve increased HRA usability and to maximize employee welfare, which 
is a sentiment expressed by a number of commenters. However, the 
Departments acknowledge the concern regarding the potential for adverse 
selection and health factor discrimination and, therefore, have 
concluded that additional safeguards are needed in certain 
circumstances, as described later in this section of the preamble.
    Under the proposed rules, the Departments enumerated eight 
permitted classes of employees and also allowed employers to combine 
the classes of employees. In the process of finalizing the rules, the 
Departments considered, as an alternative, whether to provide classes 
of employees based on a more general standard (like the one that 
applies under the HIPAA nondiscrimination rules, with a broader 
employment-based classification standard) or whether to finalize 
generally as proposed, such that the final rules would list the 
specific permitted classes. The Departments determined that a broad and 
open-ended standard would not be sufficient to mitigate the risk of 
adverse selection and therefore under the final rules, the Departments 
enumerate the permitted classes.
    The Departments considered a number of alternatives with regard to 
which classes of employees should be permitted under the final rules. 
The proposed rules contained, as a permitted class of employees, 
employees who had not attained age 25. The Departments considered 
whether to retain this class in the final rules or whether to remove 
this from the list of permitted classes, in response to commenters who 
asserted that this class could lead to adverse selection and does not 
reflect the categories employers typically use to offer benefits. In 
response to these comments, the Departments determined that the final 
rules should not include the under-age-25 class of employees in the 
list of permitted classes.
    Further, under the proposed rules, the Departments did not include 
salaried employees and hourly employees as permitted classes of 
employees. In finalizing the rules, the Departments considered whether 
to add hourly and salaried employees as permitted classes or whether to 
finalize the rule as proposed. In proposing the rules, the Departments 
had noted that they did not include these classes in the list of 
permitted classes due to a concern that employers might easily be able 
to change an employee's status from salaried to hourly (and in certain 
circumstances, from hourly to salaried), which could lead to adverse 
selection. Commenters asserted that contrary to the Departments' 
concerns these classes are not easy to manipulate and that hourly and 
salaried employees should be added as permitted classes, in order to 
increase the use of individual coverage HRAs. The Departments have 
concluded that the benefits of employer flexibility, increased 
utilization of individual coverage HRAs, and maximizing employee 
welfare outweigh the potential risk of adverse selection and health 
factor discrimination, due to a reconsideration of the extent to which 
these categories could be manipulated and because of the application of 
a minimum class size requirement, discussed later in this section of 
the preamble. Therefore, the Departments add employees paid on a salary 
basis and non-salaried employees (such as hourly employees) to the list 
of permitted classes in the final rules.
    The Departments also considered, in response to comments, whether 
to add as a class of employees temporary workers employed by staffing 
firms. The Departments determined that adding this class could increase 
the usability of HRAs for staffing firms and benefit their employees. 
The Departments also determined that this class would be difficult to 
manipulate, and that, therefore, this class does not raise a 
substantial risk of adverse selection or health factor discrimination. 
Accordingly, the Departments add temporary workers employed by staffing 
firms to the classes of employees permitted under the final rules.
    The Departments also considered whether or not to add other classes 
to the list of permitted classes, as suggested by commenters, including 
classes based on status as a field worker (such as craft workers and 
laborers), role or job title, employee tenure, being subject to the 
Davis Bacon Act and Related Acts or the Service Contract Act, exempt or 
non-exempt status under the Fair Labor Standards Act, and religion or 
status as a minister. The Departments considered each of these 
suggestions and determined that these suggested classes of employees 
should not be permitted as they raise various issues, including ease of 
manipulation and potential for adverse selection and health factor 
discrimination, industry-specificity, and administrability and 
definitional challenges.
    Additional integration safeguards. The Departments considered a 
number of alternative regulatory approaches to address the concern, 
acknowledged by the Departments and expressed by a number of 
commenters, that there is a potential for certain of the permitted 
classes of employees to be manipulated in way that could lead to 
adverse selection and health factor discrimination. The Departments 
considered not adopting additional safeguards, in order to minimize 
burden and complexity and based on the possibility that other economic 
incentives related to attracting and retaining talented workers would 
discourage employers from using the classes to segment risk. However, 
the Departments have concluded that it is appropriate to apply a 
minimum class size requirement under the final rules in certain 
circumstances. The Departments sought to develop a rule that is 
narrowly tailored both to mitigate the risk of adverse selection and 
health factor discrimination while also avoiding overly burdening 
employers or unnecessarily hampering the use and flexibility of HRAs to 
maximize employee welfare.
    The Departments considered a number of alternatives in designing 
the minimum class size requirement. The Departments considered whether 
to apply the minimum class size requirement to all permitted classes of 
employees or only to the classes of employees that raise more 
significant concerns about manipulation. The Departments determined 
that the minimum class size requirement should apply to only certain of 
the classes, referred to as the applicable classes (that

[[Page 28975]]

is, full-time employees, part-time employees, salaried employees, non-
salaried employees, and, in general, employees whose primary site of 
employment is in a rating area). The Departments also determined that 
the minimum class size requirement should apply if any of these 
applicable classes are combined with any other class, except if the 
combined class is the result of one of the applicable classes and the 
class of employees in a waiting period, because the Departments 
determined that that combined classis not easily manipulable. 
Similarly, although a class of employees based on worksites in a rating 
area is an applicable class for purposes of the minimum class size 
requirement, a class of employees based on an entire state or a 
combination of two or more entire states is not subject to the minimum 
class size requirement, because in that case, weighing concerns about 
manipulability against the intent to provide employers with flexibility 
and choice, the Departments determined the application of the minimum 
class size requirement was not warranted.
    If a class of employees is subject to the minimum class size 
requirement, the class must include a minimum number of employees for 
the individual coverage HRA to be offered to that class. As to the 
number of employees a class must contain to satisfy the minimum class 
size requirement, the Departments considered a number of alternatives 
including whether to provide one number for all employers or base the 
threshold on employer size. The Departments also considered providing a 
set number or a number calculated as a percentage of the employer's 
employees. The Departments determined that this safeguard should be 
narrowly tailored, so as to prevent against adverse selection without 
unduly restricting employer flexibility. Therefore, under the final 
rules, the applicable minimum class size varies based on the size of 
the employer for smaller employers (that is, those with under 200 
employees) and for employers with 200 or more employees, the applicable 
class size minimum is set at 20.
    In response to comments, the Departments also considered whether, 
in addition to, or instead of, a minimum class size requirement, the 
final rules should contain an anti-abuse rule that would give the 
Departments the discretion to determine whether an individual coverage 
HRA is offered in a manner that is intended to segment sicker workers 
based on all the facts and circumstances. Therefore, even if an 
employer followed the other rules set forth in the final rules, this 
additional rule would nevertheless permit the Departments to address 
instances of discrimination based on a health factor. The Departments 
decline to add a facts and circumstances test to the final rules, 
because the Departments have concluded that the minimum class size 
requirement adequately balances the need to prevent health factor 
discrimination with the need to provide employers with certainty in 
order to encourage expansion and use of individual coverage HRAs. 
Moreover, other applicable nondiscrimination laws continue to apply. A 
new facts and circumstances test would add significant uncertainty for 
employers while adding little additional protection mitigating adverse 
selection and health factor discrimination.
    Additional flexibility for the transition to individual coverage 
HRAs from traditional group health plans. The Departments also 
considered regulatory alternatives that would allow employers to phase 
in offering individual coverage HRAs, in response to comments noting 
that the transition from traditional group health plans to individual 
coverage HRAs could be a substantial change from an employee 
perspective. The Departments considered whether additional flexibility 
was needed, in particular because the permitted classes of employees 
that apply under the final rules provide employers some flexibility to 
manage the transition to individual coverage HRAs. However, the 
Departments also considered that certain additional flexibility could 
benefit employers and employees, without adding significant complexity 
or increasing the risk of adverse selection. Accordingly, the final 
rules provide that, notwithstanding the general rule that a plan 
sponsor may only offer either a traditional group health plan or an 
individual coverage HRA to a class of employees, a plan sponsor that 
offers a traditional group health plan to a class of employees may 
prospectively offer employees in that class hired on or after a certain 
date in the future an individual coverage HRA, while continuing to 
offer employees in the class hired before the new hire date a 
traditional group health plan.
    Alternatives considered regarding excepted benefit HRAs. As 
proposed, the excepted benefit HRA would allow for the reimbursement of 
premiums for STLDI. In response to commenters requesting that the 
excepted benefit HRA not be permitted to reimburse STLDI premiums due 
to adverse selection concerns and concerns about the comprehensiveness 
of STLDI, the Departments considered whether to finalize as proposed or 
whether to prohibit the reimbursement of STLDI premiums under all 
excepted benefit HRAs. The Departments also considered whether to 
prohibit the reimbursement of STLDI premiums for only certain excepted 
benefit HRAs, more specifically, those sponsored by employers that 
offer traditional group health plans in the small group market, where 
commenters asserted this aspect of the rule would have particularly 
damaging effects because employers would not have a direct negative 
financial consequence from offering the excepted benefit for STLDI in 
addition to a traditional small group market plan in which case lower-
risk employees would likely choose the STLDI and higher-risk employees 
would choose the traditional small group market health plan. The 
Departments determined that excepted benefit HRAs generally should be 
allowed to reimburse premiums for STLDI because it can be a viable 
health insurance option for many people in many circumstances, no 
individual is required to enroll in STLDI, and STLDI disclosure 
requirements are sufficient to apprise consumers of its limits. As 
explained earlier in this preamble, the Departments do not expect that 
allowing the excepted benefit HRA to reimburse STLDI premiums will 
produce adverse selection in the small group market. In particular, the 
Departments note that individuals who choose to use the excepted 
benefit HRA to purchase STLDI are likely to be uninsured otherwise, 
including lower-wage workers who are increasingly declining employer 
offers of traditional group coverage.\313\ The purchase of STLDI 
coverage by these individuals will have no effect on the small group or 
individual market.
---------------------------------------------------------------------------

    \313\ In 1999, 17 percent of workers eligible for employer 
coverage at small firms (those with 3 to 199 workers) turned down 
the offer of employer coverage. By 2011, this share had climbed to 
22 percent, and in 2018 it was 27 percent. See Kaiser Family 
Foundation, ``Employer Health Benefits 2018 Survey,'' Figure 3.1, 
available at https://files.kff.org/attachment/Report-Employer-Health-Benefits-Annual-Survey-2018.
---------------------------------------------------------------------------

    However, in response to concerns raised by commenters, the final 
rules also contain a special rule to address commenters' concerns about 
the potential for adverse selection in the small group markets. Under 
the special rule, the Departments may restrict excepted benefit HRAs 
from being able to reimburse STLDI premiums, for employers offering 
fully-insured or partially-insured traditional group health plans in 
the small group market in a state, if certain criteria are satisfied, 
including that HHS makes a finding, in consultation with DOL and the 
Treasury

[[Page 28976]]

Department, that the reimbursement of premiums for STLDI by excepted 
benefit HRAs has caused significant harm to the small group market in 
the state that is the principal place of business of the small employer 
and this finding must be made after submission of a written 
recommendation by the applicable state regulatory authority of such 
state.
    The proposed excepted benefit HRA rules did not contain a specific 
notice requirement. However, several commenters suggested that the 
final rules impose certain notice requirements for excepted benefit 
HRAs, including to inform participants and beneficiaries of the annual 
dollar limit for benefits under the excepted benefit HRA, other terms 
and conditions of the excepted benefit HRA, and participants' and 
beneficiaries' rights under the excepted benefit HRA. In response, the 
Departments considered whether to impose a notice requirement, whether 
to finalize as proposed with no notice requirement, or whether to 
explain the disclosure requirements otherwise applicable to excepted 
benefit HRAs. In the final rules, the Departments do not impose a 
notice requirement on private-sector, employment-based plans covered by 
ERISA but, instead, explain that excepted benefit HRAs that are subject 
to ERISA are already subject to a number of disclosure provisions, 
under which excepted benefit HRAs should generally provide information 
on eligibility to receive benefits, annual or lifetime caps or other 
limits on benefits under the plan, and a description or summary of the 
benefits. However, for non-federal governmental plans, which are not 
subject to ERISA, the final rules announce HHS' intent to propose a 
notice requirement, similar to the disclosures required under ERISA.
    Under the proposed excepted benefit HRA rules, the Departments 
proposed that annual amounts newly made available under the HRA would 
be limited to $1,800, indexed for inflation. Many commenters supported 
the proposed dollar limit as a reasonable mid-point of the different 
limits that would result in applying various methodologies, however 
some requested that the limit be increased, including to allow for the 
additional purchase of excepted benefit policies or for more expensive 
STLDI policies and others requested it not be subject to any dollar 
limit. Some of these commenters favored a higher limit for excepted 
benefit HRAs based on age and number of dependents to reflect that 
participants who are older or have dependents are likely to have higher 
healthcare costs. The Departments considered as regulatory alternatives 
the various limits suggested by commenters, including the annual salary 
reduction contribution limit for health FSAs or 15 percent of the cost 
of coverage under the employer's primary plan. The final rules do not 
remove or increase the dollar limit for the excepted benefit HRA. The 
Departments agree that increasing the dollar limit would encourage 
certain participants to rely solely on benefits reimbursed through the 
excepted benefit HRA and could lead to adverse selection. Also, in 
order to constitute a limited excepted benefit, as explained earlier in 
this preamble, because the benefit is not otherwise limited in scope, 
the HRA must have a strict dollar limit.
    In determining the appropriate dollar limit for excepted benefit 
HRAs, the Departments considered other, similar limited excepted 
benefits. The Departments agree with commenters' assertions that the 
proposed limit was reasonable and rational, especially considering the 
relatively low cost of excepted benefits coverage, such as dental or 
vision coverage. Additionally, although the Departments recognize that 
healthcare expenses may be higher for participants who are older or 
have dependents, adopting a higher limit to account for a combination 
of factors like age and family size could allow an excepted benefit HRA 
to be too large and to resemble major medical coverage and would add 
significant complexity to the rule.
    Applicability date. The proposed rules were generally proposed to 
be applicable for plan years beginning on or after January 1, 2020. In 
response to comments expressing concern that issuers, state insurance 
regulators, the Exchanges, and employers would not be prepared for 
implementation of the final rules by 2020, the Departments considered 
whether to finalize the applicability date as proposed or whether to 
delay the applicability date until 2021. The Departments have 
determined that, in consideration that Executive Order 13813, issued in 
October 2017, set forth HRA expansion as an Administration priority 
``in the near term,'' and in order to provide Americans with more 
options for financing their healthcare, the regulations should be 
applicable, as proposed, for 2020. However, the Departments acknowledge 
and also considered the crucial role that the Exchanges have in 
implementation and operationalization of the final rules, and the 
Departments will work closely with the Exchanges on implementation. The 
Departments considered the comments and the concerns raised by various 
State Exchanges, issuers, employers and other stakeholders related to 
the ability of the Exchanges to fully implement changes related to the 
final rules in time for open enrollment for the 2020 plan year. The 
Departments recognize that Exchanges may be unable to fully implement 
changes related to the final rules in time for open enrollment for the 
2020 plan year. However, prior to full implementation, the Departments 
will work with the Exchanges on their strategies to provide information 
to consumers about affordability of individual coverage HRAs and 
eligibility for APTC, including how employees can access individual 
health insurance coverage through the Exchanges and determine whether 
they should use APTC. In fact, multiple conversations have already 
occurred between program and operational experts at HHS and officials 
from State Exchanges regarding implementation in the event the rule was 
finalized as proposed (including with an applicability date as 
proposed). Ongoing technical assistance will be provided related to the 
development of tools and functionality by Exchanges to support 
employers and employees with understanding HRA affordability 
determinations and their impact on APTC eligibility, as well as the SEP 
for those with an offer of an individual coverage HRA. Specific 
assistance could include sharing technical and educational 
documentation from FFE implementation that can be leveraged to support 
State Exchange efforts. In addition, the Departments will provide 
assistance to Exchanges in developing information and tools that could 
be provided to employers and employees to help ensure smooth 
implementation before the full system changes are complete. This could 
include State Exchanges providing employees with information on how 
they can calculate HRA affordability and determine the impact on APTC 
in the absence of system changes that can make those calculations for 
the employee.
    The Departments also considered that many individuals covered by an 
individual coverage HRA will prefer to select off-Exchange individual 
health insurance plans because salary reductions through a cafeteria 
plan may be used to pay premiums for off-Exchange coverage, if the 
employer so allows, and may not be used to pay premiums for Exchange 
coverage. To the extent a significant proportion of employees with 
individual coverage HRAs purchase individual health insurance coverage 
off the Exchange, concerns about burden on the Exchanges, and concerns 
regarding the

[[Page 28977]]

effects of timely operationalization of the PTC rules, are mitigated.
    Further, the Departments have worked to release the final rules as 
early in 2019 as possible, in recognition of the implementation timing 
issues raised and the Departments note, and considered, that plan 
sponsors may choose if and when to offer an individual coverage HRA (or 
an excepted benefit HRA) and may do so any time on or after the 
applicability date. The Departments intend to provide the guidance 
necessary for plan sponsors to offer individual coverage HRAs and 
excepted benefit HRAs for the 2020 plan year, but the Departments also 
expect that plan sponsors will take the time they need to evaluate the 
final rules and to take advantage of these new coverage options if and 
when it is best for their workforce.

D. Paperwork Reduction Act--Department of Health and Human Services

    Under the Paperwork Reduction Act of 1995 (PRA), HHS is required to 
provide 30-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
OMB for review and approval. To fairly evaluate whether an information 
collection should be approved by OMB, section 3506(c)(2)(A) of the PRA 
requires that HHS solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of HHS' estimate of the information 
collection burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
1. Wage Estimates
    To derive wage estimates, the Departments generally used data from 
the Bureau of Labor Statistics to derive average labor costs (including 
a 100 percent increase for fringe benefits and overhead) for estimating 
the burden associated with the information collection requirements 
(ICRs).\314\ Table 3 below presents the mean hourly wage, the cost of 
fringe benefits and overhead, and the adjusted hourly wage.
---------------------------------------------------------------------------

    \314\ See May 2017 Bureau of Labor Statistics, Occupational 
Employment Statistics, National Occupational Employment and Wage 
Estimates, available at https://www.bls.gov/oes/current/oes_nat.htm.
---------------------------------------------------------------------------

    As indicated, employee hourly wage estimates have been adjusted by 
a factor of 100 percent. This is necessarily a rough adjustment, both 
because fringe benefits and overhead costs vary significantly across 
employers, and because methods of estimating these costs vary widely 
across studies. Nonetheless, there is no practical alternative, and the 
Departments are of the view that doubling the hourly wage to estimate 
total cost is a reasonably accurate estimation method.

                             Table 3--Adjusted Hourly Wages Used in Burden Estimates
----------------------------------------------------------------------------------------------------------------
                                                                                      Fringe
                                                   Occupational    Mean  hourly    benefits and      Adjusted
                Occupation title                       code       wage  ($/hour)   overhead  ($/    hourly wage
                                                                                       hour)         ($/hour)
----------------------------------------------------------------------------------------------------------------
Compensation and Benefits Manager...............         11-3111          $62.50          $62.50         $125.00
Lawyer..........................................         23-1011           68.22           68.22          136.44
All Occupations.................................         00-0000           24.34           24.34           48.68
----------------------------------------------------------------------------------------------------------------

2. ICRs Regarding Substantiation of Individual Health Insurance 
Coverage (45 CFR 146.123(c)(5))
    Under the final rules, an HRA must implement reasonable procedures 
to annually verify that participants or dependents, whose medical care 
expenses are reimbursable by the HRA are, or will be, enrolled in 
individual health insurance coverage or Medicare for the entire plan 
year on or before the first day of the plan year, or, for an individual 
who is not eligible to participate in the individual coverage HRA on 
the first day of the plan year, by the date HRA coverage begins (annual 
coverage substantiation requirement).
    In addition to the annual substantiation of coverage, with each new 
request for reimbursement of an incurred medical care expense for the 
same plan year, the final rules provide that the HRA may not reimburse 
a participant for any medical care expenses unless, prior to each 
reimbursement, the participant provides substantiation that the 
individual on whose behalf reimbursement of medical care expenses are 
requested to be reimbursed were enrolled in individual health insurance 
coverage or Medicare for the month during which the medical care 
expenses were incurred. The attestation may be part of the form used 
for requesting reimbursement.
    To satisfy these substantiation requirements, the HRA may require 
that the participant submit a document provided by a third party (for 
example, an explanation of benefits or insurance card) showing that the 
participant and any dependent(s) covered by the individual coverage HRA 
are, or will be, enrolled in individual health insurance coverage or 
Medicare during the plan year or an attestation by the participant 
stating that the participant and any dependent(s) are, or will be, 
enrolled in individual health insurance coverage or Medicare, the date 
coverage began or will begin, and the name of the provider of the 
coverage. Additionally, nothing in the final rules would prohibit an 
individual coverage HRA from establishing procedures to comply with the 
substantiation requirements through electronic means, so long as the 
procedures are reasonable to verify enrollment. The ongoing 
substantiation may be in the form of a written attestation by the 
participant, which may be part of the form used for requesting 
reimbursement and which will minimize the burden on plan sponsors and 
participants. The ongoing substantiation requirement may also be 
satisfied by a document from a third party. The associated cost of 
substantiation will be minimal and is, therefore, not estimated.
    The Departments are releasing guidance providing model attestation 
language, separate from the final rules. However, the Departments note 
that individual coverage HRAs will not be required to use the model 
attestation. For those HRAs that elect to use the model attestation 
language provided by the Departments, it will further reduce burden for 
HRAs and participants.
    The burden related to these ICRs will be reviewed under emergency 
review

[[Page 28978]]

and approval. They have been submitted to OMB in conjunction with this 
final rule and are pending approval.
3. ICRs Regarding Notice Requirement for Individual Coverage HRA (45 
CFR 146.123(c)(6))
    These final rules include a requirement that an HRA provide written 
notice to eligible participants. In general, the HRA will be required 
to provide a written notice to each participant at least 90 days before 
the beginning of each plan year. For participants who are not yet 
eligible to participate at the beginning of the plan year (or who are 
not eligible when the notice is provided at least 90 days prior to the 
beginning of the plan year), the HRA must provide the notice no later 
than the date on which the HRA may first take effect for the 
participant. However, the Departments encourage the HRA to provide the 
notice as soon as practicable prior to the date the HRA may first take 
effect. The final rules provide that if the HRA is sponsored by an 
employer that is established less than 120 days prior to the beginning 
of the first plan year of the HRA, the notice may be provided no later 
than the date on which the HRA may first take effect for the 
participant.
    The written notice will be required to include certain relevant 
information, including a description of the terms of the HRA, including 
the maximum dollar amount made available that is used in the 
affordability determination under the Code section 36B rules including 
information on when the amounts will be made available (for example, 
monthly or annually at the beginning of the plan year); a statement of 
the right of the participant to opt-out of and waive future 
reimbursement under the HRA; a description of the potential 
availability of the PTC for a participant who opts out of and waives an 
HRA if the HRA is not affordable under the PTC rules; a description of 
the PTC eligibility consequences for a participant who accepts the HRA; 
a statement on how the participant may find assistance for determining 
their individual coverage HRA affordability; a statement that the 
participant must inform any Exchange to which they apply for advance 
payments of the PTC of certain relevant information; contact 
information (including at least a phone number) of an individual or a 
group of individuals who participants may contact with questions 
regarding the individual coverage HRA; a statement that the participant 
should retain the written notice because it may be needed to determine 
whether the participant is allowed the PTC; a statement that the HRA 
may not reimburse any medical care expense unless the substantiation 
requirements are satisfied; a statement of availability of an SEP for 
employees and dependents who newly gain access to the HRA; the date as 
of which coverage under the HRA may first become effective and the date 
on which the HRA plan year ends; and a statement to clarify further 
that there are multiple types of HRAs and the type the participant is 
being offered is an individual coverage HRA.
    The written notice may include other information, as long as the 
additional content does not conflict with the required information. The 
written notice will not need to include information specific to a 
participant.
    The Departments are providing model language contemporaneously on 
certain aspects of the notice that are not employer-specific, including 
model language describing the PTC consequences of being offered and 
accepting an individual coverage HRA, how the participant may find 
information to determine whether the individual coverage HRA offered is 
affordable, and language to meet the requirement to include a statement 
regarding the availability of an SEP in the individual market for 
individuals for whom an individual coverage HRA is newly made 
available. While the Departments hope it will be useful to employers, 
plan sponsors will not be required to use the model language and the 
final rules do not prohibit an employer from providing more 
individualized notices, such as different notices for different classes 
of employees, if the employer so chooses.
    The Departments estimate that for each HRA plan sponsor, a 
compensation and benefits manager will need 2 hours (at $125 per hour) 
and a lawyer will need 1 hour (at $136.44 per hour) to prepare the 
notices. The total burden for an HRA plan sponsor will be 3 hours with 
an equivalent cost of approximately $386. This burden will be incurred 
the first time the plan sponsor provides an individual coverage HRA. In 
subsequent years, the burden to update the notice is expected to be 
minimal and therefore is not estimated. If the HRA plan sponsor elects 
to use the model notice, the burden may be reduced.
    HHS estimates that in 2020, an estimated 1,203 state and local 
government entities will offer individual coverage HRAs.\315\ The total 
burden to prepare notices will be approximately 3,610 hours with an 
equivalent cost of approximately $464,984. In 2021 approximately 1,805 
additional state and local government entities will offer individual 
coverage HRAs for the first time and will incur a burden of 
approximately 5,415 hours with an equivalent cost of approximately 
$697,476. In 2022, approximately 3,008 additional state and local 
government entities will offer individual coverage HRAs for the first 
time and will incur a burden of approximately 9,024 hours with an 
equivalent cost of approximately $1.16 million.
---------------------------------------------------------------------------

    \315\ U.S. Department of the Treasury, Office of Tax Analysis 
simulation model suggests that in 2020, approximately 80,000 
employers will offer individual coverage HRAs, with 1.1 million 
individuals receiving an offer of an individual coverage HRA. These 
numbers will increase to 200,000 employers and 2.7 million 
individuals in 2021 and to 400,000 employers and 5.3 million 
individuals in 2022. The Departments estimate that there is, on 
average, 1 dependent for every policyholder. The Departments also 
estimate that approximately 2 percent of employers are state and 
local government entities, accounting for approximately 14 percent 
of participants.
---------------------------------------------------------------------------

    HRA plan sponsors will provide the notice to eligible participants 
every year. HHS estimates that HRA plan sponsors will provide printed 
notices to approximately 99,178 eligible participants \316\ in 2020, 
243,438 eligible participants in 2021 and 477,859 eligible participants 
in 2022. The Departments anticipate that the notices will be 
approximately 6 pages long and the cost of materials and printing will 
be $0.05 per page, with a total cost of $0.30 per notice. It is assumed 
that these notices will be provided along with other benefits 
information with no additional mailing cost. The Departments assume 
that approximately 54 percent of notices will be provided 
electronically and approximately 46 percent will be provided in print 
along with other benefits information. Therefore, in 2020, state and 
local government entities providing individual coverage HRAs will print 
approximately 45,622 notices at a cost of approximately $13,687. In 
2021, approximately 111,981 notices will be printed at a cost of 
approximately $33,594 and in 2022, approximately 219,815 notices will 
be printed at a cost of approximately $65,945.
---------------------------------------------------------------------------

    \316\ U.S. Department of the Treasury, Office of Tax Analysis 
simulation model provides estimates of the number of participants 
and dependents offered an individual coverage HRA. Number of 
eligible participants is estimated based on the assumption that 75 
percent of eligible participants will enroll in their employers' 
plans. See Kaiser Family Foundation, ``2017 Employer Health Benefits 
Survey'', Section 3, https://www.kff.org/health-costs/report/2017-employer-health-benefits-survey/.

[[Page 28979]]



                                                            Table 4--Annual Burden and Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Estimated        Estimated
                                                                        number of        number of                           Total            Total
                                Year                                    employers     notices to  all    Total annual      estimated        estimated
                                                                     newly  offering      eligible     burden  (hours)     labor cost      printing and
                                                                           HRAs         participants                                      materials cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
2020...............................................................            1,203           99,178            3,610         $464,984          $13,687
2021...............................................................            1,805          243,438            5,415          697,476           33,594
2022...............................................................            3,008          477,859            9,024        1,162,461           65,945
                                                                    ------------------------------------------------------------------------------------
    3 year average.................................................            2,005          273,492            6,016          774,974           37,742
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The burden related to these ICRs will be reviewed under emergency 
review and approval. They have been submitted to OMB in conjunction 
with this final rule and are pending approval.
4. ICRs Regarding Notice Requirement for Excepted Benefit HRAs
    In response to commenters' concerns, the final rules announce HHS' 
intent to propose a notice requirement with respect to excepted benefit 
HRAs sponsored by nonfederal governmental plan sponsors in future 
notice and comment rulemaking. It is anticipated that the proposed 
excepted benefit HRA notice would describe conditions pertaining to 
eligibility to receive benefits, annual or lifetime caps or other 
limits on benefits under the plan, and a description or summary of the 
benefits consistent with the requirements of 29 CFR 2520.102-3(j)(2), 
(3). At that time, HHS will estimate the burden associated with this 
requirement, solicit public comment, and request OMB approval in 
accordance with the PRA, as may be necessary.
5. ICRs Regarding Notification of Termination of Coverage (45 CFR 
146.123(c)(1)(iii))
    Under the final rules, if an individual's health insurance coverage 
is cancelled or terminated, including retroactively, for failure to pay 
premiums or any other reason (for example, a rescission), the 
individual coverage HRA must require that the individual notify the HRA 
that coverage has been cancelled or terminated and the date on which 
the cancellation or termination is effective. The associated cost of 
this notification will be minimal and is, therefore, not estimated.
    The burden related to these ICRs will be reviewed under emergency 
review and approval. They have been submitted to OMB in conjunction 
with this final rule and are pending approval.
6. ICRs Regarding Special Rule for Excepted Benefit HRAs (45 CFR 
146.145(b)(3)(viii)(F))
    Under the final rules, an excepted benefit HRA offered by certain 
small employers must not reimburse premiums for STLDI in a state, if 
the Secretary of HHS makes a finding (in consultation with the 
Secretaries of Labor and the Treasury) that the reimbursement of 
premiums for STLDI by excepted benefit HRAs has caused significant harm 
to the small group market in the state that is the principal place of 
business of the small employer. The finding by the Secretary of HHS may 
be made only after submission of a written recommendation by the 
applicable state authority of such state, in a form and manner as 
specified in guidance published by HHS. The written recommendation must 
include evidence that the reimbursement of premiums for STLDI by 
excepted benefit HRAs established by fully-insured or partially-insured 
small employers in the state has caused significant harm to the state's 
small group market, including with respect to premiums. HHS anticipates 
fewer than 10 states will submit recommendations annually.
    Under 5 CFR 1320.3(c)(4), this ICR will not be subject to the PRA 
as we anticipate it will affect fewer than 10 entities in a 12-month 
period.
7. ICRs Regarding SEPs (45 CFR 155.420(d)(14))
    The final SEP rules include a new SEP at 45 CFR 155.420(d)(14), to 
allow individuals who newly gain access to an individual coverage HRA 
or are newly provided a QSEHRA to enroll in or change their individual 
health insurance coverage. As stated earlier in the preamble, the FFEs 
will require individuals to submit documentation to confirm their SEP 
eligibility prior to effectuating their enrollment, and encourages 
State Exchanges to do so, as well. Consistent with other SEPs subject 
to pre-enrollment verification, individuals will be required to provide 
supporting documentation, such as the HRA notice required under the 
final rules, within 30 days of plan selection.
    HHS estimates that an additional 330,000 consumers will submit 
documents in 2020 to verify their eligibility to enroll through the SEP 
in the Exchanges, and that a consumer will, on average, spend 
approximately 1 hour gathering and submitting required documentation. 
Using the average hourly wage for all occupations (at an hourly rate of 
$48.68), the opportunity cost to a consumer completing this task is 
estimated to be approximately $48.68. The total annual burden on those 
consumers submitting documentation will be approximately 330,000 hours 
with an equivalent cost of approximately $16,064,400. As new individual 
coverage HRA enrollments increase, these costs also increase in 
subsequent years. In 2021, an additional 480,000 consumers will submit 
documents and incur burden of 480,000 hours with an equivalent cost of 
approximately $23,366,400 and in 2022 an additional 780,000 consumers 
will submit documents and incur burden of 780,000 hours with an 
equivalent cost of approximately $37,970,400. The three-year average is 
530,000 additional consumers submitting documents, with a total burden 
of 530,000 hours and an equivalent cost of $25,800,400 per year.
    HHS will amend the information collection currently approved under 
OMB control number 0938-1207 (Medicaid and Children's Health Insurance 
Programs: Essential Health Benefits in Alternative Benefit Plans, 
Eligibility Notices, Fair Hearing and Appeal Processes, and Premiums 
and Cost Sharing; Exchanges: Eligibility and Enrollment (CMS-10468)) to 
account for this additional burden.

[[Page 28980]]



                                                                    Table 5--Annual Recordkeeping and Reporting Requirements
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    Burden per     Total annual    Hourly labor     Total labor    Printing and
          Regulation section                OMB  control No.        Respondents      Responses       response         burden          cost of         cost of        materials      Total cost
                                                                                                      (hours)         (hours)        reporting       reporting         cost
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   146.123(c)(6) (Notice for       0938-NEW.................           2,005         273,492               3           6,016         $128.81        $774,974         $37,742        $812,716
 Individual Coverage HRAs).
45 CFR 155.420(d)(14) (SEP)..........  0938-1207................         530,000         530,000               1         530,000           48.68      25,800,400               0      25,800,400
                                      ----------------------------------------------------------------------------------------------------------------------------------------------------------
    Total............................  .........................         532,005         803,492  ..............         536,016  ..............      26,575,374          37,742      26,613,116
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8. Submission of PRA-Related Comments
    HHS has submitted a copy of the final rules to OMB for its review 
of the rule's information collection and recordkeeping requirements. 
The requirements are not effective until they have been approved by 
OMB.
    To obtain copies of the supporting statement and any related forms 
for the collections discussed in this rule, please visit CMS' website 
at www.cms.hhs.gov/PaperworkReductionActof1995, or call the Reports 
Clearance Office at 410-786-1326. HHS invites public comments on these 
information collection requirements. If you wish to comment, please 
identify the rule (CMS-9918-F), the ICR's CFR citation, CMS ID number, 
and OMB control number. Comments and recommendations must be received 
by the OMB desk officer via one of the following transmissions:
    OMB, Office of Information and Regulatory Affairs, Attention: CMS 
Desk Officer, Fax: (202) 395-5806 OR, Email: 
[email protected].
    To obtain copies of a supporting statement and any related forms 
for the collection(s) summarized in this rule, you may make your 
request using one of following:
    1. Access CMS' website address at https://www.cms.gov/Regulations-and-Guidance/Legislation/PaperworkReductionActof1995/PRA-Listing.html.
    2. Email your request, including your address, phone number, OMB 
number, and CMS document identifier, to [email protected].
    3. Call the Reports Clearance Office at (410) 786-1326.
    ICR-related comments are due July 22, 2019.

E. Paperwork Reduction Act--Department of Labor and Department of the 
Treasury

    As part of the continuing effort to reduce paperwork and respondent 
burden, the Departments conduct a preclearance consultation program to 
provide the general public and federal agencies with an opportunity to 
comment on proposed and continuing collections of information in 
accordance with the PRA. This helps to ensure that the public 
understands the Departments' collection instructions, respondents can 
provide the requested data in the desired format, reporting burden 
(time and financial resources) is minimized, collection instruments are 
clearly understood, and the Departments can properly assess the impact 
of collection requirements on respondents.
    Under the PRA, an agency may not conduct or sponsor, and an 
individual is not required to respond to, a collection of information 
unless it displays a valid OMB control number. In accordance with the 
requirements of the PRA, DOL published notice on October 29, 2018 (83 
FR 54420, 54454) requesting an OMB control number for three new 
information collections (ICs) contained in the proposed rules. Two ICs 
are sponsored jointly by DOL and the Treasury Department: (1) 
Verification of Enrollment in Individual Health Insurance Coverage (26 
CFR 54.9802-4(c)(5), 29 CFR 2590.702-2(c)(5) and 45 CFR 146.123(c)(5)); 
and (2) HRA Notice to Participants (26 CFR 54.9802-4(c)(6), 29 CFR 
2590.702-2(c)(6) and 45 CFR 146.123(c)(6)). A third IC is sponsored 
solely by DOL (29 CFR 2510.3-1): (3) Notice to Participants that 
Individual Health Insurance Coverage Policy is Not Subject to Title I 
of ERISA. In response to comments received on the proposal, the 
Departments have added two additional information collections entitled 
Participant Notify Individual Coverage HRA of Cancelled or Terminated 
Coverage (26 CFR 54.9802-4(c)(1)(iii), 29 CFR 2590.702-2(c)(1)(iii) and 
45 CFR 146.123(c)(1)(iii)) and Notice for Excepted Benefit HRAs (26 CFR 
54.9831-1(c)(3)(viii)(E), 29 CFR 2590.732(c)(3)(viii)(E) and 45 CFR 
146.145(c)(3)(viii)(E)).
    With regard to the Treasury Department, the collection of 
information contained in these regulations is submitted to OMB for 
review in accordance with the PRA as follows. The collection of 
information in these regulations is in 26 CFR 54.9815-2711(d)(4) and 26 
CFR 54.9802-4(c)(1)(iii), (c)(5) and (c)(6). The burden for the 
collection of information contained in these regulations is reflected 
in the burden for OMB Control Number 1545-0123 for the U. S. Business 
Income Tax Return, 1545-0074 for U.S. Individual Income Tax Return, and 
1545-0047 Return of Organizations Exempt From Income Tax. The estimated 
annual burden per respondent, estimated annual burden per recordkeeper, 
or estimated number of respondents is updated annually.
    The Departments submitted an information collection request (ICR) 
to OMB in accordance with 44 U.S.C. 3507(d) contemporaneously with the 
publication of the proposed rules for OMB's review. A copy of the ICR 
may be obtained by contacting the PRA addressee identified or at https://www.RegInfo.gov. PRA Addressee: G. Christopher Cosby, Office of Policy 
and Research, U.S. Department of Labor, Employee Benefits Security 
Administration, 200 Constitution Avenue NW, Room N- 5718, Washington, 
DC 20210. Telephone (202) 693-8410; Fax: (202) 219-5333. These are not 
toll-free numbers. ICRs submitted to OMB also are available at https://www.RegInfo.gov.
    In connection with the final rules, the Departments are submitting 
an ICR to OMB requesting approval of a new collection of information 
under OMB Control Number 1210-0160. Below is a description of the 
information collections contained in the final rules and their burden.
1. Verification of Enrollment in Individual Health Insurance Coverage
    In order for an HRA to be integrated with individual health 
insurance coverage (or Medicare, if applicable), among other 
requirements, in general, the HRA must implement, and comply with, 
reasonable procedures to substantiate that participants and dependents 
covered by the HRA are, or will be, enrolled in individual health 
insurance coverage (or Medicare, if applicable) for the plan year (or 
for the portion of the plan year the individual is covered by the HRA, 
if applicable). This requirement may be satisfied by providing a 
document from a third party, like an issuer, verifying coverage. As an 
alternative procedure, this requirement may also be satisfied if the

[[Page 28981]]

HRA requires participants to provide an attestation of coverage, 
including the date coverage begins and the provider of the coverage.
    In addition, following the initial substantiation of coverage, with 
each new request for reimbursement of an incurred medical care expense 
for the same plan year, the HRA may not reimburse participants for any 
medical care expenses unless, prior to each reimbursement, the 
participant provides substantiation that the individual whose medical 
care expenses are requested to be reimbursed continues to be enrolled 
in individual health insurance coverage (or Medicare, if applicable) 
for the month during which the medical care expenses were incurred. The 
HRA must implement, and comply with, reasonable procedures to satisfy 
this requirement. This substantiation may be in the form of a written 
attestation by the participant, which may be part of the form used for 
requesting reimbursement, or a document from a third party (for 
example, a health insurance issuer).
    Documentation, including proof that expenditure of funds is for a 
medical care expense, is currently universal when seeking reimbursement 
from an HRA. For the new requirements contained in the final rules 
regarding verification of enrollment in individual health insurance 
coverage (or Medicare, if applicable), the HRA can require proof of 
coverage or attestations of coverage as part of the processes that 
already exist for when participants seek reimbursement from HRAs for 
premiums or other medical care expenses. The additional burden is de 
minimis, because the attestation can be a part of the information 
already required when seeking reimbursement. To the extent an HRA 
develops additional processes for the requirement that individuals 
verify enrollment in individual health insurance coverage (or Medicare) 
for the plan year, the additional burden is also expected to be de 
minimis because it involves either attestation or providing documents 
that already exist.
    The Departments are providing model attestation language, separate 
from the final rules. However, the Departments note that individual 
coverage HRAs will not be required to use the model attestation. For 
those HRAs that elect to use the model attestation language provided by 
the Departments, it will further reduce burden for the HRAs and 
participants.
    Section II.A.8 of this preamble discusses comments received on the 
requirement to verify enrollment including II.A.8.a In General, 
II.A.8.b Methods of Substantiation, and II.A.8.c Reliance on 
Documentation or Attestation.
2. HRA Notice to Participants
    The final rules (29 CFR 2590.702-2(c)(6)(ii)) require an HRA to 
provide written notice to eligible participants including, among other 
things, the following information: (1) A description of the terms of 
the HRA, including the amounts newly made available as used in the 
affordability determination under the Code section 36B final rules; (2) 
a statement of the right of the participant to opt-out of and waive 
future reimbursement under the HRA; (3) a description of the potential 
availability of the PTC for a participant who opts out of and waives an 
HRA if the HRA is not affordable under the final PTC rules; and (4) a 
description of the PTC eligibility consequences for a participant who 
accepts the HRA. The written notice may include other information, as 
long as the additional information does not conflict with the required 
information. The written notice does not need to include information 
specific to a participant. In response to public comments, the 
Departments are separately publishing a model notice that can be used 
to satisfy these requirements, although the HRA will be required to add 
certain information specific to the particular HRA. The Departments 
note that individual coverage HRAs will not be required to use the 
model notice. For those HRAs that elect to use the model notice 
language provided by the Departments, it will further reduce burden for 
the HRAs.
    In general, the HRA must provide the written notice to each 
participant at least 90 days before the beginning of each plan year. 
For participants who are not yet eligible to participate at the 
beginning of the plan year (or who are not eligible when the notice is 
provided at least 90 days prior to the beginning of the plan year), the 
HRA must provide the notice no later than the date on which the HRA may 
first take effect for the participant. Also, for any participant who is 
employed by an employer that is first established less than 120 days 
before the beginning of the first plan year of the HRA, the notice must 
be provided no later than the date on which the HRA may first take 
effect for the participant.
    Section II.A.9 of the preamble discusses comments received on the 
notice, the Departments' responses and changes made to the notice 
requirement including II.A.9.a Notice Content, II.A.9.b Notice 
Individualization, II.A.9.c Model Notice, II.A.9.d Notice Timing and 
Delivery.
    The Departments estimate that a compensation and benefits manager 
would require two hours (at $125 per hour) and a lawyer would require 
one hour (at $136.44 per hour) to prepare the notice for each HRA. 
Thus, the total hour burden for each HRA would be 3 hours with an 
equivalent cost of approximately $386. The Departments estimate that 
each notice would be six pages, with total materials and printing cost 
of $0.30 per notice ($0.05 per page). The Departments estimate that 
78,797 private employers would \317\ newly offer individual coverage 
HRAs in 2020 \318\ as a result of the final rules in the first year. 
Therefore, the Departments estimate the total hour burden for these 
HRAs to prepare the notices would be 236,390 hours with an equivalent 
cost of $30,450,216.
---------------------------------------------------------------------------

    \317\ U.S. Department of the Treasury, Office of Tax Analysis 
used a simulation model to obtain these estimates. For 2020, the 
model estimated that 80,000 employers will offer individual coverage 
HRAs and 1.1 million individuals will be offered those HRAs. Based 
on DOL estimates about 98 percent of these will be in the private 
market, and the rest will be through public employers like state and 
local governments. There are on average one dependent for every 
policy holder. ``Health Insurance Coverage Bulletin'', Abstract of 
the Auxiliary Data for the March 2016 Annual Social and Economic 
Supplement of the Current Population Survey, July 25, 2017. https://www.dol.gov/sites/default/files/ebsa/researchers/data/health-and-welfare/health-insurance-coverage-bulletin-2016.pdf.
    \318\ Comparable numbers for 2021 are 118,195 private employers 
will newly offer individual coverage HRAs and 1,556,562 eligible 
participants in all individual coverage HRAs will receive notices, 
and for 2022 196,992 private employers will newly offer individual 
coverage HRAs and 3,055,474 eligible participants in all individual 
coverage HRAs will receive notices.
---------------------------------------------------------------------------

    All individual coverage HRAs are required to annually send the 
notice to all eligible participants (those eligible to enroll). The 
Departments estimate that there would be 634,155 eligible participants 
at private employers in 2020 that would need to receive the 
notice.\319\ The Departments assume that approximately 54 percent of 
notices would be provided electronically and approximately 46 percent 
would be provided in print along with other benefits information. 
Therefore, a total of 291,711 notices will be printed at a

[[Page 28982]]

cost of $87,513. Tables 6 and 7 provide estimates for years 2020, 2021 
and 2022.
---------------------------------------------------------------------------

    \319\ Number of eligible participants is estimated based on 
Treasury estimates of the number of individuals enrolled in 
individual coverage HRAs, the assumption that there are two 
enrollees per employee participant, and the assumption that 75 
percent of eligible participants would enroll in their employers' 
plans. See Kaiser Family Foundation, ``2017 Employer Health Benefits 
Survey'', Section 3, https://www.kff.org/health-costs/report/2017-employer-health-benefits-survey/.

                                                        Table 6--Burden To Prepare HRA Notice for the First Time-Private Sector Employers
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Number of
                                                                      employers    Legal cost per  Number of hours      Benefit     Number of hours
                               Year                                newly offering       hour          for legal      manager cost     for benefit    Total hour burden    Total equivalent cost
                                                                        HRAs                                           per hour         manager
(a)                                                                           (b)             (c)    (d) = 1 * (b)             (e)    (f) = 2 * (b)    (g) = (d) + (f)     (c) * (d) + (e) * (f)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2020.............................................................          78,797         $136.44           78,797         $125.00          157,593            236,390               $30,450,216
2021.............................................................         118,195          136.44          118,195          125.00          236,390            354,585                45,675,324
2022.............................................................         196,992          136.44          196,992          125.00          393,984            590,976                76,125,539
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


                  Table 7--Burden To Provide Notice to All Eligible Private Sector Participants
----------------------------------------------------------------------------------------------------------------
                                                                  Number of
                     Year                       Total number    notices sent      Cost per     Total cost burden
                                                 of notices        by mail         notice
(a)                                                       (b)             (c)             (d)    (e) = (c) * (d)
----------------------------------------------------------------------------------------------------------------
2020.........................................         634,155         291,711           $0.30            $87,513
2021.........................................       1,556,562         716,019            0.30            214,806
2022.........................................       3,055,474       1,405,518            0.30            421,655
----------------------------------------------------------------------------------------------------------------

3. Notice to Participants That Individual Health Insurance Coverage 
Policy Is Not Subject to Title I of ERISA
    In the final rules, DOL clarifies that individual health insurance 
coverage, the premiums of which are reimbursed by an HRA, QSEHRA, or 
supplemental salary reduction arrangement is not considered an 
``employee welfare benefit plan'' with the consumer protections 
provided under ERISA, if certain safe harbor conditions are satisfied. 
HRA plan sponsors are required to notify participants of this fact (29 
CFR 2510.3-1(l)(5)). For an HRA, this notice requirement is satisfied 
if annually the notice requirement in 26 CFR 54.9802-4(c)(6) and 29 CFR 
2590.702-2(c)(6) is satisfied, which is part of the HRA Notice to 
Participants discussed earlier in this preamble. Therefore, this notice 
requirement imposes no additional burden. For QSEHRAs and for HRAs not 
subject to 26 CFR 54.9802-4(c)(6) and 29 CFR 2590.702-2(c)(6), but that 
reimburse premiums for individual health insurance coverage, the plan 
sponsor may use the following language to satisfy this condition: ``The 
individual health insurance coverage that is paid for by this plan, if 
any, is not subject to the rules and consumer protections of the 
Employee Retirement Income Security Act. You should contact your state 
insurance department for more information regarding your rights and 
responsibilities if you purchase individual health insurance 
coverage.'' The Departments estimate that this burden will be de 
minimis, because the required text is provided in the rule and can be 
included with other notices.
    Section II.A.9 of the preamble discusses comments received on the 
notice required to be provided to participants eligible for an 
individual coverage HRA.
4. Participant Notifies Individual Coverage HRA of Cancelled or 
Terminated Coverage
    The final rules require that if a covered individual fails to pay 
the applicable premium(s) by the end of a grace period and the coverage 
is cancelled or terminated, including retroactively, or if individual 
health insurance coverage is cancelled or terminated retroactively for 
some other reason (for example, a rescission), the individual coverage 
HRA must require that the individual notify the HRA that coverage has 
been cancelled or terminated and the date on which the coverage 
cancellation or termination is effective (26 CFR 54.9802-4(c)(1)(iii), 
29 CFR 2590.702-254.9801-4(c)(1)(iii) and 45 CFR 146.123(c)(1)(iii)). 
The Departments have concluded that the burden associated with this 
notification requirement is de minimis for participants that cancel 
coverage, because they can satisfy the requirement by making a phone 
call or sending an email.
    Other related comments are discussed in section II.A.2.d of this 
preamble.
5. Notice for Excepted Benefit HRAs
    In response to commenters' concerns, the final rules announce HHS' 
intent to propose a notice requirement with respect to excepted benefit 
HRAs sponsored by non-federal governmental plan sponsors in future 
notice and comment rulemaking. It is anticipated that the proposed 
excepted benefit HRA notice would be required to state conditions 
pertaining to eligibility to receive benefits, annual or lifetime caps 
or other limits on benefits under the excepted benefit HRA, and a 
description of or summary of the benefits consistent with the content 
and timing of DOL's SPD requirements.
    For private-sector, employment-based plans, other notice 
requirements under Part 1 of ERISA already apply. For example, excepted 
benefit HRAs that are ERISA-covered plans must provide a SPD, SMM, and 
summaries of material reductions in covered services or benefits.\320\ 
The excepted benefit HRA's SPD must include, for example, the 
conditions pertaining to eligibility to receive benefits; a description 
or summary of the benefits; the circumstances that may result in 
disqualification, ineligibility, or denial, loss, forfeiture, 
suspension, offset, reduction, or recovery (for example, by exercise of 
subrogation or reimbursement rights) of any benefits; and the 
procedures governing claims for benefits under the excepted benefit 
HRA. Accordingly, for excepted benefit HRAs that are subject to ERISA, 
the burden for providing information regarding excepted benefit HRAs is 
captured under DOL's SPD information collection (OMB Control Number 
1210-

[[Page 28983]]

0039), which includes a growth factor for new SPDs and SMMs provided to 
participants to notify them regarding coverage under new plans and plan 
amendments.
---------------------------------------------------------------------------

    \320\ See 29 CFR 2520.104b-2, 2520.104b-3(a), and (d)(3).
---------------------------------------------------------------------------

    Additional comments are discussed in section II.B.7 of this 
preamble.
    The information collections are summarized as follows:
    Type of Review: New Collection.
    Agency: DOL-EBSA, Treasury--IRS.
    Title: Notice for Health Reimbursement Arrangements integrated with 
Individual Health Insurance Coverage.
    OMB Numbers: 1210-0160 (DOL), 1545-0123, 1545-0074, and 1545-0047 
(Treasury).
    Affected Public: Private Sector.
    Total Respondents: 1,442,876 three-year average.
    Total Responses: 18,798,855 three-year average.
    Frequency of Response: Annually.
    Estimated Total Annual Burden Hours: 196,992 for each agency 
(combined total is 393,984 hours). Three year average.
    Estimated Total Annual Burden Cost: $120,662 for each agency 
(combined total is $241,325). Three year average.

F. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are 
likely to have a significant economic impact on a substantial number of 
small entities. Unless an agency certifies that a final rule is not 
likely to have a significant economic impact on a substantial number of 
small entities, section 604 of the RFA requires that the agency prepare 
a final regulatory flexibility analysis describing the impact of the 
rule on small entities. Small entities include small businesses, 
organizations, and governmental jurisdictions.
    The RFA generally defines a ``small entity'' as (1) a proprietary 
firm meeting the size standards of the Small Business Administration 
(SBA) (13 CFR 121.201), (2) a nonprofit organization that is not 
dominant in its field, or (3) a small government jurisdiction with a 
population of less than 50,000. (States and individuals are not 
included in the definition of ``small entity.'') The Departments use as 
their measure of significant economic impact on a substantial number of 
small entities a change in revenues of more than 3 to 5 percent.
    The Departments do not expect the final rules to produce costs or 
benefits in excess of 3 to 5 percent of revenues for small entities. 
Entities that choose to offer an individual coverage HRA instead of a 
traditional group health plan are likely to experience a modest 
increase or decrease in administrative burden associated with health 
benefits. Entities that newly offer health benefits in the form of an 
individual coverage HRA would bear modest administrative costs. 
However, offering an individual coverage HRA is entirely voluntary on 
the part of employers, and no employer that would experience 
substantial costs would be expected to offer an individual coverage 
HRA. In addition, the final rules would provide large and small 
employers with an additional choice of a tax-preferred health benefit 
to offer their employees, potentially enabling them to attract and 
retain workers and maintain a healthier workforce.
    In addition, section 1102(b) of the Social Security Act requires 
agencies to prepare a regulatory impact analysis if a rule may have a 
significant economic impact on the operations of a substantial number 
of small rural hospitals. This analysis must conform to the provisions 
of section 604 of the RFA. The final rules will not have a direct 
effect on small rural hospitals though there may be an indirect effect. 
By reducing the number of uninsured persons, the final rules could 
reduce administrative costs, such as billing costs and the costs of 
helping patients obtain public health benefits. The final rules could 
also reduce the cost of uncompensated care borne by small rural 
hospitals and other healthcare providers (and shift such costs to 
insured persons). However, the Departments have determined that the 
final rules will not have a significant impact on the operations of a 
substantial number of small rural hospitals.

G. Impact of Regulations on Small Business--Department of the Treasury

    Pursuant to section 7805(f) of the Code, the proposed rule that 
preceded this final rule was submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business, and no comments were received.

H. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any 1 year by state, 
local, or Tribal governments, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. In 2019, that threshold is approximately $154 million. These 
final rules do not include any Federal mandate that may result in 
expenditures by state, local, or tribal governments, or by the private 
sector in excess of that threshold.

I. Federalism

    Executive Order 13132 outlines fundamental principles of 
federalism. It requires adherence to specific criteria by Federal 
agencies in formulating and implementing policies that have 
``substantial direct effects'' on the states, the relationship between 
the national government and states, or on the distribution of power and 
responsibilities among the various levels of government. Federal 
agencies promulgating regulations that have these federalism 
implications must consult with state and local officials, and describe 
the extent of their consultation and the nature of the concerns of 
state and local officials in the preamble to the final rules. Federal 
officials have discussed the issues related to implementation of the 
policies in the proposed rules with state regulatory officials. Over 
multiple individual and group conversations, federal and state 
officials shared information about how and when Exchange systems and 
processes could be updated to support implementation of individual 
coverage HRAs while minimizing burden and confusion for both employers 
and consumers. State Exchanges expressed interest in how the FFEs would 
update information and systems to support employers and employees with 
HRA affordability determinations and the impact on APTC eligibility. 
The FFEs explained possible ways in which the federal platform would 
approach these issues and operations if the rules were finalized as 
proposed and agreed to share related documentation once implementation 
begins, to support state efforts. Some State Exchanges expressed 
concerns in these conversations that fully implementing these changes 
would take several months and likely would not be finished before 
individual coverage HRAs become available starting on January 1, 2020. 
The FFEs offered suggestions for information that could be provided to 
employers and consumers to address these concerns and ensure smooth 
implementation before system changes are complete.

J. Congressional Review Act

    This final rule is subject to the Congressional Review Act 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5

[[Page 28984]]

U.S.C. 801 et seq.) and will be transmitted to the Congress and to the 
Comptroller General for review in accordance with such provisions.

K. Reducing Regulation and Controlling Regulatory Cost

    Executive Order 13771, titled Reducing Regulation and Controlling 
Regulatory Costs, was issued on January 30, 2017 and requires that the 
costs associated with significant new regulations ``shall, to the 
extent permitted by law, be offset by the elimination of existing costs 
associated with at least two prior regulations.'' This final rule is an 
Executive Order 13771 deregulatory action.

Statutory Authority

    The Department of the Treasury regulations are adopted pursuant to 
the authority contained in sections 7805 and 9833 of the Code.
    The Department of Labor regulations are adopted pursuant to the 
authority contained in 29 U.S.C. 1002, 1135, 1182, 1185d, 1191a, 1191b, 
and 1191c; Secretary of Labor's Order 1-2011, 77 FR 1088 (Jan. 9, 
2012).
    The Department of Health and Human Services regulations are adopted 
pursuant to the authority contained in sections 2701 through 2763, 
2791, 2792, and 2794 of the PHS Act (42 U.S.C. 300gg-300gg-63, 300gg-
91, 300gg-92 and 300gg-94), as amended; sections 1311 and 1321 of PPACA 
(42 U.S.C. 13031 and 18041).

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 54

    Excise taxes, Health care, Health insurance, Pensions, Reporting 
and recordkeeping requirements.

29 CFR Part 2510

    Employee benefit plans, Pensions.

29 CFR Part 2590

    Continuation coverage, Disclosure, Employee benefit plans, Group 
health plans, Health care, Health insurance, Medical child support, 
Reporting and recordkeeping requirements.

45 CFR Parts 144 and 146

    Health care, Health insurance, Reporting and recordkeeping 
requirements.

45 CFR Part 147

    Health care, Health insurance, Reporting and recordkeeping 
requirements, and State regulation of health insurance.

45 CFR Part 155

    Exchange establishment standards and other related standards under 
the Affordable Care Act.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement, Internal Revenue 
Service.
    Approved: June 6, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
    Signed at Washington, DC, this 10th day of June, 2019.
Preston Rutledge,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
    Dated: June 7, 2019.
Seema Verma,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: June 7, 2019.
Alex M. Azar II,
Secretary, Department of Health and Human Services.

DEPARTMENT OF THE TREASURY

Internal Revenue Service

Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 54 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805.
* * * * *

0
Par 2. Section 1.36B-0 is amended by--
0
a. Adding entries for Sec. Sec.  1.36B-2(c)(3)(i)(A) and (B).
0
b. Revising the entry for Sec.  1.36B-2(c)(5).
0
c. Adding entries for Sec. Sec.  1.36B-2(c)(5)(i) and (ii), 1.36B-
2(c)(5)(iii), 1.36B-2(c)(5)(iii)(A) and (B), and 1.36B-2(c)(5)(iv) 
through (ix).
    The additions and revision read as follows:


Sec.  1.36B-0  Table of contents.

* * * * *


Sec.  1.36B-2  Eligibility for premium tax credit.

* * * * *
    (c) * * *
    (3) * * *
    (i) In general.
    (A) Plans other than health reimbursement arrangements (HRAs) or 
other account-based group health plans described in paragraph 
(c)(3)(i)(B) of this section.
    (B) HRAs and other account-based group health plans integrated with 
individual health insurance coverage.
* * * * *
    (5) Affordable HRA or other account-based group health plan.
    (i) In general.
    (ii) Required HRA contribution.
    (iii) Monthly amounts.
    (A) Monthly lowest cost silver plan premium.
    (B) Monthly HRA amount.
    (iv) Employee safe harbor.
    (v) Amounts used for affordability determination.
    (vi) Affordability for part-year period.
    (vii) Related individual not allowed as a personal exemption 
deduction.
    (viii) Post-employment coverage.
    (ix) Examples.
* * * * *

0
Par. 3. Section 1.36B-2 is amended by:
0
a. Redesignating the text of paragraph (c)(3)(i) as paragraph 
(c)(3)(i)(A).
0
b. Revising the subject heading to newly designated paragraph 
(c)(3)(i)(A).
0
c. Adding paragraph (c)(3)(i)(B).
0
d. Adding a sentence at the end of paragraphs (c)(3)(ii) and 
(c)(3)(v)(A)(1) and (2).
0
e. Revising paragraphs (c)(3)(v)(A)(3) and (5).
0
f. Adding a sentence at the end of paragraph (c)(3)(vi).
0
g. Adding paragraph (c)(5).
0
h. Revising paragraph (e)(1).
0
i. Adding paragraph (e)(3).
    The revisions and additions read as follows:


Sec.  1.36B-2  Eligibility for premium tax credit.

* * * * *
    (c) * * *
    (3) * * *
    (i) * * *
    (A) Plans other than health reimbursement arrangements (HRAs) or 
other account-based group health plans described in paragraph 
(c)(3)(i)(B) of this section. * * *
    (B) HRAs and other account-based group health plans integrated with 
individual health insurance coverage. An employee who is offered an HRA 
or other account-based group health plan that would be integrated with 
individual health insurance coverage (or Medicare Part A and B or 
Medicare Part C), within the meaning of Sec. Sec.  54.9802-4 and 
54.9815-2711(d)(4) of this chapter, if the employee enrolls in 
individual health insurance coverage (or Medicare Part A and B or 
Medicare Part C), and an individual who is offered the HRA or

[[Page 28985]]

other account-based group health plan because of a relationship to the 
employee (a related HRA individual), are eligible for minimum essential 
coverage under an eligible employer-sponsored plan for any month for 
which the HRA or other account-based group health plan is offered if 
the HRA or other account-based group health plan is affordable for the 
month under paragraph (c)(5) of this section or if the employee does 
not opt out of and waive future reimbursements from the HRA or other 
account-based group health plan. An HRA or other account-based group 
health plan described in this paragraph (c)(3)(i)(B) that is affordable 
for a month under paragraph (c)(5) of this section is treated as 
providing minimum value for the month. For purposes of paragraphs 
(c)(3) and (5) of this section, the definitions under Sec.  54.9815-
2711(d)(6) of this chapter apply.
    (ii) * * * The plan year for an HRA or other account-based group 
health plan described in paragraph (c)(3)(i)(B) of this section is the 
plan's 12-month coverage period (or the remainder of the 12-month 
coverage period for a newly eligible individual or an individual who 
enrolls during a special enrollment period).
* * * * *
    (v) * * *
    (A) * * *
    (1) * * * See paragraph (c)(5) of this section for rules for when 
an HRA or other account-based group health plan described in paragraph 
(c)(3)(i)(B) of this section is affordable for an employee for a month.
    (2) * * * See paragraph (c)(5) of this section for rules for when 
an HRA or other account-based group health plan described in paragraph 
(c)(3)(i)(B) of this section is affordable for a related HRA individual 
for a month.
    (3) Employee safe harbor. An eligible employer-sponsored plan is 
not affordable for an employee or a related individual for a plan year 
if, when the employee or a related individual enrolls in a qualified 
health plan for a period coinciding with the plan year (in whole or in 
part), an Exchange determines that the eligible employer-sponsored plan 
is not affordable for that plan year. This paragraph (c)(3)(v)(A)(3) 
does not apply to a determination made as part of the redetermination 
process described in 45 CFR 155.335 unless the individual receiving an 
Exchange redetermination notification affirmatively responds and 
provides current information about affordability. This paragraph 
(c)(3)(v)(A)(3) does not apply for an individual who, with intentional 
or reckless disregard for the facts, provides incorrect information to 
an Exchange concerning the portion of the annual premium for coverage 
for the employee or related individual under the plan. A reckless 
disregard of the facts occurs if the taxpayer makes little or no effort 
to determine whether the information provided to the Exchange is 
accurate under circumstances that demonstrate a substantial deviation 
from the standard of conduct a reasonable person would observe. A 
disregard of the facts is intentional if the taxpayer knows that the 
information provided to the Exchange is inaccurate. See paragraph 
(c)(5) of this section for an employee safe harbor that applies when an 
Exchange determines that an HRA or other account-based group health 
plan described in paragraph (c)(3)(i)(B) of this section is not 
affordable for an employee or a related HRA individual for the period 
of enrollment in a qualified health plan.
* * * * *
    (5) Employer contributions to HRAs integrated with eligible 
employer-sponsored plans. Amounts newly made available for the current 
plan year under an HRA that an employee may use to pay premiums, or may 
use to pay cost-sharing or benefits not covered by the primary plan in 
addition to premiums, reduce the employee's required contribution if 
the HRA would be integrated, within the meaning of Sec.  54.9815-
2711(d)(2) of this chapter, with an eligible employer-sponsored plan 
for an employee enrolled in the plan. The eligible employer-sponsored 
plan and the HRA must be offered by the same employer. Employer 
contributions to an HRA described in this paragraph (c)(3)(v)(A)(5) 
reduce an employee's required contribution only to the extent the 
amount of the annual contribution is required under the terms of the 
plan or otherwise determinable within a reasonable time before the 
employee must decide whether to enroll in the eligible employer-
sponsored plan.
* * * * *
    (vi) * * * An HRA or other account-based group health plan 
described in paragraph (c)(3)(i)(B) of this section that is affordable 
for a month under paragraph (c)(5) of this section is treated as 
providing minimum value for the month.
* * * * *
    (5) Affordable HRA or other account-based group health plan--(i) In 
general. Except as otherwise provided in this paragraph (c)(5), an HRA 
or other account-based group health plan described in paragraph 
(c)(3)(i)(B) of this section is affordable for a month if the 
employee's required HRA contribution (as defined in paragraph 
(c)(5)(ii) of this section) for the month does not exceed 1/12 of the 
product of the employee's household income for the taxable year and the 
required contribution percentage (as defined in paragraph (c)(3)(v)(C) 
of this section).
    (ii) Required HRA contribution. An employee's required HRA 
contribution is the excess of--
    (A) The monthly premium for the lowest cost silver plan for self-
only coverage of the employee offered in the Exchange for the rating 
area in which the employee resides, over
    (B) The monthly self-only HRA or other account-based group health 
plan amount (or the monthly maximum amount available to the employee 
under the HRA or other account-based group health plan if the HRA or 
other account-based group health plan provides for reimbursements up to 
a single dollar amount regardless of whether an employee has self-only 
or other-than-self-only coverage).
    (iii) Monthly amounts--(A) Monthly lowest cost silver plan premium. 
For purposes of paragraph (c)(5)(ii)(A) of this section, the premium 
for the lowest cost silver plan is determined without regard to any 
wellness program incentive that affects premiums unless the wellness 
program incentive relates exclusively to tobacco use, in which case the 
incentive is treated as earned. If the premium differs for tobacco 
users and non-tobacco users, the premium for the lowest cost silver 
plan is the premium that applies to non-tobacco users. For the purpose 
of this paragraph (c)(5)(iii)(A), the term wellness program incentive 
has the same meaning as the term reward in 26 CFR 54.9802-1(f)(1)(i). A 
silver-level qualified health plan that is used for purposes of 
determining a taxpayer's lowest cost silver plan for self-only coverage 
under paragraph (c)(5)(ii)(A) of this section does not cease to be the 
taxpayer's lowest cost silver plan for self-only coverage solely 
because the plan terminates or closes to enrollment during the taxable 
year.
    (B) Monthly HRA amount. For purposes of paragraph (c)(5)(ii)(B) of 
this section, the monthly self-only HRA or other account-based group 
health plan amount is the self-only HRA or other account-based group 
health plan amount newly made available under the HRA for the plan 
year, divided by the number of months in the plan year the HRA or other 
account-based group health plan is available to the employee. The 
monthly maximum amount available to the employee under the HRA or other 
account-based group health plan is the maximum amount

[[Page 28986]]

newly made available for the plan year to the employee under the plan, 
divided by the number of months in the plan year the HRA or other 
account-based group health plan is available to the employee.
    (iv) Employee safe harbor. An HRA or other account-based group 
health plan described in paragraph (c)(3)(i)(B) of this section is not 
affordable for a month for an employee or a related HRA individual if, 
when the employee or related HRA individual enrolls in a qualified 
health plan for a period coinciding with the period the HRA or other 
account-based group health plan is available to the employee or related 
HRA individual (in whole or in part), an Exchange determines that the 
HRA or other account-based group health plan is not affordable for the 
period of enrollment in the qualified health plan. This paragraph 
(c)(5)(iv) does not apply to a determination made as part of the 
redetermination process described in 45 CFR 155.335 unless the 
individual receiving an Exchange redetermination notification 
affirmatively responds and provides current information about 
affordability. This paragraph (c)(5)(iv) does not apply for an 
individual who, with intentional or reckless disregard for the facts, 
provides incorrect information to an Exchange concerning the relevant 
HRA or other account-based group health plan amount offered by the 
employee's employer. A reckless disregard of the facts occurs if the 
taxpayer makes little or no effort to determine whether the information 
provided to the Exchange is accurate under circumstances that 
demonstrate a substantial deviation from the standard of conduct a 
reasonable person would observe. A disregard of the facts is 
intentional if the taxpayer knows that the information provided to the 
Exchange is inaccurate.
    (v) Amounts used for affordability determination. Only amounts that 
are newly made available for the plan year of the HRA or other account-
based group health plan described in paragraph (c)(3)(i)(B) of this 
section and determinable within a reasonable time before the beginning 
of the plan year of the HRA or other account-based health plan are 
considered in determining whether an HRA or other account-based group 
health plan described in paragraph (c)(3)(i)(B) of this section is 
affordable. Amounts made available for a prior plan year that carry 
over to the current plan year are not taken into account for purposes 
of this paragraph (c)(5). Similarly, amounts made available to account 
for amounts remaining in a different HRA or other account-based group 
health plan the employer previously provided to the employee and under 
which the employee is no longer covered are not taken into account for 
purposes of this paragraph (c)(5).
    (vi) Affordability for part-year period. Affordability under this 
paragraph (c)(5) is determined separately for each employment period 
that is less than a full calendar year or for the portions of the plan 
year of an employer's HRA or other account-based group health plan that 
fall in different taxable years of an applicable taxpayer. An HRA or 
other account-based group health plan described in paragraph 
(c)(3)(i)(B) of this section is affordable for a part-year period if 
the employee's annualized required HRA contribution for the part-year 
period does not exceed the required contribution percentage of the 
applicable taxpayer's household income for the taxable year. The 
employee's annualized required HRA contribution is the employee's 
required HRA contribution for the part-year period times a fraction, 
the numerator of which is 12 and the denominator of which is the number 
of months in the part-year period during the applicable taxpayer's 
taxable year. Only full calendar months are included in the computation 
under this paragraph (c)(5)(vi).
    (vii) Related individual not allowed as a personal exemption 
deduction. A related HRA individual is treated as ineligible for 
minimum essential coverage under an HRA or other account-based group 
health plan described in paragraph (c)(3)(i)(B) of this section for 
months that the employee opted out of and waived future reimbursements 
from the HRA or other account-based group health plan and the employee 
is not allowed a personal exemption deduction under section 151 for the 
related HRA individual.
    (viii) Post-employment coverage. An individual who is offered an 
HRA or other account-based group health plan described in paragraph 
(c)(3)(i)(B) of this section, for months after an employee terminates 
employment with the employer offering the HRA or other account-based 
group health plan, is eligible for minimum essential coverage under the 
HRA or other account-based group health plan for months after 
termination of employment only if the employee does not forfeit or opt 
out of and waive future reimbursements from the HRA or other account-
based group health plan for months after termination of employment.
    (ix) Examples. The following examples illustrate the provisions of 
this paragraph (c)(5). The required contribution percentage is defined 
in paragraph (c)(3)(v)(C) of this section and is updated annually. 
Because the required contribution percentage for 2020 has not yet been 
determined, the examples assume a required contribution percentage for 
2020 of 9.78 percent.

    (A) Example 1: Determination of affordability--(1) Facts. In 
2020 Taxpayer A is single, has no dependents, and has household 
income of $28,000. A is an employee of Employer X for all of 2020. X 
offers its employees an HRA described in paragraph (c)(3)(i)(B) of 
this section that reimburses $2,400 of medical care expenses for 
single employees with no children (the self-only HRA amount) and 
$4,000 for employees with a spouse or children for the medical 
expenses of the employees and their family members. A enrolls in a 
qualified health plan through the Exchange in the rating area in 
which A resides and remains enrolled for all of 2020. The monthly 
premium for the lowest cost silver plan for self-only coverage of A 
that is offered in the Exchange for the rating area in which A 
resides is $500.
    (2) Conclusion. A's required HRA contribution, as defined in 
paragraph (c)(5)(ii) of this section, is $300, the excess of $500 
(the monthly premium for the lowest cost silver plan for self-only 
coverage of A) over $200 (1/12 of the self-only HRA amount provided 
by Employer X to its employees). In addition, 1/12 of the product of 
9.78 percent and A's household income is $228 ($28,000 x .0978 = 
$2,738; $2,738/12 = $228). Because A's required HRA contribution of 
$300 exceeds $228 (1/12 of the product of 9.78 percent and A's 
household income), the HRA is unaffordable for A for each month of 
2020 under paragraph (c)(5) of this section. If A opts out of and 
waives future reimbursements from the HRA, A is not eligible for 
minimum essential coverage under the HRA for each month of 2020 
under paragraph (c)(3)(i)(B) of this section.
    (B) Example 2: Determination of affordability for a related HRA 
individual--(1) Facts. In 2020 Taxpayer B is married and has one 
child who is a dependent of B for 2020. B has household income of 
$28,000. B is an employee of Employer X for all of 2020. X offers 
its employees an HRA described in paragraph (c)(3)(i)(B) of this 
section that reimburses $3,600 of medical care expenses for single 
employees with no children (the self-only HRA amount) and $5,000 for 
employees with a spouse or children for the medical expenses of the 
employees and their family members. B, B's spouse, and B's child 
enroll in a qualified health plan through the Exchange in the rating 
area in which B resides and they remain enrolled for all of 2020. No 
advance credit payments are made for their coverage. The monthly 
premium for the lowest cost silver plan for self-only coverage of B 
that is offered in the Exchange for the rating area in which B 
resides is $500.
    (2) Conclusion. B's required HRA contribution, as defined in 
paragraph (c)(5)(ii) of this section, is $200, the excess of $500 
(the monthly premium for the lowest cost silver plan for self-only 
coverage for B) over $300 (1/12 of the self-only HRA amount

[[Page 28987]]

provided by Employer X to its employees). In addition, 1/12 of the 
product of 9.78 percent and B's household income for 2020 is $228 
($28,000 x .0978 = $2,738; $2,738/12 = $228). Because B's required 
HRA contribution of $200 does not exceed $228 (1/12 of the product 
of 9.78 percent and B's household income for 2020), the HRA is 
affordable for B under paragraph (c)(5) of this section, and B is 
eligible for minimum essential coverage under an eligible employer-
sponsored plan for each month of 2020 under paragraph (c)(3)(i)(B) 
of this section. In addition, B's spouse and child are also eligible 
for minimum essential coverage under an eligible employer-sponsored 
plan for each month of 2020 under paragraph (c)(3)(i)(B) of this 
section.
    (C) Example 3: Exchange determines that HRA is unaffordable--(1) 
Facts. The facts are the same as in paragraph (c)(5)(ix)(B) of this 
section (Example 2), except that B, when enrolling in Exchange 
coverage for B's family, received a determination by the Exchange 
that the HRA was unaffordable, because B believed B's household 
income would be lower than it turned out to be. Consequently, 
advance credit payments were made for their 2020 coverage.
    (2) Conclusion. Under paragraph (c)(5)(iv) of this section, the 
HRA is considered unaffordable for B, B's spouse, and B's child for 
each month of 2020 provided that B did not, with intentional or 
reckless disregard for the facts, provide incorrect information to 
the Exchange concerning the HRA.
    (D) Example 4: Affordability determined for part of a taxable 
year (part-year period)--(1) Facts. Taxpayer C is an employee of 
Employer X. C's household income for 2020 is $28,000. X offers its 
employees an HRA described in paragraph (c)(3)(i)(B) of this section 
that reimburses medical care expenses of $3,600 for single employees 
without children (the self-only HRA amount) and $5,000 to employees 
with a spouse or children for the medical expenses of the employees 
and their family members. X's HRA plan year is September 1 to August 
31 and C is first eligible to participate in the HRA for the period 
beginning September 1, 2020. C enrolls in a qualified health plan 
through the Exchange in the rating area in which C resides for all 
of 2020. The monthly premium for the lowest cost silver plan for 
self-only coverage of C that is offered in the Exchange for the 
rating area in which C resides for 2020 is $500.
    (2) Conclusion. Under paragraph (c)(3)(vi) of this section, the 
affordability of the HRA is determined separately for the period 
September 1 through December 31, 2020, and for the period January 1 
through August 31, 2021. C's required HRA contribution, as defined 
in paragraph (c)(5)(ii) of this section, for the period September 1 
through December 31, 2020, is $200, the excess of $500 (the monthly 
premium for the lowest cost silver plan for self-only coverage for 
C) over $300 (1/12 of the self-only HRA amount provided by X to its 
employees). In addition, 1/12 of the product of 9.78 percent and C's 
household income is $228 ($28,000 x .0978 = $2,738; $2,738/12 = 
$228). Because C's required HRA contribution of $200 does not exceed 
$228, the HRA is affordable for C for each month in the period 
September 1 through December 31, 2020, under paragraph (c)(5) of 
this section. Affordability for the period January 1 through August 
31, 2021, is determined using C's 2021 household income and required 
HRA contribution.
    (E) Example 5: Carryover amounts ignored in determining 
affordability--(1) Facts. Taxpayer D is an employee of Employer X 
for all of 2020 and 2021. D is single. For each of 2020 and 2021, X 
offers its employees an HRA described in paragraph (c)(3)(i)(B) of 
this section that provides reimbursement for medical care expenses 
of $2,400 to single employees with no children (the self-only HRA 
amount) and $4,000 to employees with a spouse or children for the 
medical expenses of the employees and their family members. Under 
the terms of the HRA, amounts that an employee does not use in a 
calendar year may be carried over and used in the next calendar 
year. In 2020, D used only $1,500 of her $2,400 maximum 
reimbursement and the unused $900 is carried over and may be used by 
D in 2021.
    (2) Conclusion. Under paragraph (c)(5)(v) of this section, only 
the $2,400 self-only HRA amount offered to D for 2021 is considered 
in determining whether D's HRA is affordable for D. The $900 
carryover amount is not considered in determining the affordability 
of the HRA.

* * * * *
    (e) * * *
    (1) Except as provided in paragraphs (e)(2) and (3) of this 
section, this section applies to taxable years ending after December 
31, 2013.
* * * * *
    (3) Paragraphs (c)(3)(i)(B) and (c)(5) of this section, and the 
last sentences of paragraphs (c)(3)(ii), (c)(3)(v)(A)(1) through (3), 
and (c)(3)(vi) of this section apply to taxable years beginning on or 
after January 1, 2020.

PART 54--PENSION EXCISE TAXES

    Par. 4. The authority citation for part 54 is amended by adding an 
entry for Sec.  54.9802-4 in numerical order to read in part as 
follows:

    Authority:  26 U.S.C. 7805.
* * * * *
    Section 54.9802-4 is also issued under 26 U.S.C. 9833.
* * * * *


0
Par. 5. Section 54.9801-2 is amended by revising the definition of 
``Group health insurance coverage'' to read as follows:


Sec.  54.9801-2  Definitions.

* * * * *
    Group health insurance coverage means health insurance coverage 
offered in connection with a group health plan. Individual health 
insurance coverage reimbursed by the arrangements described in 29 CFR 
2510.3-1(l) is not offered in connection with a group health plan, and 
is not group health insurance coverage, provided all the conditions in 
29 CFR 2510.3-1(l) are satisfied.
* * * * *

0
Par. 6. Section 54.9802-4 is added to read as follows:


Sec.  54.9802-4  Special Rule Allowing Integration of Health 
Reimbursement Arrangements (HRAs) and Other Account-Based Group Health 
Plans with Individual Health Insurance Coverage and Medicare and 
Prohibiting Discrimination In HRAs and Other Account-Based Group Health 
Plans.

    (a) Scope. This section applies to health reimbursement 
arrangements (HRAs) and other account-based group health plans, as 
defined in Sec.  54.9815-2711(d)(6)(i) of this chapter. For ease of 
reference, the term ``HRA'' is used in this section to include other 
account-based group health plans. For related regulations, see 26 CFR 
1.36B-2(c)(3)(i) and (c)(5), 29 CFR 2510.3-1(l), and 45 CFR 155.420.
    (b) Purpose. This section provides the conditions that an HRA must 
satisfy in order to be integrated with individual health insurance 
coverage for purposes of Public Health Service Act (PHS Act) sections 
2711 and 2713 and Sec.  54.9815-2711(d)(4) of this chapter (referred to 
as an individual coverage HRA). This section also allows an individual 
coverage HRA to be integrated with Medicare for purposes of PHS Act 
sections 2711 and 2713 and Sec.  54.9815-2711(d)(4), subject to the 
conditions provided in this section (see paragraph (e) of this 
section). Some of the conditions set forth in this section specifically 
relate to compliance with PHS Act sections 2711 and 2713 and some 
relate to the effect of having or being offered an individual coverage 
HRA on eligibility for the premium tax credit under section 36B. In 
addition, this section provides conditions that an individual coverage 
HRA must satisfy in order to comply with the nondiscrimination 
provisions in section 9802 and PHS Act section 2705 (which is 
incorporated in section 9815) and that are consistent with the 
provisions of the Patient Protection and Affordable Care Act, Public 
Law 111-148 (124 Stat. 119 (2010)), and the Health Care and Education 
Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)), 
each as amended, that are designed to create a competitive individual 
market. These conditions are intended to prevent an HRA plan sponsor 
from intentionally or unintentionally, directly or indirectly, steering 
any participants or dependents with adverse health factors away from 
its traditional group health plan, if any,

[[Page 28988]]

and toward individual health insurance coverage.
    (c) General rule. An HRA will be considered to be integrated with 
individual health insurance coverage for purposes of PHS Act sections 
2711 and 2713 and Sec.  54.9815-2711(d)(4) of this chapter and will not 
be considered to discriminate in violation of section 9802 and PHS Act 
section 2705 solely because it is integrated with individual health 
insurance coverage, provided that the conditions of this paragraph (c) 
are satisfied. See paragraph (e) of this section for how these 
conditions apply to an individual coverage HRA integrated with 
Medicare. For purposes of this section, medical care expenses means 
medical care expenses as defined in Sec.  54.9815-2711(d)(6)(ii) of 
this chapter and Exchange means Exchange as defined in 45 CFR 155.20.
    (1) Enrollment in individual health insurance coverage--(i) In 
general. The HRA must require that the participant and any dependent(s) 
are enrolled in individual health insurance coverage that is subject to 
and complies with the requirements in PHS Act section 2711 (and Sec.  
54.9815-2711(a)(2) of this chapter) and PHS Act section 2713 (and Sec.  
54.9815-2713(a)(1) of this chapter), for each month that the 
individual(s) are covered by the HRA. For purposes of this paragraph 
(c), all individual health insurance coverage, except for individual 
health insurance coverage that consists solely of excepted benefits, is 
treated as being subject to and complying with PHS Act sections 2711 
and 2713. References to individual health insurance coverage in this 
paragraph (c) do not include individual health insurance coverage that 
consists solely of excepted benefits.
    (ii) Forfeiture. The HRA must provide that if any individual 
covered by the HRA ceases to be covered by individual health insurance 
coverage, the HRA will not reimburse medical care expenses that are 
incurred by that individual after the individual health insurance 
coverage ceases. In addition, if the participant and all dependents 
covered by the participant's HRA cease to be covered by individual 
health insurance coverage, the participant must forfeit the HRA. In 
either case, the HRA must reimburse medical care expenses incurred by 
the individual prior to the cessation of individual health insurance 
coverage to the extent the medical care expenses are otherwise covered 
by the HRA, but the HRA may limit the period to submit medical care 
expenses for reimbursement to a reasonable specified time period. If a 
participant or dependent loses coverage under the HRA for a reason 
other than cessation of individual health insurance coverage, COBRA and 
other continuation coverage requirements may apply.
    (iii) Grace periods and retroactive termination of individual 
health insurance coverage. In the event an individual is initially 
enrolled in individual health insurance coverage and subsequently 
timely fails to pay premiums for the coverage, with the result that the 
individual is in a grace period, the individual is considered to be 
enrolled in individual health insurance coverage for purposes of this 
paragraph (c)(1) and the individual coverage HRA must reimburse medical 
care expenses incurred by the individual during that time period to the 
extent the medical care expenses are otherwise covered by the HRA. If 
the individual fails to pay the applicable premium(s) by the end of the 
grace period and the coverage is cancelled or terminated, including 
retroactively, or if the individual health insurance coverage is 
cancelled or terminated retroactively for some other reason (for 
example, a rescission), an individual coverage HRA must require that a 
participant notify the HRA that coverage has been cancelled or 
terminated and the date on which the cancellation or termination is 
effective. After the individual coverage HRA has received the notice of 
cancellation or termination, the HRA may not reimburse medical care 
expenses incurred on and after the date the individual health insurance 
coverage was cancelled or terminated, which is considered to be the 
date of termination of coverage under the HRA.
    (2) No traditional group health plan may be offered to same 
participants. To the extent a plan sponsor offers any class of 
employees (as defined in paragraph (d) of this section) an individual 
coverage HRA, the plan sponsor may not also offer a traditional group 
health plan to the same class of employees, except as provided in 
paragraph (d)(5) of this section. For purposes of this section, a 
traditional group health plan is any group health plan other than 
either an account-based group health plan or a group health plan that 
consists solely of excepted benefits. Therefore, a plan sponsor may not 
offer a choice between an individual coverage HRA or a traditional 
group health plan to any participant or dependent.
    (3) Same terms requirement--(i) In general. If a plan sponsor 
offers an individual coverage HRA to a class of employees described in 
paragraph (d) of this section, the HRA must be offered on the same 
terms to all participants within the class, except as provided in 
paragraphs (c)(3)(ii) through (vi) and (d)(5) of this section.
    (ii) Carryover amounts, salary reduction arrangements, and transfer 
amounts. Amounts that are not used to reimburse medical care expenses 
for any plan year that are made available to participants in later plan 
years are disregarded for purposes of determining whether an HRA is 
offered on the same terms, provided that the method for determining 
whether participants have access to unused amounts in future years, and 
the methodology and formula for determining the amounts of unused funds 
which they may access in future years, is the same for all participants 
in a class of employees. In addition, the ability to pay the portion of 
the premium for individual health insurance coverage that is not 
covered by the HRA, if any, by using a salary reduction arrangement 
under section 125 is considered to be a term of the HRA for purposes of 
this paragraph (c)(3). Therefore, an HRA is not provided on the same 
terms unless the salary reduction arrangement, if made available to any 
participant in a class of employees, is made available on the same 
terms to all participants (other than former employees, as defined in 
paragraph (c)(3)(iv) of this section) in the class of employees. 
Further, to the extent that a participant in an individual coverage HRA 
was previously covered by another HRA and the current individual 
coverage HRA makes available amounts that were not used to reimburse 
medical care expenses under the prior HRA (transferred amounts), the 
transferred amounts are disregarded for purposes of determining whether 
the HRA is offered on the same terms, provided that if the HRA makes 
available transferred amounts, it does so on the same terms for all 
participants in the class of employees.
    (iii) Permitted variation. An HRA does not fail to be provided on 
the same terms solely because the maximum dollar amount made available 
to participants in a class of employees to reimburse medical care 
expenses for any plan year increases in accordance with paragraph 
(c)(3)(iii)(A) or (B) of this section.
    (A) Variation due to number of dependents. An HRA does not fail to 
be provided on the same terms to participants in a class of employees 
solely because the maximum dollar amount made available to those 
participants to reimburse medical care expenses for any plan year 
increases as the number of the participant's dependents who are covered 
under the HRA increases, so long as the same

[[Page 28989]]

maximum dollar amount attributable to the increase in family size is 
made available to all participants in that class of employees with the 
same number of dependents covered by the HRA.
    (B) Variation due to age. An HRA does not fail to be provided on 
the same terms to participants in a class of employees solely because 
the maximum dollar amount made available under the terms of the HRA to 
those participants to reimburse medical care expenses for any plan year 
increases as the age of the participant increases, so long as the 
requirements in paragraphs (c)(3)(iii)(B)(1) and (2) of this section 
are satisfied. For the purpose of this paragraph (c)(3)(iii)(B), the 
plan sponsor may determine the age of the participant using any 
reasonable method for a plan year, so long as the plan sponsor 
determines each participant's age for the purpose of this paragraph 
(c)(3)(iii)(B) using the same method for all participants in the class 
of employees for the plan year and the method is determined prior to 
the plan year.
    (1) The same maximum dollar amount attributable to the increase in 
age is made available to all participants who are the same age.
    (2) The maximum dollar amount made available to the oldest 
participant(s) is not more than three times the maximum dollar amount 
made available to the youngest participant(s).
    (iv) Former employees. An HRA does not fail to be treated as 
provided on the same terms if the plan sponsor offers the HRA to some, 
but not all, former employees within a class of employees. However, if 
a plan sponsor offers the HRA to one or more former employees within a 
class of employees, the HRA must be offered to the former employee(s) 
on the same terms as to all other employees within the class, except as 
provided in paragraph (c)(3)(ii) of this section. For purposes of this 
section, a former employee is an employee who is no longer performing 
services for the employer.
    (v) New employees or new dependents. For a participant whose 
coverage under the HRA becomes effective later than the first day of 
the plan year, the HRA does not fail to be treated as being provided on 
the same terms to the participant if the maximum dollar amount made 
available to the participant either is the same as the maximum dollar 
amount made available to participants in the participant's class of 
employees whose coverage became effective as of the first day of the 
plan year, or is pro-rated consistent with the portion of the plan year 
in which the participant is covered by the HRA. Similarly, if the HRA 
provides for variation in the maximum amount made available to 
participants in a class of employees based on the number of a 
participant's dependents covered by the HRA, and the number of a 
participant's dependents covered by the HRA changes during a plan year 
(either increasing or decreasing), the HRA does not fail to be treated 
as being provided on the same terms to the participant if the maximum 
dollar amount made available to the participant either is the same as 
the maximum dollar amount made available to participants in the 
participant's class of employees who had the same number of dependents 
covered by the HRA on the first day of the plan year or is pro-rated 
for the remainder of the plan year after the change in the number of 
the participant's dependents covered by the HRA consistent with the 
portion of the plan year in which that number of dependents are covered 
by the HRA. The method the HRA uses to determine amounts made available 
for participants whose coverage under the HRA is effective later than 
the first day of the plan year or who have changes in the number of 
dependents covered by the HRA during a plan year must be the same for 
all participants in the class of employees and the method must be 
determined prior to the beginning of the plan year.
    (vi) HSA-compatible HRAs. An HRA does not fail to be treated as 
provided on the same terms if the plan sponsor offers participants in a 
class of employees a choice between an HSA-compatible individual 
coverage HRA and an individual coverage HRA that is not HSA compatible, 
provided both types of HRAs are offered to all participants in the 
class of employees on the same terms. For the purpose of this paragraph 
(c)(3)(vi), an HSA-compatible individual coverage HRA is an individual 
coverage HRA that is limited in accordance with applicable guidance 
under section 223 such that an individual covered by such an HRA is not 
disqualified from being an eligible individual under section 223.
    (vii) Examples. The following examples illustrate the provisions of 
this paragraph (c)(3), without taking into account the provisions of 
paragraph (d) of this section. In each example, the HRA is an 
individual coverage HRA that has a calendar year plan year and may 
reimburse any medical care expenses, including premiums for individual 
health insurance coverage (except as provided in paragraph 
(c)(3)(vii)(E) of this section (Example 5)). Further, in each example, 
assume the HRA is offered on the same terms, except as otherwise 
specified in the example and that no participants or dependents are 
Medicare beneficiaries.

    (A) Example 1: Carryover amounts permitted--(1) Facts. For 2020 
and again for 2021, Plan Sponsor A offers all employees $7,000 each 
in an HRA, and the HRA provides that amounts that are unused at the 
end of a plan year may be carried over to the next plan year, with 
no restrictions on the use of the carryover amounts compared to the 
use of newly available amounts. At the end of 2020, some employees 
have used all of the funds in their HRAs, while other employees have 
balances remaining that range from $500 to $1,750 that are carried 
over to 2021 for those employees.
    (2) Conclusion. The same terms requirement of this paragraph 
(c)(3) is satisfied in this paragraph (c)(3)(vii)(A) (Example 1) for 
2020 because Plan Sponsor A offers all employees the same amount, 
$7,000, in an HRA for that year. The same terms requirement is also 
satisfied for 2021 because Plan Sponsor A again offers all employees 
the same amount for that year, and the carryover amounts that some 
employees have are disregarded in applying the same terms 
requirement because the amount of the carryover for each employee 
(that employee's balance) and each employee's access to the 
carryover amounts is based on the same terms.
    (B) Example 2: Employees hired after the first day of the plan 
year--(1) Facts. For 2020, Plan Sponsor B offers all employees 
employed on January 1, 2020, $7,000 each in an HRA for the plan 
year. Employees hired after January 1, 2020, are eligible to enroll 
in the HRA with an effective date of the first day of the month 
following their date of hire, as long as they have enrolled in 
individual health insurance coverage effective on or before that 
date, and the amount offered to these employees is pro-rated based 
on the number of months remaining in the plan year, including the 
month which includes their coverage effective date.
    (2) Conclusion. The same terms requirement of this paragraph 
(c)(3) is satisfied in this paragraph (c)(3)(vii)(B) (Example 2) for 
2020 because Plan Sponsor B offers all employees employed on the 
first day of the plan year the same amount, $7,000, in an HRA for 
that plan year and all employees hired after January 1, 2020, a pro-
rata amount based on the portion of the plan year during which they 
are enrolled in the HRA.
    (C) Example 3: HRA amounts offered vary based on number of 
dependents--(1) Facts. For 2020, Plan Sponsor C offers its employees 
the following amounts in an HRA: $1,500, if the employee is the only 
individual covered by the HRA; $3,500, if the employee and one 
dependent are covered by the HRA; and $5,000, if the employee and 
more than one dependent are covered by the HRA.
    (2) Conclusion. The same terms requirement of this paragraph 
(c)(3) is satisfied in this paragraph (c)(3)(vii)(C) (Example 3) 
because paragraph (c)(3)(iii)(A) of this section allows the maximum 
dollar amount made available in an HRA to increase as the number of 
the participant's

[[Page 28990]]

dependents covered by the HRA increases and Plan Sponsor C makes the 
same amount available to each employee with the same number of 
dependents covered by the HRA.
    (D) Example 4: HRA amounts offered vary based on increases in 
employees' ages--(1) Facts. For 2020, Plan Sponsor D offers its 
employees the following amounts in an HRA: $1,000 each for employees 
age 25 to 35; $2,000 each for employees age 36 to 45; $2,500 each 
for employees age 46 to 55; and $4,000 each for employees over age 
55.
    (2) Conclusion. The same terms requirement of this paragraph 
(c)(3) is not satisfied in this paragraph (c)(3)(vii)(D) (Example 4) 
because the terms of the HRA provide the oldest participants (those 
over age 55) with more than three times the amount made available to 
the youngest participants (those ages 25 to 35), in violation of 
paragraph (c)(3)(iii)(B)(2) of this section.
    (E) Example 5: Application of same terms requirement to premium 
only HRA--(1) Facts. For 2020, Plan Sponsor E offers its employees 
an HRA that reimburses only premiums for individual health insurance 
coverage, up to $10,000 for the year. Employee A enrolls in 
individual health insurance coverage with a $5,000 premium for the 
year and is reimbursed $5,000 from the HRA. Employee B enrolls in 
individual health insurance coverage with an $8,000 premium for the 
year and is reimbursed $8,000 from the HRA.
    (2) Conclusion. The same terms requirement of this paragraph 
(c)(3) is satisfied in this paragraph (c)(3)(vii)(E) (Example 5) 
because Plan Sponsor E offers the HRA on the same terms to all 
employees, notwithstanding that some employees receive a greater 
amount of reimbursement than others based on the cost of the 
individual health insurance coverage selected by the employee.
    (4) Opt out. Under the terms of the HRA, a participant who is 
otherwise eligible for coverage must be permitted to opt out of and 
waive future reimbursements on behalf of the participant and all 
dependents eligible for the HRA from the HRA once, and only once, with 
respect to each plan year. The HRA may establish timeframes for 
enrollment in (and opting out of) the HRA but, in general, the 
opportunity to opt out must be provided in advance of the first day of 
the plan year. For participants who become eligible to participate in 
the HRA on a date other than the first day of the plan year (or who 
become eligible fewer than 90 days prior to the plan year or for whom 
the notice under paragraph (c)(6) of this section is required to be 
provided as set forth in paragraph (c)(6)(i)(C) of this section), or 
for a dependent who newly becomes eligible during the plan year, this 
opportunity must be provided during the applicable HRA enrollment 
period(s) established by the HRA for these individuals. Further, under 
the terms of the HRA, upon termination of employment, for a participant 
who is covered by the HRA, either the remaining amounts in the HRA must 
be forfeited or the participant must be permitted to permanently opt 
out of and waive future reimbursements from the HRA on behalf of the 
participant and all dependents covered by the HRA.
    (5) Reasonable procedures for coverage substantiation--(i) 
Substantiation of individual health insurance coverage for the plan 
year. The HRA must implement, and comply with, reasonable procedures to 
substantiate that participants and each dependent covered by the HRA 
are, or will be, enrolled in individual health insurance coverage for 
the plan year (or for the portion of the plan year the individual is 
covered by the HRA, if applicable). The HRA may establish the date by 
which this substantiation must be provided, but, in general, the date 
may be no later than the first day of the plan year. However, for a 
participant who is not eligible to participate in the HRA on the first 
day of the plan year (or who becomes eligible fewer than 90 days prior 
to the plan year or for whom the notice under paragraph (c)(6) of this 
section is required to be provided as set forth in paragraph 
(c)(6)(i)(C) of this section), the HRA may establish the date by which 
this substantiation must be provided, but that date may be no later 
than the date the HRA coverage begins. Similarly, for a participant who 
adds a new dependent during the plan year, the HRA may establish the 
date by which this substantiation must be provided, but the date may be 
no later than the date the HRA coverage for the new dependent begins; 
however, to the extent the dependent's coverage under the HRA is 
effective retroactively, the HRA may establish a reasonable time by 
which this substantiation is required, but must require it be provided 
before the HRA will reimburse any medical care expense for the newly 
added dependent. The reasonable procedures an HRA may use to implement 
the substantiation requirement set forth in this paragraph (c)(5)(i) 
may include a requirement that a participant substantiate enrollment by 
providing either:
    (A) A document from a third party (for example, the issuer or an 
Exchange) showing that the participant and any dependents covered by 
the HRA are, or will be, enrolled in individual health insurance 
coverage (for example, an insurance card or an explanation of benefits 
document pertaining to the relevant time period or documentation from 
the Exchange showing that the individual has completed the application 
and plan selection); or
    (B) An attestation by the participant stating that the participant 
and dependent(s) covered by the HRA are, or will be, enrolled in 
individual health insurance coverage, the date coverage began or will 
begin, and the name of the provider of the coverage.
    (ii) Coverage substantiation with each request for reimbursement of 
medical care expenses. Following the initial substantiation of 
coverage, with each new request for reimbursement of an incurred 
medical care expense for the same plan year, the HRA may not reimburse 
a participant for any medical care expenses unless, prior to each 
reimbursement, the participant substantiates that the individual on 
whose behalf medical care expenses are requested to be reimbursed 
continues to be enrolled in individual health insurance coverage for 
the month during which the medical care expenses were incurred. The HRA 
must implement, and comply with, reasonable procedures to satisfy this 
requirement. This substantiation may be in the form of a written 
attestation by the participant, which may be part of the form used to 
request reimbursement, or a document from a third party (for example, a 
health insurance issuer) showing that the participant or the dependent, 
if applicable, are or were enrolled in individual health insurance 
coverage for the applicable month.
    (iii) Reliance on substantiation. For purposes of this paragraph 
(c)(5), an HRA may rely on the participant's documentation or 
attestation unless the HRA, its plan sponsor, or any other entity 
acting in an official capacity on behalf of the HRA has actual 
knowledge that any individual covered by the HRA is not, or will not 
be, enrolled in individual health insurance coverage for the plan year 
(or applicable portion of the plan year) or the month, as applicable.
    (6) Notice requirement--(i) Timing. The HRA must provide a written 
notice to each participant:
    (A) At least 90 calendar days before the beginning of each plan 
year for any participant who is not described in either paragraph 
(c)(6)(i)(B) or (C) of this section;
    (B) No later than the date on which the HRA may first take effect 
for the participant, for any participant who is not eligible to 
participate at the beginning of the plan year (or is not eligible to 
participate at the time the notice is provided at least 90 calendar 
days before the beginning of the plan year pursuant to paragraph 
(c)(6)(i)(A) of this section); or
    (C) No later than the date on which the HRA may first take effect 
for the

[[Page 28991]]

participant, for any participant who is employed by an employer that is 
first established less than 120 days before the beginning of the first 
plan year of the HRA; this paragraph (c)(6)(i)(C) applies only with 
respect to the first plan year of the HRA.
    (ii) Content. The notice must include all the information described 
in this paragraph (c)(6)(ii) (and may include any additional 
information that does not conflict with that information). To the 
extent that the Departments of the Treasury, Labor and Health and Human 
Services provide model notice language for certain elements of this 
required notice, HRAs are permitted, but not required, to use the model 
language.
    (A) A description of the terms of the HRA, including the maximum 
dollar amount available for each participant (including the self-only 
HRA amount available for the plan year (or the maximum dollar amount 
available for the plan year if the HRA provides for reimbursements up 
to a single dollar amount regardless of whether a participant has self-
only or other than self-only coverage)), any rules regarding the 
proration of the maximum dollar amount applicable to any participant 
(or dependent, if applicable) who is not eligible to participate in the 
HRA for the entire plan year, whether (and which of) the participant's 
dependents are eligible for the HRA, a statement that there are 
different kinds of HRAs (including a qualified small employer health 
reimbursement arrangement) and the HRA being offered is an individual 
coverage HRA, a statement that the HRA requires the participant and any 
covered dependents to be enrolled in individual health insurance 
coverage (or Medicare Part A and B or Medicare Part C, if applicable), 
a statement that the coverage in which the participant and any covered 
dependents must be enrolled cannot be short-term, limited-duration 
insurance or consist solely of excepted benefits, if the HRA is subject 
to the Employee Retirement Income Security Act (ERISA), a statement 
that individual health insurance coverage in which the participant and 
any covered dependents are enrolled is not subject to ERISA, if the 
conditions under 29 CFR 2510.3-1(l) are satisfied, the date as of which 
coverage under the HRA may first become effective (both for 
participants whose coverage will become effective on the first day of 
the plan year and for participants whose HRA coverage may become 
effective at a later date), the dates on which the HRA plan year begins 
and ends, and the dates on which the amounts newly made available under 
the HRA will be made available.
    (B) A statement of the right of the participant to opt out of and 
waive future reimbursements from the HRA, as set forth under paragraph 
(c)(4) of this section.
    (C) A description of the potential availability of the premium tax 
credit if the participant opts out of and waives future reimbursements 
from the HRA and the HRA is not affordable for one or more months under 
Sec.  1.36B-2(c)(5) of this chapter, a statement that even if the 
participant opts out of and waives future reimbursements from an HRA, 
the offer will prohibit the participant (and, potentially, the 
participant's dependents) from receiving a premium tax credit for the 
participant's coverage (or the dependent's coverage, if applicable) on 
an Exchange for any month that the HRA is affordable under Sec.  1.36B-
2(c)(5) of this chapter, a statement describing how the participant may 
find assistance with determining affordability, a statement that, if 
the participant is a former employee, the offer of the HRA does not 
render the participant (or the participant's dependents, if applicable) 
ineligible for the premium tax credit regardless of whether it is 
affordable under Sec.  1.36B-2(c)(5) of this chapter, and a statement 
that if the participant or dependent is enrolled in Medicare, he or she 
is ineligible for the premium tax credit without regard to the offer or 
acceptance of the HRA;
    (D) A statement that if the participant accepts the HRA, the 
participant may not claim a premium tax credit for the participant's 
Exchange coverage for any month the HRA may be used to reimburse 
medical care expenses of the participant, and a premium tax credit may 
not be claimed for the Exchange coverage of the participant's 
dependents for any month the HRA may be used to reimburse medical care 
expenses of the dependents.
    (E) A statement that the participant must inform any Exchange to 
which the participant applies for advance payments of the premium tax 
credit of the availability of the HRA; the self-only HRA amount 
available for the HRA plan year (or the maximum dollar amount available 
for the plan year if the HRA provides for reimbursements up to a single 
dollar amount regardless of whether a participant has self-only or 
other than self-only coverage) as set forth in the written notice in 
accordance with paragraph (c)(6)(ii)(A) of this section; whether the 
HRA is also available to the participant's dependents and if so, which 
ones; the date as of which coverage under the HRA may first become 
effective; the date on which the plan year begins and the date on which 
it ends; and whether the participant is a current employee or former 
employee.
    (F) A statement that the participant should retain the written 
notice because it may be needed to determine whether the participant is 
allowed a premium tax credit on the participant's individual income tax 
return.
    (G) A statement that the HRA may not reimburse any medical care 
expense unless the substantiation requirement set forth in paragraph 
(c)(5)(ii) of this section is satisfied and a statement that the 
participant must also provide the substantiation required by paragraph 
(c)(5)(i) of this section.
    (H) A statement that if the individual health insurance coverage 
(or coverage under Medicare Part A and B or Medicare Part C) of a 
participant or dependent ceases, the HRA will not reimburse any medical 
care expenses that are incurred by the participant or dependent, as 
applicable, after the coverage ceases, and a statement that the 
participant must inform the HRA if the participant's or dependent's 
individual health insurance coverage (or coverage under Medicare Part A 
and B or Medicare Part C) is cancelled or terminated retroactively and 
the date on which the cancellation or termination is effective.
    (I) The contact information (including a phone number) for an 
individual or a group of individuals who participants may contact in 
order to receive additional information regarding the HRA. The plan 
sponsor may determine which individual or group of individuals is best 
suited to be the specified contact.
    (J) A statement of availability of a special enrollment period to 
enroll in or change individual health insurance coverage, through or 
outside of an Exchange, for the participant and any dependents who 
newly gain access to the HRA and are not already covered by the HRA.
    (d) Classes of employees--(1) In general. This paragraph (d) sets 
forth the rules for determining classes of employees. Paragraph (d)(2) 
of this section sets forth the specific classes of employees; paragraph 
(d)(3) of this section sets forth a minimum class size requirement that 
applies in certain circumstances; paragraph (d)(4) of this section sets 
forth rules regarding the definition of ``full-time employees,'' 
``part-time employees,'' and ``seasonal employees''; paragraph (d)(5) 
of this section sets forth a special rule for new hires; and paragraph 
(d)(6) of this section addresses student premium reduction 
arrangements. For purposes of this section, including determining

[[Page 28992]]

classes under this paragraph (d), the employer is the common law 
employer and is determined without regard to the rules under sections 
414(b), (c), (m), and (o) that would treat the common law employer as a 
single employer with certain other entities.
    (2) List of classes. Participants may be treated as belonging to a 
class of employees based on whether they are, or are not, included in 
the classes described in this paragraph (d)(2). If the individual 
coverage HRA is offered to former employees, former employees are 
considered to be in the same class in which they were included 
immediately before separation from service. Before each plan year, a 
plan sponsor must determine for the plan year which classes of 
employees it intends to treat separately and the definition of the 
relevant class(es) it will apply, to the extent these regulations 
permit a choice. After the classes and the definitions of the classes 
are established for a plan year, a plan sponsor may not make changes to 
the classes of employees or the definitions of those relevant classes 
with respect to that plan year.
    (i) Full-time employees, defined at the election of the plan 
sponsor to mean either full-time employees under section 4980H (and 
Sec.  54.4980H-1(a)(21) of this chapter) or employees who are not part-
time employees (as described in Sec.  1.105-11(c)(2)(iii)(C) of this 
chapter);
    (ii) Part-time employees, defined at the election of the plan 
sponsor to mean either employees who are not full-time employees under 
section 4980H (and under Sec.  54.4980H-1(a)(21) of this chapter (which 
defines full-time employee)) or employees who are part-time employees 
as described in Sec.  1.105-11(c)(2)(iii)(C) of this chapter;
    (iii) Employees who are paid on a salary basis;
    (iv) Non-salaried employees (such as, for example, hourly 
employees);
    (v) Employees whose primary site of employment is in the same 
rating area as defined in 45 CFR 147.102(b);
    (vi) Seasonal employees, defined at the election of the plan 
sponsor to mean seasonal employees as described in either Sec.  
54.4980H-1(a)(38) or Sec.  1.105-11(c)(2)(iii)(C) of this chapter;
    (vii) Employees included in a unit of employees covered by a 
particular collective bargaining agreement (or an appropriate related 
participation agreement) in which the plan sponsor participates (as 
described in Sec.  1.105-11(c)(2)(iii)(D) of this chapter);
    (viii) Employees who have not satisfied a waiting period for 
coverage (if the waiting period complies with Sec.  54.9815-2708 of 
this chapter);
    (ix) Non-resident aliens with no U.S.-based income (as described in 
Sec.  1.105-11(c)(2)(iii)(E) of this chapter);
    (x) Employees who, under all the facts and circumstances, are 
employees of an entity that hired the employees for temporary placement 
at an entity that is not the common law employer of the employees and 
that is not treated as a single employer with the entity that hired the 
employees for temporary placement under section 414(b), (c), (m), or 
(o); or
    (xi) A group of participants described as a combination of two or 
more of the classes of employees set forth in paragraphs (d)(2)(i) 
through (x) of this section.
    (3) Minimum class size requirement--(i) In general. If a class of 
employees is subject to the minimum class size requirement as set forth 
in this paragraph (d)(3), the class must consist of at least a minimum 
number of employees (as described in paragraphs (d)(3)(iii) and (iv) of 
this section), otherwise, the plan sponsor may not treat that class as 
a separate class of employees. Paragraph (d)(3)(ii) of this section 
sets forth the circumstances in which the minimum class size 
requirement applies to a class of employees, paragraph (d)(3)(iii) of 
this section sets forth the rules for determining the applicable class 
size minimum, and paragraph (d)(3)(iv) of this section sets forth the 
rules for a plan sponsor to determine if it satisfies the minimum class 
size requirement with respect to a class of employees.
    (ii) Circumstances in which minimum class size requirement 
applies--(A) The minimum class size requirement applies only if a plan 
sponsor offers a traditional group health plan to one or more classes 
of employees and offers an individual coverage HRA to one or more other 
classes of employees.
    (B) The minimum class size requirement does not apply to a class of 
employees offered a traditional group health plan or a class of 
employees offered no coverage.
    (C) The minimum class size requirement applies to a class of 
employees offered an individual coverage HRA if the class is full-time 
employees, part-time employees, salaried employees, non-salaried 
employees, or employees whose primary site of employment is in the same 
rating area (described in paragraph (d)(2)(i), (ii), (iii), (iv), or 
(v) of this section, respectively, and referred to collectively as the 
applicable classes or individually as an applicable class), except 
that:
    (1) In the case of the class of employees whose primary site of 
employment is in the same rating area (as described in paragraph 
(d)(2)(v) of this section), the minimum class size requirement does not 
apply if the geographic area defining the class is a State or a 
combination of two or more entire States; and
    (2) In the case of the classes of employees that are full-time 
employees and part-time employees (as described in paragraphs (d)(2)(i) 
and (ii) of this section, respectively), the minimum class size 
requirement applies only to those classes (and the classes are only 
applicable classes) if the employees in one such class are offered a 
traditional group health plan while the employees in the other such 
class are offered an individual coverage HRA. In such a case, the 
minimum class size requirement applies only to the class offered an 
individual coverage HRA.
    (D) A class of employees offered an individual coverage HRA is also 
subject to the minimum class size requirement if the class is a class 
of employees created by combining at least one of the applicable 
classes (as defined in paragraph (d)(3)(ii)(C) of this section) with 
any other class, except that the minimum class size requirement shall 
not apply to a class that is the result of a combination of one of the 
applicable classes and a class of employees who have not satisfied a 
waiting period (as described in paragraph (d)(2)(viii) of this 
section).
    (iii) Determination of the applicable class size minimum--(A) In 
general. The minimum number of employees that must be in a class of 
employees that is subject to the minimum class size requirement (the 
applicable class size minimum) is determined prior to the beginning of 
the plan year for each plan year of the individual coverage HRA and is:
    (1) 10, for an employer with fewer than 100 employees;
    (2) A number, rounded down to a whole number, equal to 10 percent 
of the total number of employees, for an employer with 100 to 200 
employees; and
    (3) 20, for an employer with more than 200 employees.
    (B) Determining employer size. For purposes of this paragraph 
(d)(3), the number of employees of an employer is determined in advance 
of the plan year of the HRA based on the number of employees that the 
employer reasonably expects to employ on the first day of the plan 
year.
    (iv) Determining if a class satisfies the applicable class size 
minimum. For purposes of this paragraph (d)(3), whether a class of 
employees satisfies the applicable class size minimum for a

[[Page 28993]]

plan year of the individual coverage HRA is based on the number of 
employees in the class offered the individual coverage HRA as of the 
first day of the plan year. Therefore, this determination is not based 
on the number of employees that actually enroll in the individual 
coverage HRA, and this determination is not affected by changes in the 
number of employees in the class during the plan year.
    (4) Consistency requirement. For any plan year, a plan sponsor may 
define ``full-time employee,'' ``part-time employee,'' and ``seasonal 
employee'' in accordance with the relevant provisions of sections 
105(h) or 4980H, as set forth in paragraphs (d)(2)(i), (ii), and (vi) 
of this section, if:
    (i) To the extent applicable under the HRA for the plan year, each 
of the three classes of employees are defined in accordance with 
section 105(h) or each of the three classes of employees are defined in 
accordance with section 4980H for the plan year; and
    (ii) The HRA plan document sets forth the applicable definitions 
prior to the beginning of the plan year to which the definitions will 
apply.
    (5) Special rule for new hires--(i) In general. Notwithstanding 
paragraphs (c)(2) and (3) of this section, a plan sponsor that offers a 
traditional group health plan to a class of employees may prospectively 
offer the employees in that class of employees who are hired on or 
after a certain future date (the new hire date) an individual coverage 
HRA (with this group of employees referred to as the new hire 
subclass), while continuing to offer employees in that class of 
employees who are hired before the new hire date a traditional group 
health plan (with the rule set forth in this sentence referred to as 
the special rule for new hires). For the new hire subclass, the 
individual coverage HRA must be offered on the same terms to all 
participants within the subclass, in accordance with paragraph (c)(3) 
of this section. In accordance with paragraph (c)(2) of this section, a 
plan sponsor may not offer a choice between an individual coverage HRA 
or a traditional group health plan to any employee in the new hire 
subclass or to any employee in the class who is not a member of the new 
hire subclass.
    (ii) New hire date. A plan sponsor may set the new hire date for a 
class of employees prospectively as any date on or after January 1, 
2020. A plan sponsor may set different new hire dates prospectively for 
separate classes of employees.
    (iii) Discontinuation of use of special rule for new hires and 
multiple applications of the special rule for new hires. A plan sponsor 
may discontinue use of the special rule for new hires at any time for 
any class of employees. In that case, the new hire subclass is no 
longer treated as a separate subclass of employees. In the event a plan 
sponsor applies the special rule for new hires to a class of employees 
and later discontinues use of the rule to the class of employees, the 
plan sponsor may later apply the rule if the application of the rule 
would be permitted under the rules for initial application of the 
special rule for new hires. If a plan sponsor, in accordance with the 
requirements for the special rule for new hires, applies the rule to a 
class of employees subsequent to any prior application and 
discontinuance of the rule to that class, the new hire date must be 
prospective.
    (iv) Application of the minimum class size requirement under the 
special rule for new hires. The minimum class size requirement set 
forth in paragraph (d)(3) of this section does not apply to the new 
hire subclass. However, if a plan sponsor subdivides the new hire 
subclass subsequent to creating the new hire subclass, the minimum 
class size requirement set forth in paragraph (d)(3) of this section 
applies to any class of employees created by subdividing the new hire 
subclass, if the minimum class size requirement otherwise applies.
    (6) Student employees offered student premium reduction 
arrangements. For purposes of this section, if an institution of higher 
education (as defined in the Higher Education Act of 1965) offers a 
student employee a student premium reduction arrangement, the employee 
is not considered to be part of the class of employees to which the 
employee would otherwise belong. For the purpose of this paragraph 
(d)(6) and paragraph (f)(1) of this section, a student premium 
reduction arrangement is defined as any program offered by an 
institution of higher education under which the cost of insured or 
self-insured student health coverage is reduced for certain students 
through a credit, offset, reimbursement, stipend or similar 
arrangement. A student employee offered a student premium reduction 
arrangement is also not counted for purposes of determining the 
applicable class size minimum under paragraph (d)(3)(iii) of this 
section. If a student employee is not offered a student premium 
reduction arrangement (including if the student employee is offered an 
individual coverage HRA instead), the student employee is considered to 
be part of the class of employees to which the employee otherwise 
belongs and is counted for purposes of determining the applicable class 
size minimum under paragraph (d)(3)(iii) of this section.
    (e) Integration of Individual Coverage HRAs with Medicare--(1) 
General rule. An individual coverage HRA will be considered to be 
integrated with Medicare (and deemed to comply with PHS Act sections 
2711 and 2713 and Sec.  54.9815-2711(d)(4) of this chapter), provided 
that the conditions of paragraph (c) of this section are satisfied, 
subject to paragraph (e)(2) of this section. Nothing in this section 
requires that a participant and his or her dependents all have the same 
type of coverage; therefore, an individual coverage HRA may be 
integrated with Medicare for some individuals and with individual 
health insurance coverage for others, including, for example, a 
participant enrolled in Medicare Part A and B or Part C and his or her 
dependents enrolled in individual health insurance coverage.
    (2) Application of conditions in paragraph (c) of this section--(i) 
In general. Except as provided in paragraph (e)(2)(ii) of this section, 
in applying the conditions of paragraph (c) of this section with 
respect to integration with Medicare, a reference to ``individual 
health insurance coverage'' is deemed to refer to coverage under 
Medicare Part A and B or Part C. References in this section to 
integration of an HRA with Medicare refer to integration of an 
individual coverage HRA with Medicare Part A and B or Part C.
    (ii) Exceptions. For purposes of the statement regarding ERISA 
under the notice content element under paragraph (c)(6)(ii)(A) of this 
section and the statement regarding the availability of a special 
enrollment period under the notice content element under paragraph 
(c)(6)(ii)(J) of this section, the term individual health insurance 
coverage means only individual health insurance coverage and does not 
also mean coverage under Medicare Part A and B or Part C.
    (f) Examples--(1) Examples regarding classes and the minimum class 
size requirement. The following examples illustrate the provisions of 
paragraph (c)(3) of this section, taking into account the provisions of 
paragraphs (d)(1) through (4) and (d)(6) of this section. In each 
example, the HRA is an individual coverage HRA that may reimburse any 
medical care expenses, including premiums for individual health 
insurance coverage and it is assumed that no participants or dependents 
are Medicare beneficiaries.

    (i) Example 1: Collectively bargained employees offered 
traditional group health

[[Page 28994]]

plan; non-collectively bargained employees offered HRA--(A) Facts. 
For 2020, Plan Sponsor A offers its employees covered by a 
collective bargaining agreement a traditional group health plan (as 
required by the collective bargaining agreement) and all other 
employees (non-collectively bargained employees) each an HRA on the 
same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(i) (Example 1) 
because collectively bargained and non-collectively bargained 
employees may be treated as different classes of employees, one of 
which may be offered a traditional group health plan and the other 
of which may be offered an individual coverage HRA, and Plan Sponsor 
A offers the HRA on the same terms to all participants who are non-
collectively bargained employees. The minimum class size requirement 
does not apply to this paragraph (f)(1)(i) (Example 1) even though 
Plan Sponsor A offers one class a traditional group health plan and 
one class the HRA because collectively bargained and non-
collectively bargained employees are not applicable classes that are 
subject to the minimum class size requirement.
    (ii) Example 2: Collectively bargained employees in one unit 
offered traditional group health plan and in another unit offered 
HRA--(A) Facts. For 2020, Plan Sponsor B offers its employees 
covered by a collective bargaining agreement with Local 100 a 
traditional group health plan (as required by the collective 
bargaining agreement), and its employees covered by a collective 
bargaining agreement with Local 200 each an HRA on the same terms 
(as required by the collective bargaining agreement).
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(ii) (Example 
2) because the employees covered by the collective bargaining 
agreements with the two separate bargaining units (Local 100 and 
Local 200) may be treated as two different classes of employees and 
Plan Sponsor B offers an HRA on the same terms to the participants 
covered by the agreement with Local 200. The minimum class size 
requirement does not apply to this paragraph (f)(1)(ii) (Example 2) 
even though Plan Sponsor B offers the Local 100 employees a 
traditional group health plan and the Local 200 employees an HRA 
because collectively bargained employees are not applicable classes 
that are subject to the minimum class size requirement.
    (iii) Example 3: Employees in a waiting period offered no 
coverage; other employees offered an HRA--(A) Facts. For 2020, Plan 
Sponsor C offers its employees who have completed a waiting period 
that complies with the requirements for waiting periods in Sec.  
54.9815-2708 of this chapter each an HRA on the same terms and does 
not offer coverage to its employees who have not completed the 
waiting period.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(iii) (Example 
3) because employees who have completed a waiting period and 
employees who have not completed a waiting period may be treated as 
different classes and Plan Sponsor C offers the HRA on the same 
terms to all participants who have completed the waiting period. The 
minimum class size requirement does not apply to this paragraph 
(f)(1)(iii) (Example 3) because Plan Sponsor C does not offer at 
least one class of employees a traditional group health plan and 
because the class of employees who have not completed a waiting 
period and the class of employees who have completed a waiting 
period are not applicable classes that are subject to the minimum 
class size requirement.
    (iv) Example 4: Employees in a waiting period offered an HRA; 
other employees offered a traditional group health plan--(A) Facts. 
For 2020, Plan Sponsor D offers its employees who have completed a 
waiting period that complies with the requirements for waiting 
periods in Sec.  54.9815-2708 of this chapter a traditional group 
health plan and offers its employees who have not completed the 
waiting period each an HRA on the same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(iv) (Example 
4) because employees who have completed a waiting period and 
employees who have not completed a waiting period may be treated as 
different classes and Plan Sponsor D offers an HRA on the same terms 
to all participants who have not completed the waiting period. The 
minimum class size requirement does not apply to this paragraph 
(f)(1)(iv) (Example 4) even though Plan Sponsor D offers employees 
who have completed a waiting period a traditional group health plan 
and employees who have not completed a waiting period an HRA because 
the class of employees who have not completed a waiting period is 
not an applicable class that is subject to the minimum class size 
requirement (nor is the class made up of employees who have 
completed the waiting period).
    (v) Example 5: Staffing firm employees temporarily placed with 
customers offered an HRA; other employees offered a traditional 
group health plan--(A) Facts. Plan Sponsor E is a staffing firm that 
places certain of its employees on temporary assignments with 
customers that are not the common law employers of Plan Sponsor E's 
employees or treated as a single employer with Plan Sponsor E under 
section 414(b), (c), (m), or (o) (unrelated entities); other 
employees work in Plan Sponsor E's office managing the staffing 
business (non-temporary employees). For 2020, Plan Sponsor E offers 
its employees who are on temporary assignments with customers each 
an HRA on the same terms. All other employees are offered a 
traditional group health plan.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(v) (Example 5) 
because the employees who are hired for temporary placement at an 
unrelated entity and non-temporary employees of Plan Sponsor E may 
be treated as different classes of employees and Plan Sponsor E 
offers an HRA on the same terms to all participants temporarily 
placed with customers. The minimum class size requirement does not 
apply to this paragraph (f)(1)(v) (Example 5) even though Plan 
Sponsor E offers one class a traditional group health plan and one 
class the HRA because the class of employees hired for temporary 
placement is not an applicable class that is subject to the minimum 
class size requirement (nor is the class made up of non-temporary 
employees).
    (vi) Example 6: Staffing firm employees temporarily placed with 
customers in rating area 1 offered an HRA; other employees offered a 
traditional group health plan--(A) Facts. The facts are the same as 
in paragraph (f)(1)(v) of this section (Example 5), except that Plan 
Sponsor E has work sites in rating area 1 and rating area 2, and it 
offers its 10 employees on temporary assignments with a work site in 
rating area 1 an HRA on the same terms. Plan Sponsor E has 200 other 
employees in rating areas 1 and 2, including its non-temporary 
employees in rating areas 1 and 2 and its employees on temporary 
assignments with a work site in rating area 2, all of whom are 
offered a traditional group health plan.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(vi) 
(Example 6) because, even though the employees who are temporarily 
placed with customers generally may be treated as employees of a 
different class, because Plan Sponsor E is also using a rating area 
to identify the class offered the HRA (which is an applicable class 
for the minimum class size requirement) and is offering one class 
the HRA and another class the traditional group health plan, the 
minimum class size requirement applies to the class offered the HRA, 
and the class offered the HRA fails to satisfy the minimum class 
size requirement. Because Plan Sponsor E employs 210 employees, the 
applicable class size minimum is 20, and the HRA is offered to only 
10 employees.
    (vii) Example 7: Employees in State 1 offered traditional group 
health plan; employees in State 2 offered HRA--(A) Facts. Plan 
Sponsor F employs 45 employees whose work site is in State 1 and 7 
employees whose primary site of employment is in State 2. For 2020, 
Plan Sponsor F offers its 45 employees in State 1 a traditional 
group health plan, and each of its 7 employees in State 2 an HRA on 
the same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(vii) (Example 
7) because Plan Sponsor F offers the HRA on the same terms to all 
employees with a work site in State 2 and that class is a 
permissible class under paragraph (d) of this section. This is 
because employees whose work sites are in different rating areas may 
be considered different classes and a plan sponsor may create a 
class of employees by combining classes of employees, including by 
combining employees whose work site is in one rating area with 
employees whose work site is in a different rating area, or by 
combining all employees whose work site is in a state. The minimum 
class size requirement does not apply to this paragraph (f)(1)(vii) 
(Example 7) because the minimum class size requirement does not 
apply if the geographic area defining a class

[[Page 28995]]

of employees is a state or a combination of two or more entire 
states.
    (viii) Example 8: Full-time seasonal employees offered HRA; all 
other full-time employees offered traditional group health plan; 
part-time employees offered no coverage--(A) Facts. Plan Sponsor G 
employs 6 full-time seasonal employees, 75 full-time employees who 
are not seasonal employees, and 5 part-time employees. For 2020, 
Plan Sponsor G offers each of its 6 full-time seasonal employees an 
HRA on the same terms, its 75 full-time employees who are not 
seasonal employees a traditional group health plan, and offers no 
coverage to its 5 part-time employees.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(viii) (Example 
8) because full-time seasonal employees and full-time employees who 
are not seasonal employees may be considered different classes and 
Plan Sponsor G offers the HRA on the same terms to all full-time 
seasonal employees. The minimum class size requirement does not 
apply to the class offered the HRA in this paragraph (f)(1)(viii) 
(Example 8) because part-time employees are not offered coverage and 
full-time employees are not an applicable class subject to the 
minimum class size requirement if part-time employees are not 
offered coverage.
    (ix) Example 9: Full-time employees in rating area 1 offered 
traditional group health plan; full-time employees in rating area 2 
offered HRA; part-time employees offered no coverage--(A) Facts. 
Plan Sponsor H employs 17 full-time employees and 10 part-time 
employees whose work site is in rating area 1 and 552 full-time 
employees whose work site is in rating area 2. For 2020, Plan 
Sponsor H offers its 17 full-time employees in rating area 1 a 
traditional group health plan and each of its 552 full-time 
employees in rating area 2 an HRA on the same terms. Plan Sponsor H 
offers no coverage to its 10 part-time employees in rating area 1. 
Plan Sponsor H reasonably expects to employ 569 employees on the 
first day of the HRA plan year.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(ix) (Example 
9) because employees whose work sites are in different rating areas 
may be considered different classes and Plan Sponsor H offers the 
HRA on the same terms to all full-time employees in rating area 2. 
The minimum class size requirement applies to the class offered the 
HRA in this paragraph (f)(1)(ix) (Example 9) because the minimum 
class size requirement applies to a class based on a geographic area 
unless the geographic area is a state or a combination of two or 
more entire states. However, the minimum class size requirement 
applies only to the class offered the HRA, and Plan Sponsor H offers 
the HRA to the 552 full-time employees in rating area 2 on the first 
day of the plan year, satisfying the minimum class size requirement 
(because the applicable class size minimum for Plan Sponsor H is 
20).
    (x) Example 10: Employees in rating area 1 offered HRA; 
employees in rating area 2 offered traditional group health plan--
(A) Facts. The facts are the same as in paragraph (f)(1)(ix) of this 
section (Example 9) except that Plan Sponsor H offers its 17 full-
time employees in rating area 1 the HRA and offers its 552 full-time 
employees in rating area 2 the traditional group health plan.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(x) 
(Example 10) because, even though employees whose work sites are in 
different rating areas generally may be considered different classes 
and Plan Sponsor H offers the HRA on the same terms to all 
participants in rating area 1, the HRA fails to satisfy the minimum 
class size requirement. Specifically, the minimum class size 
requirement applies to this paragraph (f)(1)(x) (Example 10) because 
the minimum class size requirement applies to a class based on a 
geographic area unless the geographic area is a state or a 
combination of two or more entire states. Further, the applicable 
class size minimum for Plan Sponsor H is 20 employees, and the HRA 
is only offered to the 17 full-time employees in rating area 1 on 
the first day of the HRA plan year.
    (xi) Example 11: Employees in State 1 and rating area 1 of State 
2 offered HRA; employees in all other rating areas of State 2 
offered traditional group health plan--(A) Facts. For 2020, Plan 
Sponsor I offers an HRA on the same terms to a total of 200 
employees it employs with work sites in State 1 and in rating area 1 
of State 2. Plan Sponsor I offers a traditional group health plan to 
its 150 employees with work sites in other rating areas in State 2. 
Plan Sponsor I reasonably expects to employ 350 employees on the 
first day of the HRA plan year.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(xi) (Example 
11). Plan Sponsor I may treat all of the employees with a work site 
in State 1 and rating area 1 of State 2 as a class of employees 
because employees whose work sites are in different rating areas may 
be considered different classes and a plan sponsor may create a 
class of employees by combining classes of employees, including by 
combining employees whose work site is in one rating area with a 
class of employees whose work site is in a different rating area. 
The minimum class size requirement applies to the class of employees 
offered the HRA (made up of employees in State 1 and in rating area 
1 of State 2) because the minimum class size requirement applies to 
a class based on a geographic area unless the geographic area is a 
state or a combination of two or more entire states. In this case, 
the class is made up of a state plus a rating area which is not the 
entire state. However, this class satisfies the minimum class size 
requirement because the applicable class size minimum for Plan 
Sponsor I is 20, and Plan Sponsor I offered the HRA to 200 employees 
on the first day of the plan year.
    (xii) Example 12: Salaried employees offered a traditional group 
health plan; hourly employees offered an HRA--(A) Facts. Plan 
Sponsor J has 163 salaried employees and 14 hourly employees. For 
2020, Plan Sponsor J offers its 163 salaried employees a traditional 
group health plan and each of its 14 hourly employees an HRA on the 
same terms. Plan Sponsor J reasonably expects to employ 177 
employees on the first day of the HRA plan year.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(xii) 
(Example 12) because, even though salaried and hourly employees 
generally may be considered different classes and Plan Sponsor J 
offers the HRA on the same terms to all hourly employees, the HRA 
fails to satisfy the minimum class size requirement. Specifically, 
the minimum class size requirement applies in this paragraph 
(f)(1)(xii) (Example 12) because employees who are paid on a 
salaried basis and employees who are not paid on a salaried basis 
are applicable classes subject to the minimum class size 
requirement. Because Plan Sponsor J reasonably expects to employ 
between 100 and 200 employees on the first day of the plan year, the 
applicable class size minimum is 10 percent, rounded down to a whole 
number. Ten percent of 177 total employees, rounded down to a whole 
number is 17, and the HRA is offered to only 14 hourly employees.
    (xiii) Example 13: Part-time employees and full-time employees 
offered different HRAs; no traditional group health plan offered--
(A) Facts. Plan Sponsor K has 50 full-time employees and 7 part-time 
employees. For 2020, Plan Sponsor K offers its 50 full-time 
employees $2,000 each in an HRA otherwise provided on the same terms 
and each of its 7 part-time employees $500 in an HRA otherwise 
provided on the same terms. Plan Sponsor K reasonably expects to 
employ 57 employees on the first day of the HRA plan year.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(xiii) (Example 
13) because full-time employees and part-time employees may be 
treated as different classes and Plan Sponsor K offers an HRA on the 
same terms to all the participants in each class. The minimum class 
size requirement does not apply to either the full-time class or the 
part-time class because (although in certain circumstances the 
minimum class size requirement applies to a class of full-time 
employees and a class of part-time employees) Plan Sponsor K does 
not offer any class of employees a traditional group health plan, 
and the minimum class size requirement applies only when, among 
other things, at least one class of employees is offered a 
traditional group health plan while another class is offered an HRA.
    (xiv) Example 14: No employees offered an HRA--(A) Facts. The 
facts are the same facts as in paragraph (f)(1)(xiii) of this 
section (Example 13), except that Plan Sponsor K offers its full-
time employees a traditional group health plan and does not offer 
any group health plan (either a traditional group health plan or an 
HRA) to its part-time employees.
    (B) Conclusion. The regulations set forth under this section do 
not apply to Plan Sponsor K because Plan Sponsor K does not offer an 
individual coverage HRA to any employee.

[[Page 28996]]

    (xv) Example 15: Full-time employees offered traditional group 
health plan; part-time employees offered HRA--(A) Facts. The facts 
are the same as in paragraph (f)(1)(xiii) of this section (Example 
13), except that Plan Sponsor K offers its full-time employees a 
traditional group health plan and offers each of its part-time 
employees $500 in an HRA and otherwise on the same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(xv) 
(Example 15) because, even though the full-time employees and the 
part-time employees generally may be treated as different classes, 
in this paragraph (f)(1)(xv) (Example 15), the minimum class size 
requirement applies to the part-time employees, and it is not 
satisfied. Specifically, the minimum class size requirement applies 
to the part-time employees because that requirement applies to an 
applicable class offered an HRA when one class is offered a 
traditional group health plan while another class is offered an HRA, 
and to the part-time and full-time employee classes when one of 
those classes is offered a traditional group health plan while the 
other is offered an HRA. Because Plan Sponsor K reasonably expects 
to employ fewer than 100 employees on the first day of the HRA plan 
year, the applicable class size minimum for Plan Sponsor K is 10 
employees, but Plan Sponsor K offered the HRA only to its 7 part-
time employees.
    (xvi) Example 16: Satisfying minimum class size requirement 
based on employees offered HRA--(A) Facts. Plan Sponsor L employs 78 
full-time employees and 12 part-time employees. For 2020, Plan 
Sponsor L offers its 78 full-time employees a traditional group 
health plan and each of its 12 part-times employees an HRA on the 
same terms. Only 6 part-time employees enroll in the HRA. Plan 
Sponsor L reasonably expects to employ fewer than 100 employees on 
the first day of the HRA plan year.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(xvi) (Example 
16) because full-time employees and part-time employees may be 
treated as different classes, Plan Sponsor L offers an HRA on the 
same terms to all the participants in the part-time class, and the 
minimum class size requirement is satisfied. Specifically, whether a 
class of employees satisfies the applicable class size minimum is 
determined as of the first day of the plan year based on the number 
of employees in a class that is offered an HRA, not on the number of 
employees who enroll in the HRA. The applicable class size minimum 
for Plan Sponsor L is 10 employees, and Plan Sponsor L offered the 
HRA to its 12 part-time employees.
    (xvii) Example 17: Student employees offered student premium 
reduction arrangements and same terms requirement--(A) Facts. Plan 
Sponsor M is an institution of higher education that offers each of 
its part-time employees an HRA on the same terms, except that it 
offers its part-time employees who are student employees a student 
premium reduction arrangement, and the student premium reduction 
arrangement provides different amounts to different part-time 
student employees.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(xvii) (Example 
17) because Plan Sponsor M offers the HRA on the same terms to its 
part-time employees who are not students and because the part-time 
student employees offered a student premium reduction arrangement 
(and their varying HRAs) are not taken into account as part-time 
employees for purposes of determining whether a class of employees 
is offered an HRA on the same terms.
    (xiii) Example 18: Student employees offered student premium 
reduction arrangements and minimum class size requirement--(A) 
Facts. Plan Sponsor N is an institution of higher education with 25 
hourly employees. Plan Sponsor N offers 15 of its hourly employees, 
who are student employees, a student premium reduction arrangement 
and it wants to offer its other 10 hourly employees an HRA for 2022. 
Plan Sponsor N offers its salaried employees a traditional group 
health plan. Plan Sponsor N reasonably expects to have 250 employees 
on the first day of the 2022 HRA plan year, 15 of which will have 
offers of student premium reduction arrangements.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(xviii) 
(Example 18). The minimum class size requirement will apply to the 
class of hourly employees to which Plan Sponsor N wants to offer the 
HRA because Plan Sponsor N offers a class of employees a traditional 
group health plan and another class the HRA, and the minimum class 
size requirement generally applies to a class of hourly employees 
offered an HRA. Plan Sponsor N's applicable class size minimum is 20 
because Plan Sponsor N reasonably expects to employ 235 employees on 
the first day of the plan year (250 employees minus 15 employees 
receiving a student premium reduction arrangement). Plan Sponsor N 
may not offer the HRA to its hourly employees because the 10 
employees offered the HRA as of the first day of the plan year does 
not satisfy the applicable class size minimum.

    (2) Examples regarding special rule for new hires. The following 
examples illustrate the provisions of paragraph (c)(3) of this section, 
taking into account the provisions of paragraph (d) of this section, in 
particular the special rule for new hires under paragraph (d)(5) of 
this section. In each example, the HRA is an individual coverage HRA 
that has a calendar year plan year and may reimburse any medical care 
expenses, including premiums for individual health insurance coverage. 
The examples also assume that no participants or dependents are 
Medicare beneficiaries.

    (i) Example 1: Application of special rule for new hires to all 
employees--(A) Facts. For 2021, Plan Sponsor A offers all employees 
a traditional group health plan. For 2022, Plan Sponsor A offers all 
employees hired on or after January 1, 2022, an HRA on the same 
terms and continues to offer the traditional group health plan to 
employees hired before that date. On the first day of the 2022 plan 
year, Plan Sponsor A has 2 new hires who are offered the HRA.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(2)(i) (Example 1) 
because, under the special rule for new hires in paragraph (d)(5) of 
this section, the employees newly hired on and after January 1, 
2022, may be treated as a new hire subclass, Plan Sponsor A offers 
the HRA on the same terms to all participants in the new hire 
subclass, and the minimum class size requirement does not apply to 
the new hire subclass.
    (ii) Example 2: Application of special rule for new hires to 
full-time employees--(A) Facts. For 2021, Plan Sponsor B offers a 
traditional group health plan to its full-time employees and does 
not offer any coverage to its part-time employees. For 2022, Plan 
Sponsor B offers full-time employees hired on or after January 1, 
2022, an HRA on the same terms, continues to offer its full-time 
employees hired before that date a traditional group health plan, 
and continues to offer no coverage to its part-time employees. On 
the first day of the 2022 plan year, Plan Sponsor B has 2 new hire, 
full-time employees who are offered the HRA.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(2)(ii) (Example 
2) because, under the special rule for new hires in paragraph (d)(5) 
of this section, the full-time employees newly hired on and after 
January 1, 2022, may be treated as a new hire subclass and Plan 
Sponsor B offers the HRA on the same terms to all participants in 
the new hire subclass. The minimum class size requirement does not 
apply to the new hire subclass.
    (iii) Example 3: Special rule for new hires impermissibly 
applied retroactively--(A) Facts. For 2025, Plan Sponsor C offers a 
traditional group health plan to its full-time employees. For 2026, 
Plan Sponsor C wants to offer an HRA to its full-time employees 
hired on and after January 1, 2023, while continuing to offer a 
traditional group health plan to its full-time employees hired 
before January 1, 2023.
    (B) Conclusion. The special rule for new hires under paragraph 
(d)(5) of this section does not apply in this paragraph (f)(2)(iii) 
(Example 3) because the rule must be applied prospectively. That is, 
Plan Sponsor C may not, in 2026, choose to apply the special rule 
for new hires retroactive to 2023. If Plan Sponsor C were to offer 
an HRA in this way, it would fail to satisfy the conditions under 
paragraphs (c)(2) and (3) of this section because the new hire 
subclass would not be treated as a subclass for purposes of applying 
those rules and, therefore, all full-time employees would be treated 
as one class to which either a traditional group health plan or an 
HRA could be offered, but not both.
    (iv) Example 4: Permissible second application of the special 
rule for new hires to the same class of employees--(A) Facts. For 
2021, Plan Sponsor D offers all of its full-time employees a 
traditional group health

[[Page 28997]]

plan. For 2022, Plan Sponsor D applies the special rule for new 
hires and offers an HRA on the same terms to all employees hired on 
and after January 1, 2022, and continues to offer a traditional 
group health plan to full-time employees hired before that date. For 
2025, Plan Sponsor D discontinues use of the special rule for new 
hires, and again offers all full-time employees a traditional group 
health plan. In 2030, Plan Sponsor D decides to apply the special 
rule for new hires to the full-time employee class again, offering 
an HRA to all full-time employees hired on and after January 1, 
2030, on the same terms, while continuing to offer employees hired 
before that date a traditional group health plan.
    (B) Conclusion. Plan Sponsor D has permissibly applied the 
special rule for new hires and is in compliance with the 
requirements of paragraphs (c)(2) and (3) of this section.
    (v) Example 5: Impermissible second application of the special 
rule for new hires to the same class of employees--(A) Facts. The 
facts are the same as in paragraph (f)(2)(iv) of this section 
(Example 4), except that for 2025, Plan Sponsor D discontinues use 
of the special rule for new hires by offering all full-time 
employees an HRA on the same terms. Further, for 2030, Plan Sponsor 
D wants to continue to offer an HRA on the same terms to all full-
time employees hired before January 1, 2030, and to offer all full-
time employees hired on or after January 1, 2030, an HRA in a 
different amount.
    (B) Conclusion. Plan Sponsor D may not apply the special rule 
for new hires for 2030 to the class of full-time employees being 
offered an HRA because the special rule for new hires may only be 
applied to a class that is being offered a traditional group health 
plan.
    (vi) Example 6: New full-time employees offered different HRAs 
in different rating areas--(A) Facts. Plan Sponsor E has work sites 
in rating area 1, rating area 2, and rating area 3. For 2021, Plan 
Sponsor E offers its full-time employees a traditional group health 
plan. For 2022, Plan Sponsor E offers its full-time employees hired 
on or after January 1, 2022, in rating area 1 an HRA of $3,000, its 
full-time employees hired on or after January 1, 2022, in rating 
area 2 an HRA of $5,000, and its full-time employees hired on or 
after January 1, 2022, in rating area 3 an HRA of $7,000. Within 
each class offered an HRA, Plan Sponsor E offers the HRA on the same 
terms. Plan Sponsor E offers its full-time employees hired prior to 
January 1, 2022, in each of those classes a traditional group health 
plan. On the first day of the 2022 plan year, there is one new hire, 
full-time employee in rating area 1, three new hire, full-time 
employees in rating area 2, and 10 new hire-full-time employees in 
rating area 3.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(2)(vi) (Example 
6) because, under the special rule for new hires in paragraph (d)(5) 
of this section, the full-time employees in each of the three rating 
areas newly hired on and after January 1, 2022, may be treated as 
three new hire subclasses and Plan Sponsor E offers the HRA on the 
same terms to all participants in the new hire subclasses. Further, 
the minimum class size requirement does not apply to the new hire 
subclasses.
    (vii) Example 7: New full-time employee class subdivided based 
on rating area--(A) Facts. Plan Sponsor F offers its full-time 
employees hired on or after January 1, 2022, an HRA on the same 
terms and it continues to offer its full-time employees hired before 
that date a traditional group health plan. Plan Sponsor F offers no 
coverage to its part-time employees. For the 2025 plan year, Plan 
Sponsor F wants to subdivide the full-time new hire subclass so that 
those whose work site is in rating area 1 will be offered the 
traditional group health plan and those whose work site is in rating 
area 2 will continue to receive the HRA. Plan Sponsor F reasonably 
expects to employ 219 employees on January 1, 2025. As of January 1, 
2025, Plan Sponsor F has 15 full-time employees whose work site in 
in rating area 2 and who were hired between January 1, 2022, and 
January 1, 2025.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(2)(vii) 
(Example 7) because the new hire subclass has been subdivided in a 
manner that is subject to the minimum class size requirement, and 
the class offered the HRA fails to satisfy the minimum class size 
requirement. Specifically, once the new hire subclass is subdivided 
the general rules for applying the minimum class size requirement 
apply to the employees offered the HRA in the new hire subclass. In 
this case, because the subdivision of the new hire full-time 
subclass is based on rating areas; a class based on rating areas is 
an applicable class subject to the minimum class size requirement; 
and the employees in one rating area are to be offered the HRA, 
while the employees in the other rating area are offered the 
traditional group health plan, the minimum class size requirement 
would apply on and after the date of the subdivision. Further, the 
minimum class size requirement would not be satisfied, because the 
applicable class size minimum for Plan Sponsor F would be 20, and 
only 15 employees in rating area 2 would be offered the HRA.
    (viii) Example 8: New full-time employee class subdivided based 
on state--(A) Facts. The facts are the same as in paragraph 
(f)(2)(vii) of this section (Example 7), except that for the 2025 
plan year, Plan Sponsor F intends to subdivide the new hire, full-
time class so that those in State 1 will be offered the traditional 
group health plan and those in State 2 will each be offered an HRA 
on the same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(2)(viii) (Example 
8) because even though the new hire subclass has been subdivided, it 
has been subdivided in a manner that is not subject to the minimum 
class size requirement as the subdivision is based on the entire 
state.
    (ix) Example 9: New full-time employees and part-time employees 
offered HRA--(A) Facts. In 2021, Plan Sponsor G offers its full-time 
employees a traditional group health plan and does not offer 
coverage to its part-time employees. For the 2022 plan year, Plan 
Sponsor G offers its full-time employees hired on or after January 
1, 2022, and all of its part-time employees, including those hired 
before January 1, 2022, and those hired on and after January 1, 
2022, an HRA on the same terms, and it continues to offer its full-
time employees hired before January 1, 2022, a traditional group 
health plan.
    (B) Conclusion. The minimum class size requirement applies to 
the part-time employees offered the HRA in 2022 because the class is 
being offered an HRA; the special rule for new hires does not apply 
(because this class was not previously offered a traditional group 
health plan) and so it is not a new hire subclass exempt from the 
minimum class size requirement; another class of employees (that is, 
full-time hired before January 1, 2022) are being offered a 
traditional group health plan; and the part-time employee class is 
generally an applicable classes that is subject to the minimum class 
size requirement. However, because the full-time, new hire subclass 
is based on the special rule for new hires, the minimum class size 
requirement does not apply to full-time new hires offered an HRA in 
2022.

    (g) Applicability date. This section applies to plan years 
beginning on or after January 1, 2020.
0
Par. 7. Section[thinsp]54.9815-2711 is amended by revising paragraphs 
(c), (d), and (e) to read as follows:


Sec.  54.9815-2711  No lifetime or annual limits.

* * * * *
    (c) Definition of essential health benefits. The term ``essential 
health benefits'' means essential health benefits under section 1302(b) 
of the Patient Protection and Affordable Care Act and applicable 
regulations. For the purpose of this section, a group health plan or a 
health insurance issuer that is not required to provide essential 
health benefits under section 1302(b) must define ``essential health 
benefits'' in a manner that is consistent with the following:
    (1) For plan years beginning before January 1, 2020, one of the 
EHB-benchmark plans applicable in a State under 45 CFR 156.110, and 
including coverage of any additional required benefits that are 
considered essential health benefits consistent with 45 CFR 
155.170(a)(2), or one of the three Federal Employees Health Benefits 
Program (FEHBP) plan options as defined by 45 CFR 156.100(a)(3), 
supplemented as necessary, to satisfy the standards in 45 CFR 156.110; 
or
    (2) For plan years beginning on or after January 1, 2020, an EHB-
benchmark plan selected by a State in accordance with the available 
options and requirements for EHB-benchmark

[[Page 28998]]

plan selection at 45 CFR 156.111, including an EHB-benchmark plan in a 
State that takes no action to change its EHB-benchmark plan and thus 
retains the EHB-benchmark plan applicable in that State for the prior 
year in accordance with 45 CFR 156.111(d)(1), and including coverage of 
any additional required benefits that are considered essential health 
benefits consistent with 45 CFR 155.170(a)(2).
    (d) Health reimbursement arrangements (HRAs) and other account-
based group health plans--(1) In general. If an HRA or other account-
based group health plan is integrated with another group health plan or 
individual health insurance coverage and the other group health plan or 
individual health insurance coverage, as applicable, separately is 
subject to and satisfies the requirements in PHS Act section 2711 and 
paragraph (a)(2) of this section, the fact that the benefits under the 
HRA or other account-based group health plan are limited does not cause 
the HRA or other account-based group health plan to fail to satisfy the 
requirements of PHS Act section 2711 and paragraph (a)(2) of this 
section. Similarly, if an HRA or other account-based group health plan 
is integrated with another group health plan or individual health 
insurance coverage and the other group health plan or individual health 
insurance coverage, as applicable, separately is subject to and 
satisfies the requirements in PHS Act section 2713 and Sec.  54.9815-
2713(a)(1) of this chapter, the fact that the benefits under the HRA or 
other account-based group health plan are limited does not cause the 
HRA or other account-based group health plan to fail to satisfy the 
requirements of PHS Act section 2713 and Sec.  54.9815-2713(a)(1) of 
this chapter. For the purpose of this paragraph (d), all individual 
health insurance coverage, except for coverage that consists solely of 
excepted benefits, is treated as being subject to and complying with 
PHS Act sections 2711 and 2713.
    (2) Requirements for an HRA or other account-based group health 
plan to be integrated with another group health plan. An HRA or other 
account-based group health plan is integrated with another group health 
plan for purposes of PHS Act section 2711 and paragraph (a)(2) of this 
section if it satisfies the requirements under one of the integration 
methods set forth in paragraph (d)(2)(i) or (ii) of this section. For 
purposes of the integration methods under which an HRA or other 
account-based group health plan is integrated with another group health 
plan, integration does not require that the HRA or other account-based 
group health plan and the other group health plan with which it is 
integrated share the same plan sponsor, the same plan document or 
governing instruments, or file a single Form 5500, if applicable. An 
HRA or other account-based group health plan integrated with another 
group health plan for purposes of PHS Act section 2711 and paragraph 
(a)(2) of this section may not be used to purchase individual health 
insurance coverage unless that coverage consists solely of excepted 
benefits, as defined in 45 CFR 148.220.
    (i) Method for integration with a group health plan: Minimum value 
not required. An HRA or other account-based group health plan is 
integrated with another group health plan for purposes of this 
paragraph (d) if:
    (A) The plan sponsor offers a group health plan (other than the HRA 
or other account-based group health plan) to the employee that does not 
consist solely of excepted benefits;
    (B) The employee receiving the HRA or other account-based group 
health plan is actually enrolled in a group health plan (other than the 
HRA or other account-based group health plan) that does not consist 
solely of excepted benefits, regardless of whether the plan is offered 
by the same plan sponsor (referred to as non-HRA group coverage);
    (C) The HRA or other account-based group health plan is available 
only to employees who are enrolled in non-HRA group coverage, 
regardless of whether the non-HRA group coverage is offered by the plan 
sponsor of the HRA or other account-based group health plan (for 
example, the HRA may be offered only to employees who do not enroll in 
an employer's group health plan but are enrolled in other non-HRA group 
coverage, such as a group health plan maintained by the employer of the 
employee's spouse);
    (D) The benefits under the HRA or other account-based group health 
plan are limited to reimbursement of one or more of the following--co-
payments, co-insurance, deductibles, and premiums under the non-HRA 
group coverage, as well as medical care expenses that do not constitute 
essential health benefits as defined in paragraph (c) of this section; 
and
    (E) Under the terms of the HRA or other account-based group health 
plan, an employee (or former employee) is permitted to permanently opt 
out of and waive future reimbursements from the HRA or other account-
based group health plan at least annually and, upon termination of 
employment, either the remaining amounts in the HRA or other account-
based group health plan are forfeited or the employee is permitted to 
permanently opt out of and waive future reimbursements from the HRA or 
other account-based group health plan (see paragraph (d)(3) of this 
section for additional rules regarding forfeiture and waiver).
    (ii) Method for integration with another group health plan: Minimum 
value required. An HRA or other account-based group health plan is 
integrated with another group health plan for purposes of this 
paragraph (d) if:
    (A) The plan sponsor offers a group health plan (other than the HRA 
or other account-based group health plan) to the employee that provides 
minimum value pursuant to section 36B(c)(2)(C)(ii) (and its 
implementing regulations and applicable guidance);
    (B) The employee receiving the HRA or other account-based group 
health plan is actually enrolled in a group health plan (other than the 
HRA or other account-based group health plan) that provides minimum 
value pursuant to section 36B(c)(2)(C)(ii) (and applicable guidance), 
regardless of whether the plan is offered by the plan sponsor of the 
HRA or other account-based group health plan (referred to as non-HRA MV 
group coverage);
    (C) The HRA or other account-based group health plan is available 
only to employees who are actually enrolled in non-HRA MV group 
coverage, regardless of whether the non-HRA MV group coverage is 
offered by the plan sponsor of the HRA or other account-based group 
health plan (for example, the HRA may be offered only to employees who 
do not enroll in an employer's group health plan but are enrolled in 
other non-HRA MV group coverage, such as a group health plan maintained 
by an employer of the employee's spouse); and
    (D) Under the terms of the HRA or other account-based group health 
plan, an employee (or former employee) is permitted to permanently opt 
out of and waive future reimbursements from the HRA or other account-
based group health plan at least annually, and, upon termination of 
employment, either the remaining amounts in the HRA or other account-
based group health plan are forfeited or the employee is permitted to 
permanently opt out of and waive future reimbursements from the HRA or 
other account-based group health plan (see paragraph (d)(3) of this 
section for additional rules regarding forfeiture and waiver).
    (3) Forfeiture. For purposes of integration under paragraphs 
(d)(2)(i)(E) and (d)(2)(ii)(D) of this section, forfeiture or waiver 
occurs even if the

[[Page 28999]]

forfeited or waived amounts may be reinstated upon a fixed date, a 
participant's death, or the earlier of the two events (the 
reinstatement event). For the purpose of this paragraph (d)(3), 
coverage under an HRA or other account-based group health plan is 
considered forfeited or waived prior to a reinstatement event only if 
the participant's election to forfeit or waive is irrevocable, meaning 
that, beginning on the effective date of the election and through the 
date of the reinstatement event, the participant and the participant's 
beneficiaries have no access to amounts credited to the HRA or other 
account-based group health plan. This means that upon and after 
reinstatement, the reinstated amounts under the HRA or other account-
based group health plan may not be used to reimburse or pay medical 
care expenses incurred during the period after forfeiture and prior to 
reinstatement.
    (4) Requirements for an HRA or other account-based group health 
plan to be integrated with individual health insurance coverage or 
Medicare Part A and B or Medicare Part C. An HRA or other account-based 
group health plan is integrated with individual health insurance 
coverage or Medicare Part A and B or Medicare Part C (and treated as 
complying with PHS Act sections 2711 and 2713) if the HRA or other 
account-based group health plan satisfies the requirements of Sec.  
54.9802-4(c) of this chapter (as modified by Sec.  54.9802-4(e), for 
HRAs or other account-based group health plans integrated with Medicare 
Part A and B or Medicare Part C).
    (5) Integration with Medicare Part B and D. For employers that are 
not required to offer their non-HRA group health plan coverage to 
employees who are Medicare beneficiaries, an HRA or other account-based 
group health plan that may be used to reimburse premiums under Medicare 
Part B or D may be integrated with Medicare (and deemed to comply with 
PHS Act sections 2711 and 2713) if the following requirements are 
satisfied with respect to employees who would be eligible for the 
employer's non-HRA group health plan but for their eligibility for 
Medicare (and the integration rules under paragraphs (d)(2)(i) and (ii) 
of this section continue to apply to employees who are not eligible for 
Medicare):
    (i) The plan sponsor offers a group health plan (other than the HRA 
or other account-based group health plan and that does not consist 
solely of excepted benefits) to employees who are not eligible for 
Medicare;
    (ii) The employee receiving the HRA or other account-based group 
health plan is actually enrolled in Medicare Part B or D;
    (iii) The HRA or other account-based group health plan is available 
only to employees who are enrolled in Medicare Part B or D; and
    (iv) The HRA or other account-based group health plan complies with 
paragraphs (d)(2)(i)(E) and (d)(2)(ii)(D) of this section.
    (6) Definitions. The following definitions apply for purposes of 
this section.
    (i) Account-based group health plan. An account-based group health 
plan is an employer-provided group health plan that provides 
reimbursements of medical care expenses with the reimbursement subject 
to a maximum fixed dollar amount for a period. An HRA is a type of 
account-based group health plan. An account-based group health plan 
does not include a qualified small employer health reimbursement 
arrangement, as defined in section 9831(d)(2).
    (ii) Medical care expenses. Medical care expenses means expenses 
for medical care as defined under section 213(d).
    (e) Applicability date. The provisions of this section are 
applicable to group health plans and health insurance issuers for plan 
years beginning on or after January 1, 2020. Until the applicability 
date for this section, plans and issuers are required to continue to 
comply with the corresponding sections of 26 CFR part 54, contained in 
the 26 CFR, subchapter D, revised as of April 1, 2018.

0
Par. 8. Section 54.9831-1 is amended by revising paragraph (c)(3)(i) 
and adding paragraph (c)(3)(viii) to read as follows:


Sec.  54.9831-1  Special rules relating to group health plans.

* * * * *
    (c) * * *
    (3) * * *
    (i) In general. Limited-scope dental benefits, limited-scope vision 
benefits, or long-term care benefits are excepted if they are provided 
under a separate policy, certificate, or contract of insurance, or are 
otherwise not an integral part of a group health plan as described in 
paragraph (c)(3)(ii) of this section. In addition, benefits provided 
under a health flexible spending arrangement (health FSA) are excepted 
benefits if they satisfy the requirements of paragraph (c)(3)(v) of 
this section; benefits provided under an employee assistance program 
are excepted benefits if they satisfy the requirements of paragraph 
(c)(3)(vi) of this section; benefits provided under limited wraparound 
coverage are excepted benefits if they satisfy the requirements of 
paragraph (c)(3)(vii) of this section; and benefits provided under a 
health reimbursement arrangement or other account-based group health 
plan, other than a health FSA, are excepted benefits if they satisfy 
the requirements of paragraph (c)(3)(viii) of this section.
* * * * *
    (viii) Health reimbursement arrangements (HRAs) and other account-
based group health plans. Benefits provided under an HRA or other 
account-based group health plan, other than a health FSA, are excepted 
if they satisfy all of the requirements of this paragraph (c)(3)(viii). 
See paragraph (c)(3)(v) of this section for the circumstances in which 
benefits provided under a health FSA are excepted benefits. For 
purposes of this paragraph (c)(3)(viii), the term ``HRA or other 
account-based group health plan'' has the same meaning as ``account-
based group health plan'' set forth in Sec.  54.9815-2711(d)(6)(i) of 
this part, except that the term does not include health FSAs. For ease 
of reference, an HRA or other account-based group health plan that 
satisfies the requirements of this paragraph (c)(3)(viii) is referred 
to as an excepted benefit HRA.
    (A) Otherwise not an integral part of the plan. Other group health 
plan coverage that is not limited to excepted benefits and that is not 
an HRA or other account-based group health plan must be made available 
by the same plan sponsor for the plan year to the participant.
    (B) Benefits are limited in amount--(1) Limit on annual amounts 
made available. The amounts newly made available for each plan year 
under the HRA or other account-based group health plan do not exceed 
$1,800. In the case of any plan year beginning after December 31, 2020, 
the dollar amount in the preceding sentence shall be increased by an 
amount equal to such dollar amount multiplied by the cost-of-living 
adjustment. The cost of living adjustment is the percentage (if any) by 
which the C-CPI-U for the preceding calendar year exceeds the C-CPI-U 
for calendar year 2019. The term ``C-CPI-U'' means the Chained Consumer 
Price Index for All Urban Consumers as published by the Bureau of Labor 
Statistics of the Department of Labor. The C-CPI-U for any calendar 
year is the average of the C-CPI-U as of the close of the 12-month 
period ending on March 31 of such calendar year. The values of the C-
CPI-U used for any calendar year shall be the latest values

[[Page 29000]]

so published as of the date on which the Bureau publishes the initial 
value of the C-CPI-U for the month of March for the preceding calendar 
year. Any such increase that is not a multiple of $50 shall be rounded 
down to the next lowest multiple of $50. The Department of the Treasury 
and the Internal Revenue Service will publish the adjusted amount for 
plan years beginning in any calendar year no later than June 1 of the 
preceding calendar year.
    (2) Carryover amounts. If the terms of the HRA or other account-
based group health plan allow unused amounts to be made available to 
participants and dependents in later plan years, such carryover amounts 
are disregarded for purposes of determining whether benefits are 
limited in amount.
    (3) Multiple HRAs or other account-based group health plans. If the 
plan sponsor provides more than one HRA or other account-based group 
health plan to the participant for the same time period, the amounts 
made available under all such plans are aggregated to determine whether 
the benefits are limited in amount, except that HRAs or other account-
based group health plans that reimburse only excepted benefits are not 
included in determining whether the benefits are limited in amount.
    (C) Prohibition on reimbursement of certain health insurance 
premiums. The HRA or other account-based group health plan must not 
reimburse premiums for individual health insurance coverage, group 
health plan coverage (other than COBRA continuation coverage or other 
continuation coverage), or Medicare Part A, B, C, or D, except that the 
HRA or other account-based group health plan may reimburse premiums for 
such coverage that consists solely of excepted benefits. See also, 
paragraph (c)(3)(viii)(F) of this section.
    (D) Uniform availability. The HRA or other account-based group 
health plan is made available under the same terms to all similarly 
situated individuals, as defined in Sec.  54.9802-1(d) of this part, 
regardless of any health factor (as described in Sec.  54.9802-1(a)).
    (E) Notice requirement. See 29 CFR 2520.102-3(j)(2) and (3) and 29 
CFR 2520.104b-2(a) for rules regarding the time, manner, and content 
for summary plan descriptions (including a description of conditions 
pertaining to eligibility to receive benefits; annual or lifetime caps 
or other limits on benefits under the plan; and a description or 
summary of the benefits) applicable to plans subject to Tile I of the 
Employee Retirement Income Security Act of 1974, as amended.
    (F) Special rule. The HRA or other account-based group health plan 
must not reimburse premiums for short-term, limited-duration insurance 
(as defined in Sec.  54.9801-2 of this part) if the conditions of this 
paragraph (c)(3)(viii)(F) are satisfied.
    (1) The HRA or other account-based group health plan is offered by 
a small employer (as defined in PHS Act section 2791(e)(4)).
    (2) The other group health plan coverage offered by the employer 
pursuant to paragraph (c)(3)(viii)(A) of this section is either fully-
insured or partially-insured.
    (3) The Secretary of Health and Human Services (HHS) makes a 
finding, in consultation with the Secretaries of Labor and the 
Treasury, that the reimbursement of premiums for short-term, limited-
duration insurance by excepted benefit HRAs has caused significant harm 
to the small group market in the state that is the principal place of 
business of the small employer.
    (4) The finding by the Secretary of HHS is made after submission of 
a written recommendation by the applicable state authority of such 
state, in a form and manner specified by HHS. The written 
recommendation must include evidence that the reimbursement of premiums 
for short-term, limited-duration insurance by excepted benefit HRAs 
established by insured or partially-insured small employers in the 
state has caused significant harm to the state's small group market, 
including with respect to premiums.
    (5) The restriction shall be imposed or discontinued by publication 
by the Secretary of HHS of a notice in the Federal Register and shall 
apply only prospectively and with a reasonable time for plan sponsors 
to comply.
* * * * *

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Chapter XXV

    For the reasons stated in the preamble, the Department of Labor 
amends 29 CFR parts 2510 and 2590 as set forth below:

PART 2510--DEFINITION OF TERMS USED IN SUBCHAPTERS C, D, E, F, G, 
AND L OF THIS CHAPTER

0
9. The authority citation for part 2510 is revised to read as follows:

    Authority:  29 U.S.C. 1002(1), 1002(3), 1002(2), 1002(5), 
1002(16), 1002(21), 1002(37), 1002(38), 1002(40), 1002(42), 1031, 
and 1135; Secretary of Labor's Order No. 1-2011, 77 FR 1088 (Jan. 9, 
2012); Secs. 2510.3-21, 2510.3-101 and 2510.3-102 also issued under 
sec. 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. at 237 
(2012), E.O. 12108, 44 FR 1065 (Jan. 3, 1979) and 29 U.S.C. 1135 
note. Sec. 2510.3-38 is also issued under sec. 1, Pub. L. 105-72, 
111 Stat. 1457 (1997).


0
10. Section 2510.3-1 is amended by adding paragraph (l) to read as 
follows:


Sec.  2510.3-1  Employee welfare benefit plan.

* * * * *
    (l) Safe harbor for health reimbursement arrangements (HRAs) and 
certain other arrangements that reimburse individual health insurance 
coverage. For purposes of title I of the Act and this chapter, the 
terms ``employee welfare benefit plan'' and ``welfare plan'' shall not 
include individual health insurance coverage the premiums of which are 
reimbursed by a health reimbursement arrangement (HRA) (or other 
account-based group health plan), including an HRA or other account-
based group health plan integrated with individual health insurance 
coverage (as described in Sec.  2590.702-2 of this chapter), an HRA 
that covers fewer than two current employees (as described in Sec.  
2590.732(b) of this chapter) and that reimburses premiums for 
individual health insurance coverage, a qualified small employer health 
reimbursement arrangement (QSEHRA), as defined in section 9831(d)(2) of 
the Code, or an arrangement under which an employer allows employees to 
pay the portion of the premium for individual health insurance coverage 
that is not covered by an HRA or other account-based group health plan 
with which the coverage is integrated by using a salary reduction 
arrangement in a cafeteria plan under section 125 of the Code 
(supplemental salary reduction arrangement), if all the conditions of 
this paragraph (l) are satisfied.
    (1) The purchase of any individual health insurance coverage is 
completely voluntary for participants and beneficiaries. The fact that 
a plan sponsor requires such coverage to be purchased as a condition 
for participation in an HRA or supplemental salary reduction 
arrangement does not make the purchase involuntary.
    (2) The employer, employee organization, or other plan sponsor does 
not select or endorse any particular issuer or insurance coverage. In 
contrast, providing general contact information regarding availability 
of health insurance in a state (such as

[[Page 29001]]

providing information regarding www.HealthCare.gov or contact 
information for a state insurance commissioner's office) or providing 
general health insurance educational information (such as the uniform 
glossary of health coverage and medical terms available at: https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/laws/affordable-care-act/for-employers-and-advisers/sbc-uniform-glossary-of-coverage-and-medical-terms-final.pdf) is permitted.
    (3) Reimbursement for non-group health insurance premiums is 
limited solely to individual health insurance coverage (as defined in 
Sec.  2590.701-2 of this chapter) that does not consist solely of 
excepted benefits (as defined in Sec.  2590.732(c) of this chapter).
    (4) The employer, employee organization, or other plan sponsor 
receives no consideration in the form of cash or otherwise in 
connection with the employee's selection or renewal of any individual 
health insurance coverage.
    (5) Each plan participant is notified annually that the individual 
health insurance coverage is not subject to title I of ERISA. For an 
HRA that is integrated with individual health insurance coverage, the 
notice must satisfy the notice requirement set forth in Sec.  2590.702-
2(c)(6) of this chapter. A QSEHRA or an HRA not subject to the notice 
requirement set forth in Sec.  2590.702-2(c)(6) of this chapter may use 
the following language to satisfy this condition: ``The individual 
health insurance coverage that is paid for by this plan, if any, is not 
subject to the rules and consumer protections of the Employee 
Retirement Income Security Act. You should contact your state insurance 
department for more information regarding your rights and 
responsibilities if you purchase individual health insurance 
coverage.'' A supplemental salary reduction arrangement is not required 
to provide this notice as the notice will be provided by the HRA that 
such an arrangement supplements.

PART 2590--RULES AND REGULATIONS FOR GROUP HEALTH PLANS.

0
11. The authority citation for part 2590 continues to read as follows:

    Authority:  29 U.S.C. 1027, 1059, 1135, 1161-1168, 1169, 1181-
1183, 1181 note, 1185, 1185a, 1185b, 1191, 1191a, 1191b, and 1191c; 
sec. 101(g), Pub. L. 104-191, 110 Stat. 1936; sec. 401(b), Pub. L. 
105-200, 112 Stat. 645 (42 U.S.C. 651 note); sec. 512(d), Pub. L. 
110-343, 122 Stat. 3881; sec. 1001, 1201, and 1562(e), Pub. L. 111-
148, 124 Stat. 119, as amended by Pub. L. 111-152, 124 Stat. 1029; 
Division M, Pub. L. 113-235, 128 Stat. 2130; Secretary of Labor's 
Order 1-2011, 77 FR 1088 (Jan. 9, 2012).


0
12. Section 2590.701-2 is amended by revising the definition of ``group 
health insurance coverage'' to read as follows:


Sec.  2590.701-2  Definitions.

* * * * *
    Group health insurance coverage means health insurance coverage 
offered in connection with a group health plan. Individual health 
insurance coverage reimbursed by the arrangements described in 29 CFR 
2510.3-1(l) is not offered in connection with a group health plan, and 
is not group health insurance coverage, provided all the conditions in 
29 CFR 2510.3-1(l) are satisfied.
* * * * *

0
13. Section 2590.702-2 is added to read as follows:


Sec.  2590.702-2  Special Rule Allowing Integration of Health 
Reimbursement Arrangements (HRAs) and Other Account-Based Group Health 
Plans with Individual Health Insurance Coverage and Medicare and 
Prohibiting Discrimination In HRAs and Other Account-Based Group Health 
Plans.

    (a) Scope. This section applies to health reimbursement 
arrangements (HRAs) and other account-based group health plans, as 
defined in Sec.  2590.715-2711(d)(6)(i) of this part. For ease of 
reference, the term ``HRA'' is used in this section to include other 
account-based group health plans. For related regulations, see 26 CFR 
1.36B-2(c)(3)(i) and (c)(5), 29 CFR 2510.3-1(l), and 45 CFR 155.420.
    (b) Purpose. This section provides the conditions that an HRA must 
satisfy in order to be integrated with individual health insurance 
coverage for purposes of Public Health Service Act (PHS Act) sections 
2711 and 2713 and Sec.  2590.715-2711(d)(4) of this part (referred to 
as an individual coverage HRA). This section also allows an individual 
coverage HRA to be integrated with Medicare for purposes of PHS Act 
sections 2711 and 2713 and Sec.  2590.715-2711(d)(4), subject to the 
conditions provided in this section (see paragraph (e) of this 
section). Some of the conditions set forth in this section specifically 
relate to compliance with PHS Act sections 2711 and 2713 and some 
relate to the effect of having or being offered an individual coverage 
HRA on eligibility for the premium tax credit under section 36B of the 
Code. In addition, this section provides conditions that an individual 
coverage HRA must satisfy in order to comply with the nondiscrimination 
provisions in ERISA section 702 and PHS Act section 2705 (which is 
incorporated in ERISA section 715) and that are consistent with the 
provisions of the Patient Protection and Affordable Care Act, Public 
Law 111-148 (124 Stat. 119 (2010)), and the Health Care and Education 
Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)), 
each as amended, that are designed to create a competitive individual 
market. These conditions are intended to prevent an HRA plan sponsor 
from intentionally or unintentionally, directly or indirectly, steering 
any participants or dependents with adverse health factors away from 
its traditional group health plan, if any, and toward individual health 
insurance coverage.
    (c) General rule. An HRA will be considered to be integrated with 
individual health insurance coverage for purposes of PHS Act sections 
2711 and 2713 and Sec.  2590.715-2711(d)(4) of this part and will not 
be considered to discriminate in violation of ERISA section 702 and PHS 
Act section 2705 solely because it is integrated with individual health 
insurance coverage, provided that the conditions of this paragraph (c) 
are satisfied. See paragraph (e) of this section for how these 
conditions apply to an individual coverage HRA integrated with 
Medicare. For purposes of this section, medical care expenses means 
medical care expenses as defined in Sec.  2590.715-2711(d)(6)(ii) of 
this part and Exchange means Exchange as defined in 45 CFR 155.20.
    (1) Enrollment in individual health insurance coverage--(i) In 
general. The HRA must require that the participant and any dependent(s) 
are enrolled in individual health insurance coverage that is subject to 
and complies with the requirements in PHS Act sections 2711 (and Sec.  
2590.715-2711(a)(2) of this part) and PHS Act section 2713 (and Sec.  
2590.715-2713(a)(1) of this part), for each month that the 
individual(s) are covered by the HRA. For purposes of this paragraph 
(c), all individual health insurance coverage, except for individual 
health insurance coverage that consists solely of excepted benefits, is 
treated as being subject to and complying with PHS Act sections 2711 
and 2713. References to individual health insurance coverage in this 
paragraph (c) do not include individual health insurance coverage that 
consists solely of excepted benefits.
    (ii) Forfeiture. The HRA must provide that if any individual 
covered by the HRA ceases to be covered by individual health insurance 
coverage, the HRA will not reimburse medical care expenses that are 
incurred by that individual after

[[Page 29002]]

the individual health insurance coverage ceases. In addition, if the 
participant and all dependents covered by the participant's HRA cease 
to be covered by individual health insurance coverage, the participant 
must forfeit the HRA. In either case, the HRA must reimburse medical 
care expenses incurred by the individual prior to the cessation of 
individual health insurance coverage to the extent the medical care 
expenses are otherwise covered by the HRA, but the HRA may limit the 
period to submit medical care expenses for reimbursement to a 
reasonable specified time period. If a participant or dependent loses 
coverage under the HRA for a reason other than cessation of individual 
health insurance coverage, COBRA and other continuation coverage 
requirements may apply.
    (iii) Grace periods and retroactive termination of individual 
health insurance coverage. In the event an individual is initially 
enrolled in individual health insurance coverage and subsequently 
timely fails to pay premiums for the coverage, with the result that the 
individual is in a grace period, the individual is considered to be 
enrolled in individual health insurance coverage for purposes of this 
paragraph (c)(1) and the individual coverage HRA must reimburse medical 
care expenses incurred by the individual during that time period to the 
extent the medical care expenses are otherwise covered by the HRA. If 
the individual fails to pay the applicable premium(s) by the end of the 
grace period and the coverage is cancelled or terminated, including 
retroactively, or if the individual health insurance coverage is 
cancelled or terminated retroactively for some other reason (for 
example, a rescission), an individual coverage HRA must require that a 
participant notify the HRA that coverage has been cancelled or 
terminated and the date on which the cancellation or termination is 
effective. After the individual coverage HRA has received the notice of 
cancellation or termination, the HRA may not reimburse medical care 
expenses incurred on and after the date the individual health insurance 
coverage was cancelled or terminated, which is considered to be the 
date of termination of coverage under the HRA.
    (2) No traditional group health plan may be offered to same 
participants. To the extent a plan sponsor offers any class of 
employees (as defined in paragraph (d) of this section) an individual 
coverage HRA, the plan sponsor may not also offer a traditional group 
health plan to the same class of employees, except as provided in 
paragraph (d)(5) of this section. For purposes of this section, a 
traditional group health plan is any group health plan other than 
either an account-based group health plan or a group health plan that 
consists solely of excepted benefits. Therefore, a plan sponsor may not 
offer a choice between an individual coverage HRA or a traditional 
group health plan to any participant or dependent.
    (3) Same terms requirement--(i) In general. If a plan sponsor 
offers an individual coverage HRA to a class of employees described in 
paragraph (d) of this section, the HRA must be offered on the same 
terms to all participants within the class, except as provided in 
paragraphs (c)(3)(ii) through (vi) and (d)(5) of this section.
    (ii) Carryover amounts, salary reduction arrangements, and transfer 
amounts. Amounts that are not used to reimburse medical care expenses 
for any plan year that are made available to participants in later plan 
years are disregarded for purposes of determining whether an HRA is 
offered on the same terms, provided that the method for determining 
whether participants have access to unused amounts in future years, and 
the methodology and formula for determining the amounts of unused funds 
which they may access in future years, is the same for all participants 
in a class of employees. In addition, the ability to pay the portion of 
the premium for individual health insurance coverage that is not 
covered by the HRA, if any, by using a salary reduction arrangement 
under section 125 of the Code is considered to be a term of the HRA for 
purposes of this paragraph (c)(3). Therefore, an HRA is not provided on 
the same terms unless the salary reduction arrangement, if made 
available to any participant in a class of employees, is made available 
on the same terms to all participants (other than former employees, as 
defined in paragraph (c)(3)(iv) of this section) in the class of 
employees. Further, to the extent that a participant in an individual 
coverage HRA was previously covered by another HRA and the current 
individual coverage HRA makes available amounts that were not used to 
reimburse medical care expenses under the prior HRA (transferred 
amounts), the transferred amounts are disregarded for purposes of 
determining whether the HRA is offered on the same terms, provided that 
if the HRA makes available transferred amounts, it does so on the same 
terms for all participants in the class of employees.
    (iii) Permitted variation. An HRA does not fail to be provided on 
the same terms solely because the maximum dollar amount made available 
to participants in a class of employees to reimburse medical care 
expenses for any plan year increases in accordance with paragraph 
(c)(3)(iii)(A) or (B) of this section.
    (A) Variation due to number of dependents. An HRA does not fail to 
be provided on the same terms to participants in a class of employees 
solely because the maximum dollar amount made available to those 
participants to reimburse medical care expenses for any plan year 
increases as the number of the participant's dependents who are covered 
under the HRA increases, so long as the same maximum dollar amount 
attributable to the increase in family size is made available to all 
participants in that class of employees with the same number of 
dependents covered by the HRA.
    (B) Variation due to age. An HRA does not fail to be provided on 
the same terms to participants in a class of employees solely because 
the maximum dollar amount made available under the terms of the HRA to 
those participants to reimburse medical care expenses for any plan year 
increases as the age of the participant increases, so long as the 
requirements in paragraphs (c)(3)(iii)(B)(1) and (2) of this section 
are satisfied. For the purpose of this paragraph (c)(3)(iii)(B), the 
plan sponsor may determine the age of the participant using any 
reasonable method for a plan year, so long as the plan sponsor 
determines each participant's age for the purpose of this paragraph 
(c)(3)(iii)(B) using the same method for all participants in the class 
of employees for the plan year and the method is determined prior to 
the plan year.
    (1) The same maximum dollar amount attributable to the increase in 
age is made available to all participants who are the same age.
    (2) The maximum dollar amount made available to the oldest 
participant(s) is not more than three times the maximum dollar amount 
made available to the youngest participant(s).
    (iv) Former employees. An HRA does not fail to be treated as 
provided on the same terms if the plan sponsor offers the HRA to some, 
but not all, former employees within a class of employees. However, if 
a plan sponsor offers the HRA to one or more former employees within a 
class of employees, the HRA must be offered to the former employee(s) 
on the same terms as to all other employees within the class, except as 
provided in paragraph (c)(3)(ii) of this section. For purposes of this 
section, a former employee is an employee who is

[[Page 29003]]

no longer performing services for the employer.
    (v) New employees or new dependents. For a participant whose 
coverage under the HRA becomes effective later than the first day of 
the plan year, the HRA does not fail to be treated as being provided on 
the same terms to the participant if the maximum dollar amount made 
available to the participant either is the same as the maximum dollar 
amount made available to participants in the participant's class of 
employees whose coverage became effective as of the first day of the 
plan year, or is pro-rated consistent with the portion of the plan year 
in which the participant is covered by the HRA. Similarly, if the HRA 
provides for variation in the maximum amount made available to 
participants in a class of employees based on the number of a 
participant's dependents covered by the HRA, and the number of a 
participant's dependents covered by the HRA changes during a plan year 
(either increasing or decreasing), the HRA does not fail to be treated 
as being provided on the same terms to the participant if the maximum 
dollar amount made available to the participant either is the same as 
the maximum dollar amount made available to participants in the 
participant's class of employees who had the same number of dependents 
covered by the HRA on the first day of the plan year or is pro-rated 
for the remainder of the plan year after the change in the number of 
the participant's dependents covered by the HRA consistent with the 
portion of the plan year in which that number of dependents are covered 
by the HRA. The method the HRA uses to determine amounts made available 
for participants whose coverage under the HRA is effective later than 
the first day of the plan year or who have changes in the number of 
dependents covered by the HRA during a plan year must be the same for 
all participants in the class of employees and the method must be 
determined prior to the beginning of the plan year.
    (vi) HSA-compatible HRAs. An HRA does not fail to be treated as 
provided on the same terms if the plan sponsor offers participants in a 
class of employees a choice between an HSA-compatible individual 
coverage HRA and an individual coverage HRA that is not HSA compatible, 
provided both types of HRAs are offered to all participants in the 
class of employees on the same terms. For the purpose of this paragraph 
(c)(3)(vi), an HSA-compatible individual coverage HRA is an individual 
coverage HRA that is limited in accordance with applicable guidance 
under section 223 of the Code such that an individual covered by such 
an HRA is not disqualified from being an eligible individual under 
section 223 of the Code.
    (vii) Examples. The following examples illustrate the provisions of 
this paragraph (c)(3), without taking into account the provisions of 
paragraph (d) of this section. In each example, the HRA is an 
individual coverage HRA that has a calendar year plan year and may 
reimburse any medical care expenses, including premiums for individual 
health insurance coverage (except as provided in paragraph 
(c)(3)(vii)(E) of this section (Example 5)). Further, in each example, 
assume the HRA is offered on the same terms, except as otherwise 
specified in the example and that no participants or dependents are 
Medicare beneficiaries.

    (A) Example 1: Carryover amounts permitted--(1) Facts. For 2020 
and again for 2021, Plan Sponsor A offers all employees $7,000 each 
in an HRA, and the HRA provides that amounts that are unused at the 
end of a plan year may be carried over to the next plan year, with 
no restrictions on the use of the carryover amounts compared to the 
use of newly available amounts. At the end of 2020, some employees 
have used all of the funds in their HRAs, while other employees have 
balances remaining that range from $500 to $1,750 that are carried 
over to 2021 for those employees.
    (2) Conclusion. The same terms requirement of this paragraph 
(c)(3) is satisfied in this paragraph (c)(3)(vii)(A) (Example 1) for 
2020 because Plan Sponsor A offers all employees the same amount, 
$7,000, in an HRA for that year. The same terms requirement is also 
satisfied for 2021 because Plan Sponsor A again offers all employees 
the same amount for that year, and the carryover amounts that some 
employees have are disregarded in applying the same terms 
requirement because the amount of the carryover for each employee 
(that employee's balance) and each employee's access to the 
carryover amounts is based on the same terms.
    (B) Example 2: Employees hired after the first day of the plan 
year--(1)
     Facts. For 2020, Plan Sponsor B offers all employees employed 
on January 1, 2020, $7,000 each in an HRA for the plan year. 
Employees hired after January 1, 2020, are eligible to enroll in the 
HRA with an effective date of the first day of the month following 
their date of hire, as long as they have enrolled in individual 
health insurance coverage effective on or before that date, and the 
amount offered to these employees is pro-rated based on the number 
of months remaining in the plan year, including the month which 
includes their coverage effective date.
    (2) Conclusion. The same terms requirement of this paragraph 
(c)(3) is satisfied in this paragraph (c)(3)(vii)(B) (Example 2) for 
2020 because Plan Sponsor B offers all employees employed on the 
first day of the plan year the same amount, $7,000, in an HRA for 
that plan year and all employees hired after January 1, 2020, a pro-
rata amount based on the portion of the plan year during which they 
are enrolled in the HRA.
    (C) Example 3: HRA amounts offered vary based on number of 
dependents--(1) Facts. For 2020, Plan Sponsor C offers its employees 
the following amounts in an HRA: $1,500, if the employee is the only 
individual covered by the HRA; $3,500, if the employee and one 
dependent are covered by the HRA; and $5,000, if the employee and 
more than one dependent are covered by the HRA.
    (2) Conclusion. The same terms requirement of this paragraph 
(c)(3) is satisfied in this paragraph (c)(3)(vii)(C) (Example 3) 
because paragraph (c)(3)(iii)(A) of this section allows the maximum 
dollar amount made available in an HRA to increase as the number of 
the participant's dependents covered by the HRA increases and Plan 
Sponsor C makes the same amount available to each employee with the 
same number of dependents covered by the HRA.
    (D) Example 4: HRA amounts offered vary based on increases in 
employees' ages--(1) Facts. For 2020, Plan Sponsor D offers its 
employees the following amounts in an HRA: $1,000 each for employees 
age 25 to 35; $2,000 each for employees age 36 to 45; $2,500 each 
for employees age 46 to 55; and $4,000 each for employees over age 
55.
    (2) Conclusion. The same terms requirement of this paragraph 
(c)(3) is not satisfied in this paragraph (c)(3)(vii)(D) (Example 4) 
because the terms of the HRA provide the oldest participants (those 
over age 55) with more than three times the amount made available to 
the youngest participants (those ages 25 to 35), in violation of 
paragraph (c)(3)(iii)(B)(2) of this section.
    (E) Example 5: Application of same terms requirement to premium 
only HRA--(1) Facts. For 2020, Plan Sponsor E offers its employees 
an HRA that reimburses only premiums for individual health insurance 
coverage, up to $10,000 for the year. Employee A enrolls in 
individual health insurance coverage with a $5,000 premium for the 
year and is reimbursed $5,000 from the HRA. Employee B enrolls in 
individual health insurance coverage with an $8,000 premium for the 
year and is reimbursed $8,000 from the HRA.
    (2) Conclusion. The same terms requirement of this paragraph 
(c)(3) is satisfied in this paragraph (c)(3)(vii)(E) (Example 5) 
because Plan Sponsor E offers the HRA on the same terms to all 
employees, notwithstanding that some employees receive a greater 
amount of reimbursement than others based on the cost of the 
individual health insurance coverage selected by the employee.

    (4) Opt out. Under the terms of the HRA, a participant who is 
otherwise eligible for coverage must be permitted to opt out of and 
waive future reimbursements on behalf of the participant and all 
dependents eligible for the HRA from the HRA once, and only once, with 
respect to each plan year. The HRA may establish

[[Page 29004]]

timeframes for enrollment in (and opting out of) the HRA but, in 
general, the opportunity to opt out must be provided in advance of the 
first day of the plan year. For participants who become eligible to 
participate in the HRA on a date other than the first day of the plan 
year (or who become eligible fewer than 90 days prior to the plan year 
or for whom the notice under paragraph (c)(6) of this section is 
required to be provided as set forth in paragraph (c)(6)(i)(C) of this 
section), or for a dependent who newly becomes eligible during the plan 
year, this opportunity must be provided during the applicable HRA 
enrollment period(s) established by the HRA for these individuals. 
Further, under the terms of the HRA, upon termination of employment, 
for a participant who is covered by the HRA, either the remaining 
amounts in the HRA must be forfeited or the participant must be 
permitted to permanently opt out of and waive future reimbursements 
from the HRA on behalf of the participant and all dependents covered by 
the HRA.
    (5) Reasonable procedures for coverage substantiation--(i) 
Substantiation of individual health insurance coverage for the plan 
year. The HRA must implement, and comply with, reasonable procedures to 
substantiate that participants and each dependent covered by the HRA 
are, or will be, enrolled in individual health insurance coverage for 
the plan year (or for the portion of the plan year the individual is 
covered by the HRA, if applicable). The HRA may establish the date by 
which this substantiation must be provided, but, in general, the date 
may be no later than the first day of the plan year. However, for a 
participant who is not eligible to participate in the HRA on the first 
day of the plan year (or who becomes eligible fewer than 90 days prior 
to the plan year or for whom the notice under paragraph (c)(6) of this 
section is required to be provided as set forth in paragraph 
(c)(6)(i)(C) of this section), the HRA may establish the date by which 
this substantiation must be provided, but that date may be no later 
than the date the HRA coverage begins. Similarly, for a participant who 
adds a new dependent during the plan year, the HRA may establish the 
date by which this substantiation must be provided, but the date may be 
no later than the date the HRA coverage for the new dependent begins; 
however, to the extent the dependent's coverage under the HRA is 
effective retroactively, the HRA may establish a reasonable time by 
which this substantiation is required, but must require it be provided 
before the HRA will reimburse any medical care expense for the newly 
added dependent. The reasonable procedures an HRA may use to implement 
the substantiation requirement set forth in this paragraph (c)(5)(i) 
may include a requirement that a participant substantiate enrollment by 
providing either:
    (A) A document from a third party (for example, the issuer or an 
Exchange) showing that the participant and any dependents covered by 
the HRA are, or will be, enrolled in individual health insurance 
coverage (for example, an insurance card or an explanation of benefits 
document pertaining to the relevant time period or documentation from 
the Exchange showing that the individual has completed the application 
and plan selection); or
    (B) An attestation by the participant stating that the participant 
and dependent(s) covered by the HRA are, or will be, enrolled in 
individual health insurance coverage, the date coverage began or will 
begin, and the name of the provider of the coverage.
    (ii) Coverage substantiation with each request for reimbursement of 
medical care expenses. Following the initial substantiation of 
coverage, with each new request for reimbursement of an incurred 
medical care expense for the same plan year, the HRA may not reimburse 
a participant for any medical care expenses unless, prior to each 
reimbursement, the participant substantiates that the individual on 
whose behalf medical care expenses are requested to be reimbursed 
continues to be enrolled in individual health insurance coverage for 
the month during which the medical care expenses were incurred. The HRA 
must implement, and comply with, reasonable procedures to satisfy this 
requirement. This substantiation may be in the form of a written 
attestation by the participant, which may be part of the form used to 
request reimbursement, or a document from a third party (for example, a 
health insurance issuer) showing that the participant or the dependent, 
if applicable, are or were enrolled in individual health insurance 
coverage for the applicable month.
    (iii) Reliance on substantiation. For purposes of this paragraph 
(c)(5), an HRA may rely on the participant's documentation or 
attestation unless the HRA, its plan sponsor, or any other entity 
acting in an official capacity on behalf of the HRA has actual 
knowledge that any individual covered by the HRA is not, or will not 
be, enrolled in individual health insurance coverage for the plan year 
(or applicable portion of the plan year) or the month, as applicable.
    (6) Notice requirement--(i) Timing. The HRA must provide a written 
notice to each participant:
    (A) At least 90 calendar days before the beginning of each plan 
year for any participant who is not described in either paragraph 
(c)(6)(i)(B) or (C) of this section;
    (B) No later than the date on which the HRA may first take effect 
for the participant, for any participant who is not eligible to 
participate at the beginning of the plan year (or is not eligible to 
participate at the time the notice is provided at least 90 calendar 
days before the beginning of the plan year pursuant to paragraph 
(c)(6)(i)(A) of this section); or
    (C) No later than the date on which the HRA may first take effect 
for the participant, for any participant who is employed by an employer 
that is first established less than 120 days before the beginning of 
the first plan year of the HRA; this paragraph (c)(6)(i)(C) applies 
only with respect to the first plan year of the HRA.
    (ii) Content. The notice must include all the information described 
in this paragraph (c)(6)(ii) (and may include any additional 
information that does not conflict with that information). To the 
extent that the Departments of the Treasury, Labor and Health and Human 
Services provide model notice language for certain elements of this 
required notice, HRAs are permitted, but not required, to use the model 
language.
    (A) A description of the terms of the HRA, including the maximum 
dollar amount available for each participant (including the self-only 
HRA amount available for the plan year (or the maximum dollar amount 
available for the plan year if the HRA provides for reimbursements up 
to a single dollar amount regardless of whether a participant has self-
only or other than self-only coverage)), any rules regarding the 
proration of the maximum dollar amount applicable to any participant 
(or dependent, if applicable) who is not eligible to participate in the 
HRA for the entire plan year, whether (and which of) the participant's 
dependents are eligible for the HRA, a statement that there are 
different kinds of HRAs (including a qualified small employer health 
reimbursement arrangement) and the HRA being offered is an individual 
coverage HRA, a statement that the HRA requires the participant and any 
covered dependents to be enrolled in individual health insurance 
coverage (or Medicare Part A and B or Medicare Part C, if applicable), 
a statement that the coverage in which the participant and

[[Page 29005]]

any covered dependents must be enrolled cannot be short-term, limited-
duration insurance or consist solely of excepted benefits, a statement 
that individual health insurance coverage in which the participant and 
any covered dependents are enrolled is not subject to the Employee 
Retirement Income Security Act if the conditions under Sec.  2510.3-
1(l) of this chapter are satisfied, the date as of which coverage under 
the HRA may first become effective (both for participants whose 
coverage will become effective on the first day of the plan year and 
for participants whose HRA coverage may become effective at a later 
date), the dates on which the HRA plan year begins and ends, and the 
dates on which the amounts newly made available under the HRA will be 
made available.
    (B) A statement of the right of the participant to opt out of and 
waive future reimbursements from the HRA, as set forth under paragraph 
(c)(4) of this section.
    (C) A description of the potential availability of the premium tax 
credit if the participant opts out of and waives future reimbursements 
from the HRA and the HRA is not affordable for one or more months under 
26 CFR 1.36B-2(c)(5), a statement that even if the participant opts out 
of and waives future reimbursements from an HRA, the offer will 
prohibit the participant (and, potentially, the participant's 
dependents) from receiving a premium tax credit for the participant's 
coverage (or the dependent's coverage, if applicable) on an Exchange 
for any month that the HRA is affordable under 26 CFR 1.36B-2(c)(5), a 
statement describing how the participant may find assistance with 
determining affordability, a statement that, if the participant is a 
former employee, the offer of the HRA does not render the participant 
(or the participant's dependents, if applicable) ineligible for the 
premium tax credit regardless of whether it is affordable under 26 CFR 
1.36B-2(c)(5), and a statement that if the participant or dependent is 
enrolled in Medicare, he or she is ineligible for the premium tax 
credit without regard to the offer or acceptance of the HRA;
    (D) A statement that if the participant accepts the HRA, the 
participant may not claim a premium tax credit for the participant's 
Exchange coverage for any month the HRA may be used to reimburse 
medical care expenses of the participant, and a premium tax credit may 
not be claimed for the Exchange coverage of the participant's 
dependents for any month the HRA may be used to reimburse medical care 
expenses of the dependents.
    (E) A statement that the participant must inform any Exchange to 
which the participant applies for advance payments of the premium tax 
credit of the availability of the HRA; the self-only HRA amount 
available for the HRA plan year (or the maximum dollar amount available 
for the plan year if the HRA provides for reimbursements up to a single 
dollar amount regardless of whether a participant has self-only or 
other than self-only coverage) as set forth in the written notice in 
accordance with paragraph (c)(6)(ii)(A) of this section; whether the 
HRA is also available to the participant's dependents and if so, which 
ones; the date as of which coverage under the HRA may first become 
effective; the date on which the plan year begins and the date on which 
it ends; and whether the participant is a current employee or former 
employee.
    (F) A statement that the participant should retain the written 
notice because it may be needed to determine whether the participant is 
allowed a premium tax credit on the participant's individual income tax 
return.
    (G) A statement that the HRA may not reimburse any medical care 
expense unless the substantiation requirement set forth in paragraph 
(c)(5)(ii) of this section is satisfied and a statement that the 
participant must also provide the substantiation required by paragraph 
(c)(5)(i) of this section.
    (H) A statement that if the individual health insurance coverage 
(or coverage under Medicare Part A and B or Medicare Part C) of a 
participant or dependent ceases, the HRA will not reimburse any medical 
care expenses that are incurred by the participant or dependent, as 
applicable, after the coverage ceases, and a statement that the 
participant must inform the HRA if the participant's or dependent's 
individual health insurance coverage (or coverage under Medicare Part A 
and B or Medicare Part C) is cancelled or terminated retroactively and 
the date on which the cancellation or termination is effective.
    (I) The contact information (including a phone number) for an 
individual or a group of individuals who participants may contact in 
order to receive additional information regarding the HRA. The plan 
sponsor may determine which individual or group of individuals is best 
suited to be the specified contact.
    (J) A statement of availability of a special enrollment period to 
enroll in or change individual health insurance coverage, through or 
outside of an Exchange, for the participant and any dependents who 
newly gain access to the HRA and are not already covered by the HRA.
    (d) Classes of employees--(1) In general. This paragraph (d) sets 
forth the rules for determining classes of employees. Paragraph (d)(2) 
of this section sets forth the specific classes of employees; paragraph 
(d)(3) of this section sets forth a minimum class size requirement that 
applies in certain circumstances; paragraph (d)(4) of this section sets 
forth rules regarding the definition of ``full-time employees,'' 
``part-time employees,'' and ``seasonal employees''; paragraph (d)(5) 
of this section sets forth a special rule for new hires; and paragraph 
(d)(6) of this section addresses student premium reduction 
arrangements. For purposes of this section, including determining 
classes under this paragraph (d), the employer is the common law 
employer and is determined without regard to the rules under sections 
414(b), (c), (m), and (o) of the Code that would treat the common law 
employer as a single employer with certain other entities.
    (2) List of classes. Participants may be treated as belonging to a 
class of employees based on whether they are, or are not, included in 
the classes described in this paragraph (d)(2). If the individual 
coverage HRA is offered to former employees, former employees are 
considered to be in the same class in which they were included 
immediately before separation from service. Before each plan year, a 
plan sponsor must determine for the plan year which classes of 
employees it intends to treat separately and the definition of the 
relevant class(es) it will apply, to the extent these regulations 
permit a choice. After the classes and the definitions of the classes 
are established for a plan year, a plan sponsor may not make changes to 
the classes of employees or the definitions of those relevant classes 
with respect to that plan year.
    (i) Full-time employees, defined at the election of the plan 
sponsor to mean either full-time employees under section 4980H of the 
Code (and 26 CFR 54.4980H-1(a)(21)) or employees who are not part-time 
employees (as described in 26 CFR 1.105-11(c)(2)(iii)(C));
    (ii) Part-time employees, defined at the election of the plan 
sponsor to mean either employees who are not full-time employees under 
section 4980H of the Code (and under 26 CFR 54.4980H-1(a)(21) (which 
defines full-time employee)) or employees who are part-time employees 
as described in 26 CFR 1.105-11(c)(2)(iii)(C);
    (iii) Employees who are paid on a salary basis;

[[Page 29006]]

    (iv) Non-salaried employees (such as, for example, hourly 
employees);
    (v) Employees whose primary site of employment is in the same 
rating area as defined in 45 CFR 147.102(b);
    (vi) Seasonal employees, defined at the election of the plan 
sponsor to mean seasonal employees as described in either 26 CFR 
54.4980H-1(a)(38) or 26 CFR 1.105-11(c)(2)(iii)(C);
    (vii) Employees included in a unit of employees covered by a 
particular collective bargaining agreement (or an appropriate related 
participation agreement) in which the plan sponsor participates (as 
described in 26 CFR 1.105-11(c)(2)(iii)(D));
    (viii) Employees who have not satisfied a waiting period for 
coverage (if the waiting period complies with Sec.  2590.715-2708 of 
this part);
    (ix) Non-resident aliens with no U.S.-based income (as described in 
26 CFR 1.105-11(c)(2)(iii)(E));
    (x) Employees who, under all the facts and circumstances, are 
employees of an entity that hired the employees for temporary placement 
at an entity that is not the common law employer of the employees and 
that is not treated as a single employer with the entity that hired the 
employees for temporary placement under section 414(b), (c), (m), or 
(o) of the Code; or
    (xi) A group of participants described as a combination of two or 
more of the classes of employees set forth in paragraphs (d)(2)(i) 
through (x) of this section.
    (3) Minimum class size requirement--(i) In general. If a class of 
employees is subject to the minimum class size requirement as set forth 
in this paragraph (d)(3), the class must consist of at least a minimum 
number of employees (as described in paragraphs (d)(3)(iii) and (iv) of 
this section), otherwise, the plan sponsor may not treat that class as 
a separate class of employees. Paragraph (d)(3)(ii) of this section 
sets forth the circumstances in which the minimum class size 
requirement applies to a class of employees, paragraph (d)(3)(iii) of 
this section sets forth the rules for determining the applicable class 
size minimum, and paragraph (d)(3)(iv) of this section sets forth the 
rules for a plan sponsor to determine if it satisfies the minimum class 
size requirement with respect to a class of employees.
    (ii) Circumstances in which minimum class size requirement 
applies--(A) The minimum class size requirement applies only if a plan 
sponsor offers a traditional group health plan to one or more classes 
of employees and offers an individual coverage HRA to one or more other 
classes of employees.
    (B) The minimum class size requirement does not apply to a class of 
employees offered a traditional group health plan or a class of 
employees offered no coverage.
    (C) The minimum class size requirement applies to a class of 
employees offered an individual coverage HRA if the class is full-time 
employees, part-time employees, salaried employees, non-salaried 
employees, or employees whose primary site of employment is in the same 
rating area (described in paragraph (d)(2)(i), (ii), (iii), (iv), or 
(v) of this section, respectively, and referred to collectively as the 
applicable classes or individually as an applicable class), except 
that:
    (1) In the case of the class of employees whose primary site of 
employment is in the same rating area (as described in paragraph 
(d)(2)(v) of this section), the minimum class size requirement does not 
apply if the geographic area defining the class is a State or a 
combination of two or more entire States; and
    (2) In the case of the classes of employees that are full-time 
employees and part-time employees (as described in paragraphs (d)(2)(i) 
and (ii) of this section, respectively), the minimum class size 
requirement applies only to those classes (and the classes are only 
applicable classes) if the employees in one such class are offered a 
traditional group health plan while the employees in the other such 
class are offered an individual coverage HRA. In such a case, the 
minimum class size requirement applies only to the class offered an 
individual coverage HRA.
    (D) A class of employees offered an individual coverage HRA is also 
subject to the minimum class size requirement if the class is a class 
of employees created by combining at least one of the applicable 
classes (as defined in paragraph (d)(3)(ii)(C) of this section) with 
any other class, except that the minimum class size requirement shall 
not apply to a class that is the result of a combination of one of the 
applicable classes and a class of employees who have not satisfied a 
waiting period (as described in paragraph (d)(2)(viii) of this 
section).
    (iii) Determination of the applicable class size minimum--(A) In 
general. The minimum number of employees that must be in a class of 
employees that is subject to the minimum class size requirement (the 
applicable class size minimum) is determined prior to the beginning of 
the plan year for each plan year of the individual coverage HRA and is:
    (1) 10, for an employer with fewer than 100 employees;
    (2) A number, rounded down to a whole number, equal to 10 percent 
of the total number of employees, for an employer with 100 to 200 
employees; and
    (3) 20, for an employer with more than 200 employees.
    (B) Determining employer size. For purposes of this paragraph 
(d)(3), the number of employees of an employer is determined in advance 
of the plan year of the HRA based on the number of employees that the 
employer reasonably expects to employ on the first day of the plan 
year.
    (iv) Determining if a class satisfies the applicable class size 
minimum. For purposes of this paragraph (d)(3), whether a class of 
employees satisfies the applicable class size minimum for a plan year 
of the individual coverage HRA is based on the number of employees in 
the class offered the individual coverage HRA as of the first day of 
the plan year. Therefore, this determination is not based on the number 
of employees that actually enroll in the individual coverage HRA, and 
this determination is not affected by changes in the number of 
employees in the class during the plan year.
    (4) Consistency requirement. For any plan year, a plan sponsor may 
define ``full-time employee,'' ``part-time employee,'' and ``seasonal 
employee'' in accordance with the relevant provisions of sections 
105(h) or 4980H of the Code, as set forth in paragraphs (d)(2)(i), 
(ii), and (vi) of this section, if:
    (i) To the extent applicable under the HRA for the plan year, each 
of the three classes of employees are defined in accordance with 
section 105(h) of the Code or each of the three classes of employees 
are defined in accordance with section 4980H of the Code for the plan 
year; and
    (ii) The HRA plan document sets forth the applicable definitions 
prior to the beginning of the plan year to which the definitions will 
apply.
    (5) Special rule for new hires--(i) In general. Notwithstanding 
paragraphs (c)(2) and (3) of this section, a plan sponsor that offers a 
traditional group health plan to a class of employees may prospectively 
offer the employees in that class of employees who are hired on or 
after a certain future date (the new hire date) an individual coverage 
HRA (with this group of employees referred to as the new hire 
subclass), while continuing to offer employees in that class of 
employees who are hired before the new hire date a traditional group 
health plan (with the rule set forth in this sentence referred to as 
the special

[[Page 29007]]

rule for new hires). For the new hire subclass, the individual coverage 
HRA must be offered on the same terms to all participants within the 
subclass, in accordance with paragraph (c)(3) of this section. In 
accordance with paragraph (c)(2) of this section, a plan sponsor may 
not offer a choice between an individual coverage HRA or a traditional 
group health plan to any employee in the new hire subclass or to any 
employee in the class who is not a member of the new hire subclass.
    (ii) New hire date. A plan sponsor may set the new hire date for a 
class of employees prospectively as any date on or after January 1, 
2020. A plan sponsor may set different new hire dates prospectively for 
separate classes of employees.
    (iii) Discontinuation of use of special rule for new hires and 
multiple applications of the special rule for new hires. A plan sponsor 
may discontinue use of the special rule for new hires at any time for 
any class of employees. In that case, the new hire subclass is no 
longer treated as a separate subclass of employees. In the event a plan 
sponsor applies the special rule for new hires to a class of employees 
and later discontinues use of the rule to the class of employees, the 
plan sponsor may later apply the rule if the application of the rule 
would be permitted under the rules for initial application of the 
special rule for new hires. If a plan sponsor, in accordance with the 
requirements for the special rule for new hires, applies the rule to a 
class of employees subsequent to any prior application and 
discontinuance of the rule to that class, the new hire date must be 
prospective.
    (iv) Application of the minimum class size requirement under the 
special rule for new hires. The minimum class size requirement set 
forth in paragraph (d)(3) of this section does not apply to the new 
hire subclass. However, if a plan sponsor subdivides the new hire 
subclass subsequent to creating the new hire subclass, the minimum 
class size requirement set forth in paragraph (d)(3) of this section 
applies to any class of employees created by subdividing the new hire 
subclass, if the minimum class size requirement otherwise applies.
    (6) Student employees offered student premium reduction 
arrangements. For purposes of this section, if an institution of higher 
education (as defined in the Higher Education Act of 1965) offers a 
student employee a student premium reduction arrangement, the employee 
is not considered to be part of the class of employees to which the 
employee would otherwise belong. For the purpose of this paragraph 
(d)(6) and paragraph (f)(1) of this section, a student premium 
reduction arrangement is defined as any program offered by an 
institution of higher education under which the cost of insured or 
self-insured student health coverage is reduced for certain students 
through a credit, offset, reimbursement, stipend or similar 
arrangement. A student employee offered a student premium reduction 
arrangement is also not counted for purposes of determining the 
applicable class size minimum under paragraph (d)(3)(iii) of this 
section. If a student employee is not offered a student premium 
reduction arrangement (including if the student employee is offered an 
individual coverage HRA instead), the student employee is considered to 
be part of the class of employees to which the employee otherwise 
belongs and is counted for purposes of determining the applicable class 
size minimum under paragraph (d)(3)(iii) of this section.
    (e) Integration of Individual Coverage HRAs with Medicare--(1) 
General rule. An individual coverage HRA will be considered to be 
integrated with Medicare (and deemed to comply with PHS Act sections 
2711 and 2713 and Sec.  2590.715-2711(d)(4) of this part), provided 
that the conditions of paragraph (c) of this section are satisfied, 
subject to paragraph (e)(2) of this section. Nothing in this section 
requires that a participant and his or her dependents all have the same 
type of coverage; therefore, an individual coverage HRA may be 
integrated with Medicare for some individuals and with individual 
health insurance coverage for others, including, for example, a 
participant enrolled in Medicare Part A and B or Part C and his or her 
dependents enrolled in individual health insurance coverage.
    (2) Application of conditions in paragraph (c) of this section--(i) 
In general. Except as provided in paragraph (e)(2)(ii) of this section, 
in applying the conditions of paragraph (c) of this section with 
respect to integration with Medicare, a reference to ``individual 
health insurance coverage'' is deemed to refer to coverage under 
Medicare Part A and B or Part C. References in this section to 
integration of an HRA with Medicare refer to integration of an 
individual coverage HRA with Medicare Part A and B or Part C.
    (ii) Exceptions. For purposes of the statement regarding ERISA 
under the notice content element under paragraph (c)(6)(ii)(A) of this 
section and the statement regarding the availability of a special 
enrollment period under the notice content element under paragraph 
(c)(6)(ii)(J) of this section, the term individual health insurance 
coverage means only individual health insurance coverage and does not 
also mean coverage under Medicare Part A and B or Part C.
    (f) Examples--(1) Examples regarding classes and the minimum class 
size requirement. The following examples illustrate the provisions of 
paragraph (c)(3) of this section, taking into account the provisions of 
paragraphs (d)(1) through (4) and (d)(6) of this section. In each 
example, the HRA is an individual coverage HRA that may reimburse any 
medical care expenses, including premiums for individual health 
insurance coverage and it is assumed that no participants or dependents 
are Medicare beneficiaries.
    (i) Example 1: Collectively bargained employees offered 
traditional group health plan; non-collectively bargained employees 
offered HRA--(A) Facts. For 2020, Plan Sponsor A offers its 
employees covered by a collective bargaining agreement a traditional 
group health plan (as required by the collective bargaining 
agreement) and all other employees (non-collectively bargained 
employees) each an HRA on the same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(i) (Example 1) 
because collectively bargained and non-collectively bargained 
employees may be treated as different classes of employees, one of 
which may be offered a traditional group health plan and the other 
of which may be offered an individual coverage HRA, and Plan Sponsor 
A offers the HRA on the same terms to all participants who are non-
collectively bargained employees. The minimum class size requirement 
does not apply to this paragraph (f)(1)(i) (Example 1) even though 
Plan Sponsor A offers one class a traditional group health plan and 
one class the HRA because collectively bargained and non-
collectively bargained employees are not applicable classes that are 
subject to the minimum class size requirement.
    (ii) Example 2: Collectively bargained employees in one unit 
offered traditional group health plan and in another unit offered 
HRA--(A)
     Facts. For 2020, Plan Sponsor B offers its employees covered by 
a collective bargaining agreement with Local 100 a traditional group 
health plan (as required by the collective bargaining agreement), 
and its employees covered by a collective bargaining agreement with 
Local 200 each an HRA on the same terms (as required by the 
collective bargaining agreement).
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(ii) (Example 
2) because the employees covered by the collective bargaining 
agreements with the two separate bargaining units (Local 100 and 
Local 200) may be treated as two different classes of employees and 
Plan Sponsor B offers an HRA on the same terms to the participants 
covered by the agreement with Local 200. The minimum class size

[[Page 29008]]

requirement does not apply to this paragraph (f)(1)(ii) (Example 2) 
even though Plan Sponsor B offers the Local 100 employees a 
traditional group health plan and the Local 200 employees an HRA 
because collectively bargained employees are not applicable classes 
that are subject to the minimum class size requirement.
    (iii) Example 3: Employees in a waiting period offered no 
coverage; other employees offered an HRA--(A) Facts. For 2020, Plan 
Sponsor C offers its employees who have completed a waiting period 
that complies with the requirements for waiting periods in Sec.  
2590.715-2708 of this part each an HRA on the same terms and does 
not offer coverage to its employees who have not completed the 
waiting period.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(iii) (Example 
3) because employees who have completed a waiting period and 
employees who have not completed a waiting period may be treated as 
different classes and Plan Sponsor C offers the HRA on the same 
terms to all participants who have completed the waiting period. The 
minimum class size requirement does not apply to this paragraph 
(f)(1)(iii) (Example 3) because Plan Sponsor C does not offer at 
least one class of employees a traditional group health plan and 
because the class of employees who have not completed a waiting 
period and the class of employees who have completed a waiting 
period are not applicable classes that are subject to the minimum 
class size requirement.
    (iv) Example 4: Employees in a waiting period offered an HRA; 
other employees offered a traditional group health plan--(A) Facts. 
For 2020, Plan Sponsor D offers its employees who have completed a 
waiting period that complies with the requirements for waiting 
periods in Sec.  2590.715-2708 of this part a traditional group 
health plan and offers its employees who have not completed the 
waiting period each an HRA on the same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(iv) (Example 
4) because employees who have completed a waiting period and 
employees who have not completed a waiting period may be treated as 
different classes and Plan Sponsor D offers an HRA on the same terms 
to all participants who have not completed the waiting period. The 
minimum class size requirement does not apply to this paragraph 
(f)(1)(iv) (Example 4) even though Plan Sponsor D offers employees 
who have completed a waiting period a traditional group health plan 
and employees who have not completed a waiting period an HRA because 
the class of employees who have not completed a waiting period is 
not an applicable class that is subject to the minimum class size 
requirement (nor is the class made up of employees who have 
completed the waiting period).
    (v) Example 5: Staffing firm employees temporarily placed with 
customers offered an HRA; other employees offered a traditional 
group health plan--(A) Facts. Plan Sponsor E is a staffing firm that 
places certain of its employees on temporary assignments with 
customers that are not the common law employers of Plan Sponsor E's 
employees or treated as a single employer with Plan Sponsor E under 
section 414(b), (c), (m), or (o) of the Code (unrelated entities); 
other employees work in Plan Sponsor E's office managing the 
staffing business (non-temporary employees). For 2020, Plan Sponsor 
E offers its employees who are on temporary assignments with 
customers each an HRA on the same terms. All other employees are 
offered a traditional group health plan.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(v) (Example 5) 
because the employees who are hired for temporary placement at an 
unrelated entity and non-temporary employees of Plan Sponsor E may 
be treated as different classes of employees and Plan Sponsor E 
offers an HRA on the same terms to all participants temporarily 
placed with customers. The minimum class size requirement does not 
apply to this paragraph (f)(1)(v) (Example 5) even though Plan 
Sponsor E offers one class a traditional group health plan and one 
class the HRA because the class of employees hired for temporary 
placement is not an applicable class that is subject to the minimum 
class size requirement (nor is the class made up of non-temporary 
employees).
    (vi) Example 6: Staffing firm employees temporarily placed with 
customers in rating area 1 offered an HRA; other employees offered a 
traditional group health plan--(A) Facts. The facts are the same as 
in paragraph (f)(1)(v) of this section (Example 5), except that Plan 
Sponsor E has work sites in rating area 1 and rating area 2, and it 
offers its 10 employees on temporary assignments with a work site in 
rating area 1 an HRA on the same terms. Plan Sponsor E has 200 other 
employees in rating areas 1 and 2, including its non-temporary 
employees in rating areas 1 and 2 and its employees on temporary 
assignments with a work site in rating area 2, all of whom are 
offered a traditional group health plan.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(vi) 
(Example 6) because, even though the employees who are temporarily 
placed with customers generally may be treated as employees of a 
different class, because Plan Sponsor E is also using a rating area 
to identify the class offered the HRA (which is an applicable class 
for the minimum class size requirement) and is offering one class 
the HRA and another class the traditional group health plan, the 
minimum class size requirement applies to the class offered the HRA, 
and the class offered the HRA fails to satisfy the minimum class 
size requirement. Because Plan Sponsor E employs 210 employees, the 
applicable class size minimum is 20, and the HRA is offered to only 
10 employees.
    (vii) Example 7: Employees in State 1 offered traditional group 
health plan; employees in State 2 offered HRA--(A) Facts. Plan 
Sponsor F employs 45 employees whose work site is in State 1 and 7 
employees whose primary site of employment is in State 2. For 2020, 
Plan Sponsor F offers its 45 employees in State 1 a traditional 
group health plan, and each of its 7 employees in State 2 an HRA on 
the same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(vii) (Example 
7) because Plan Sponsor F offers the HRA on the same terms to all 
employees with a work site in State 2 and that class is a 
permissible class under paragraph (d) of this section. This is 
because employees whose work sites are in different rating areas may 
be considered different classes and a plan sponsor may create a 
class of employees by combining classes of employees, including by 
combining employees whose work site is in one rating area with 
employees whose work site is in a different rating area, or by 
combining all employees whose work site is in a state. The minimum 
class size requirement does not apply to this paragraph (f)(1)(vii) 
(Example 7) because the minimum class size requirement does not 
apply if the geographic area defining a class of employees is a 
state or a combination of two or more entire states.
    (viii) Example 8: Full-time seasonal employees offered HRA; all 
other full-time employees offered traditional group health plan; 
part-time employees offered no coverage--(A) Facts. Plan Sponsor G 
employs 6 full-time seasonal employees, 75 full-time employees who 
are not seasonal employees, and 5 part-time employees. For 2020, 
Plan Sponsor G offers each of its 6 full-time seasonal employees an 
HRA on the same terms, its 75 full-time employees who are not 
seasonal employees a traditional group health plan, and offers no 
coverage to its 5 part-time employees.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(viii) (Example 
8) because full-time seasonal employees and full-time employees who 
are not seasonal employees may be considered different classes and 
Plan Sponsor G offers the HRA on the same terms to all full-time 
seasonal employees. The minimum class size requirement does not 
apply to the class offered the HRA in this paragraph (f)(1)(viii) 
(Example 8) because part-time employees are not offered coverage and 
full-time employees are not an applicable class subject to the 
minimum class size requirement if part-time employees are not 
offered coverage.
    (ix) Example 9: Full-time employees in rating area 1 offered 
traditional group health plan; full-time employees in rating area 2 
offered HRA; part-time employees offered no coverage--(A) Facts. 
Plan Sponsor H employs 17 full-time employees and 10 part-time 
employees whose work site is in rating area 1 and 552 full-time 
employees whose work site is in rating area 2. For 2020, Plan 
Sponsor H offers its 17 full-time employees in rating area 1 a 
traditional group health plan and each of its 552 full-time 
employees in rating area 2 an HRA on the same terms. Plan Sponsor H 
offers no coverage to its 10 part-time employees in rating area 1. 
Plan Sponsor H reasonably expects to employ 569 employees on the 
first day of the HRA plan year.

[[Page 29009]]

    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(ix) (Example 
9) because employees whose work sites are in different rating areas 
may be considered different classes and Plan Sponsor H offers the 
HRA on the same terms to all full-time employees in rating area 2. 
The minimum class size requirement applies to the class offered the 
HRA in this paragraph (f)(1)(ix) (Example 9) because the minimum 
class size requirement applies to a class based on a geographic area 
unless the geographic area is a state or a combination of two or 
more entire states. However, the minimum class size requirement 
applies only to the class offered the HRA, and Plan Sponsor H offers 
the HRA to the 552 full-time employees in rating area 2 on the first 
day of the plan year, satisfying the minimum class size requirement 
(because the applicable class size minimum for Plan Sponsor H is 
20).
    (x) Example 10: Employees in rating area 1 offered HRA; 
employees in rating area 2 offered traditional group health plan--
(A) Facts. The facts are the same as in paragraph (f)(1)(ix) of this 
section (Example 9) except that Plan Sponsor H offers its 17 full-
time employees in rating area 1 the HRA and offers its 552 full-time 
employees in rating area 2 the traditional group health plan.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(x) 
(Example 10) because, even though employees whose work sites are in 
different rating areas generally may be considered different classes 
and Plan Sponsor H offers the HRA on the same terms to all 
participants in rating area 1, the HRA fails to satisfy the minimum 
class size requirement. Specifically, the minimum class size 
requirement applies to this paragraph (f)(1)(x) (Example 10) because 
the minimum class size requirement applies to a class based on a 
geographic area unless the geographic area is a state or a 
combination of two or more entire states. Further, the applicable 
class size minimum for Plan Sponsor H is 20 employees, and the HRA 
is only offered to the 17 full-time employees in rating area 1 on 
the first day of the HRA plan year.
    (xi) Example 11: Employees in State 1 and rating area 1 of State 
2 offered HRA; employees in all other rating areas of State 2 
offered traditional group health plan--(A) Facts. For 2020, Plan 
Sponsor I offers an HRA on the same terms to a total of 200 
employees it employs with work sites in State 1 and in rating area 1 
of State 2. Plan Sponsor I offers a traditional group health plan to 
its 150 employees with work sites in other rating areas in State 2. 
Plan Sponsor I reasonably expects to employ 350 employees on the 
first day of the HRA plan year.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(xi) (Example 
11). Plan Sponsor I may treat all of the employees with a work site 
in State 1 and rating area 1 of State 2 as a class of employees 
because employees whose work sites are in different rating areas may 
be considered different classes and a plan sponsor may create a 
class of employees by combining classes of employees, including by 
combining employees whose work site is in one rating area with a 
class of employees whose work site is in a different rating area. 
The minimum class size requirement applies to the class of employees 
offered the HRA (made up of employees in State 1 and in rating area 
1 of State 2) because the minimum class size requirement applies to 
a class based on a geographic area unless the geographic area is a 
state or a combination of two or more entire states. In this case, 
the class is made up of a state plus a rating area which is not the 
entire state. However, this class satisfies the minimum class size 
requirement because the applicable class size minimum for Plan 
Sponsor I is 20, and Plan Sponsor I offered the HRA to 200 employees 
on the first day of the plan year.
    (xii) Example 12: Salaried employees offered a traditional group 
health plan; hourly employees offered an HRA--(A) Facts. Plan 
Sponsor J has 163 salaried employees and 14 hourly employees. For 
2020, Plan Sponsor J offers its 163 salaried employees a traditional 
group health plan and each of its 14 hourly employees an HRA on the 
same terms. Plan Sponsor J reasonably expects to employ 177 
employees on the first day of the HRA plan year.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(xii) 
(Example 12) because, even though salaried and hourly employees 
generally may be considered different classes and Plan Sponsor J 
offers the HRA on the same terms to all hourly employees, the HRA 
fails to satisfy the minimum class size requirement. Specifically, 
the minimum class size requirement applies in this paragraph 
(f)(1)(xii) (Example 12) because employees who are paid on a 
salaried basis and employees who are not paid on a salaried basis 
are applicable classes subject to the minimum class size 
requirement. Because Plan Sponsor J reasonably expects to employ 
between 100 and 200 employees on the first day of the plan year, the 
applicable class size minimum is 10 percent, rounded down to a whole 
number. Ten percent of 177 total employees, rounded down to a whole 
number is 17, and the HRA is offered to only 14 hourly employees.
    (xiii) Example 13: Part-time employees and full-time employees 
offered different HRAs; no traditional group health plan offered--
(A) Facts. Plan Sponsor K has 50 full-time employees and 7 part-time 
employees. For 2020, Plan Sponsor K offers its 50 full-time 
employees $2,000 each in an HRA otherwise provided on the same terms 
and each of its 7 part-time employees $500 in an HRA otherwise 
provided on the same terms. Plan Sponsor K reasonably expects to 
employ 57 employees on the first day of the HRA plan year.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(xiii) (Example 
13) because full-time employees and part-time employees may be 
treated as different classes and Plan Sponsor K offers an HRA on the 
same terms to all the participants in each class. The minimum class 
size requirement does not apply to either the full-time class or the 
part-time class because (although in certain circumstances the 
minimum class size requirement applies to a class of full-time 
employees and a class of part-time employees) Plan Sponsor K does 
not offer any class of employees a traditional group health plan, 
and the minimum class size requirement applies only when, among 
other things, at least one class of employees is offered a 
traditional group health plan while another class is offered an HRA.
    (xiv) Example 14: No employees offered an HRA--(A) Facts. The 
facts are the same facts as in paragraph (f)(1)(xiii) of this 
section (Example 13), except that Plan Sponsor K offers its full-
time employees a traditional group health plan and does not offer 
any group health plan (either a traditional group health plan or an 
HRA) to its part-time employees.
    (B) Conclusion. The regulations set forth under this section do 
not apply to Plan Sponsor K because Plan Sponsor K does not offer an 
individual coverage HRA to any employee.
    (xv) Example 15: Full-time employees offered traditional group 
health plan; part-time employees offered HRA--(A) Facts. The facts 
are the same as in paragraph (f)(1)(xiii) of this section (Example 
13), except that Plan Sponsor K offers its full-time employees a 
traditional group health plan and offers each of its part-time 
employees $500 in an HRA and otherwise on the same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(xv) 
(Example 15) because, even though the full-time employees and the 
part-time employees generally may be treated as different classes, 
in this paragraph (f)(1)(xv) (Example 15), the minimum class size 
requirement applies to the part-time employees, and it is not 
satisfied. Specifically, the minimum class size requirement applies 
to the part-time employees because that requirement applies to an 
applicable class offered an HRA when one class is offered a 
traditional group health plan while another class is offered an HRA, 
and to the part-time and full-time employee classes when one of 
those classes is offered a traditional group health plan while the 
other is offered an HRA. Because Plan Sponsor K reasonably expects 
to employ fewer than 100 employees on the first day of the HRA plan 
year, the applicable class size minimum for Plan Sponsor K is 10 
employees, but Plan Sponsor K offered the HRA only to its 7 part-
time employees.
    (xvi) Example 16: Satisfying minimum class size requirement 
based on employees offered HRA--(A) Facts. Plan Sponsor L employs 78 
full-time employees and 12 part-time employees. For 2020, Plan 
Sponsor L offers its 78 full-time employees a traditional group 
health plan and each of its 12 part-times employees an HRA on the 
same terms. Only 6 part-time employees enroll in the HRA. Plan 
Sponsor L reasonably expects to employ fewer than 100 employees on 
the first day of the HRA plan year.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph

[[Page 29010]]

(f)(1)(xvi) (Example 16) because full-time employees and part-time 
employees may be treated as different classes, Plan Sponsor L offers 
an HRA on the same terms to all the participants in the part-time 
class, and the minimum class size requirement is satisfied. 
Specifically, whether a class of employees satisfies the applicable 
class size minimum is determined as of the first day of the plan 
year based on the number of employees in a class that is offered an 
HRA, not on the number of employees who enroll in the HRA. The 
applicable class size minimum for Plan Sponsor L is 10 employees, 
and Plan Sponsor L offered the HRA to its 12 part-time employees.
    (xvii) Example 17: Student employees offered student premium 
reduction arrangements and same terms requirement--(A) Facts. Plan 
Sponsor M is an institution of higher education that offers each of 
its part-time employees an HRA on the same terms, except that it 
offers its part-time employees who are student employees a student 
premium reduction arrangement, and the student premium reduction 
arrangement provides different amounts to different part-time 
student employees.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(xvii) (Example 
17) because Plan Sponsor M offers the HRA on the same terms to its 
part-time employees who are not students and because the part-time 
student employees offered a student premium reduction arrangement 
(and their varying HRAs) are not taken into account as part-time 
employees for purposes of determining whether a class of employees 
is offered an HRA on the same terms.
    (xiii) Example 18: Student employees offered student premium 
reduction arrangements and minimum class size requirement--(A) 
Facts. Plan Sponsor N is an institution of higher education with 25 
hourly employees. Plan Sponsor N offers 15 of its hourly employees, 
who are student employees, a student premium reduction arrangement 
and it wants to offer its other 10 hourly employees an HRA for 2022. 
Plan Sponsor N offers its salaried employees a traditional group 
health plan. Plan Sponsor N reasonably expects to have 250 employees 
on the first day of the 2022 HRA plan year, 15 of which will have 
offers of student premium reduction arrangements.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(xviii) 
(Example 18). The minimum class size requirement will apply to the 
class of hourly employees to which Plan Sponsor N wants to offer the 
HRA because Plan Sponsor N offers a class of employees a traditional 
group health plan and another class the HRA, and the minimum class 
size requirement generally applies to a class of hourly employees 
offered an HRA. Plan Sponsor N's applicable class size minimum is 20 
because Plan Sponsor N reasonably expects to employ 235 employees on 
the first day of the plan year (250 employees minus 15 employees 
receiving a student premium reduction arrangement). Plan Sponsor N 
may not offer the HRA to its hourly employees because the 10 
employees offered the HRA as of the first day of the plan year does 
not satisfy the applicable class size minimum.

    (2) Examples regarding special rule for new hires. The following 
examples illustrate the provisions of paragraph (c)(3) of this section, 
taking into account the provisions of paragraph (d) of this section, in 
particular the special rule for new hires under paragraph (d)(5) of 
this section. In each example, the HRA is an individual coverage HRA 
that has a calendar year plan year and may reimburse any medical care 
expenses, including premiums for individual health insurance coverage. 
The examples also assume that no participants or dependents are 
Medicare beneficiaries.

    (i) Example 1: Application of special rule for new hires to all 
employees--(A) Facts. For 2021, Plan Sponsor A offers all employees 
a traditional group health plan. For 2022, Plan Sponsor A offers all 
employees hired on or after January 1, 2022, an HRA on the same 
terms and continues to offer the traditional group health plan to 
employees hired before that date. On the first day of the 2022 plan 
year, Plan Sponsor A has 2 new hires who are offered the HRA.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(2)(i) (Example 1) 
because, under the special rule for new hires in paragraph (d)(5) of 
this section, the employees newly hired on and after January 1, 
2022, may be treated as a new hire subclass, Plan Sponsor A offers 
the HRA on the same terms to all participants in the new hire 
subclass, and the minimum class size requirement does not apply to 
the new hire subclass.
    (ii) Example 2: Application of special rule for new hires to 
full-time employees--(A) Facts. For 2021, Plan Sponsor B offers a 
traditional group health plan to its full-time employees and does 
not offer any coverage to its part-time employees. For 2022, Plan 
Sponsor B offers full-time employees hired on or after January 1, 
2022, an HRA on the same terms, continues to offer its full-time 
employees hired before that date a traditional group health plan, 
and continues to offer no coverage to its part-time employees. On 
the first day of the 2022 plan year, Plan Sponsor B has 2 new hire, 
full-time employees who are offered the HRA.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(2)(ii) (Example 
2) because, under the special rule for new hires in paragraph (d)(5) 
of this section, the full-time employees newly hired on and after 
January 1, 2022, may be treated as a new hire subclass and Plan 
Sponsor B offers the HRA on the same terms to all participants in 
the new hire subclass. The minimum class size requirement does not 
apply to the new hire subclass.
    (iii) Example 3: Special rule for new hires impermissibly 
applied retroactively--(A) Facts. For 2025, Plan Sponsor C offers a 
traditional group health plan to its full-time employees. For 2026, 
Plan Sponsor C wants to offer an HRA to its full-time employees 
hired on and after January 1, 2023, while continuing to offer a 
traditional group health plan to its full-time employees hired 
before January 1, 2023.
    (B) Conclusion. The special rule for new hires under paragraph 
(d)(5) of this section does not apply in this paragraph (f)(2)(iii) 
(Example 3) because the rule must be applied prospectively. That is, 
Plan Sponsor C may not, in 2026, choose to apply the special rule 
for new hires retroactive to 2023. If Plan Sponsor C were to offer 
an HRA in this way, it would fail to satisfy the conditions under 
paragraphs (c)(2) and (3) of this section because the new hire 
subclass would not be treated as a subclass for purposes of applying 
those rules and, therefore, all full-time employees would be treated 
as one class to which either a traditional group health plan or an 
HRA could be offered, but not both.
    (iv) Example 4: Permissible second application of the special 
rule for new hires to the same class of employees--(A) Facts. For 
2021, Plan Sponsor D offers all of its full-time employees a 
traditional group health plan. For 2022, Plan Sponsor D applies the 
special rule for new hires and offers an HRA on the same terms to 
all employees hired on and after January 1, 2022, and continues to 
offer a traditional group health plan to full-time employees hired 
before that date. For 2025, Plan Sponsor D discontinues use of the 
special rule for new hires, and again offers all full-time employees 
a traditional group health plan. In 2030, Plan Sponsor D decides to 
apply the special rule for new hires to the full-time employee class 
again, offering an HRA to all full-time employees hired on and after 
January 1, 2030, on the same terms, while continuing to offer 
employees hired before that date a traditional group health plan.
    (B) Conclusion. Plan Sponsor D has permissibly applied the 
special rule for new hires and is in compliance with the 
requirements of paragraphs (c)(2) and (3) of this section.
    (v) Example 5: Impermissible second application of the special 
rule for new hires to the same class of employees--(A) Facts. The 
facts are the same as in paragraph (f)(2)(iv) of this section 
(Example 4), except that for 2025, Plan Sponsor D discontinues use 
of the special rule for new hires by offering all full-time 
employees an HRA on the same terms. Further, for 2030, Plan Sponsor 
D wants to continue to offer an HRA on the same terms to all full-
time employees hired before January 1, 2030, and to offer all full-
time employees hired on or after January 1, 2030, an HRA in a 
different amount.
    (B) Conclusion. Plan Sponsor D may not apply the special rule 
for new hires for 2030 to the class of full-time employees being 
offered an HRA because the special rule for new hires may only be 
applied to a class that is being offered a traditional group health 
plan.
    (vi) Example 6: New full-time employees offered different HRAs 
in different rating areas--(A) Facts. Plan Sponsor E has work sites 
in rating area 1, rating area 2, and rating area 3. For 2021, Plan 
Sponsor E offers its full-time employees a traditional group health 
plan. For 2022, Plan Sponsor E offers

[[Page 29011]]

its full-time employees hired on or after January 1, 2022, in rating 
area 1 an HRA of $3,000, its full-time employees hired on or after 
January 1, 2022, in rating area 2 an HRA of $5,000, and its full-
time employees hired on or after January 1, 2022, in rating area 3 
an HRA of $7,000. Within each class offered an HRA, Plan Sponsor E 
offers the HRA on the same terms. Plan Sponsor E offers its full-
time employees hired prior to January 1, 2022, in each of those 
classes a traditional group health plan. On the first day of the 
2022 plan year, there is one new hire, full-time employee in rating 
area 1, three new hire, full-time employees in rating area 2, and 10 
new hire-full-time employees in rating area 3.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(2)(vi) (Example 
6) because, under the special rule for new hires in paragraph (d)(5) 
of this section, the full-time employees in each of the three rating 
areas newly hired on and after January 1, 2022, may be treated as 
three new hire subclasses and Plan Sponsor E offers the HRA on the 
same terms to all participants in the new hire subclasses. Further, 
the minimum class size requirement does not apply to the new hire 
subclasses.
    (vii) Example 7: New full-time employee class subdivided based 
on rating area--(A) Facts. Plan Sponsor F offers its full-time 
employees hired on or after January 1, 2022, an HRA on the same 
terms and it continues to offer its full-time employees hired before 
that date a traditional group health plan. Plan Sponsor F offers no 
coverage to its part-time employees. For the 2025 plan year, Plan 
Sponsor F wants to subdivide the full-time new hire subclass so that 
those whose work site is in rating area 1 will be offered the 
traditional group health plan and those whose work site is in rating 
area 2 will continue to receive the HRA. Plan Sponsor F reasonably 
expects to employ 219 employees on January 1, 2025. As of January 1, 
2025, Plan Sponsor F has 15 full-time employees whose work site in 
in rating area 2 and who were hired between January 1, 2022, and 
January 1, 2025.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(2)(vii) 
(Example 7) because the new hire subclass has been subdivided in a 
manner that is subject to the minimum class size requirement, and 
the class offered the HRA fails to satisfy the minimum class size 
requirement. Specifically, once the new hire subclass is subdivided 
the general rules for applying the minimum class size requirement 
apply to the employees offered the HRA in the new hire subclass. In 
this case, because the subdivision of the new hire full-time 
subclass is based on rating areas; a class based on rating areas is 
an applicable class subject to the minimum class size requirement; 
and the employees in one rating area are to be offered the HRA, 
while the employees in the other rating area are offered the 
traditional group health plan, the minimum class size requirement 
would apply on and after the date of the subdivision. Further, the 
minimum class size requirement would not be satisfied, because the 
applicable class size minimum for Plan Sponsor F would be 20, and 
only 15 employees in rating area 2 would be offered the HRA.
    (viii) Example 8: New full-time employee class subdivided based 
on state--(A) Facts. The facts are the same as in paragraph 
(f)(2)(vii) of this section (Example 7), except that for the 2025 
plan year, Plan Sponsor F intends to subdivide the new hire, full-
time class so that those in State 1 will be offered the traditional 
group health plan and those in State 2 will each be offered an HRA 
on the same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(2)(viii) (Example 
8) because even though the new hire subclass has been subdivided, it 
has been subdivided in a manner that is not subject to the minimum 
class size requirement as the subdivision is based on the entire 
state.
    (ix) Example 9: New full-time employees and part-time employees 
offered HRA--(A) Facts. In 2021, Plan Sponsor G offers its full-time 
employees a traditional group health plan and does not offer 
coverage to its part-time employees. For the 2022 plan year, Plan 
Sponsor G offers its full-time employees hired on or after January 
1, 2022, and all of its part-time employees, including those hired 
before January 1, 2022, and those hired on and after January 1, 
2022, an HRA on the same terms, and it continues to offer its full-
time employees hired before January 1, 2022, a traditional group 
health plan.
    (B) Conclusion. The minimum class size requirement applies to 
the part-time employees offered the HRA in 2022 because the class is 
being offered an HRA; the special rule for new hires does not apply 
(because this class was not previously offered a traditional group 
health plan) and so it is not a new hire subclass exempt from the 
minimum class size requirement; another class of employees (that is, 
full-time hired before January 1, 2022) are being offered a 
traditional group health plan; and the part-time employee class is 
generally an applicable classes that is subject to the minimum class 
size requirement. However, because the full-time, new hire subclass 
is based on the special rule for new hires, the minimum class size 
requirement does not apply to full-time new hires offered an HRA in 
2022.

    (g) Applicability date. This section applies to plan years 
beginning on or after January 1, 2020.

0
14. Section 2590.715-2711 is amended by revising paragraphs (c), (d), 
and (e) to read as follows:


Sec.  [thinsp]2590.715-2711  No lifetime or annual limits.

* * * * *
    (c) Definition of essential health benefits. The term ``essential 
health benefits'' means essential health benefits under section 1302(b) 
of the Patient Protection and Affordable Care Act and applicable 
regulations. For the purpose of this section, a group health plan or a 
health insurance issuer that is not required to provide essential 
health benefits under section 1302(b) must define ``essential health 
benefits'' in a manner that is consistent with the following:
    (1) For plan years beginning before January 1, 2020, one of the 
EHB-benchmark plans applicable in a State under 45 CFR 156.110, and 
including coverage of any additional required benefits that are 
considered essential health benefits consistent with 45 CFR 
155.170(a)(2), or one of the three Federal Employees Health Benefits 
Program (FEHBP) plan options as defined by 45 CFR 156.100(a)(3), 
supplemented as necessary, to satisfy the standards in 45 CFR 156.110; 
or
    (2) For plan years beginning on or after January 1, 2020, an EHB-
benchmark plan selected by a State in accordance with the available 
options and requirements for EHB-benchmark plan selection at 45 CFR 
156.111, including an EHB-benchmark plan in a State that takes no 
action to change its EHB-benchmark plan and thus retains the EHB-
benchmark plan applicable in that State for the prior year in 
accordance with 45 CFR 156.111(d)(1), and including coverage of any 
additional required benefits that are considered essential health 
benefits consistent with 45 CFR 155.170(a)(2).
    (d) Health reimbursement arrangements (HRAs) and other account-
based group health plans--(1) In general. If an HRA or other account-
based group health plan is integrated with another group health plan or 
individual health insurance coverage and the other group health plan or 
individual health insurance coverage, as applicable, separately is 
subject to and satisfies the requirements in PHS Act section 2711 and 
paragraph (a)(2) of this section, the fact that the benefits under the 
HRA or other account-based group health plan are limited does not cause 
the HRA or other account-based group health plan to fail to satisfy the 
requirements of PHS Act section 2711 and paragraph (a)(2) of this 
section. Similarly, if an HRA or other account-based group health plan 
is integrated with another group health plan or individual health 
insurance coverage and the other group health plan or individual health 
insurance coverage, as applicable, separately is subject to and 
satisfies the requirements in PHS Act section 2713 and Sec.  2590.715-
2713(a)(1) of this part, the fact that the benefits under the HRA or 
other account-based group health plan are limited does not cause the 
HRA or other account-based group health plan to fail to satisfy the 
requirements of PHS Act section 2713

[[Page 29012]]

and Sec.  2590.715-2713(a)(1) of this part. For the purpose of this 
paragraph (d), all individual health insurance coverage, except for 
coverage that consists solely of excepted benefits, is treated as being 
subject to and complying with PHS Act sections 2711 and 2713.
    (2) Requirements for an HRA or other account-based group health 
plan to be integrated with another group health plan. An HRA or other 
account-based group health plan is integrated with another group health 
plan for purposes of PHS Act section 2711 and paragraph (a)(2) of this 
section if it satisfies the requirements under one of the integration 
methods set forth in paragraph (d)(2)(i) or (ii) of this section. For 
purposes of the integration methods under which an HRA or other 
account-based group health plan is integrated with another group health 
plan, integration does not require that the HRA or other account-based 
group health plan and the other group health plan with which it is 
integrated share the same plan sponsor, the same plan document or 
governing instruments, or file a single Form 5500, if applicable. An 
HRA or other account-based group health plan integrated with another 
group health plan for purposes of PHS Act section 2711 and paragraph 
(a)(2) of this section may not be used to purchase individual health 
insurance coverage unless that coverage consists solely of excepted 
benefits, as defined in 45 CFR 148.220.
    (i) Method for integration with a group health plan: Minimum value 
not required. An HRA or other account-based group health plan is 
integrated with another group health plan for purposes of this 
paragraph (d) if:
    (A) The plan sponsor offers a group health plan (other than the HRA 
or other account-based group health plan) to the employee that does not 
consist solely of excepted benefits;
    (B) The employee receiving the HRA or other account-based group 
health plan is actually enrolled in a group health plan (other than the 
HRA or other account-based group health plan) that does not consist 
solely of excepted benefits, regardless of whether the plan is offered 
by the same plan sponsor (referred to as non-HRA group coverage);
    (C) The HRA or other account-based group health plan is available 
only to employees who are enrolled in non-HRA group coverage, 
regardless of whether the non-HRA group coverage is offered by the plan 
sponsor of the HRA or other account-based group health plan (for 
example, the HRA may be offered only to employees who do not enroll in 
an employer's group health plan but are enrolled in other non-HRA group 
coverage, such as a group health plan maintained by the employer of the 
employee's spouse);
    (D) The benefits under the HRA or other account-based group health 
plan are limited to reimbursement of one or more of the following--co-
payments, co-insurance, deductibles, and premiums under the non-HRA 
group coverage, as well as medical care expenses that do not constitute 
essential health benefits as defined in paragraph (c) of this section; 
and
    (E) Under the terms of the HRA or other account-based group health 
plan, an employee (or former employee) is permitted to permanently opt 
out of and waive future reimbursements from the HRA or other account-
based group health plan at least annually and, upon termination of 
employment, either the remaining amounts in the HRA or other account-
based group health plan are forfeited or the employee is permitted to 
permanently opt out of and waive future reimbursements from the HRA or 
other account-based group health plan (see paragraph (d)(3) of this 
section for additional rules regarding forfeiture and waiver).
    (ii) Method for integration with another group health plan: Minimum 
value required. An HRA or other account-based group health plan is 
integrated with another group health plan for purposes of this 
paragraph (d) if:
    (A) The plan sponsor offers a group health plan (other than the HRA 
or other account-based group health plan) to the employee that provides 
minimum value pursuant to Code section 36B(c)(2)(C)(ii) (and its 
implementing regulations and applicable guidance);
    (B) The employee receiving the HRA or other account-based group 
health plan is actually enrolled in a group health plan (other than the 
HRA or other account-based group health plan) that provides minimum 
value pursuant to Code section 36B(c)(2)(C)(ii) (and applicable 
guidance), regardless of whether the plan is offered by the plan 
sponsor of the HRA or other account-based group health plan (referred 
to as non-HRA MV group coverage);
    (C) The HRA or other account-based group health plan is available 
only to employees who are actually enrolled in non-HRA MV group 
coverage, regardless of whether the non-HRA MV group coverage is 
offered by the plan sponsor of the HRA or other account-based group 
health plan (for example, the HRA may be offered only to employees who 
do not enroll in an employer's group health plan but are enrolled in 
other non-HRA MV group coverage, such as a group health plan maintained 
by an employer of the employee's spouse); and
    (D) Under the terms of the HRA or other account-based group health 
plan, an employee (or former employee) is permitted to permanently opt 
out of and waive future reimbursements from the HRA or other account-
based group health plan at least annually, and, upon termination of 
employment, either the remaining amounts in the HRA or other account-
based group health plan are forfeited or the employee is permitted to 
permanently opt out of and waive future reimbursements from the HRA or 
other account-based group health plan (see paragraph (d)(3) of this 
section for additional rules regarding forfeiture and waiver).
    (3) Forfeiture. For purposes of integration under paragraphs 
(d)(2)(i)(E) and (d)(2)(ii)(D) of this section, forfeiture or waiver 
occurs even if the forfeited or waived amounts may be reinstated upon a 
fixed date, a participant's death, or the earlier of the two events 
(the reinstatement event). For the purpose of this paragraph (d)(3), 
coverage under an HRA or other account-based group health plan is 
considered forfeited or waived prior to a reinstatement event only if 
the participant's election to forfeit or waive is irrevocable, meaning 
that, beginning on the effective date of the election and through the 
date of the reinstatement event, the participant and the participant's 
beneficiaries have no access to amounts credited to the HRA or other 
account-based group health plan. This means that upon and after 
reinstatement, the reinstated amounts under the HRA or other account-
based group health plan may not be used to reimburse or pay medical 
care expenses incurred during the period after forfeiture and prior to 
reinstatement.
    (4) Requirements for an HRA or other account-based group health 
plan to be integrated with individual health insurance coverage or 
Medicare Part A and B or Medicare Part C. An HRA or other account-based 
group health plan is integrated with individual health insurance 
coverage or Medicare Part A and B or Medicare Part C (and treated as 
complying with PHS Act sections 2711 and 2713) if the HRA or other 
account-based group health plan satisfies the requirements of Sec.  
2590.702-2(c) of this part (as modified by Sec.  2590.702-2(e), for 
HRAs or other account-based group health plans integrated with Medicare 
Part A and B or Medicare Part C).
    (5) Integration with Medicare Part B and D. For employers that are 
not required to offer their non-HRA group

[[Page 29013]]

health plan coverage to employees who are Medicare beneficiaries, an 
HRA or other account-based group health plan that may be used to 
reimburse premiums under Medicare Part B or D may be integrated with 
Medicare (and deemed to comply with PHS Act sections 2711 and 2713) if 
the following requirements are satisfied with respect to employees who 
would be eligible for the employer's non-HRA group health plan but for 
their eligibility for Medicare (and the integration rules under 
paragraphs (d)(2)(i) and (ii) of this section continue to apply to 
employees who are not eligible for Medicare):
    (i) The plan sponsor offers a group health plan (other than the HRA 
or other account-based group health plan and that does not consist 
solely of excepted benefits) to employees who are not eligible for 
Medicare;
    (ii) The employee receiving the HRA or other account-based group 
health plan is actually enrolled in Medicare Part B or D;
    (iii) The HRA or other account-based group health plan is available 
only to employees who are enrolled in Medicare Part B or D; and
    (iv) The HRA or other account-based group health plan complies with 
paragraphs (d)(2)(i)(E) and (d)(2)(ii)(D) of this section.
    (6) Definitions. The following definitions apply for purposes of 
this section.
    (i) Account-based group health plan. An account-based group health 
plan is an employer-provided group health plan that provides 
reimbursements of medical care expenses with the reimbursement subject 
to a maximum fixed dollar amount for a period. An HRA is a type of 
account-based group health plan. An account-based group health plan 
does not include a qualified small employer health reimbursement 
arrangement, as defined in Code section 9831(d)(2).
    (ii) Medical care expenses. Medical care expenses means expenses 
for medical care as defined under Code section 213(d).
    (e) Applicability date. The provisions of this section are 
applicable to group health plans and health insurance issuers for plan 
years beginning on or after January 1, 2020. Until the applicability 
date for this section, plans and issuers are required to continue to 
comply with the corresponding sections of this part, contained in the 
29 CFR parts 1927 to end edition, revised as of July 1, 2018.

0
15. Section 2590.732 is amended by revising paragraph (c)(3)(i) and 
adding paragraph (c)(3)(viii) to read as follows:


Sec.  2590.732  Special rules relating to group health plans.

* * * * *
    (c) * * *
    (3) * * *
    (i) In general. Limited-scope dental benefits, limited-scope vision 
benefits, or long-term care benefits are excepted if they are provided 
under a separate policy, certificate, or contract of insurance, or are 
otherwise not an integral part of a group health plan as described in 
paragraph (c)(3)(ii) of this section. In addition, benefits provided 
under a health flexible spending arrangement (health FSA) are excepted 
benefits if they satisfy the requirements of paragraph (c)(3)(v) of 
this section; benefits provided under an employee assistance program 
are excepted benefits if they satisfy the requirements of paragraph 
(c)(3)(vi) of this section; benefits provided under limited wraparound 
coverage are excepted benefits if they satisfy the requirements of 
paragraph (c)(3)(vii) of this section; and benefits provided under a 
health reimbursement arrangement or other account-based group health 
plan, other than a health FSA, are excepted benefits if they satisfy 
the requirements of paragraph (c)(3)(viii) of this section.
* * * * *
    (viii) Health reimbursement arrangements (HRAs) and other account-
based group health plans. Benefits provided under an HRA or other 
account-based group health plan, other than a health FSA, are excepted 
if they satisfy all of the requirements of this paragraph (c)(3)(viii). 
See paragraph (c)(3)(v) of this section for the circumstances in which 
benefits provided under a health FSA are excepted benefits. For 
purposes of this paragraph (c)(3)(viii), the term ``HRA or other 
account-based group health plan'' has the same meaning as ``account-
based group health plan'' set forth in Sec.  2590.715-2711(d)(6)(i) of 
this part, except that the term does not include health FSAs. For ease 
of reference, an HRA or other account-based group health plan that 
satisfies the requirements of this paragraph (c)(3)(viii) is referred 
to as an excepted benefit HRA.
    (A) Otherwise not an integral part of the plan. Other group health 
plan coverage that is not limited to excepted benefits and that is not 
an HRA or other account-based group health plan must be made available 
by the same plan sponsor for the plan year to the participant.
    (B) Benefits are limited in amount--(1) Limit on annual amounts 
made available. The amounts newly made available for each plan year 
under the HRA or other account-based group health plan do not exceed 
$1,800. In the case of any plan year beginning after December 31, 2020, 
the dollar amount in the preceding sentence shall be increased by an 
amount equal to such dollar amount multiplied by the cost-of-living 
adjustment. The cost of living adjustment is the percentage (if any) by 
which the C-CPI-U for the preceding calendar year exceeds the C-CPI-U 
for calendar year 2019. The term ``C-CPI-U'' means the Chained Consumer 
Price Index for All Urban Consumers as published by the Bureau of Labor 
Statistics of the Department of Labor. The C-CPI-U for any calendar 
year is the average of the C-CPI-U as of the close of the 12-month 
period ending on March 31 of such calendar year. The values of the C-
CPI-U used for any calendar year shall be the latest values so 
published as of the date on which the Bureau publishes the initial 
value of the C-CPI-U for the month of March for the preceding calendar 
year. Any such increase that is not a multiple of $50 shall be rounded 
down to the next lowest multiple of $50. The Department of the Treasury 
and the Internal Revenue Service will publish the adjusted amount for 
plan years beginning in any calendar year no later than June 1 of the 
preceding calendar year.
    (2) Carryover amounts. If the terms of the HRA or other account-
based group health plan allow unused amounts to be made available to 
participants and dependents in later plan years, such carryover amounts 
are disregarded for purposes of determining whether benefits are 
limited in amount.
    (3) Multiple HRAs or other account-based group health plans. If the 
plan sponsor provides more than one HRA or other account-based group 
health plan to the participant for the same time period, the amounts 
made available under all such plans are aggregated to determine whether 
the benefits are limited in amount, except that HRAs or other account-
based group health plans that reimburse only excepted benefits are not 
included in determining whether the benefits are limited in amount.
    (C) Prohibition on reimbursement of certain health insurance 
premiums. The HRA or other account-based group health plan must not 
reimburse premiums for individual health insurance coverage, group 
health plan coverage (other than COBRA continuation coverage or other 
continuation coverage), or Medicare Part A, B, C, or D, except that the 
HRA or other account-based group health plan

[[Page 29014]]

may reimburse premiums for such coverage that consists solely of 
excepted benefits. See also, paragraph (c)(3)(viii)(F) of this section.
    (D) Uniform availability. The HRA or other account-based group 
health plan is made available under the same terms to all similarly 
situated individuals, as defined in Sec.  2590.702(d) of this part, 
regardless of any health factor (as described in Sec.  2590.702(a)).
    (E) Notice requirement. See sections 2520.102-3(j)(2) and (3) and 
2520.104b-2(a) of this chapter regarding the time, manner, and content 
for summary plan descriptions (including a description of conditions 
pertaining to eligibility to receive benefits; annual or lifetime caps 
or other limits on benefits under the plan; and a description or 
summary of the benefits).
    (F) Special rule. The HRA or other account-based group health plan 
must not reimburse premiums for short-term, limited-duration insurance 
(as defined in Sec.  2590.701-2 of this part) if the conditions of this 
paragraph (c)(3)(viii)(F) are satisfied.
    (1) The HRA or other account-based group health plan is offered by 
a small employer (as defined in PHS Act section 2791(e)(4)).
    (2) The other group health plan coverage offered by the employer 
pursuant to paragraph (c)(3)(viii)(A) of this section is either fully-
insured or partially-insured.
    (3) The Secretary of Health and Human Services (HHS) makes a 
finding, in consultation with the Secretaries of Labor and the 
Treasury, that the reimbursement of premiums for short-term, limited-
duration insurance by excepted benefit HRAs has caused significant harm 
to the small group market in the state that is the principal place of 
business of the small employer.
    (4) The finding by the Secretary of HHS is made after submission of 
a written recommendation by the applicable state authority of such 
state, in a form and manner specified by HHS. The written 
recommendation must include evidence that the reimbursement of premiums 
for short-term, limited-duration insurance by excepted benefit HRAs 
established by insured or partially-insured small employers in the 
state has caused significant harm to the state's small group market, 
including with respect to premiums.
    (5) The restriction shall be imposed or discontinued by publication 
by the Secretary of HHS of a notice in the Federal Register and shall 
apply only prospectively and with a reasonable time for plan sponsors 
to comply.
* * * * *

DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Chapter 1

    For the reasons stated in the preamble, the Department of Health 
and Human Services amends 45 CFR parts 144, 146, 147, and 155 as set 
forth below:

PART 144--REQUIREMENTS RELATING TO HEALTH INSURANCE COVERAGE

0
16. The authority for part 144 is revised to read as follows:

    Authority: 42 U.S.C. 300gg through 300gg-63, 300gg-91, and 
300gg-92.


0
17. Section 144.103 is amended by revising the definition of ``Group 
health insurance coverage'' to read as follows:


Sec.  144.103  Definitions.

* * * * *
    Group health insurance coverage means health insurance coverage 
offered in connection with a group health plan. Individual health 
insurance coverage reimbursed by the arrangements described in 29 CFR 
2510.3-1(l) is not offered in connection with a group health plan, and 
is not group health insurance coverage, provided all the conditions in 
29 CFR 2510.3-1(l) are satisfied.
* * * * *

PART 146--REQUIREMENTS FOR THE GROUP HEALTH INSURANCE MARKET

    18. The authority citation for part 146 continues to read as 
follows:

    Authority:  42 U.S.C. 300gg-1 through 300gg-5, 300gg-11 through 
300gg-23, 300gg-91, and 300gg-92.


0
19. Section 146.123 is added to read as follows:


Sec.  146.123  Special rule allowing integration of Health 
Reimbursement Arrangements (HRAs) and other account-based group health 
plans with individual health insurance coverage and medicare and 
prohibiting discrimination in HRAs and other account-based group health 
plans.

    (a) Scope. This section applies to health reimbursement 
arrangements (HRAs) and other account-based group health plans, as 
defined in Sec.  147.126(d)(6)(i) of this subchapter. For ease of 
reference, the term ``HRA'' is used in this section to include other 
account-based group health plans. For related regulations, see 26 CFR 
1.36B-2(c)(3)(i) and (c)(5), 29 CFR 2510.3-1(l), and 45 CFR 155.420.
    (b) Purpose. This section provides the conditions that an HRA must 
satisfy in order to be integrated with individual health insurance 
coverage for purposes of Public Health Service Act (PHS Act) sections 
2711 and 2713 and Sec.  147.126(d)(4) of this subchapter (referred to 
as an individual coverage HRA). This section also allows an individual 
coverage HRA to be integrated with Medicare for purposes of PHS Act 
sections 2711 and 2713 and Sec.  147.126(d)(4) of this subchapter, 
subject to the conditions provided in this section (see paragraph (e) 
of this section). Some of the conditions set forth in this section 
specifically relate to compliance with PHS Act sections 2711 and 2713 
and some relate to the effect of having or being offered an individual 
coverage HRA on eligibility for the premium tax credit under section 
36B of the Internal Revenue Code (Code). In addition, this section 
provides conditions that an individual coverage HRA must satisfy in 
order to comply with the nondiscrimination provisions in PHS Act 
section 2705 and that are consistent with the provisions of the Patient 
Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 
(2010)), and the Health Care and Education Reconciliation Act of 2010, 
Public Law 111-152 (124 Stat. 1029 (2010)), each as amended, that are 
designed to create a competitive individual market. These conditions 
are intended to prevent an HRA plan sponsor from intentionally or 
unintentionally, directly or indirectly, steering any participants or 
dependents with adverse health factors away from its traditional group 
health plan, if any, and toward individual health insurance coverage.
    (c) General rule. An HRA will be considered to be integrated with 
individual health insurance coverage for purposes of PHS Act sections 
2711 and 2713 and Sec.  147.126(d)(4) of this subchapter and will not 
be considered to discriminate in violation of PHS Act section 2705 
solely because it is integrated with individual health insurance 
coverage, provided that the conditions of this paragraph (c) are 
satisfied. See paragraph (e) of this section for how these conditions 
apply to an individual coverage HRA integrated with Medicare. For 
purposes of this section, medical care expenses means medical care 
expenses as defined in Sec.  147.126(d)(6)(ii) of this subchapter and 
Exchange means Exchange as defined in Sec.  155.20 of this subchapter.
    (1) Enrollment in individual health insurance coverage--(i) In 
general. The HRA must require that the participant and any dependent(s) 
are enrolled in individual health insurance coverage that is subject to 
and complies with the requirements in PHS Act sections 2711

[[Page 29015]]

(and Sec.  147.126(a)(2) of this subchapter) and PHS Act section 2713 
(and Sec.  147.130(a)(1) of this subchapter), for each month that the 
individual(s) are covered by the HRA. For purposes of this paragraph 
(c), all individual health insurance coverage, except for individual 
health insurance coverage that consists solely of excepted benefits, is 
treated as being subject to and complying with PHS Act sections 2711 
and 2713. References to individual health insurance coverage in this 
paragraph (c) do not include individual health insurance coverage that 
consists solely of excepted benefits.
    (ii) Forfeiture. The HRA must provide that if any individual 
covered by the HRA ceases to be covered by individual health insurance 
coverage, the HRA will not reimburse medical care expenses that are 
incurred by that individual after the individual health insurance 
coverage ceases. In addition, if the participant and all dependents 
covered by the participant's HRA cease to be covered by individual 
health insurance coverage, the participant must forfeit the HRA. In 
either case, the HRA must reimburse medical care expenses incurred by 
the individual prior to the cessation of individual health insurance 
coverage to the extent the medical care expenses are otherwise covered 
by the HRA, but the HRA may limit the period to submit medical care 
expenses for reimbursement to a reasonable specified time period. If a 
participant or dependent loses coverage under the HRA for a reason 
other than cessation of individual health insurance coverage, COBRA and 
other continuation coverage requirements may apply.
    (iii) Grace periods and retroactive termination of individual 
health insurance coverage. In the event an individual is initially 
enrolled in individual health insurance coverage and subsequently 
timely fails to pay premiums for the coverage, with the result that the 
individual is in a grace period, the individual is considered to be 
enrolled in individual health insurance coverage for purposes of this 
paragraph (c)(1) and the individual coverage HRA must reimburse medical 
care expenses incurred by the individual during that time period to the 
extent the medical care expenses are otherwise covered by the HRA. If 
the individual fails to pay the applicable premium(s) by the end of the 
grace period and the coverage is cancelled or terminated, including 
retroactively, or if the individual health insurance coverage is 
cancelled or terminated retroactively for some other reason (for 
example, a rescission), an individual coverage HRA must require that a 
participant notify the HRA that coverage has been cancelled or 
terminated and the date on which the cancellation or termination is 
effective. After the individual coverage HRA has received the notice of 
cancellation or termination, the HRA may not reimburse medical care 
expenses incurred on and after the date the individual health insurance 
coverage was cancelled or terminated, which is considered to be the 
date of termination of coverage under the HRA.
    (2) No traditional group health plan may be offered to same 
participants. To the extent a plan sponsor offers any class of 
employees (as defined in paragraph (d) of this section) an individual 
coverage HRA, the plan sponsor may not also offer a traditional group 
health plan to the same class of employees, except as provided in 
paragraph (d)(5) of this section. For purposes of this section, a 
traditional group health plan is any group health plan other than 
either an account-based group health plan or a group health plan that 
consists solely of excepted benefits. Therefore, a plan sponsor may not 
offer a choice between an individual coverage HRA or a traditional 
group health plan to any participant or dependent.
    (3) Same terms requirement--(i) In general. If a plan sponsor 
offers an individual coverage HRA to a class of employees described in 
paragraph (d) of this section, the HRA must be offered on the same 
terms to all participants within the class, except as provided in 
paragraphs (c)(3)(ii) through (vi) and (d)(5) of this section.
    (ii) Carryover amounts, salary reduction arrangements, and transfer 
amounts. Amounts that are not used to reimburse medical care expenses 
for any plan year that are made available to participants in later plan 
years are disregarded for purposes of determining whether an HRA is 
offered on the same terms, provided that the method for determining 
whether participants have access to unused amounts in future years, and 
the methodology and formula for determining the amounts of unused funds 
which they may access in future years, is the same for all participants 
in a class of employees. In addition, the ability to pay the portion of 
the premium for individual health insurance coverage that is not 
covered by the HRA, if any, by using a salary reduction arrangement 
under section 125 of the Code is considered to be a term of the HRA for 
purposes of this paragraph (c)(3). Therefore, an HRA is not provided on 
the same terms unless the salary reduction arrangement, if made 
available to any participant in a class of employees, is made available 
on the same terms to all participants (other than former employees, as 
defined in paragraph (c)(3)(iv) of this section) in the class of 
employees. Further, to the extent that a participant in an individual 
coverage HRA was previously covered by another HRA and the current 
individual coverage HRA makes available amounts that were not used to 
reimburse medical care expenses under the prior HRA (transferred 
amounts), the transferred amounts are disregarded for purposes of 
determining whether the HRA is offered on the same terms, provided that 
if the HRA makes available transferred amounts, it does so on the same 
terms for all participants in the class of employees.
    (iii) Permitted variation. An HRA does not fail to be provided on 
the same terms solely because the maximum dollar amount made available 
to participants in a class of employees to reimburse medical care 
expenses for any plan year increases in accordance with paragraph 
(c)(3)(iii)(A) or (B) of this section.
    (A) Variation due to number of dependents. An HRA does not fail to 
be provided on the same terms to participants in a class of employees 
solely because the maximum dollar amount made available to those 
participants to reimburse medical care expenses for any plan year 
increases as the number of the participant's dependents who are covered 
under the HRA increases, so long as the same maximum dollar amount 
attributable to the increase in family size is made available to all 
participants in that class of employees with the same number of 
dependents covered by the HRA.
    (B) Variation due to age. An HRA does not fail to be provided on 
the same terms to participants in a class of employees solely because 
the maximum dollar amount made available under the terms of the HRA to 
those participants to reimburse medical care expenses for any plan year 
increases as the age of the participant increases, so long as the 
requirements in paragraphs (c)(3)(iii)(B)(1) and (2) of this section 
are satisfied. For the purpose of this paragraph (c)(3)(iii)(B), the 
plan sponsor may determine the age of the participant using any 
reasonable method for a plan year, so long as the plan sponsor 
determines each participant's age for the purpose of this paragraph 
(c)(3)(iii)(B) using the same method for all participants in the class 
of employees for the plan year and the method is determined prior to 
the plan year.
    (1) The same maximum dollar amount attributable to the increase in 
age is

[[Page 29016]]

made available to all participants who are the same age.
    (2) The maximum dollar amount made available to the oldest 
participant(s) is not more than three times the maximum dollar amount 
made available to the youngest participant(s).
    (iv) Former employees. An HRA does not fail to be treated as 
provided on the same terms if the plan sponsor offers the HRA to some, 
but not all, former employees within a class of employees. However, if 
a plan sponsor offers the HRA to one or more former employees within a 
class of employees, the HRA must be offered to the former employee(s) 
on the same terms as to all other employees within the class, except as 
provided in paragraph (c)(3)(ii) of this section. For purposes of this 
section, a former employee is an employee who is no longer performing 
services for the employer.
    (v) New employees or new dependents. For a participant whose 
coverage under the HRA becomes effective later than the first day of 
the plan year, the HRA does not fail to be treated as being provided on 
the same terms to the participant if the maximum dollar amount made 
available to the participant either is the same as the maximum dollar 
amount made available to participants in the participant's class of 
employees whose coverage became effective as of the first day of the 
plan year, or is pro-rated consistent with the portion of the plan year 
in which the participant is covered by the HRA. Similarly, if the HRA 
provides for variation in the maximum amount made available to 
participants in a class of employees based on the number of a 
participant's dependents covered by the HRA, and the number of a 
participant's dependents covered by the HRA changes during a plan year 
(either increasing or decreasing), the HRA does not fail to be treated 
as being provided on the same terms to the participant if the maximum 
dollar amount made available to the participant either is the same as 
the maximum dollar amount made available to participants in the 
participant's class of employees who had the same number of dependents 
covered by the HRA on the first day of the plan year or is pro-rated 
for the remainder of the plan year after the change in the number of 
the participant's dependents covered by the HRA consistent with the 
portion of the plan year in which that number of dependents are covered 
by the HRA. The method the HRA uses to determine amounts made available 
for participants whose coverage under the HRA is effective later than 
the first day of the plan year or who have changes in the number of 
dependents covered by the HRA during a plan year must be the same for 
all participants in the class of employees and the method must be 
determined prior to the beginning of the plan year.
    (vi) HSA-compatible HRAs. An HRA does not fail to be treated as 
provided on the same terms if the plan sponsor offers participants in a 
class of employees a choice between an HSA-compatible individual 
coverage HRA and an individual coverage HRA that is not HSA compatible, 
provided both types of HRAs are offered to all participants in the 
class of employees on the same terms. For the purpose of this paragraph 
(c)(3)(vi), an HSA-compatible individual coverage HRA is an individual 
coverage HRA that is limited in accordance with applicable guidance 
under section 223 of the Code such that an individual covered by such 
an HRA is not disqualified from being an eligible individual under 
section 223 of the Code.
    (vii) Examples. The following examples illustrate the provisions of 
this paragraph (c)(3), without taking into account the provisions of 
paragraph (d) of this section. In each example, the HRA is an 
individual coverage HRA that has a calendar year plan year and may 
reimburse any medical care expenses, including premiums for individual 
health insurance coverage (except as provided in paragraph 
(c)(3)(vii)(E) of this section (Example 5)). Further, in each example, 
assume the HRA is offered on the same terms, except as otherwise 
specified in the example and that no participants or dependents are 
Medicare beneficiaries.

    (A) Example 1: Carryover amounts permitted--(1) Facts. For 2020 
and again for 2021, Plan Sponsor A offers all employees $7,000 each 
in an HRA, and the HRA provides that amounts that are unused at the 
end of a plan year may be carried over to the next plan year, with 
no restrictions on the use of the carryover amounts compared to the 
use of newly available amounts. At the end of 2020, some employees 
have used all of the funds in their HRAs, while other employees have 
balances remaining that range from $500 to $1,750 that are carried 
over to 2021 for those employees.
    (2) Conclusion. The same terms requirement of this paragraph 
(c)(3) is satisfied in this paragraph (c)(3)(vii)(A) (Example 1) for 
2020 because Plan Sponsor A offers all employees the same amount, 
$7,000, in an HRA for that year. The same terms requirement is also 
satisfied for 2021 because Plan Sponsor A again offers all employees 
the same amount for that year, and the carryover amounts that some 
employees have are disregarded in applying the same terms 
requirement because the amount of the carryover for each employee 
(that employee's balance) and each employee's access to the 
carryover amounts is based on the same terms.
    (B) Example 2: Employees hired after the first day of the plan 
year--(1) Facts. For 2020, Plan Sponsor B offers all employees 
employed on January 1, 2020, $7,000 each in an HRA for the plan 
year. Employees hired after January 1, 2020, are eligible to enroll 
in the HRA with an effective date of the first day of the month 
following their date of hire, as long as they have enrolled in 
individual health insurance coverage effective on or before that 
date, and the amount offered to these employees is pro-rated based 
on the number of months remaining in the plan year, including the 
month which includes their coverage effective date.
    (2) Conclusion. The same terms requirement of this paragraph 
(c)(3) is satisfied in this paragraph (c)(3)(vii)(B) (Example 2) for 
2020 because Plan Sponsor B offers all employees employed on the 
first day of the plan year the same amount, $7,000, in an HRA for 
that plan year and all employees hired after January 1, 2020, a pro-
rata amount based on the portion of the plan year during which they 
are enrolled in the HRA.
    (C) Example 3: HRA amounts offered vary based on number of 
dependents--(1) Facts. For 2020, Plan Sponsor C offers its employees 
the following amounts in an HRA: $1,500, if the employee is the only 
individual covered by the HRA; $3,500, if the employee and one 
dependent are covered by the HRA; and $5,000, if the employee and 
more than one dependent are covered by the HRA.
    (2) Conclusion. The same terms requirement of this paragraph 
(c)(3) is satisfied in this paragraph (c)(3)(vii)(C) (Example 3) 
because paragraph (c)(3)(iii)(A) of this section allows the maximum 
dollar amount made available in an HRA to increase as the number of 
the participant's dependents covered by the HRA increases and Plan 
Sponsor C makes the same amount available to each employee with the 
same number of dependents covered by the HRA.
    (D) Example 4: HRA amounts offered vary based on increases in 
employees' ages--(1) Facts. For 2020, Plan Sponsor D offers its 
employees the following amounts in an HRA: $1,000 each for employees 
age 25 to 35; $2,000 each for employees age 36 to 45; $2,500 each 
for employees age 46 to 55; and $4,000 each for employees over age 
55.
    (2) Conclusion. The same terms requirement of this paragraph 
(c)(3) is not satisfied in this paragraph (c)(3)(vii)(D) (Example 4) 
because the terms of the HRA provide the oldest participants (those 
over age 55) with more than three times the amount made available to 
the youngest participants (those ages 25 to 35), in violation of 
paragraph (c)(3)(iii)(B)(2) of this section.
    (E) Example 5: Application of same terms requirement to premium 
only HRA--(1) Facts. For 2020, Plan Sponsor E offers its employees 
an HRA that reimburses only premiums for individual health insurance 
coverage, up to $10,000 for the year. Employee A enrolls in 
individual health insurance coverage with a $5,000 premium for the 
year and is reimbursed $5,000 from the HRA. Employee B enrolls in 
individual

[[Page 29017]]

health insurance coverage with an $8,000 premium for the year and is 
reimbursed $8,000 from the HRA.
    Conclusion. The same terms requirement of this paragraph (c)(3) 
is satisfied in this paragraph (c)(3)(vii)(E) (Example 5) because 
Plan Sponsor E offers the HRA on the same terms to all employees, 
notwithstanding that some employees receive a greater amount of 
reimbursement than others based on the cost of the individual health 
insurance coverage selected by the employee.

    (4) Opt out. Under the terms of the HRA, a participant who is 
otherwise eligible for coverage must be permitted to opt out of and 
waive future reimbursements on behalf of the participant and all 
dependents eligible for the HRA from the HRA once, and only once, with 
respect to each plan year. The HRA may establish timeframes for 
enrollment in (and opting out of) the HRA but, in general, the 
opportunity to opt out must be provided in advance of the first day of 
the plan year. For participants who become eligible to participate in 
the HRA on a date other than the first day of the plan year (or who 
become eligible fewer than 90 days prior to the plan year or for whom 
the notice under paragraph (c)(6) of this section is required to be 
provided as set forth in paragraph (c)(6)(i)(C) of this section), or 
for a dependent who newly becomes eligible during the plan year, this 
opportunity must be provided during the applicable HRA enrollment 
period(s) established by the HRA for these individuals. Further, under 
the terms of the HRA, upon termination of employment, for a participant 
who is covered by the HRA, either the remaining amounts in the HRA must 
be forfeited or the participant must be permitted to permanently opt 
out of and waive future reimbursements from the HRA on behalf of the 
participant and all dependents covered by the HRA.
    (5) Reasonable procedures for coverage substantiation--(i) 
Substantiation of individual health insurance coverage for the plan 
year. The HRA must implement, and comply with, reasonable procedures to 
substantiate that participants and each dependent covered by the HRA 
are, or will be, enrolled in individual health insurance coverage for 
the plan year (or for the portion of the plan year the individual is 
covered by the HRA, if applicable). The HRA may establish the date by 
which this substantiation must be provided, but, in general, the date 
may be no later than the first day of the plan year. However, for a 
participant who is not eligible to participate in the HRA on the first 
day of the plan year (or who becomes eligible fewer than 90 days prior 
to the plan year or for whom the notice under paragraph (c)(6) of this 
section is required to be provided as set forth in paragraph 
(c)(6)(i)(C) of this section), the HRA may establish the date by which 
this substantiation must be provided, but that date may be no later 
than the date the HRA coverage begins. Similarly, for a participant who 
adds a new dependent during the plan year, the HRA may establish the 
date by which this substantiation must be provided, but the date may be 
no later than the date the HRA coverage for the new dependent begins; 
however, to the extent the dependent's coverage under the HRA is 
effective retroactively, the HRA may establish a reasonable time by 
which this substantiation is required, but must require it be provided 
before the HRA will reimburse any medical care expense for the newly 
added dependent. The reasonable procedures an HRA may use to implement 
the substantiation requirement set forth in this paragraph (c)(5)(i) 
may include a requirement that a participant substantiate enrollment by 
providing either:
    (A) A document from a third party (for example, the issuer or an 
Exchange) showing that the participant and any dependents covered by 
the HRA are, or will be, enrolled in individual health insurance 
coverage (for example, an insurance card or an explanation of benefits 
document pertaining to the relevant time period or documentation from 
the Exchange showing that the individual has completed the application 
and plan selection); or
    (B) An attestation by the participant stating that the participant 
and dependent(s) covered by the HRA are, or will be, enrolled in 
individual health insurance coverage, the date coverage began or will 
begin, and the name of the provider of the coverage.
    (ii) Coverage substantiation with each request for reimbursement of 
medical care expenses. Following the initial substantiation of 
coverage, with each new request for reimbursement of an incurred 
medical care expense for the same plan year, the HRA may not reimburse 
a participant for any medical care expenses unless, prior to each 
reimbursement, the participant substantiates that the individual on 
whose behalf medical care expenses are requested to be reimbursed 
continues to be enrolled in individual health insurance coverage for 
the month during which the medical care expenses were incurred. The HRA 
must implement, and comply with, reasonable procedures to satisfy this 
requirement. This substantiation may be in the form of a written 
attestation by the participant, which may be part of the form used to 
request reimbursement, or a document from a third party (for example, a 
health insurance issuer) showing that the participant or the dependent, 
if applicable, are or were enrolled in individual health insurance 
coverage for the applicable month.
    (iii) Reliance on substantiation. For purposes of this paragraph 
(c)(5), an HRA may rely on the participant's documentation or 
attestation unless the HRA, its plan sponsor, or any other entity 
acting in an official capacity on behalf of the HRA has actual 
knowledge that any individual covered by the HRA is not, or will not 
be, enrolled in individual health insurance coverage for the plan year 
(or applicable portion of the plan year) or the month, as applicable.
    (6) Notice requirement--(i) Timing. The HRA must provide a written 
notice to each participant:
    (A) At least 90 calendar days before the beginning of each plan 
year for any participant who is not described in either paragraph 
(c)(6)(i)(B) or (C) of this section;
    (B) No later than the date on which the HRA may first take effect 
for the participant, for any participant who is not eligible to 
participate at the beginning of the plan year (or is not eligible to 
participate at the time the notice is provided at least 90 calendar 
days before the beginning of the plan year pursuant to paragraph 
(c)(6)(i)(A) of this section); or
    (C) No later than the date on which the HRA may first take effect 
for the participant, for any participant who is employed by an employer 
that is first established less than 120 days before the beginning of 
the first plan year of the HRA; this paragraph (c)(6)(i)(C) applies 
only with respect to the first plan year of the HRA.
    (ii) Content. The notice must include all the information described 
in this paragraph (c)(6)(ii) (and may include any additional 
information that does not conflict with that information). To the 
extent that the Departments of the Treasury, Labor and Health and Human 
Services provide model notice language for certain elements of this 
required notice, HRAs are permitted, but not required, to use the model 
language.
    (A) A description of the terms of the HRA, including the maximum 
dollar amount available for each participant (including the self-only 
HRA amount available for the plan year (or the maximum dollar amount 
available for the plan year if the HRA provides for reimbursements up 
to a single dollar amount regardless of whether a participant has self-
only or other than

[[Page 29018]]

self-only coverage)), any rules regarding the proration of the maximum 
dollar amount applicable to any participant (or dependent, if 
applicable) who is not eligible to participate in the HRA for the 
entire plan year, whether (and which of) the participant's dependents 
are eligible for the HRA, a statement that there are different kinds of 
HRAs (including a qualified small employer health reimbursement 
arrangement) and the HRA being offered is an individual coverage HRA, a 
statement that the HRA requires the participant and any covered 
dependents to be enrolled in individual health insurance coverage (or 
Medicare Part A and B or Medicare Part C, if applicable), a statement 
that the coverage in which the participant and any covered dependents 
must be enrolled cannot be short-term, limited-duration insurance or 
consist solely of excepted benefits, if the HRA is subject to the 
Employee Retirement Income Security Act (ERISA), a statement that 
individual health insurance coverage in which the participant and any 
covered dependents are enrolled is not subject to ERISA, if the 
conditions under 29 CFR 2510.3-1(l) are satisfied, the date as of which 
coverage under the HRA may first become effective (both for 
participants whose coverage will become effective on the first day of 
the plan year and for participants whose HRA coverage may become 
effective at a later date), the dates on which the HRA plan year begins 
and ends, and the dates on which the amounts newly made available under 
the HRA will be made available.
    (B) A statement of the right of the participant to opt out of and 
waive future reimbursements from the HRA, as set forth under paragraph 
(c)(4) of this section.
    (C) A description of the potential availability of the premium tax 
credit if the participant opts out of and waives future reimbursements 
from the HRA and the HRA is not affordable for one or more months under 
26 CFR 1.36B-2(c)(5), a statement that even if the participant opts out 
of and waives future reimbursements from an HRA, the offer will 
prohibit the participant (and, potentially, the participant's 
dependents) from receiving a premium tax credit for the participant's 
coverage (or the dependent's coverage, if applicable) on an Exchange 
for any month that the HRA is affordable under 26 CFR 1.36B-2(c)(5), a 
statement describing how the participant may find assistance with 
determining affordability, a statement that, if the participant is a 
former employee, the offer of the HRA does not render the participant 
(or the participant's dependents, if applicable) ineligible for the 
premium tax credit regardless of whether it is affordable under 26 CFR 
1.36B-2(c)(5), and a statement that if the participant or dependent is 
enrolled in Medicare, he or she is ineligible for the premium tax 
credit without regard to the offer or acceptance of the HRA;
    (D) A statement that if the participant accepts the HRA, the 
participant may not claim a premium tax credit for the participant's 
Exchange coverage for any month the HRA may be used to reimburse 
medical care expenses of the participant, and a premium tax credit may 
not be claimed for the Exchange coverage of the participant's 
dependents for any month the HRA may be used to reimburse medical care 
expenses of the dependents.
    (E) A statement that the participant must inform any Exchange to 
which the participant applies for advance payments of the premium tax 
credit of the availability of the HRA; the self-only HRA amount 
available for the HRA plan year (or the maximum dollar amount available 
for the plan year if the HRA provides for reimbursements up to a single 
dollar amount regardless of whether a participant has self-only or 
other than self-only coverage) as set forth in the written notice in 
accordance with paragraph (c)(6)(ii)(A) of this section; whether the 
HRA is also available to the participant's dependents and if so, which 
ones; the date as of which coverage under the HRA may first become 
effective; the date on which the plan year begins and the date on which 
it ends; and whether the participant is a current employee or former 
employee.
    (F) A statement that the participant should retain the written 
notice because it may be needed to determine whether the participant is 
allowed a premium tax credit on the participant's individual income tax 
return.
    (G) A statement that the HRA may not reimburse any medical care 
expense unless the substantiation requirement set forth in paragraph 
(c)(5)(ii) of this section is satisfied and a statement that the 
participant must also provide the substantiation required by paragraph 
(c)(5)(i) of this section.
    (H) A statement that if the individual health insurance coverage 
(or coverage under Medicare Part A and B or Medicare Part C) of a 
participant or dependent ceases, the HRA will not reimburse any medical 
care expenses that are incurred by the participant or dependent, as 
applicable, after the coverage ceases, and a statement that the 
participant must inform the HRA if the participant's or dependent's 
individual health insurance coverage (or coverage under Medicare Part A 
and B or Medicare Part C) is cancelled or terminated retroactively and 
the date on which the cancellation or termination is effective.
    (I) The contact information (including a phone number) for an 
individual or a group of individuals who participants may contact in 
order to receive additional information regarding the HRA. The plan 
sponsor may determine which individual or group of individuals is best 
suited to be the specified contact.
    (J) A statement of availability of a special enrollment period to 
enroll in or change individual health insurance coverage, through or 
outside of an Exchange, for the participant and any dependents who 
newly gain access to the HRA and are not already covered by the HRA.
    (d) Classes of employees--(1) In general. This paragraph (d) sets 
forth the rules for determining classes of employees. Paragraph (d)(2) 
of this section sets forth the specific classes of employees; paragraph 
(d)(3) of this section sets forth a minimum class size requirement that 
applies in certain circumstances; paragraph (d)(4) of this section sets 
forth rules regarding the definition of ``full-time employees,'' 
``part-time employees,'' and ``seasonal employees''; paragraph (d)(5) 
of this section sets forth a special rule for new hires; and paragraph 
(d)(6) of this section addresses student premium reduction 
arrangements. For purposes of this section, including determining 
classes under this paragraph (d), the employer is the common law 
employer and is determined without regard to the rules under sections 
414(b), (c), (m), and (o) of the Code that would treat the common law 
employer as a single employer with certain other entities.
    (2) List of classes. Participants may be treated as belonging to a 
class of employees based on whether they are, or are not, included in 
the classes described in this paragraph (d)(2). If the individual 
coverage HRA is offered to former employees, former employees are 
considered to be in the same class in which they were included 
immediately before separation from service. Before each plan year, a 
plan sponsor must determine for the plan year which classes of 
employees it intends to treat separately and the definition of the 
relevant class(es) it will apply, to the extent these regulations 
permit a choice. After the classes and the definitions of the classes 
are established for a plan year, a plan sponsor may not make changes to 
the classes of employees or the definitions of those relevant classes 
with respect to that plan year.

[[Page 29019]]

    (i) Full-time employees, defined at the election of the plan 
sponsor to mean either full-time employees under section 4980H of the 
Code (and 26 CFR 54.4980H-1(a)(21)) or employees who are not part-time 
employees (as described in 26 CFR 1.105-11(c)(2)(iii)(C));
    (ii) Part-time employees, defined at the election of the plan 
sponsor to mean either employees who are not full-time employees under 
section 4980H of the Code (and under 26 CFR 54.4980H-1(a)(21) (which 
defines full-time employee)) or employees who are part-time employees 
as described in 26 CFR 1.105-11(c)(2)(iii)(C);
    (iii) Employees who are paid on a salary basis;
    (iv) Non-salaried employees (such as, for example, hourly 
employees);
    (v) Employees whose primary site of employment is in the same 
rating area as defined in Sec.  147.102(b) of this subchapter;
    (vi) Seasonal employees, defined at the election of the plan 
sponsor to mean seasonal employees as described in either 26 CFR 
54.4980H-1(a)(38) or 26 CFR 1.105-11(c)(2)(iii)(C);
    (vii) Employees included in a unit of employees covered by a 
particular collective bargaining agreement (or an appropriate related 
participation agreement) in which the plan sponsor participates (as 
described in 26 CFR 1.105-11(c)(2)(iii)(D));
    (viii) Employees who have not satisfied a waiting period for 
coverage (if the waiting period complies with Sec.  147.116 of this 
subchapter);
    (ix) Non-resident aliens with no U.S.-based income (as described in 
26 CFR 1.105-11(c)(2)(iii)(E));
    (x) Employees who, under all the facts and circumstances, are 
employees of an entity that hired the employees for temporary placement 
at an entity that is not the common law employer of the employees and 
that is not treated as a single employer with the entity that hired the 
employees for temporary placement under section 414(b), (c), (m), or 
(o) of the Code; or
    (xi) A group of participants described as a combination of two or 
more of the classes of employees set forth in paragraphs (d)(2)(i) 
through (x) of this section.
    (3) Minimum class size requirement--(i) In general. If a class of 
employees is subject to the minimum class size requirement as set forth 
in this paragraph (d)(3), the class must consist of at least a minimum 
number of employees (as described in paragraphs (d)(3)(iii) and (iv) of 
this section), otherwise, the plan sponsor may not treat that class as 
a separate class of employees. Paragraph (d)(3)(ii) of this section 
sets forth the circumstances in which the minimum class size 
requirement applies to a class of employees, paragraph (d)(3)(iii) of 
this section sets forth the rules for determining the applicable class 
size minimum, and paragraph (d)(3)(iv) of this section sets forth the 
rules for a plan sponsor to determine if it satisfies the minimum class 
size requirement with respect to a class of employees.
    (ii) Circumstances in which minimum class size requirement 
applies--(A) The minimum class size requirement applies only if a plan 
sponsor offers a traditional group health plan to one or more classes 
of employees and offers an individual coverage HRA to one or more other 
classes of employees.
    (B) The minimum class size requirement does not apply to a class of 
employees offered a traditional group health plan or a class of 
employees offered no coverage.
    (C) The minimum class size requirement applies to a class of 
employees offered an individual coverage HRA if the class is full-time 
employees, part-time employees, salaried employees, non-salaried 
employees, or employees whose primary site of employment is in the same 
rating area (described in paragraph (d)(2)(i), (ii), (iii), (iv), or 
(v) of this section, respectively, and referred to collectively as the 
applicable classes or individually as an applicable class), except 
that:
    (1) In the case of the class of employees whose primary site of 
employment is in the same rating area (as described in paragraph 
(d)(2)(v) of this section), the minimum class size requirement does not 
apply if the geographic area defining the class is a State or a 
combination of two or more entire States; and
    (2) In the case of the classes of employees that are full-time 
employees and part-time employees (as described in paragraphs (d)(2)(i) 
and (ii) of this section, respectively), the minimum class size 
requirement applies only to those classes (and the classes are only 
applicable classes) if the employees in one such class are offered a 
traditional group health plan while the employees in the other such 
class are offered an individual coverage HRA. In such a case, the 
minimum class size requirement applies only to the class offered an 
individual coverage HRA.
    (D) A class of employees offered an individual coverage HRA is also 
subject to the minimum class size requirement if the class is a class 
of employees created by combining at least one of the applicable 
classes (as defined in paragraph (d)(3)(ii)(C) of this section) with 
any other class, except that the minimum class size requirement shall 
not apply to a class that is the result of a combination of one of the 
applicable classes and a class of employees who have not satisfied a 
waiting period (as described in paragraph (d)(2)(viii) of this 
section).
    (iii) Determination of the applicable class size minimum--(A) In 
general. The minimum number of employees that must be in a class of 
employees that is subject to the minimum class size requirement (the 
applicable class size minimum) is determined prior to the beginning of 
the plan year for each plan year of the individual coverage HRA and is:
    (1) 10, for an employer with fewer than 100 employees;
    (2) A number, rounded down to a whole number, equal to 10 percent 
of the total number of employees, for an employer with 100 to 200 
employees; and
    (3) 20, for an employer with more than 200 employees.
    (B) Determining employer size. For purposes of this paragraph 
(d)(3), the number of employees of an employer is determined in advance 
of the plan year of the HRA based on the number of employees that the 
employer reasonably expects to employ on the first day of the plan 
year.
    (iv) Determining if a class satisfies the applicable class size 
minimum. For purposes of this paragraph (d)(3), whether a class of 
employees satisfies the applicable class size minimum for a plan year 
of the individual coverage HRA is based on the number of employees in 
the class offered the individual coverage HRA as of the first day of 
the plan year. Therefore, this determination is not based on the number 
of employees that actually enroll in the individual coverage HRA, and 
this determination is not affected by changes in the number of 
employees in the class during the plan year.
    (4) Consistency requirement. For any plan year, a plan sponsor may 
define ``full-time employee,'' ``part-time employee,'' and ``seasonal 
employee'' in accordance with the relevant provisions of sections 
105(h) or 4980H of the Code, as set forth in paragraphs (d)(2)(i), 
(ii), and (vi) of this section, if:
    (i) To the extent applicable under the HRA for the plan year, each 
of the three classes of employees are defined in accordance with 
section 105(h) of the Code or each of the three classes of employees 
are defined in accordance with section 4980H of the Code for the plan 
year; and

[[Page 29020]]

    (ii) The HRA plan document sets forth the applicable definitions 
prior to the beginning of the plan year to which the definitions will 
apply.
    (5) Special rule for new hires--(i) In general. Notwithstanding 
paragraphs (c)(2) and (3) of this section, a plan sponsor that offers a 
traditional group health plan to a class of employees may prospectively 
offer the employees in that class of employees who are hired on or 
after a certain future date (the new hire date) an individual coverage 
HRA (with this group of employees referred to as the new hire 
subclass), while continuing to offer employees in that class of 
employees who are hired before the new hire date a traditional group 
health plan (with the rule set forth in this sentence referred to as 
the special rule for new hires). For the new hire subclass, the 
individual coverage HRA must be offered on the same terms to all 
participants within the subclass, in accordance with paragraph (c)(3) 
of this section. In accordance with paragraph (c)(2) of this section, a 
plan sponsor may not offer a choice between an individual coverage HRA 
or a traditional group health plan to any employee in the new hire 
subclass or to any employee in the class who is not a member of the new 
hire subclass.
    (ii) New hire date. A plan sponsor may set the new hire date for a 
class of employees prospectively as any date on or after January 1, 
2020. A plan sponsor may set different new hire dates prospectively for 
separate classes of employees.
    (iii) Discontinuation of use of special rule for new hires and 
multiple applications of the special rule for new hires. A plan sponsor 
may discontinue use of the special rule for new hires at any time for 
any class of employees. In that case, the new hire subclass is no 
longer treated as a separate subclass of employees. In the event a plan 
sponsor applies the special rule for new hires to a class of employees 
and later discontinues use of the rule to the class of employees, the 
plan sponsor may later apply the rule if the application of the rule 
would be permitted under the rules for initial application of the 
special rule for new hires. If a plan sponsor, in accordance with the 
requirements for the special rule for new hires, applies the rule to a 
class of employees subsequent to any prior application and 
discontinuance of the rule to that class, the new hire date must be 
prospective.
    (iv) Application of the minimum class size requirement under the 
special rule for new hires. The minimum class size requirement set 
forth in paragraph (d)(3) of this section does not apply to the new 
hire subclass. However, if a plan sponsor subdivides the new hire 
subclass subsequent to creating the new hire subclass, the minimum 
class size requirement set forth in paragraph (d)(3) of this section 
applies to any class of employees created by subdividing the new hire 
subclass, if the minimum class size requirement otherwise applies.
    (6) Student employees offered student premium reduction 
arrangements. For purposes of this section, if an institution of higher 
education (as defined in the Higher Education Act of 1965) offers a 
student employee a student premium reduction arrangement, the employee 
is not considered to be part of the class of employees to which the 
employee would otherwise belong. For the purpose of this paragraph 
(d)(6) and paragraph (f)(1) of this section, a student premium 
reduction arrangement is defined as any program offered by an 
institution of higher education under which the cost of insured or 
self-insured student health coverage is reduced for certain students 
through a credit, offset, reimbursement, stipend or similar 
arrangement. A student employee offered a student premium reduction 
arrangement is also not counted for purposes of determining the 
applicable class size minimum under paragraph (d)(3)(iii) of this 
section. If a student employee is not offered a student premium 
reduction arrangement (including if the student employee is offered an 
individual coverage HRA instead), the student employee is considered to 
be part of the class of employees to which the employee otherwise 
belongs and is counted for purposes of determining the applicable class 
size minimum under paragraph (d)(3)(iii) of this section.
    (e) Integration of Individual Coverage HRAs with Medicare--(1) 
General rule. An individual coverage HRA will be considered to be 
integrated with Medicare (and deemed to comply with PHS Act sections 
2711 and 2713 and Sec.  147.126(d)(4) of this subchapter), provided 
that the conditions of paragraph (c) of this section are satisfied, 
subject to paragraph (e)(2) of this section. Nothing in this section 
requires that a participant and his or her dependents all have the same 
type of coverage; therefore, an individual coverage HRA may be 
integrated with Medicare for some individuals and with individual 
health insurance coverage for others, including, for example, a 
participant enrolled in Medicare Part A and B or Part C and his or her 
dependents enrolled in individual health insurance coverage.
    (2) Application of conditions in paragraph (c) of this section--(i) 
In general. Except as provided in paragraph (e)(2)(ii) of this section, 
in applying the conditions of paragraph (c) of this section with 
respect to integration with Medicare, a reference to ``individual 
health insurance coverage'' is deemed to refer to coverage under 
Medicare Part A and B or Part C. References in this section to 
integration of an HRA with Medicare refer to integration of an 
individual coverage HRA with Medicare Part A and B or Part C.
    (ii) Exceptions. For purposes of the statement regarding ERISA 
under the notice content element under paragraph (c)(6)(ii)(A) of this 
section and the statement regarding the availability of a special 
enrollment period under the notice content element under paragraph 
(c)(6)(ii)(J) of this section, the term individual health insurance 
coverage means only individual health insurance coverage and does not 
also mean coverage under Medicare Part A and B or Part C.
    (f) Examples--(1) Examples regarding classes and the minimum class 
size requirement. The following examples illustrate the provisions of 
paragraph (c)(3) of this section, taking into account the provisions of 
paragraphs (d)(1) through (4) and (d)(6) of this section. In each 
example, the HRA is an individual coverage HRA that may reimburse any 
medical care expenses, including premiums for individual health 
insurance coverage and it is assumed that no participants or dependents 
are Medicare beneficiaries.

    (i) Example 1: Collectively bargained employees offered 
traditional group health plan; non-collectively bargained employees 
offered HRA--(A) Facts. For 2020, Plan Sponsor A offers its 
employees covered by a collective bargaining agreement a traditional 
group health plan (as required by the collective bargaining 
agreement) and all other employees (non-collectively bargained 
employees) each an HRA on the same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(i) (Example 1) 
because collectively bargained and non-collectively bargained 
employees may be treated as different classes of employees, one of 
which may be offered a traditional group health plan and the other 
of which may be offered an individual coverage HRA, and Plan Sponsor 
A offers the HRA on the same terms to all participants who are non-
collectively bargained employees. The minimum class size requirement 
does not apply to this paragraph (f)(1)(i) (Example 1) even though 
Plan Sponsor A offers one class a traditional group health plan and 
one class the HRA because collectively bargained and non-
collectively bargained employees are not applicable classes that are 
subject to the minimum class size requirement.
    (ii) Example 2: Collectively bargained employees in one unit 
offered traditional

[[Page 29021]]

group health plan and in another unit offered HRA--(A) Facts. For 
2020, Plan Sponsor B offers its employees covered by a collective 
bargaining agreement with Local 100 a traditional group health plan 
(as required by the collective bargaining agreement), and its 
employees covered by a collective bargaining agreement with Local 
200 each an HRA on the same terms (as required by the collective 
bargaining agreement).
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(ii) (Example 
2) because the employees covered by the collective bargaining 
agreements with the two separate bargaining units (Local 100 and 
Local 200) may be treated as two different classes of employees and 
Plan Sponsor B offers an HRA on the same terms to the participants 
covered by the agreement with Local 200. The minimum class size 
requirement does not apply to this paragraph (f)(1)(ii) (Example 2) 
even though Plan Sponsor B offers the Local 100 employees a 
traditional group health plan and the Local 200 employees an HRA 
because collectively bargained employees are not applicable classes 
that are subject to the minimum class size requirement.
    (iii) Example 3: Employees in a waiting period offered no 
coverage; other employees offered an HRA--(A) Facts. For 2020, Plan 
Sponsor C offers its employees who have completed a waiting period 
that complies with the requirements for waiting periods in Sec.  
147.116 of this subchapter each an HRA on the same terms and does 
not offer coverage to its employees who have not completed the 
waiting period.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(iii) (Example 
3) because employees who have completed a waiting period and 
employees who have not completed a waiting period may be treated as 
different classes and Plan Sponsor C offers the HRA on the same 
terms to all participants who have completed the waiting period. The 
minimum class size requirement does not apply to this paragraph 
(f)(1)(iii) (Example 3) because Plan Sponsor C does not offer at 
least one class of employees a traditional group health plan and 
because the class of employees who have not completed a waiting 
period and the class of employees who have completed a waiting 
period are not applicable classes that are subject to the minimum 
class size requirement.
    (iv) Example 4: Employees in a waiting period offered an HRA; 
other employees offered a traditional group health plan--(A) Facts. 
For 2020, Plan Sponsor D offers its employees who have completed a 
waiting period that complies with the requirements for waiting 
periods in Sec.  147.116 of this subchapter a traditional group 
health plan and offers its employees who have not completed the 
waiting period each an HRA on the same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(iv) (Example 
4) because employees who have completed a waiting period and 
employees who have not completed a waiting period may be treated as 
different classes and Plan Sponsor D offers an HRA on the same terms 
to all participants who have not completed the waiting period. The 
minimum class size requirement does not apply to this paragraph 
(f)(1)(iv) (Example 4) even though Plan Sponsor D offers employees 
who have completed a waiting period a traditional group health plan 
and employees who have not completed a waiting period an HRA because 
the class of employees who have not completed a waiting period is 
not an applicable class that is subject to the minimum class size 
requirement (nor is the class made up of employees who have 
completed the waiting period).
    (v) Example 5: Staffing firm employees temporarily placed with 
customers offered an HRA; other employees offered a traditional 
group health plan--(A) Facts. Plan Sponsor E is a staffing firm that 
places certain of its employees on temporary assignments with 
customers that are not the common law employers of Plan Sponsor E's 
employees or treated as a single employer with Plan Sponsor E under 
section 414(b), (c), (m), or (o) of the Code (unrelated entities); 
other employees work in Plan Sponsor E's office managing the 
staffing business (non-temporary employees). For 2020, Plan Sponsor 
E offers its employees who are on temporary assignments with 
customers each an HRA on the same terms. All other employees are 
offered a traditional group health plan.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(v) (Example 5) 
because the employees who are hired for temporary placement at an 
unrelated entity and non-temporary employees of Plan Sponsor E may 
be treated as different classes of employees and Plan Sponsor E 
offers an HRA on the same terms to all participants temporarily 
placed with customers. The minimum class size requirement does not 
apply to this paragraph (f)(1)(v) (Example 5) even though Plan 
Sponsor E offers one class a traditional group health plan and one 
class the HRA because the class of employees hired for temporary 
placement is not an applicable class that is subject to the minimum 
class size requirement (nor is the class made up of non-temporary 
employees).
    (vi) Example 6: Staffing firm employees temporarily placed with 
customers in rating area 1 offered an HRA; other employees offered a 
traditional group health plan--(A) Facts. The facts are the same as 
in paragraph (f)(1)(v) of this section (Example 5), except that Plan 
Sponsor E has work sites in rating area 1 and rating area 2, and it 
offers its 10 employees on temporary assignments with a work site in 
rating area 1 an HRA on the same terms. Plan Sponsor E has 200 other 
employees in rating areas 1 and 2, including its non-temporary 
employees in rating areas 1 and 2 and its employees on temporary 
assignments with a work site in rating area 2, all of whom are 
offered a traditional group health plan.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(vi) 
(Example 6) because, even though the employees who are temporarily 
placed with customers generally may be treated as employees of a 
different class, because Plan Sponsor E is also using a rating area 
to identify the class offered the HRA (which is an applicable class 
for the minimum class size requirement) and is offering one class 
the HRA and another class the traditional group health plan, the 
minimum class size requirement applies to the class offered the HRA, 
and the class offered the HRA fails to satisfy the minimum class 
size requirement. Because Plan Sponsor E employs 210 employees, the 
applicable class size minimum is 20, and the HRA is offered to only 
10 employees.
    (vii) Example 7: Employees in State 1 offered traditional group 
health plan; employees in State 2 offered HRA--(A) Facts. Plan 
Sponsor F employs 45 employees whose work site is in State 1 and 7 
employees whose primary site of employment is in State 2. For 2020, 
Plan Sponsor F offers its 45 employees in State 1 a traditional 
group health plan, and each of its 7 employees in State 2 an HRA on 
the same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(vii) (Example 
7) because Plan Sponsor F offers the HRA on the same terms to all 
employees with a work site in State 2 and that class is a 
permissible class under paragraph (d) of this section. This is 
because employees whose work sites are in different rating areas may 
be considered different classes and a plan sponsor may create a 
class of employees by combining classes of employees, including by 
combining employees whose work site is in one rating area with 
employees whose work site is in a different rating area, or by 
combining all employees whose work site is in a state. The minimum 
class size requirement does not apply to this paragraph (f)(1)(vii) 
(Example 7) because the minimum class size requirement does not 
apply if the geographic area defining a class of employees is a 
state or a combination of two or more entire states.
    (viii) Example 8: Full-time seasonal employees offered HRA; all 
other full-time employees offered traditional group health plan; 
part-time employees offered no coverage--(A) Facts. Plan Sponsor G 
employs 6 full-time seasonal employees, 75 full-time employees who 
are not seasonal employees, and 5 part-time employees. For 2020, 
Plan Sponsor G offers each of its 6 full-time seasonal employees an 
HRA on the same terms, its 75 full-time employees who are not 
seasonal employees a traditional group health plan, and offers no 
coverage to its 5 part-time employees.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(viii) (Example 
8) because full-time seasonal employees and full-time employees who 
are not seasonal employees may be considered different classes and 
Plan Sponsor G offers the HRA on the same terms to all full-time 
seasonal employees. The minimum class size requirement does not 
apply to the class offered the HRA in this paragraph (f)(1)(viii) 
(Example 8) because part-time employees are not offered coverage

[[Page 29022]]

and full-time employees are not an applicable class subject to the 
minimum class size requirement if part-time employees are not 
offered coverage.
    (ix) Example 9: Full-time employees in rating area 1 offered 
traditional group health plan; full-time employees in rating area 2 
offered HRA; part-time employees offered no coverage--(A) Facts. 
Plan Sponsor H employs 17 full-time employees and 10 part-time 
employees whose work site is in rating area 1 and 552 full-time 
employees whose work site is in rating area 2. For 2020, Plan 
Sponsor H offers its 17 full-time employees in rating area 1 a 
traditional group health plan and each of its 552 full-time 
employees in rating area 2 an HRA on the same terms. Plan Sponsor H 
offers no coverage to its 10 part-time employees in rating area 1. 
Plan Sponsor H reasonably expects to employ 569 employees on the 
first day of the HRA plan year.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(ix) (Example 
9) because employees whose work sites are in different rating areas 
may be considered different classes and Plan Sponsor H offers the 
HRA on the same terms to all full-time employees in rating area 2. 
The minimum class size requirement applies to the class offered the 
HRA in this paragraph (f)(1)(ix) (Example 9) because the minimum 
class size requirement applies to a class based on a geographic area 
unless the geographic area is a state or a combination of two or 
more entire states. However, the minimum class size requirement 
applies only to the class offered the HRA, and Plan Sponsor H offers 
the HRA to the 552 full-time employees in rating area 2 on the first 
day of the plan year, satisfying the minimum class size requirement 
(because the applicable class size minimum for Plan Sponsor H is 
20).
    (x) Example 10: Employees in rating area 1 offered HRA; 
employees in rating area 2 offered traditional group health plan--
(A) Facts. The facts are the same as in paragraph (f)(1)(ix) of this 
section (Example 9) except that Plan Sponsor H offers its 17 full-
time employees in rating area 1 the HRA and offers its 552 full-time 
employees in rating area 2 the traditional group health plan.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(x) 
(Example 10) because, even though employees whose work sites are in 
different rating areas generally may be considered different classes 
and Plan Sponsor H offers the HRA on the same terms to all 
participants in rating area 1, the HRA fails to satisfy the minimum 
class size requirement. Specifically, the minimum class size 
requirement applies to this paragraph (f)(1)(x) (Example 10) because 
the minimum class size requirement applies to a class based on a 
geographic area unless the geographic area is a state or a 
combination of two or more entire states. Further, the applicable 
class size minimum for Plan Sponsor H is 20 employees, and the HRA 
is only offered to the 17 full-time employees in rating area 1 on 
the first day of the HRA plan year.
    (xi) Example 11: Employees in State 1 and rating area 1 of State 
2 offered HRA; employees in all other rating areas of State 2 
offered traditional group health plan--(A) Facts. For 2020, Plan 
Sponsor I offers an HRA on the same terms to a total of 200 
employees it employs with work sites in State 1 and in rating area 1 
of State 2. Plan Sponsor I offers a traditional group health plan to 
its 150 employees with work sites in other rating areas in State 2. 
Plan Sponsor I reasonably expects to employ 350 employees on the 
first day of the HRA plan year.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(xi) (Example 
11). Plan Sponsor I may treat all of the employees with a work site 
in State 1 and rating area 1 of State 2 as a class of employees 
because employees whose work sites are in different rating areas may 
be considered different classes and a plan sponsor may create a 
class of employees by combining classes of employees, including by 
combining employees whose work site is in one rating area with a 
class of employees whose work site is in a different rating area. 
The minimum class size requirement applies to the class of employees 
offered the HRA (made up of employees in State 1 and in rating area 
1 of State 2) because the minimum class size requirement applies to 
a class based on a geographic area unless the geographic area is a 
state or a combination of two or more entire states. In this case, 
the class is made up of a state plus a rating area which is not the 
entire state. However, this class satisfies the minimum class size 
requirement because the applicable class size minimum for Plan 
Sponsor I is 20, and Plan Sponsor I offered the HRA to 200 employees 
on the first day of the plan year.
    (xii) Example 12: Salaried employees offered a traditional group 
health plan; hourly employees offered an HRA--(A) Facts. Plan 
Sponsor J has 163 salaried employees and 14 hourly employees. For 
2020, Plan Sponsor J offers its 163 salaried employees a traditional 
group health plan and each of its 14 hourly employees an HRA on the 
same terms. Plan Sponsor J reasonably expects to employ 177 
employees on the first day of the HRA plan year.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(xii) 
(Example 12) because, even though salaried and hourly employees 
generally may be considered different classes and Plan Sponsor J 
offers the HRA on the same terms to all hourly employees, the HRA 
fails to satisfy the minimum class size requirement. Specifically, 
the minimum class size requirement applies in this paragraph 
(f)(1)(xii) (Example 12) because employees who are paid on a 
salaried basis and employees who are not paid on a salaried basis 
are applicable classes subject to the minimum class size 
requirement. Because Plan Sponsor J reasonably expects to employ 
between 100 and 200 employees on the first day of the plan year, the 
applicable class size minimum is 10 percent, rounded down to a whole 
number. Ten percent of 177 total employees, rounded down to a whole 
number is 17, and the HRA is offered to only 14 hourly employees.
    (xiii) Example 13: Part-time employees and full-time employees 
offered different HRAs; no traditional group health plan offered--
(A) Facts. Plan Sponsor K has 50 full-time employees and 7 part-time 
employees. For 2020, Plan Sponsor K offers its 50 full-time 
employees $2,000 each in an HRA otherwise provided on the same terms 
and each of its 7 part-time employees $500 in an HRA otherwise 
provided on the same terms. Plan Sponsor K reasonably expects to 
employ 57 employees on the first day of the HRA plan year.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(xiii) (Example 
13) because full-time employees and part-time employees may be 
treated as different classes and Plan Sponsor K offers an HRA on the 
same terms to all the participants in each class. The minimum class 
size requirement does not apply to either the full-time class or the 
part-time class because (although in certain circumstances the 
minimum class size requirement applies to a class of full-time 
employees and a class of part-time employees) Plan Sponsor K does 
not offer any class of employees a traditional group health plan, 
and the minimum class size requirement applies only when, among 
other things, at least one class of employees is offered a 
traditional group health plan while another class is offered an HRA.
    (xiv) Example 14: No employees offered an HRA--(A) Facts. The 
facts are the same facts as in paragraph (f)(1)(xiii) of this 
section (Example 13), except that Plan Sponsor K offers its full-
time employees a traditional group health plan and does not offer 
any group health plan (either a traditional group health plan or an 
HRA) to its part-time employees.
    (B) Conclusion. The regulations set forth under this section do 
not apply to Plan Sponsor K because Plan Sponsor K does not offer an 
individual coverage HRA to any employee.
    (xv) Example 15: Full-time employees offered traditional group 
health plan; part-time employees offered HRA--(A) Facts. The facts 
are the same as in paragraph (f)(1)(xiii) of this section (Example 
13), except that Plan Sponsor K offers its full-time employees a 
traditional group health plan and offers each of its part-time 
employees $500 in an HRA and otherwise on the same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(xv) 
(Example 15) because, even though the full-time employees and the 
part-time employees generally may be treated as different classes, 
in this paragraph (f)(1)(xv) (Example 15), the minimum class size 
requirement applies to the part-time employees, and it is not 
satisfied. Specifically, the minimum class size requirement applies 
to the part-time employees because that requirement applies to an 
applicable class offered an HRA when one class is offered a 
traditional group health plan while another class is offered an HRA, 
and to the part-time and full-time employee classes when one of 
those classes is offered a traditional group health plan while the 
other is offered an HRA. Because Plan Sponsor K reasonably expects 
to employ

[[Page 29023]]

fewer than 100 employees on the first day of the HRA plan year, the 
applicable class size minimum for Plan Sponsor K is 10 employees, 
but Plan Sponsor K offered the HRA only to its 7 part-time 
employees.
    (xvi) Example 16: Satisfying minimum class size requirement 
based on employees offered HRA--(A) Facts. Plan Sponsor L employs 78 
full-time employees and 12 part-time employees. For 2020, Plan 
Sponsor L offers its 78 full-time employees a traditional group 
health plan and each of its 12 part-times employees an HRA on the 
same terms. Only 6 part-time employees enroll in the HRA. Plan 
Sponsor L reasonably expects to employ fewer than 100 employees on 
the first day of the HRA plan year.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(xvi) (Example 
16) because full-time employees and part-time employees may be 
treated as different classes, Plan Sponsor L offers an HRA on the 
same terms to all the participants in the part-time class, and the 
minimum class size requirement is satisfied. Specifically, whether a 
class of employees satisfies the applicable class size minimum is 
determined as of the first day of the plan year based on the number 
of employees in a class that is offered an HRA, not on the number of 
employees who enroll in the HRA. The applicable class size minimum 
for Plan Sponsor L is 10 employees, and Plan Sponsor L offered the 
HRA to its 12 part-time employees.
    (xvii) Example 17: Student employees offered student premium 
reduction arrangements and same terms requirement--(A) Facts. Plan 
Sponsor M is an institution of higher education that offers each of 
its part-time employees an HRA on the same terms, except that it 
offers its part-time employees who are student employees a student 
premium reduction arrangement, and the student premium reduction 
arrangement provides different amounts to different part-time 
student employees.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(1)(xvii) (Example 
17) because Plan Sponsor M offers the HRA on the same terms to its 
part-time employees who are not students and because the part-time 
student employees offered a student premium reduction arrangement 
(and their varying HRAs) are not taken into account as part-time 
employees for purposes of determining whether a class of employees 
is offered an HRA on the same terms.
    (xiii) Example 18: Student employees offered student premium 
reduction arrangements and minimum class size requirement--(A) 
Facts. Plan Sponsor N is an institution of higher education with 25 
hourly employees. Plan Sponsor N offers 15 of its hourly employees, 
who are student employees, a student premium reduction arrangement 
and it wants to offer its other 10 hourly employees an HRA for 2022. 
Plan Sponsor N offers its salaried employees a traditional group 
health plan. Plan Sponsor N reasonably expects to have 250 employees 
on the first day of the 2022 HRA plan year, 15 of which will have 
offers of student premium reduction arrangements.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(1)(xviii) 
(Example 18). The minimum class size requirement will apply to the 
class of hourly employees to which Plan Sponsor N wants to offer the 
HRA because Plan Sponsor N offers a class of employees a traditional 
group health plan and another class the HRA, and the minimum class 
size requirement generally applies to a class of hourly employees 
offered an HRA. Plan Sponsor N's applicable class size minimum is 20 
because Plan Sponsor N reasonably expects to employ 235 employees on 
the first day of the plan year (250 employees minus 15 employees 
receiving a student premium reduction arrangement). Plan Sponsor N 
may not offer the HRA to its hourly employees because the 10 
employees offered the HRA as of the first day of the plan year does 
not satisfy the applicable class size minimum.

    (2) Examples regarding special rule for new hires. The following 
examples illustrate the provisions of paragraph (c)(3) of this section, 
taking into account the provisions of paragraph (d) of this section, in 
particular the special rule for new hires under paragraph (d)(5) of 
this section. In each example, the HRA is an individual coverage HRA 
that has a calendar year plan year and may reimburse any medical care 
expenses, including premiums for individual health insurance coverage. 
The examples also assume that no participants or dependents are 
Medicare beneficiaries.

    (i) Example 1: Application of special rule for new hires to all 
employees--(A) Facts. For 2021, Plan Sponsor A offers all employees 
a traditional group health plan. For 2022, Plan Sponsor A offers all 
employees hired on or after January 1, 2022, an HRA on the same 
terms and continues to offer the traditional group health plan to 
employees hired before that date. On the first day of the 2022 plan 
year, Plan Sponsor A has 2 new hires who are offered the HRA.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(2)(i) (Example 1) 
because, under the special rule for new hires in paragraph (d)(5) of 
this section, the employees newly hired on and after January 1, 
2022, may be treated as a new hire subclass, Plan Sponsor A offers 
the HRA on the same terms to all participants in the new hire 
subclass, and the minimum class size requirement does not apply to 
the new hire subclass.
    (ii) Example 2: Application of special rule for new hires to 
full-time employees--(A) Facts. For 2021, Plan Sponsor B offers a 
traditional group health plan to its full-time employees and does 
not offer any coverage to its part-time employees. For 2022, Plan 
Sponsor B offers full-time employees hired on or after January 1, 
2022, an HRA on the same terms, continues to offer its full-time 
employees hired before that date a traditional group health plan, 
and continues to offer no coverage to its part-time employees. On 
the first day of the 2022 plan year, Plan Sponsor B has 2 new hire, 
full-time employees who are offered the HRA.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(2)(ii) (Example 
2) because, under the special rule for new hires in paragraph (d)(5) 
of this section, the full-time employees newly hired on and after 
January 1, 2022, may be treated as a new hire subclass and Plan 
Sponsor B offers the HRA on the same terms to all participants in 
the new hire subclass. The minimum class size requirement does not 
apply to the new hire subclass.
    (iii) Example 3: Special rule for new hires impermissibly 
applied retroactively--(A) Facts. For 2025, Plan Sponsor C offers a 
traditional group health plan to its full-time employees. For 2026, 
Plan Sponsor C wants to offer an HRA to its full-time employees 
hired on and after January 1, 2023, while continuing to offer a 
traditional group health plan to its full-time employees hired 
before January 1, 2023.
    (B) Conclusion. The special rule for new hires under paragraph 
(d)(5) of this section does not apply in this paragraph (f)(2)(iii) 
(Example 3) because the rule must be applied prospectively. That is, 
Plan Sponsor C may not, in 2026, choose to apply the special rule 
for new hires retroactive to 2023. If Plan Sponsor C were to offer 
an HRA in this way, it would fail to satisfy the conditions under 
paragraphs (c)(2) and (3) of this section because the new hire 
subclass would not be treated as a subclass for purposes of applying 
those rules and, therefore, all full-time employees would be treated 
as one class to which either a traditional group health plan or an 
HRA could be offered, but not both.
    (iv) Example 4: Permissible second application of the special 
rule for new hires to the same class of employees--(A) Facts. For 
2021, Plan Sponsor D offers all of its full-time employees a 
traditional group health plan. For 2022, Plan Sponsor D applies the 
special rule for new hires and offers an HRA on the same terms to 
all employees hired on and after January 1, 2022, and continues to 
offer a traditional group health plan to full-time employees hired 
before that date. For 2025, Plan Sponsor D discontinues use of the 
special rule for new hires, and again offers all full-time employees 
a traditional group health plan. In 2030, Plan Sponsor D decides to 
apply the special rule for new hires to the full-time employee class 
again, offering an HRA to all full-time employees hired on and after 
January 1, 2030, on the same terms, while continuing to offer 
employees hired before that date a traditional group health plan.
    (B) Conclusion. Plan Sponsor D has permissibly applied the 
special rule for new hires and is in compliance with the 
requirements of paragraphs (c)(2) and (3) of this section.
    (v) Example 5: Impermissible second application of the special 
rule for new hires to the same class of employees--(A) Facts. The 
facts are the same as in paragraph (f)(2)(iv) of this section 
(Example 4), except that for 2025, Plan Sponsor D discontinues use 
of the special rule for new hires by offering all full-time 
employees an HRA on the same terms. Further, for 2030, Plan

[[Page 29024]]

Sponsor D wants to continue to offer an HRA on the same terms to all 
full-time employees hired before January 1, 2030, and to offer all 
full-time employees hired on or after January 1, 2030, an HRA in a 
different amount.
    (B) Conclusion. Plan Sponsor D may not apply the special rule 
for new hires for 2030 to the class of full-time employees being 
offered an HRA because the special rule for new hires may only be 
applied to a class that is being offered a traditional group health 
plan.
    (vi) Example 6: New full-time employees offered different HRAs 
in different rating areas--(A) Facts. Plan Sponsor E has work sites 
in rating area 1, rating area 2, and rating area 3. For 2021, Plan 
Sponsor E offers its full-time employees a traditional group health 
plan. For 2022, Plan Sponsor E offers its full-time employees hired 
on or after January 1, 2022, in rating area 1 an HRA of $3,000, its 
full-time employees hired on or after January 1, 2022, in rating 
area 2 an HRA of $5,000, and its full-time employees hired on or 
after January 1, 2022, in rating area 3 an HRA of $7,000. Within 
each class offered an HRA, Plan Sponsor E offers the HRA on the same 
terms. Plan Sponsor E offers its full-time employees hired prior to 
January 1, 2022, in each of those classes a traditional group health 
plan. On the first day of the 2022 plan year, there is one new hire, 
full-time employee in rating area 1, three new hire, full-time 
employees in rating area 2, and 10 new hire-full-time employees in 
rating area 3.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(2)(vi) (Example 
6) because, under the special rule for new hires in paragraph (d)(5) 
of this section, the full-time employees in each of the three rating 
areas newly hired on and after January 1, 2022, may be treated as 
three new hire subclasses and Plan Sponsor E offers the HRA on the 
same terms to all participants in the new hire subclasses. Further, 
the minimum class size requirement does not apply to the new hire 
subclasses.
    (vii) Example 7: New full-time employee class subdivided based 
on rating area--(A) Facts. Plan Sponsor F offers its full-time 
employees hired on or after January 1, 2022, an HRA on the same 
terms and it continues to offer its full-time employees hired before 
that date a traditional group health plan. Plan Sponsor F offers no 
coverage to its part-time employees. For the 2025 plan year, Plan 
Sponsor F wants to subdivide the full-time new hire subclass so that 
those whose work site is in rating area 1 will be offered the 
traditional group health plan and those whose work site is in rating 
area 2 will continue to receive the HRA. Plan Sponsor F reasonably 
expects to employ 219 employees on January 1, 2025. As of January 1, 
2025, Plan Sponsor F has 15 full-time employees whose work site in 
in rating area 2 and who were hired between January 1, 2022, and 
January 1, 2025.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is not satisfied in this paragraph (f)(2)(vii) 
(Example 7) because the new hire subclass has been subdivided in a 
manner that is subject to the minimum class size requirement, and 
the class offered the HRA fails to satisfy the minimum class size 
requirement. Specifically, once the new hire subclass is subdivided 
the general rules for applying the minimum class size requirement 
apply to the employees offered the HRA in the new hire subclass. In 
this case, because the subdivision of the new hire full-time 
subclass is based on rating areas; a class based on rating areas is 
an applicable class subject to the minimum class size requirement; 
and the employees in one rating area are to be offered the HRA, 
while the employees in the other rating area are offered the 
traditional group health plan, the minimum class size requirement 
would apply on and after the date of the subdivision. Further, the 
minimum class size requirement would not be satisfied, because the 
applicable class size minimum for Plan Sponsor F would be 20, and 
only 15 employees in rating area 2 would be offered the HRA.
    (viii) Example 8: New full-time employee class subdivided based 
on state--(A) Facts. The facts are the same as in paragraph 
(f)(2)(vii) of this section (Example 7), except that for the 2025 
plan year, Plan Sponsor F intends to subdivide the new hire, full-
time class so that those in State 1 will be offered the traditional 
group health plan and those in State 2 will each be offered an HRA 
on the same terms.
    (B) Conclusion. The same terms requirement of paragraph (c)(3) 
of this section is satisfied in this paragraph (f)(2)(viii) (Example 
8) because even though the new hire subclass has been subdivided, it 
has been subdivided in a manner that is not subject to the minimum 
class size requirement as the subdivision is based on the entire 
state.
    (ix) Example 9: New full-time employees and part-time employees 
offered HRA--(A) Facts. In 2021, Plan Sponsor G offers its full-time 
employees a traditional group health plan and does not offer 
coverage to its part-time employees. For the 2022 plan year, Plan 
Sponsor G offers its full-time employees hired on or after January 
1, 2022, and all of its part-time employees, including those hired 
before January 1, 2022, and those hired on and after January 1, 
2022, an HRA on the same terms, and it continues to offer its full-
time employees hired before January 1, 2022, a traditional group 
health plan.
    (B) Conclusion. The minimum class size requirement applies to 
the part-time employees offered the HRA in 2022 because the class is 
being offered an HRA; the special rule for new hires does not apply 
(because this class was not previously offered a traditional group 
health plan) and so it is not a new hire subclass exempt from the 
minimum class size requirement; another class of employees (that is, 
full-time hired before January 1, 2022) are being offered a 
traditional group health plan; and the part-time employee class is 
generally an applicable classes that is subject to the minimum class 
size requirement. However, because the full-time, new hire subclass 
is based on the special rule for new hires, the minimum class size 
requirement does not apply to full-time new hires offered an HRA in 
2022.
    (g) Applicability date. This section applies to plan years 
beginning on or after January 1, 2020.

0
20. Section 146.145 is amended by revising paragraph (b)(3)(i) and 
adding paragraph (b)(3)(viii) to read as follows:


Sec.  146.145  Special rules relating to group health plans.

* * * * *
    (b) * * *
    (3) * * *
    (i) In general. Limited-scope dental benefits, limited-scope vision 
benefits, or long-term care benefits are excepted if they are provided 
under a separate policy, certificate, or contract of insurance, or are 
otherwise not an integral part of a group health plan as described in 
paragraph (b)(3)(ii) of this section. In addition, benefits provided 
under a health flexible spending arrangement (health FSA) are excepted 
benefits if they satisfy the requirements of paragraph (b)(3)(v) of 
this section; benefits provided under an employee assistance program 
are excepted benefits if they satisfy the requirements of paragraph 
(b)(3)(vi) of this section; benefits provided under limited wraparound 
coverage are excepted benefits if they satisfy the requirements of 
paragraph (b)(3)(vii) of this section; and benefits provided under a 
health reimbursement arrangement or other account-based group health 
plan, other than a health FSA, are excepted benefits if they satisfy 
the requirements of paragraph (b)(3)(viii) of this section.
* * * * *
    (viii) Health reimbursement arrangements (HRAs) and other account-
based group health plans. Benefits provided under an HRA or other 
account-based group health plan, other than a health FSA, are excepted 
if they satisfy all of the requirements of this paragraph (b)(3)(viii). 
See paragraph (b)(3)(v) of this section for the circumstances in which 
benefits provided under a health FSA are excepted benefits. For 
purposes of this paragraph (b)(3)(viii), the term ``HRA or other 
account-based group health plan'' has the same meaning as ``account-
based group health plan'' set forth in Sec.  147.126(d)(6)(i) of this 
subchapter, except that the term does not include health FSAs. For ease 
of reference, an HRA or other account-based group health plan that 
satisfies the requirements of this paragraph (b)(3)(viii) is referred 
to as an excepted benefit HRA.
    (A) Otherwise not an integral part of the plan. Other group health 
plan coverage that is not limited to excepted benefits and that is not 
an HRA or other account-based group health plan must

[[Page 29025]]

be made available by the same plan sponsor for the plan year to the 
participant.
    (B) Benefits are limited in amount--(1) Limit on annual amounts 
made available. The amounts newly made available for each plan year 
under the HRA or other account-based group health plan do not exceed 
$1,800. In the case of any plan year beginning after December 31, 2020, 
the dollar amount in the preceding sentence shall be increased by an 
amount equal to such dollar amount multiplied by the cost-of-living 
adjustment. The cost of living adjustment is the percentage (if any) by 
which the C-CPI-U for the preceding calendar year exceeds the C-CPI-U 
for calendar year 2019. The term ``C-CPI-U'' means the Chained Consumer 
Price Index for All Urban Consumers as published by the Bureau of Labor 
Statistics of the Department of Labor. The C-CPI-U for any calendar 
year is the average of the C-CPI-U as of the close of the 12-month 
period ending on March 31 of such calendar year. The values of the C-
CPI-U used for any calendar year shall be the latest values so 
published as of the date on which the Bureau publishes the initial 
value of the C-CPI-U for the month of March for the preceding calendar 
year. Any such increase that is not a multiple of $50 shall be rounded 
down to the next lowest multiple of $50. The Department of the Treasury 
and the Internal Revenue Service will publish the adjusted amount for 
plan years beginning in any calendar year no later than June 1 of the 
preceding calendar year.
    (2) Carryover amounts. If the terms of the HRA or other account-
based group health plan allow unused amounts to be made available to 
participants and dependents in later plan years, such carryover amounts 
are disregarded for purposes of determining whether benefits are 
limited in amount.
    (3) Multiple HRAs or other account-based group health plans. If the 
plan sponsor provides more than one HRA or other account-based group 
health plan to the participant for the same time period, the amounts 
made available under all such plans are aggregated to determine whether 
the benefits are limited in amount, except that HRAs or other account-
based group health plans that reimburse only excepted benefits are not 
included in determining whether the benefits are limited in amount.
    (C) Prohibition on reimbursement of certain health insurance 
premiums. The HRA or other account-based group health plan must not 
reimburse premiums for individual health insurance coverage, group 
health plan coverage (other than COBRA continuation coverage or other 
continuation coverage), or Medicare Part A, B, C, or D, except that the 
HRA or other account-based group health plan may reimburse premiums for 
such coverage that consists solely of excepted benefits. See also, 
paragraph (b)(3)(viii)(F) of this section.
    (D) Uniform availability. The HRA or other account-based group 
health plan is made available under the same terms to all similarly 
situated individuals, as defined in Sec.  146.121(d), regardless of any 
health factor (as described in Sec.  146.121(a)).
    (E) [Reserved]
    (F) Special rule. The HRA or other account-based group health plan 
must not reimburse premiums for short-term, limited-duration insurance 
(as defined in Sec.  144.103 of this subchapter) if the conditions of 
this paragraph (b)(3)(viii)(F) are satisfied.
    (1) The HRA or other account-based group health plan is offered by 
a small employer (as defined in PHS Act section 2791(e)(4)).
    (2) The other group health plan coverage offered by the employer 
pursuant to paragraph (b)(3)(viii)(A) of this section is either fully-
insured or partially-insured.
    (3) The Secretary makes a finding, in consultation with the 
Secretaries of Labor and the Treasury, that the reimbursement of 
premiums for short-term, limited-duration insurance by excepted benefit 
HRAs has caused significant harm to the small group market in the state 
that is the principal place of business of the small employer.
    (4) The finding by the Secretary is made after submission of a 
written recommendation by the applicable state authority of such state, 
in a form and manner specified by HHS. The written recommendation must 
include evidence that the reimbursement of premiums for short-term, 
limited-duration insurance by excepted benefit HRAs established by 
insured or partially-insured small employers in the state has caused 
significant harm to the state's small group market, including with 
respect to premiums.
    (5) The restriction shall be imposed or discontinued by publication 
by the Secretary of a notice in the Federal Register and shall apply 
only prospectively and with a reasonable time for plan sponsors to 
comply.
* * * * *

PART 147--HEALTH INSURANCE REFORM REQUIREMENTS FOR THE GROUP AND 
INDIVIDUAL HEALTH INSURANCE MARKETS

0
21. The authority citation for part 147 is revised to read as follows:

    Authority:  42 U.S.C. 300gg through 300gg-63, 300gg-91, and 
300gg-92, as amended.


0
22. Section 147.126 is amended by revising paragraphs (c), (d), and (e) 
to read as follows:


Sec.  147.126  No Lifetime or annual limits.

* * * * *
    (c) Definition of essential health benefits. The term ``essential 
health benefits'' means essential health benefits under section 1302(b) 
of the Patient Protection and Affordable Care Act and applicable 
regulations. For the purpose of this section, a group health plan or a 
health insurance issuer that is not required to provide essential 
health benefits under section 1302(b) must define ``essential health 
benefits'' in a manner that is consistent with the following:
    (1) For plan years beginning before January 1, 2020, one of the 
EHB-benchmark plans applicable in a State under Sec.  156.110 of this 
subchapter, and including coverage of any additional required benefits 
that are considered essential health benefits consistent with Sec.  
155.170(a)(2) of this subchapter, or one of the three Federal Employees 
Health Benefits Program (FEHBP) plan options as defined by Sec.  
156.100(a)(3) of this subchapter, supplemented as necessary, to satisfy 
the standards in Sec.  156.110 of this subchapter; or
    (2) For plan years beginning on or after January 1, 2020, an EHB-
benchmark plan selected by a State in accordance with the available 
options and requirements for EHB-benchmark plan selection at Sec.  
156.111 of this subchapter, including an EHB-benchmark plan in a State 
that takes no action to change its EHB-benchmark plan and thus retains 
the EHB-benchmark plan applicable in that State for the prior year in 
accordance with Sec.  156.111(d)(1) of this subchapter, and including 
coverage of any additional required benefits that are considered 
essential health benefits consistent with Sec.  155.170(a)(2) of this 
subchapter.
    (d) Health reimbursement arrangements (HRAs) and other account-
based group health plans--(1) In general. If an HRA or other account-
based group health plan is integrated with another group health plan or 
individual health insurance coverage and the other group health plan or 
individual health insurance coverage, as

[[Page 29026]]

applicable, separately is subject to and satisfies the requirements in 
PHS Act section 2711 and paragraph (a)(2) of this section, the fact 
that the benefits under the HRA or other account-based group health 
plan are limited does not cause the HRA or other account-based group 
health plan to fail to satisfy the requirements of PHS Act section 2711 
and paragraph (a)(2) of this section. Similarly, if an HRA or other 
account-based group health plan is integrated with another group health 
plan or individual health insurance coverage and the other group health 
plan or individual health insurance coverage, as applicable, separately 
is subject to and satisfies the requirements in PHS Act section 2713 
and Sec.  147.130(a)(1) of this subchapter, the fact that the benefits 
under the HRA or other account-based group health plan are limited does 
not cause the HRA or other account-based group health plan to fail to 
satisfy the requirements of PHS Act section 2713 and Sec.  
147.130(a)(1) of this subchapter. For the purpose of this paragraph 
(d), all individual health insurance coverage, except for coverage that 
consists solely of excepted benefits, is treated as being subject to 
and complying with PHS Act sections 2711 and 2713.
    (2) Requirements for an HRA or other account-based group health 
plan to be integrated with another group health plan. An HRA or other 
account-based group health plan is integrated with another group health 
plan for purposes of PHS Act section 2711 and paragraph (a)(2) of this 
section if it satisfies the requirements under one of the integration 
methods set forth in paragraph (d)(2)(i) or (ii) of this section. For 
purposes of the integration methods under which an HRA or other 
account-based group health plan is integrated with another group health 
plan, integration does not require that the HRA or other account-based 
group health plan and the other group health plan with which it is 
integrated share the same plan sponsor, the same plan document or 
governing instruments, or file a single Form 5500, if applicable. An 
HRA or other account-based group health plan integrated with another 
group health plan for purposes of PHS Act section 2711 and paragraph 
(a)(2) of this section may not be used to purchase individual health 
insurance coverage unless that coverage consists solely of excepted 
benefits, as defined in Sec.  148.220 of this subchapter.
    (i) Method for integration with a group health plan: Minimum value 
not required. An HRA or other account-based group health plan is 
integrated with another group health plan for purposes of this 
paragraph (d) if:
    (A) The plan sponsor offers a group health plan (other than the HRA 
or other account-based group health plan) to the employee that does not 
consist solely of excepted benefits;
    (B) The employee receiving the HRA or other account-based group 
health plan is actually enrolled in a group health plan (other than the 
HRA or other account-based group health plan) that does not consist 
solely of excepted benefits, regardless of whether the plan is offered 
by the same plan sponsor (referred to as non-HRA group coverage);
    (C) The HRA or other account-based group health plan is available 
only to employees who are enrolled in non-HRA group coverage, 
regardless of whether the non-HRA group coverage is offered by the plan 
sponsor of the HRA or other account-based group health plan (for 
example, the HRA may be offered only to employees who do not enroll in 
an employer's group health plan but are enrolled in other non-HRA group 
coverage, such as a group health plan maintained by the employer of the 
employee's spouse);
    (D) The benefits under the HRA or other account-based group health 
plan are limited to reimbursement of one or more of the following--co-
payments, co-insurance, deductibles, and premiums under the non-HRA 
group coverage, as well as medical care expenses that do not constitute 
essential health benefits as defined in paragraph (c) of this section; 
and
    (E) Under the terms of the HRA or other account-based group health 
plan, an employee (or former employee) is permitted to permanently opt 
out of and waive future reimbursements from the HRA or other account-
based group health plan at least annually and, upon termination of 
employment, either the remaining amounts in the HRA or other account-
based group health plan are forfeited or the employee is permitted to 
permanently opt out of and waive future reimbursements from the HRA or 
other account-based group health plan (see paragraph (d)(3) of this 
section for additional rules regarding forfeiture and waiver).
    (ii) Method for integration with another group health plan: Minimum 
value required. An HRA or other account-based group health plan is 
integrated with another group health plan for purposes of this 
paragraph (d) if:
    (A) The plan sponsor offers a group health plan (other than the HRA 
or other account-based group health plan) to the employee that provides 
minimum value pursuant to section 36B(c)(2)(C)(ii) of the Code (and its 
implementing regulations and applicable guidance);
    (B) The employee receiving the HRA or other account-based group 
health plan is actually enrolled in a group health plan (other than the 
HRA or other account-based group health plan) that provides minimum 
value pursuant to section 36B(c)(2)(C)(ii) of the Code (and applicable 
guidance), regardless of whether the plan is offered by the plan 
sponsor of the HRA or other account-based group health plan (referred 
to as non-HRA MV group coverage);
    (C) The HRA or other account-based group health plan is available 
only to employees who are actually enrolled in non-HRA MV group 
coverage, regardless of whether the non-HRA MV group coverage is 
offered by the plan sponsor of the HRA or other account-based group 
health plan (for example, the HRA may be offered only to employees who 
do not enroll in an employer's group health plan but are enrolled in 
other non-HRA MV group coverage, such as a group health plan maintained 
by an employer of the employee's spouse); and
    (D) Under the terms of the HRA or other account-based group health 
plan, an employee (or former employee) is permitted to permanently opt 
out of and waive future reimbursements from the HRA or other account-
based group health plan at least annually, and, upon termination of 
employment, either the remaining amounts in the HRA or other account-
based group health plan are forfeited or the employee is permitted to 
permanently opt out of and waive future reimbursements from the HRA or 
other account-based group health plan (see paragraph (d)(3) of this 
section for additional rules regarding forfeiture and waiver).
    (3) Forfeiture. For purposes of integration under paragraphs 
(d)(2)(i)(E) and (d)(2)(ii)(D) of this section, forfeiture or waiver 
occurs even if the forfeited or waived amounts may be reinstated upon a 
fixed date, a participant's death, or the earlier of the two events 
(the reinstatement event). For the purpose of this paragraph (d)(3), 
coverage under an HRA or other account-based group health plan is 
considered forfeited or waived prior to a reinstatement event only if 
the participant's election to forfeit or waive is irrevocable, meaning 
that, beginning on the effective date of the election and through the 
date of the reinstatement event, the participant and the participant's 
beneficiaries have no access to amounts credited to the HRA or other 
account-based group health plan. This means that upon and after 
reinstatement, the reinstated amounts

[[Page 29027]]

under the HRA or other account-based group health plan may not be used 
to reimburse or pay medical care expenses incurred during the period 
after forfeiture and prior to reinstatement.
    (4) Requirements for an HRA or other account-based group health 
plan to be integrated with individual health insurance coverage or 
Medicare Part A and B or Medicare Part C. An HRA or other account-based 
group health plan is integrated with individual health insurance 
coverage or Medicare Part A and B or Medicare Part C (and treated as 
complying with PHS Act sections 2711 and 2713) if the HRA or other 
account-based group health plan satisfies the requirements of Sec.  
146.123(c) of this subchapter (as modified by Sec.  146.123(e), for 
HRAs or other account-based group health plans integrated with Medicare 
Part A and B or Medicare Part C).
    (5) Integration with Medicare Part B and D. For employers that are 
not required to offer their non-HRA group health plan coverage to 
employees who are Medicare beneficiaries, an HRA or other account-based 
group health plan that may be used to reimburse premiums under Medicare 
Part B or D may be integrated with Medicare (and deemed to comply with 
PHS Act sections 2711 and 2713) if the following requirements are 
satisfied with respect to employees who would be eligible for the 
employer's non-HRA group health plan but for their eligibility for 
Medicare (and the integration rules under paragraphs (d)(2)(i) and (ii) 
of this section continue to apply to employees who are not eligible for 
Medicare):
    (i) The plan sponsor offers a group health plan (other than the HRA 
or other account-based group health plan and that does not consist 
solely of excepted benefits) to employees who are not eligible for 
Medicare;
    (ii) The employee receiving the HRA or other account-based group 
health plan is actually enrolled in Medicare Part B or D;
    (iii) The HRA or other account-based group health plan is available 
only to employees who are enrolled in Medicare Part B or D; and
    (iv) The HRA or other account-based group health plan complies with 
paragraphs (d)(2)(i)(E) and (d)(2)(ii)(D) of this section.
    (6) Definitions. The following definitions apply for purposes of 
this section.
    (i) Account-based group health plan. An account-based group health 
plan is an employer-provided group health plan that provides 
reimbursements of medical care expenses with the reimbursement subject 
to a maximum fixed dollar amount for a period. An HRA is a type of 
account-based group health plan. An account-based group health plan 
does not include a qualified small employer health reimbursement 
arrangement, as defined in section 9831(d)(2) of the Code.
    (ii) Medical care expenses. Medical care expenses means expenses 
for medical care as defined under section 213(d) of the Code.
    (e) Applicability date. The provisions of this section are 
applicable to group health plans and health insurance issuers for plan 
years beginning on or after January 1, 2020. Until the applicability 
date for this section, plans and issuers are required to continue to 
comply with the corresponding sections of this subchapter B, contained 
in the 45 CFR, subtitle A, parts 1-199, revised as of October 1, 2018.

PART 155--EXCHANGE ESTABLISHMENT STANDARDS AND OTHER RELATED 
STANDARDS UNDER THE AFFORDABLE CARE ACT

0
23. The authority citation for part 155 is revised to read as follows:

    Authority:  42 U.S.C. 18021-18024, 18031-18033, 18041-18042, 
18051, 18054, 18071, and 18081-18083.

0
24. Section 155.420 is amended
0
a. By revising paragraph (a)(4)(iii) introductory text;
0
b. By adding paragraph (b)(2)(vi);
0
c. By redesignating paragraph (c)(3) as paragraph (c)(4); By adding a 
new paragraph (c)(3);
0
d. In paragraph (d)(12) by removing ``; or'' and adding ``;'' in its 
place;
0
e. In paragraph (d)(13) by removing the period at the end of the 
paragraph and adding ``; or'' in its place; and
0
f. By adding paragraph (d)(14).
    The revisions and additions read as follows:


Sec.  155.420  Special enrollment periods.

* * * * *
    (a) * * *
    (4) * * *
    (iii) For the other triggering events specified in paragraph (d) of 
this section, except for paragraphs (d)(2)(i), (d)(4), and (d)(6)(i) 
and (ii) of this section for becoming newly eligible for cost-sharing 
reductions, and paragraphs (d)(8), (9), (10), (12), and (14) of this 
section:
* * * * *
    (b) * * *
    (2) * * *
    (vi) If a qualified individual, enrollee, or dependent newly gains 
access to an individual coverage HRA or is newly provided a QSEHRA, 
each as described in paragraph (d)(14) of this section, and if the plan 
selection is made before the day of the triggering event, the Exchange 
must ensure that coverage is effective on the first day of the month 
following the date of the triggering event or, if the triggering event 
is on the first day of a month, on the date of the triggering event. If 
the plan selection is made on or after the day of the triggering event, 
the Exchange must ensure that coverage is effective on the first day of 
the month following plan selection.
* * * * *
    (c) * * *
    (3) Advanced availability for individuals with an individual 
coverage HRA or QSEHRA. A qualified individual, enrollee, or his or her 
dependent who is described in paragraph (d)(14) of this section has 60 
days before the triggering event to select a QHP, unless the HRA or 
QSEHRA was not required to provide the notice setting forth its terms 
to such individual or enrollee at least 90 days before the beginning of 
the plan year, as specified in 45 CFR 146.123(c)(6), 26 CFR 54.9802-
4(c)(6), and 29 CFR 2590.702-2(c)(6) or section 9831(d)(4) of the 
Internal Revenue Code, as applicable, in which case the qualified 
individual, enrollee, or his or her dependent has 60 days before or 
after the triggering event to select a QHP.
* * * * *
    (d) * * *
    (14) The qualified individual, enrollee, or dependent newly gains 
access to an individual coverage HRA (as defined in 45 CFR 146.123(b)) 
or is newly provided a qualified small employer health reimbursement 
arrangement (QSEHRA) (as defined in section 9831(d)(2) of the Internal 
Revenue Code). The triggering event is the first day on which coverage 
for the qualified individual, enrollee, or dependent under the 
individual coverage HRA can take effect, or the first day on which 
coverage under the QSEHRA takes effect. An individual, enrollee, or 
dependent will qualify for this special enrollment period regardless of 
whether they were previously offered or enrolled in an individual 
coverage HRA or previously provided a QSEHRA, so long as the 
individual, enrollee, or dependent is not enrolled in the individual 
coverage HRA or covered by the QSEHRA on the day immediately prior to 
the triggering event.
* * * * *
[FR Doc. 2019-12571 Filed 6-13-19; 4:15 pm]
 BILLING CODE 4120-01;4510-29;4830-01-P

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