Health Reimbursement Arrangements and Other Account-Based Group Health Plans

Federal RegisterOct 29, 2018

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 54

[REG-136724-17]

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-P]

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:

Notice of proposed rulemaking.

SUMMARY:

This document sets forth proposed rules to expand opportunities for working men and women and their families to access affordable, quality healthcare through proposed changes to regulations 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. (For simplicity, this preamble generally refers only to HRAs, but references to HRAs should also be considered to include other account-based group health plans, unless indicated otherwise.) Specifically, these proposed rules allow integrating HRAs with individual health insurance coverage, if certain conditions are met. The proposed rules also set forth conditions under which certain HRAs would be recognized as limited excepted benefits. Also, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) propose rules regarding premium tax credit (PTC) eligibility for individuals offered coverage under an HRA integrated with individual health insurance coverage. In addition, the Department of Labor (DOL) proposes a clarification to provide plan sponsors with assurance that the individual health insurance coverage the premiums of which are reimbursed by an HRA or a qualified small employer health reimbursement arrangement (QSEHRA) does not become part of an ERISA plan, provided certain conditions are met. Finally, the Department of Health and Human Services (HHS) proposes rules that would provide a special enrollment period in the individual market for individuals who gain access to an HRA integrated with individual health insurance coverage or who are provided a QSEHRA. The goal of these proposed rules is to expand the flexibility and use of HRAs to provide more Americans with additional options to obtain quality, affordable healthcare. The proposed rules would 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:

Comments are due on or before December 28, 2018.

ADDRESSES:

Written comments may be submitted to the addresses specified below. Any comment that is submitted will be shared with the DOL and HHS. Please do not submit duplicates.

All comments will be made available to the public. Warning: Do not include any personally identifiable information (such as name, address, or other contact information) or confidential business information that you do not want publicly disclosed. All comments are posted on the internet exactly as received, and can be retrieved by most internet search engines. No deletions, modifications, or redactions will be made to the comments received, as they are public records. Comments may be submitted anonymously.

Comments, identified by REG-136724-17, may be submitted by one of the following methods:

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

Mail:

CC:PA:LPD:PR (REG-136724-17), Room 5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

Hand or courier delivery:

Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-136724-17), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224.

Comments received will be posted without change to

www.regulations.gov

and available for public inspection.

Inspection of Public Comments:

All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable information that is included in a comment. All comments received before the close of the comment period will be posted on the following website as soon as possible after they have been received:

https://www.regulations.gov.

Follow the search instructions on that website to view public comments.

FOR FURTHER INFORMATION CONTACT:

Christopher Dellana, Internal Revenue Service, Department of the Treasury, at (202) 317-5500; Elizabeth Schumacher or Matthew Litton, Employee Benefits Security Administration, Department of Labor, at (202) 693-8335; David Mlawsky or Cam Clemmons, 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 nonfederal 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 13813

On October 12, 2017, President Trump issued Executive Order 13813,

“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.” The proposed rules have been developed in response to this Executive Order.

82 FR 48385 (Oct. 17, 2017).

In response to Executive Order 13813, on June 21, 2018, DOL published the Definition of Employer under Section 3(5) of ERISA—Association Health Plans final rule and on August 3, 2018, DOL, HHS and the Treasury Department published the Short-Term, Limited-Duration Insurance final rule.

See

the Association Health Plan final rule at 83 FR 28912 and the Short-Term, Limited-Duration Insurance final rule at 83 FR 38212.

B. Health Reimbursement Arrangements 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 section 213(d) of the Code) (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.

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 be used to reimburse medical care expenses incurred in later years, depending on the terms of the HRA.

See

IRS Notice 2002-45, 2002-02 CB 93; Revenue Ruling 2002-41, 2002-2 CB 75; IRS Notice 2013-54, 2013-40 IRB 287.

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, such as 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.

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.

For more information about employer payment plans,

see

IRS Notice 2013-54, Q1 & Q3, and IRS Notice 2015-17, Q4 & Q5, 2015-14 IRB 845.

A QSEHRA, as defined in section 9831(d) of the Code, is not a group health plan for purposes of the market requirements of the Code (except as provided in section 4980I(f)(4) of the Code), parts 6 and 7 of ERISA, and title 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 these proposed regulations 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

section 2791(a)(1) of the PHS Act, as amended by section 18001(c) of the Cures Act. As previously noted, 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 these proposed rules, unless otherwise specified. This term does not include QSEHRAs, medical savings accounts (MSAs), or health savings accounts (HSAs). In addition, for purposes of these proposed 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 in a cafeteria plan under section 125 of the Code (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 HRA integrated with individual health insurance coverage in certain circumstances and see later in this preamble for a related comment solicitation.

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; 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 section 9831(b) and (c) of the Code, section 732(b) and (c) of ERISA, and sections 2722(b), (c) and 2763 of the PHS Act, the market requirements do not apply to a group health plan or health insurance issuers in the group or individual markets in relation to their provision of excepted benefits described in section 9832(c) of the Code, section 733(c) of ERISA, and section 2791(c) of the PHS Act.

See the discussion later in this preamble for additional background on excepted benefits. In addition, in accordance with section 9831(a)(2) of the Code and section 732(a) of ERISA, 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.

While the PPACA amendments to PHS Act section 2722(b) and (c) (formerly section 2721(c) and (d)) could be read as restricting the exemption for excepted benefits so that 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 plans and encourages States to adopt a similar approach with respect to issuers of excepted benefits.

See

75 FR 34537 at 34539-34540 (June 17, 2010).

While the PPACA amendments to title XXVII of the PHS Act removed the parallel provision at section 2722(a) (formerly 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).

PHS Act section 2711, as added by PPACA, generally prohibits group health plans and health insurance issuers offering group or individual health insurance coverage

from establishing for any individual any lifetime or annual limits on the dollar value of essential health benefits (EHBs), as defined in section 1302(b) of PPACA. 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.

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 regulations.

See

26 CFR 54.9815-1251, 29 CFR 2590.715-1251, and 45 CFR 147.140.

For information regarding EHBs,

see

HHS's February 25, 2013 final regulations addressing EHBs under section 1302 of PPACA (78 FR 12834);

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. 45 CFR 156.111 (83 FR 16930, Apr. 17, 2018). The current regulations under PHS Act section 2711 include a definition of EHBs that applies for plans that are not required to provide 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 proposed rules set forth in this document include proposed amendments to the definition of EHBs under the PHS Act section 2711 regulations to reflect the updated final EHB rules.

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.

As explained in prior guidance, however, the Treasury Department, DOL, and HHS (collectively, 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.

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 section 125 of the Code (cafeteria plan) because section 9005 of PPACA specifically limits salary reduction contributions to health FSAs to $2,500 (indexed for inflation) per year.

Similarly, although medical savings accounts (MSAs) under section 220 of the Code and health savings accounts (HSAs) under section 223 of the Code 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 meet the criteria to be a group health plan because both types of arrangements are subject to specific statutory provisions that limit the contributions.

Therefore, the proposed rules do not apply to MSAs, HSAs, or, in certain circumstances, health FSAs.

See

80 FR 72192, 72201 (November 18, 2015).

Notwithstanding this exclusion for certain health FSAs from the application of the annual dollar limit prohibition, regulations under section 125 of the Code provide that health FSAs are not permitted to reimburse employees for premiums for health coverage.

See

proposed 26 CFR 1.125-5(k)(4) (72 FR 43938, 43959 (Aug. 6, 2007)).

See

75 FR 37188, 37190 (June 28, 2010) and IRS Notice 2004-2, Q1 & Q3, 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 Bulletins 2004-01 and 2006-02, providing guidance regarding HSAs not constituting “employee welfare benefit plans” covered by title I of ERISA where employer involvement with the HSA is limited.

See

75 FR 37188, 37190 (June 28, 2010).

PHS Act section 2713, as added by PPACA, 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.

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.

See also

26 CFR 54.9815-2713; 29 CFR 2590.715-2713; and 45 CFR 147.130.

Because MSAs and HSAs are generally 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 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 2013-03, Q&A-7; and 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.

3. Prior Regulations and Guidance on Integration of HRAs and Other Account-Based Group Health Plans

The Departments have previously issued regulations and subregulatory guidance regarding the application of PHS Act sections 2711 and 2713 to HRAs.

The regulations 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 would be considered in compliance because the combined arrangement complies with PHS Act sections 2711 and 2713. The regulations and guidance also provide that HRAs may be integrated with Medicare and TRICARE coverage if certain conditions are met, but may not be integrated with individual health insurance coverage for purposes of complying with PHS Act sections 2711 and 2713.

Regulations 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

http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs11.html;

(3) IRS Notice 2013-54 and DOL Technical Release 2013-03, issued on September 13, 2013, and 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;

(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

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, (as detailed in Notice 2015-17, DOL and HHS reviewed and agreed with the guidance in Part II); (7) 80 FR 72192 (November 18, 2015); (8) Notice 2015-87, issued on December 16, 2015; (9) IRS Notice 2016-17, DOL Technical Release No. 2016-01, and Insurance Standards Bulletin, Application of the Market Reforms and Other Provisions of the Affordable Care Act to Student Health Coverage, each 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

https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/ACA-FAQ-Set-33-Final.pdf;

and (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

https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQs-Part-37.pdf.

26 CFR 54.9815-2711(d)(4); 29 CFR 2590.715-2711(d)(4) and 45 CFR 147.126(d)(4).

In the preamble to the 2010 interim final regulations 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.

The interim final regulations 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 regulations under PHS Act section 2711.

See

75 FR 37188, 37190-37191 (June 28, 2010).

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.

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.

The provisions in this guidance were later incorporated into the final regulations under PHS Act section 2711, which are summarized later in this section of the preamble.

See

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.

In addition to describing the integration methods, IRS Notice 2013-54 and DOL Technical Release 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.

On November 6, 2014, the Departments issued FAQs about Affordable Care Act Implementation (Part XXII).

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 may not be integrated with individual health insurance coverage, and therefore will fail to comply with PHS Act sections 2711 and 2713.

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

https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQs-Part-XXII-FINAL.pdf.

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 sections 36B, 9801, 9802, 9815, 9831 and 9832 of the Code and PHS Act sections 2711 and 2713.

On February 18, 2015, the Treasury Department and the IRS issued Notice 2015-17. Q&A-3 of Notice 2015-17 provides 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 plan for integration purposes. However, Q&A-3 states 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. Notice 2015-17 also included a general reminder that to the extent such an arrangement is available to active employees it may be subject to restrictions under other laws that prohibit offering financial or other incentives for TRICARE-eligible employees to decline employer-provided group health plan coverage, similar to the Medicare secondary payer rules.

Q&A-3 of Notice 2015-17 also provides 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. But it provides that 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 parts 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 provisions. See later in this preamble for a discussion of the rules provided in the final regulations 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 interim final rules under PHS Act section 2711, incorporating certain subregulatory guidance regarding HRA integration, and making various additional clarifications (the 2015 regulations).

Consistent with the initial subregulatory guidance, the final regulations under PHS Act section 2711 provide two methods for integration of HRAs with other group health plan coverage.

The first method applies to HRAs integrated with other group health plan coverage that provides MV (the MV Integration Method).

The second method applies to HRAs integrated with other group health plan coverage that does not provide MV (the Non-MV Integration Method).

See

80 FR 72192 (November 18, 2015). To the extent the final regulations did not incorporate or modify the prior subregulatory guidance, such guidance remains in effect.

These two methods of integration were originally discussed in IRS Notice 2013-54, Q4, and DOL Technical Release 2013-03, available at

https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/13-03.

See

26 CFR 54.9815-2711(d)(2)(ii); 29 CFR 2590.715-2711(d)(2)(ii); 45 CFR 147.126(d)(2)(ii).

See

26 CFR 54.9815-2711(d)(2)(i); 29 CFR 2590.715-2711(d)(2)(i); 45 CFR 147.126(d)(2)(i).

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;

and (3) the HRA is 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 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.

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

https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQs-Part-37.pdf.

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.

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 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.

The 2015 regulations 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.

For these employers, an 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.

See

26 CFR 54.9815-2711(d)(5); 29 CFR 2590.715-2711(d)(5); 45 CFR 147.126(d)(5). The final regulations did not address the Medicare integration rules that apply to employers with 20 or more employees. For a discussion of those rules, see IRS Notice 2015-17 and the discussion elsewhere in this preamble.

The 2015 regulations also incorporate prior subregulatory guidance that HRAs cannot be integrated with individual health insurance coverage for purposes of complying with PHS Act sections 2711 and 2713.

See

26 CFR 54.9815-2711(d)(4); 29 CFR 2590.715-2711(d)(4); 45 CFR 147.126(d)(4).

Also see

IRS Notice 2013-54, Q&A-1, and DOL Technical Release 2013-03, Q&A-1. This principle was also reiterated and clarified in the various other pieces of subregulatory guidance summarized elsewhere in this section of the preamble.

See also

IRS Notice 2015-87, Q&A-5, in which the Departments clarified that an HRA that by its terms may only be used to reimburse (or pay directly for) premiums for individual health insurance coverage consisting solely of excepted benefits will not fail to comply with PHS Act sections 2711 and 2713 because those provisions do not apply to a group health plan that is designed to provide only excepted benefits. For guidance on enforcement relief for certain premium reduction arrangements offered by institutions of higher education to students with respect to student health insurance coverage, which is a type of individual health insurance coverage,

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

https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/ACA-FAQ-Set-33-Final.pdf. See also

IRS Notice 2016-17, 2016-9 IRB 358; DOL Technical Release 2016-1, available at

http://www.dol.gov/ebsa/newsroom/tr16-01.html;

and Insurance Standards Bulletin, Application of the Market Reforms and Other Provisions of the Affordable Care Act to Student Health Coverage, February 5, 2016, available at

https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/student-health-bulletin.pdf. See

elsewhere in this preamble for additional discussion of student health insurance coverage.

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 section 9802 of the Code, section 702 of ERISA, and section 2702 of the PHS Act (HIPAA nondiscrimination provisions). The Departments published joint final regulations implementing the HIPAA nondiscrimination provisions on December 13, 2006.

Section 1201 of PPACA reorganized and amended the HIPAA nondiscrimination provisions of the PHS Act. (Although section 9802 of the Code and section 702 of ERISA were not amended, the requirements of section 2705 of the PHS Act are also incorporated by reference into section 9815 of the Code and section 715 of ERISA.)

As amended by PPACA, the nondiscrimination provisions of section 2705 of the PHS Act largely reflect the 2006 regulations 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.

71 FR 75014.

PPACA section 1201 moved the HIPAA nondiscrimination provisions from PHS Act section 2702 to PHS Act section 2705, with some modification.

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 health care, 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 (January 8, 2001).

Q&A-2 of FAQs about Affordable Care Act Implementation (Part XXII)

provided that, if an employer offers 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 section 2705 of the PHS Act (which is incorporated by reference into section 9815 of the Code and section 715 of ERISA), as well as the HIPAA nondiscrimination provisions of section 9802 of the Code and section 702 of ERISA. The Q&A explained that such arrangements will 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, in the Departments' view, 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.

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

https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQs-Part-XXII-FINAL.pdf.

D. Excepted Benefits

Section 9831 of the Code, section 732 of ERISA, and sections 2722 and 2763 of the PHS Act 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 section 9832 of the Code, section 733 of ERISA, and section 2791 of the PHS Act.

There are four statutory categories of excepted benefits. One such category of excepted benefits is 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 health care, or community-based care, or any combination thereof, and “such other similar, limited benefits as are specified in regulations” by the Departments.

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.

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.

See

section 9832(c)(2) of the Code, section 733(c)(2) of ERISA, and section 2791(c)(2) of the PHS Act.

See

section 9831(c)(1) of the Code, ERISA section 732(c)(1), and PHS Act section 2722(c)(1) and 2763(b).

See also

the discussion in 2014 final regulations concerning the application of these requirements to benefits such as limited-scope dental and vision benefits and employee assistance programs at 79 FR 59130, 59131-59134 (Oct. 1, 2014).

See

26 CFR 54.9831-1(c)(3)(v), (vi) and (vii); 29 CFR 2590.732(c)(3)(v), (vi) and (vii); 45 CFR 146.145(b)(3)(v), (vi) and (vii).

Coverage that consists of excepted benefits is not minimum essential coverage (MEC).

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.

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 section 4980H of the Code, the employer shared responsibility provisions; thus, an employer will not avoid a payment under section 4980H of the Code by virtue of an offer of an excepted benefit.

See

section 5000A(f)(3) of the Code.

See

section 36B(c)(2)(B) of the Code.

See

section 4980H(a)(1), (b)(1) of the Code.

See also

26 CFR 54.4980H-1(a)(14).

E. Premium Tax Credit

1. In General

Section 36B of the Code allows for the PTC to be available to applicable taxpayers to help with the cost of individual health insurance coverage obtained through an Exchange.

Under section 36B(a) and (b)(1) of the Code 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.

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

An individual is eligible for the PTC for a month if the individual meets various requirements for the month (a coverage month). Among other things, under section 36B(c)(2) of the Code, 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.

An eligible employer-sponsored plan includes coverage under a self-insured (as well as an insured) group health plan

and is MEC unless it consists solely of excepted benefits.

See

section 36B(c)(2)(C)(iii) of the Code and 26 CFR 1.36B-2(c)(3)(vii)(A) and 1.36B-3(c).

See

26 CFR 1.5000A-2(c).

See

section 5000A(f)(3) of the Code and 26 CFR 1.5000A-2(g).

An HRA is a self-insured group health plan and therefore is an eligible employer-sponsored plan. Accordingly, an individual currently 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. Although Treasury Department and IRS guidance provides that an HRA is an eligible employer-sponsored plan and therefore individuals covered by an HRA are ineligible for the PTC,

to date, the Treasury Department and the IRS have not provided guidance as to the circumstances in which an HRA is considered to be affordable or to provide MV.

See

IRS Notice 2013-54, Q&A 10.

The Treasury Department and the IRS have provided guidance regarding 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)(

) and 26 CFR 1.36B-6(c)(4).

See also

IRS Notice 2015-87, Q&A 7. This document does not make substantive revisions to those rules.

2. Affordability and Minimum Value

Section 36B(c)(2)(C) of the Code and 26 CFR 1.36B-2(c)(3)(v)(A)(

) and (

) provide that 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)(

) provides an employee safe harbor under which an eligible employer-sponsored plan is not considered affordable for an entire plan year if, at the time an individual enrolls in a qualified health plan offered through an Exchange, the Exchange determines that the eligible employer-sponsored plan is not affordable.

Thus, the employee safe harbor locks in the Exchange's determination of affordability, 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.

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)(

Under section 36B(c)(2)(C)(ii) of the Code, a 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. Section 1302(d)(2)(C) of PPACA provides that, in determining the percentage of the total allowed costs of benefits provided under a group health plan, the regulations promulgated by HHS under that paragraph apply. HHS regulations provide that an 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.

See

45 CFR 156.145.

See also

80 FR 52678 (Sept. 1, 2015).

F. Qualified Small Employer Health Reimbursement Arrangements

1. In General

The 21st Century Cures Act (Cures Act), Public Law 114-255, was enacted on December 13, 2016. Section 18001 of

the Cures Act amends 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.

For purposes of the proposed rules, QSEHRAs are not included in the term “HRA or other account-based group health plans.”

See

Section 9831(d)(1) of the Code, section 733(a)(1) of ERISA, and section 2791(a)(1) of the PHS Act. 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

section 2791(a)(1) of the PHS Act, as amended by section 18001(c) of the Cures Act. In addition, QSEHRAs were not excluded from ERISA's definition of employee welfare benefit plan under section 3(1) of ERISA 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 proposed clarification described later in this preamble are met.

Pursuant to section 9831(d) of the Code, a QSEHRA is an arrangement that meets certain conditions, including the following:

• The arrangement provides, after the eligible employee provides proof of coverage,

for the payment or reimbursement of medical care expenses incurred by the employee or the employee's family members (in accordance with the terms of the arrangement);

Under section 106(g) of the Code, payments or reimbursements from a QSEHRA are not treated as paid or reimbursed under employer-provided coverage for medical expenses under an accident or health plan for purposes of sections 106 and 105 of the Code if, for the month in which the medical care is provided, the individual does not have minimum essential coverage within the meaning of section 5000A(f) of the Code.

See

IRS Notice 2017-67 for additional discussion of this minimum essential coverage requirement.

• The amount of payments for and reimbursements of medical care expenses incurred by the employee or the employee's family members for any year does not exceed $4,950 ($10,000

for an arrangement that also provides for payments or reimbursements of medical care expenses of the eligible employee's family members (family coverage)); and

Section 9831(d)(2)(D)(ii) of the Code provides that both statutory dollar limits are adjusted for inflation beginning after 2016. The adjusted limits for 2018 are $5,050 for self-only coverage and $10,250 for family coverage.

• The arrangement generally is provided on the same terms to all eligible employees of the eligible employer.

Section 9831(d)(2)(C) of the Code provides that an arrangement shall not fail to be treated as provided on the same terms merely because the employee's permitted benefit varies in accordance with the variation in price of an insurance policy in the relevant individual health insurance market based on the employee's age or the number of family members whose expenses may be reimbursed under the arrangement.

See

section 9831(d)(2)(C) of the Code and IRS Notice 2017-67 for additional detail.

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 section 4980H(c)(2) of the Code and that does not offer a group health plan to any of its employees. The statute also requires that an employer providing a QSEHRA provide a written notice to each eligible employee (as defined in section 9831(d)(3)(A) of the Code) not later than 90 days before the beginning of the plan year (or, in the case of an employee who is not eligible to participate in the arrangement as of the beginning of the plan year, the date on which the employee is first eligible). Section 9831(d)(4) of the Code requires that the notice contain certain content, including information about the maximum dollar amount of payments and reimbursements that may be made under the terms of the QSEHRA for the year to the employee (the permitted benefit), and 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 PTC.

On October 31, 2017, the Treasury Department and the IRS issued Notice 2017-67

to provide guidance on the requirements for providing a QSEHRA to eligible employees, the tax consequences of the arrangement, and the requirements for providing written notice of the arrangement to eligible employees.

See

IRS Notice 2017-67, 2017-47 IRB 517.

See also

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.

If an eligible employer complies with the guidance provided in section 9831(d) of the Code and Notice 2017-67, it may provide a QSEHRA to its eligible employees and the QSEHRA does not have 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 section 36B of the Code relating to how a QSEHRA affects a taxpayer's eligibility for the PTC and how a QSEHRA affects a taxpayer's computation of the PTC. Under section 36B(c)(4)(A) of the Code, 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. Section 36B(c)(4)(C) of the Code 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 section 9831(d)(3)(C) of the Code, does not exceed

1/12

of a percentage of the employee's household income. The percentage, which is adjusted annually, is 9.56 for 2018.

IRS Notice 2017-67 provides that for purposes of determining whether a QSEHRA constitutes affordable coverage under section 36B(c)(4) of the Code the permitted benefit for self-only coverage is used, regardless of whether the permitted benefit provided to a particular eligible employee is for self-only or family coverage. Further, if the amount of permitted benefit varies based on the age of the employee, the age-applicable self-only coverage amount is used.

Section 36B(c)(4)(B) of the Code 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 before the beginning of the calendar year only during the annual open enrollment period described in 45 CFR 155.410. An individual may qualify for a special enrollment period to enroll in or change to a different Exchange plan outside of the annual open enrollment period under a variety of circumstances prescribed by section 1311(c)(6)(C) and (D) of PPACA and as described in 45 CFR 155.420. These special enrollment periods are under the jurisdiction of HHS, and apply to persons seeking individual health insurance coverage through a State or Federal Exchange and, in some cases, to individuals seeking individual health insurance coverage outside an Exchange.

Group health plans must provide special enrollment periods under certain circumstances and the Departments have jurisdiction over those provisions.

See

section 9801(f) of the Code, section 701(f) of ERISA, and section 2704(f) of the PHS Act;

see also

26 CFR 54.9801-6, 29 CFR 2590.701-6, 45 CFR 146.117, and 45 CFR 147.104(b)(3)-(5). The proposed rules do not affect the group health plan special enrollment periods, which continue to apply to group health plans, including HRAs.

Paragraph (d) of 45 CFR 155.420 describes the special enrollment periods available on the Exchanges to qualified individuals, enrollees, and their dependents. Paragraph (b) of 45 CFR 155.420 describes the coverage effective dates available in connection with each special enrollment period, and paragraph (a)(4) describes the plan changes a qualified individual, enrollee, or dependent may make upon qualifying for a special enrollment period.

With regard to individual health insurance coverage sold outside of the Exchange, 45 CFR 147.104(b)(2) provides that health insurance issuers must provide special 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).

II. Overview of the Proposed Rules on HRA Integration and Excepted Benefits—the Departments of the Treasury, Labor, and Health and Human Services

In developing the proposed rules, the Departments carefully considered how to meet the objectives of Executive Order 13813 in a way that is permitted by law and supported by sound policy. The proposed rules are intended to increase the usability of HRAs to provide more Americans, including employees who work at small businesses, with additional healthcare options. Such changes will facilitate the development and operation of a more efficient healthcare system that provides high-quality care at affordable prices by increasing consumer choice for employees and promoting competition in healthcare markets by adding additional options for employers. In addition, the proposed rules include certain conditions designed to prevent negative consequences that would be inconsistent with certain provisions of HIPAA and PPACA.

The proposed rules would expand the use of HRAs in several ways. First, the proposed rules would remove the current prohibition against integrating an HRA with individual health insurance coverage

under the PHS Act section 2711 regulations.

The proposed rules would instead 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 are met (hereinafter, “the proposed integration rules”).

For purposes of this preamble and the proposed regulations, “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), 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), 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103. “Group health insurance coverage” means health insurance coverage offered in connection with a group health plan.

See

ERISA section 733(b)(4), PHS Act section 2791(b)(4), 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103.

These proposed rules would make several non-substantive modifications to language throughout the regulations implementing PHS Act section 2711 to account for this change.

See

later in this preamble for a summary of these changes. The proposed regulations do not substantively change the current rules for integration of an HRA with non-HRA group coverage, Medicare or TRICARE. Unless the proposed regulations explicitly conflict with the subregulatory guidance that has been issued under PHS Act section 2711, that guidance remains in effect.

Second, the proposed rules would expand the definition of limited excepted benefits, under section 9832(c)(2) of the Code, section 733(c)(2) of ERISA, and section 2791(c)(2)(C) of the PHS Act, to recognize certain HRAs limited in amount and that are limited with regard to the types of coverage for which premiums may be reimbursed, as limited excepted benefits if certain other conditions are met (an “excepted benefit HRA”).

As discussed later in this preamble, the Treasury Department and the IRS are also proposing regulations under section 36B of the Code that would provide the PTC eligibility rules for individuals who are offered an HRA integrated

with individual health insurance coverage.

DOL is also proposing 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 met. Finally, HHS is proposing changes to regulations regarding special enrollment periods in the individual market that would provide special enrollment periods for individuals who gain access to HRAs integrated with individual health insurance coverage or who are provided QSEHRAs.

References in the preamble to “an offer of an HRA integrated with individual health insurance coverage” or to similar phrases mean an offer of an HRA designed to be integrated with individual health insurance coverage under the proposed integration rules and that will be considered integrated with such individual health insurance coverage for an individual who enrolls in such coverage.

The Treasury Department and the IRS are not proposing regulations under section 36B of the Code related to the excepted benefit HRA because the application of the PTC eligibility rules to excepted benefits is clear under current law. Also, the Treasury Department and the IRS are not proposing regulations under section 4980H of the Code, but see the discussion later in this preamble regarding how an offer of an HRA that is integrated with individual health insurance coverage is treated under section 4980H of the Code.

The Departments request comments on all aspects of the proposed rules. The following explanation of the proposed rules also solicits comments on specific topics of particular interest to the Departments.

A. Integration Rules

Pursuant to the President's Executive Order to consider proposing regulations to expand and facilitate access to HRAs, the proposed rules would remove the prohibition on integration of an HRA with individual health insurance coverage, if certain conditions are met, and propose requirements that an HRA must meet in order to be integrated with individual health insurance coverage. In order to ensure compliance with PHS Act sections 2711 and 2713, the proposed integration rules provide that to be integrated with individual health insurance coverage, the HRA must require participants

and any dependents

covered by the HRA to be enrolled in individual health insurance coverage (other than coverage that consists solely of excepted benefits) and to substantiate compliance with this requirement.

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 section 3(7) of ERISA. Under section 3(7) of ERISA, “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.”

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.”

Further, in crafting the proposed integration rules, the Departments have considered the possibility that expanding access to HRAs could lead to employers offering coverage options to their employees in a manner that discriminates based on health status and that negatively impacts the individual market for health insurance coverage. 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. Later, in 2010, Congress enacted PPACA (which included PHS Act sections 2711 and 2713), in part, because individual health insurance coverage was not a viable option for many individuals since issuers in many States could deny coverage or charge higher premiums 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 described in more detail later in this section of the preamble. In developing these proposed regulations, the Departments have carefully considered how to exercise their rulemaking authority in a manner that is consistent with Congress's overall intent in enacting HIPAA and PPACA. As part of that process, the Departments have considered how to avoid permitting discrimination based on health status or similar employer practices with respect to offering HRAs to employees that might have destabilizing effects on the individual market or lead to higher premiums in that market.

The Departments are of the view that allowing HRAs to be integrated with individual health insurance coverage could result in opportunities for employers to encourage higher risk employees (that is, those 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 are permitted to choose between participating in an employer's traditional group health plan or participating in an HRA integrated with individual health insurance coverage, some higher risk employees may have an incentive to select the HRA and enroll in individual health insurance coverage. This is because most individual health insurance coverage must cover all EHBs and large group market and self-insured group health plans are not required to cover all categories of EHBs. 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 HRAs integrated with individual health insurance coverage are used disproportionately by higher risk employees, such arrangements could worsen adverse selection and raise premiums in the individual market.

Amy Monahan and Daniel Schwarcz, “Will Employers Undermine Health Care Reform by Dumping Sick Employees?”

Virginia Law Review,

Vol. 97 (2011).

The Departments also considered the possibility that the market would develop the opposite way. Lower risk employees might choose HRAs integrated with individual health insurance coverage, while higher risk employees might remain with the relative certainty of their employer's traditional group health plan. Such an outcome could result for a host of reasons, including because higher risk employees tend to be more risk averse with respect to changing health benefits and because individual health insurance coverage might have much more restrictive provider networks than traditional group health plans and higher risk employees tend to be more sensitive to the make-up of the provider network than lower risk employees. Also, lower risk employees may prefer an HRA integrated with individual health insurance coverage, as compared to a more generous traditional group health plan, because it could allow them to spend less on premiums and have more funds available to cover cost sharing. Further, employers would have incentives to avoid legal concerns that could be raised by an attempt to steer higher risk employees toward an HRA integrated with individual health insurance coverage.

However, employers will face countervailing incentives to maintain (or improve) the average health risk that they insure. Therefore, the Departments have determined that the risk of market segmentation and health factor discrimination is sufficiently significant to justify including conditions in the proposed regulations intended to address those risks. Accordingly, the proposed regulations would add new regulations at 26 CFR 54.9802-4, 29 CFR 2590.702-2, and 45 CFR 146.123 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. In particular, the proposed integration rules prohibit a plan sponsor from offering the same class of employees both a traditional group health plan and an HRA integrated with individual health insurance coverage. In addition, to the extent a plan sponsor offers an HRA that is integrated with individual health insurance coverage to a class of employees, the proposed integration rules require that the HRA be offered on the same terms to all employees within the class, subject to certain exceptions described later in this preamble.

In the Departments' view, these proposed integration requirements are necessary and appropriate to avoid the risk of market segmentation and to ensure there are protections against discrimination based on health status when HRAs are permitted to integrate with individual health insurance coverage for purposes of compliance with PHS Act sections 2711 and 2713. The Departments also are of the view these requirements are consistent with Congress's intent in enacting both HIPAA and PPACA as well as in granting the Departments the authority to promulgate such 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 those Acts.

More specifically, these proposed integration requirements are intended to mitigate circumstances in which higher risk employees are incentivized (based on the design of the traditional group health plan versus the offer of the HRA) to obtain coverage in the individual market.

See

section 9833 of the Code, section 734 of ERISA, and section 2792 of the PHS Act.

These proposed integration conditions avoid creating a high risk of market segmentation. As noted earlier in this preamble, PPACA includes several provisions designed to create a competitive individual market that makes affordable coverage available to individuals who do not have access to other health coverage.

See

PPACA section 1311 (establishing the Exchanges), section 1312(c) (instructing health insurance issuers to consider all enrollees in all health plans in a market—either individual or small group—as members of a single risk pool), section 1401 (establishing the PTC to help qualifying individuals and families pay for individual health insurance coverage), section 1402 (reducing cost-sharing for qualifying individuals enrolled in qualified health plans), and section 1501 (requiring non-exempt applicable individuals to maintain MEC or be subject to the individual shared responsibility payment).

These provisions are

intended, in part, to draw more individuals of all risk profiles into the individual market and make premiums for individual market coverage more affordable. In addition, PPACA requires that non-grandfathered individual health insurance coverage cover generally the same categories of EHBs, in part, to prevent health insurance coverage with better benefits from becoming prohibitively expensive as lower-risk individuals gravitate to less expensive individual health insurance coverage with limited benefits while higher risk individuals select more expensive individual health insurance coverage with more generous benefits. PPACA also includes risk adjustment, reinsurance, and risk corridor programs to provide consumers with affordable health insurance coverage, to reduce incentives for issuers to avoid enrolling higher risk individuals, and to stabilize premiums in the individual and small group markets inside and outside of the Exchanges. Taken altogether, these PPACA provisions intend to create a robust and competitive individual market, in part by ensuring that risk pools included both higher risk and lower risk individuals.

Section 5000A of the Code, added by PPACA, provides that all non-exempt applicable individuals must maintain MEC or pay an individual shared responsibility payment. On December 22, 2017, the President signed tax reform legislation (Pub. L. 115-97, 131 Stat. 2054) under which the individual

shared responsibility payment is reduced to $0 effective as of January 1, 2019.

If integration of HRAs led to market segmentation, it would result in significant destabilization in the individual market, undermining those provisions of PPACA that are intended to create a robust and competitive individual market. The text of PHS Act sections 2711 and 2713 is ambiguous with regard to whether and how separate plans can integrate to comply with its provisions, and the structural and practical policy concerns discussed earlier in this preamble could, if realized, prompt the Departments to adopt an interpretation of PHS Act sections 2711 and 2713 that prohibits integration of HRAs with individual health insurance coverage. By requiring employers who wish to take advantage of HRA integration with individual health insurance coverage to adhere to the protections described in more detail later in this preamble, in particular the prohibition on offering an HRA integrated with individual health insurance coverage and a traditional group health plan to the same employees, the Departments intend to prevent large-scale destabilization of the individual market, thus allowing the Departments to interpret PHS Act sections 2711 and 2713 to permit integration with individual health insurance coverage. Accordingly, the proposed regulations provide integration rules that are intended to avoid creating a high risk of market segmentation.

Lastly, because eligibility for coverage under an HRA may affect an individual's eligibility for the PTC and enrollment in an HRA affects an individual's eligibility for the PTC, the proposed integration rules allow employees of employers who offer an HRA to opt out of and waive future reimbursements under the HRA. The Departments also propose that HRAs be required to provide a notice to participants eligible for coverage under an HRA integrated with individual health insurance coverage with information regarding how the offer of the HRA or enrollment in the HRA affects their ability to claim the PTC.

The conditions in the proposed integration rules are discussed in detail below.

1. Requirement That All Individuals Covered by the HRA Are Enrolled in Individual Health Insurance Coverage

As discussed earlier in this preamble, an HRA is a group health plan that does not comply with PHS Act sections 2711 and 2713 on its own. However, the Departments previously have determined that an HRA can be considered to be in compliance with PHS Act sections 2711 and 2713 if it is integrated with non-HRA group coverage that is subject to and complies with these sections of the PHS Act. In the past, the Departments have made the determination that it is appropriate to treat an HRA as complying with PHS Act sections 2711 and 2713 when integrated with other group health plan coverage because, generally, an individual covered by the combined arrangement has coverage that complies with PHS Act sections 2711 and 2713. (Similarly, as discussed elsewhere in this preamble, other combined arrangements involving Medicare and TRICARE, are also considered to comply with PHS Act sections 2711 and 2713.)

The proposed integration rules similarly provide that an HRA may be integrated with individual health insurance coverage, and will 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) for each month the individual(s) are covered by the HRA. If the individual covered by the HRA merely has the ability to obtain individual health insurance coverage, but does not actually have that coverage, the HRA would fail to comply with PHS Act sections 2711 and 2713. This proposed requirement would apply with respect to all individuals whose medical care expenses may be reimbursed under the HRA, not just the participant.

For purposes of integrating an HRA with individual health insurance coverage, the Departments are proposing to treat all individual health insurance coverage as subject to and compliant with PHS Act sections 2711 and 2713, except for coverage that consists solely of excepted benefits. While this would allow for integration with grandfathered individual health insurance coverage, which is not subject to and may not be compliant with PHS Act sections 2711 and 2713, only a small number of individuals are currently enrolled in grandfathered individual health insurance coverage and grandfathered coverage may not be sold in the individual market to new enrollees and may only be renewed by current enrollees so long as the coverage meets strict conditions. Additionally, 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 will continue to decline each year. Because it is the Departments' understanding that there are few individuals covered by grandfathered individual health insurance coverage, the Departments are of the view that there will be few instances where such individuals will be offered and accept an HRA that would be integrated with their grandfathered individual health insurance coverage. Moreover, new enrollees cannot enroll in grandfathered individual health insurance coverage, so employers offering traditional group health plans would not be able to shift workers into this coverage. Furthermore, even for non-grandfathered individual health insurance coverage, requiring participants or plan sponsors to substantiate compliance with PHS Act sections 2711 and 2713 for each individual health insurance policy separately is impracticable given that most participants and HRAs are unlikely to be able to reasonably determine the compliance of the individual health insurance policy. An independent assessment of compliance could require the participant or HRA to identify which benefits under each individual health insurance coverage enrolled in by a participant or dependent are considered EHBs for purposes of PHS Act section 2711, and whether all preventive services are covered without cost-sharing under

each individual health insurance coverage enrolled in by a participant or dependent. The Departments are of the view that this would be an unwieldy and burdensome task.

The Departments' final rules for grandfathered plans provide that “a plan or health insurance coverage must include a statement that the plan or coverage believes it is a grandfathered health plan . . . in any summary of benefits provided under the plan.”

The Departments remain concerned, however, that the frequency of this disclosure to participants may be insufficient to substantiate compliance for purposes of these rules. For comparison's sake, ERISA plans must provide a new SPD only every 5 years, and the required disclosure for individual market coverage will differ from state to state. Additionally, other plan materials that provide a summary of benefits that may trigger the grandfathered plan disclosure requirement may not be subject to any specific timing requirements. Furthermore, the Departments have concerns as to whether participants will be able to locate or receive the disclosure materials in the time necessary to allow for a determination of whether the plan with which the HRA will be integrated is grandfathered (and therefore unlikely to comply with sections 2711 and 2713 of the PHS Act) or non-grandfathered (and therefore generally compliant). For example, for ERISA plans, a plan sponsor has 30 days to fulfill a disclosure request. Additionally, despite the fact that individual health insurance coverage may include a disclosure that the policy is grandfathered, there may be instances in which such disclosure is not accurate, or other instances where non-grandfathered individual health insurance coverage does not comply with PHS Act sections 2711 or 2713. For these reasons, the Departments have preliminarily determined that adopting this proxy approach of relying on the sale of the policy in the individual market to deem the policy compliant for purposes of the proposed integration rules strikes an appropriate balance. (See later in this preamble for a discussion of the substantiation requirements that would apply under the proposed integration rules).

26 CFR 54.9815-1251(a)(2); 29 CFR 2590.715-1251(a)(2); 45 CFR 147.140(a)(2).

The Departments solicit 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 under the individual health insurance coverage are considered EHBs for purposes of PHS Act section 2711 and how an HRA might determine if all preventive services are covered without cost-sharing. The Departments solicit comments on whether an alternative approach, such as a requirement that an issuer make a representation about compliance and/or grandfather status upon request, would be practical, or whether any other methods might be appropriate as an alternative to the previously outlined proposed proxy approach.

Under the proposed integration rules, the requirement that each individual whose medical care expenses may be reimbursed under the HRA must be enrolled in individual health insurance coverage (other than coverage that consists solely of excepted benefits) would apply for each month that the individual is covered by the HRA. If an individual whose medical care expenses may be reimbursed under an HRA fails to have such 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 provide that an HRA may not be integrated with individual health insurance coverage unless the HRA provides that medical care expenses for any individual covered by the HRA will not be reimbursed if the individual ceases to be covered by individual health insurance coverage and, if the individuals covered by the HRA cease to be covered by such individual health insurance coverage, the participant must forfeit the HRA, in accordance with applicable laws (including COBRA and other continuation of coverage requirements).

For an explanation of the application of COBRA to HRAs, see section VII of IRS Notice 2002-45.

2. Prohibition Against Offering Both an HRA Integrated With Individual Health Insurance Coverage 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, under the proposed integration rules, a plan sponsor may offer an HRA integrated with individual health insurance coverage to a class of employees only if the plan sponsor does not also offer a traditional group health plan to the same class of employees.

Therefore, a plan sponsor would not be permitted to allow any employee within a class of employees a choice between a traditional group health plan or an HRA integrated with individual health insurance coverage. For this purpose, the term “traditional group health plan” means any group health plan other than either an account-based group health plan or a group health plan that consists solely of excepted benefits. The Departments solicit comments on whether employers should be able to offer employees a choice between a traditional group health plan or an HRA integrated with individual health insurance coverage, and on the definition of “traditional group health plan,” including whether an alternate definition or term might be appropriate and whether a definition should be codified as part of these proposed regulations.

The Departments note that an employer may not provide a QSEHRA to any employee if it offers any employee a group health plan, including a traditional group health plan or an HRA.

See

section 9831(d)(3)(B)(ii) of the Code.

b. Classes of Employees

In addition, as described in more detail later in the preamble, the proposed integration rules require a plan sponsor that offers an HRA integrated with individual health insurance coverage to a class of employees to offer the HRA on the same terms to each participant within the class of employees, subject to certain exceptions. The proposed integration rules provide that a plan sponsor may only offer the HRA on different terms to different groups of employees, and may only offer either an HRA integrated with individual health insurance coverage or a traditional group health plan by groups of employees, if those groups are specific classes of employees identified by the proposed rules. The classes are: (1) Full-time employees (using either the definition that applies for purposes of section 105(h) or 4980H of the Code, as determined by the plan sponsor); (2) part-time employees (using either the definition that applies for purposes of section 105(h) or 4980H of the Code, as determined by the plan sponsor); (3) seasonal employees (using either the definition that applies for purposes of section 105(h) or 4980H of the Code, 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)); (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 regulations);

(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)); (7) 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); and (8) employees whose primary site of employment is in the same rating area, as defined in 45 CFR 147.102(b). In addition, the proposed integration rules allow as additional classes, groups of employees described as a combination of two or more of the enumerated classes. For example, part-time employees included in a unit of employees covered by a CBA might be one class of employees, and full-time employees included in the same unit of employees covered by a CBA might be another class of employees. In that case, for example, the employer could offer an HRA to the part-time employees and not offer (or offer on different terms) an HRA to the full-time employees, but could not differentiate between the part-time employees covered under the CBA except based on any of them being in another class or, if within the same class, except as otherwise allowed under the same-terms requirement as explained later in this preamble. If an HRA is offered to former employees (such as retirees), former employees are considered to be in the same class they were in immediately before separation from service.

26 CFR 54.9815-2708; 29 CFR 2590.715-2708; 45 CFR 147.116.

The Departments have concluded that it is appropriate to permit plan sponsors to offer different benefits to these classes of employees under the proposed integration rules. First, many employers historically have offered varying benefit packages to members of these different classes of employees clearly for purposes other than inducing higher risk employees to leave the plan sponsor's traditional group health plan. Second, the Departments have determined that 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, thereby reducing the risk that a plan sponsor will offer an HRA integrated with individual health insurance coverage only to its higher risk employees. Accordingly, the classes of employees identified in these proposed rules would balance employers' reasonable need to make distinctions among employees with respect to offering health benefits with the public interest in protecting the stability of the individual market risk pools.

Historically, employers have often provided different benefit packages to employees included in a unit of employees covered by a CBA, full-time employees, part-time employees, seasonal employees, employees who work abroad, employees of different ages, employees based on whether they have completed a waiting period, and employees in different locations. This is particularly true in the case of health benefits. For example, unions typically bargain with employers over health benefits provided to employees who are members of that union, and the health benefits that an employer provides pursuant to a CBA are often different than those that it provides to its employees who are not covered by the CBA. Similarly, health benefit packages offered to employees often vary by location, in part because certain healthcare providers or health insurance issuers operate only in some areas and not in others. A rule that prohibited employers from differentiating between these classes of employees for purposes of offering HRAs integrated with individual health insurance coverage would pose significant costs that might undermine the willingness of employers to offer HRAs in the first place.

The Departments are of the view that these classes of employees are not ones that could be easily manipulated in order to transfer the risks (and perceived higher costs) from the employer's traditional group health plan to the individual market. For example, labor laws generally prevent an employer from classifying an employee as subject to a CBA when the employee traditionally has not been subject to a CBA. Similarly, economic and labor forces generally make it difficult for employers to increase or reduce significantly the number of hours worked by employees in particular positions. In certain situations, ERISA may also prevent an employer from changing employee's hours in order to interfere with an employee's ability to participate in a health plan.

The Departments have not proposed permitting plan sponsors to treat salaried and hourly employees as different classes of employees for purposes of these rules, however, as many 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.

See e.g.

, Marin

Dave & Buster's, Inc.,

159 F. Supp. 3d 460 (SDNY 2016).

To minimize burden and complexity, the Departments do not propose a minimum employer size or employee class size for purposes of applying the proposed integration rules. The Departments recognize that very small employers could manipulate these classes (for example, a very small employer could put someone who is a higher-risk employee in a separate class on his or her own), but note that other economic incentives related to attracting and retaining talent would discourage employers from doing so. The Departments invite comments on whether employer size or employee class size should be considered in determining permissible classes of employees.

In defining certain classes of employees to which different benefits may be offered in the proposed rules, the Departments propose to adopt definitions that are the same as those that apply under sections 105(h) and 4980H of the Code.

Specifically, for purposes of identifying classes of employees for purpose of the proposed integration regulations, an HRA plan sponsor may define “full-time employee,” “part-time employee,” and “seasonal employee” in accordance with either of those definitions under sections 105(h) and 4980H of the Code, but it must be consistent across these three classes of employees, to the extent it differentiates based on these classes, in using either sections 105(h) or 4980H of the Code to avoid overlapping classes of employees, and the HRA plan document must set forth the applicable definitions prior to the beginning of the plan year in which the definitions will apply. Thus, an HRA plan document may provide that, for the plan year, the term “full-time employee” means a full-time employee under section 4980H of the Code and the regulations thereunder and “part-time employee” means an employee who is not a full-time employee under section 4980H of the Code and the regulations thereunder, for the applicable plan year. But an HRA plan document may not provide that, for the plan year, the term “full-time employee” has the meaning set forth in section 4980H of the Code and the regulations thereunder, and the term “part-time employee” has the meaning set forth in 26 CFR 1.105-11(c)(2)(iii)(C), for the applicable plan year. Nothing would prevent an employer from changing the definitions

for a subsequent plan year so long as each class is defined in accordance with the same provision for the applicable plan year and the HRA plan document is updated to reflect the applicable definitions prior to the beginning of the plan year in which the definitions would apply.

For the other classes of employees, the relevant definition under section 105(h) of the Code applies, except for the class of employees based on worksite rating area. The Departments propose to adopt the Code section 105(h) definitions, in part, because they reflect a relatively common understanding of the terms “full-time,” “part-time” and “seasonal” employees and because HRAs generally are subject to the nondiscrimination rules of section 105(h) of the Code. The Departments understand that plan sponsors may want to design their employee health plans, which may include offering a traditional group health plan and HRAs (or HRAs in different amounts or under different terms and conditions) to different classes of employees in a manner that complies with the requirements of Code section 105(h) to avoid the inclusion of amounts in income under that section.

The Departments have concluded that defining the classes of employees to which different offers of coverage may be made by using the Code section 105(h) definitions may be helpful in accomplishing that result.

HRAs generally are subject to the rules under section 105(h) of the Code and its related regulations as self-insured medical reimbursement plans. In general, section 105(h) of the Code provides that certain amounts paid to highly compensated individuals under self-insured medical reimbursement plans are includible in the income of the highly compensated individual. In the near term, the Treasury Department and the IRS intend to issue guidance that addresses the interaction of section 105(h) of the Code and HRAs integrated with individual health insurance coverage.

As noted earlier, the Departments propose to allow employers to adopt the Code section 4980H definitions as an alternative set of definitions for identifying full-time, part-time, and seasonal employees. The Departments acknowledge that certain employers have already determined how those definitions apply to their workforce and using those same definitions for purposes of applying the proposed integration rules may reduce burden for those employers. Section 4980H of the Code applies to ALEs, which generally includes employers that employed at least 50 full-time employees (including full-time equivalent employees) in the prior calendar year.

An employer must classify its employees as either full-time or part-time employees, and in some cases as seasonal employees, in accordance with section 4980H of the Code and the regulations thereunder, in order to determine whether it is an ALE and, if so, to determine which employees it must offer coverage to in order to avoid liabilities under section 4980H of the Code and to complete the associated reporting requirements. Accordingly, ALEs that want to offer HRAs to a particular class of employees, or offer HRAs of differing amounts or under different terms and conditions based on particular classes of employees, may prefer to use the Code section 4980H definitions with which they are familiar and which they have historically communicated to employees through the reporting requirements. The Departments understand, however, that some ALEs may still wish to use the Code section 105(h) definitions, and some non-ALEs may wish to use the Code section 4980H definitions. Therefore, the proposed rules would offer each employer the flexibility to determine which set of definitions are 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 each of these classifications.

Discussion of how section 4980H of the Code would affect an ALE that offers an HRA integrated with individual health insurance coverage is included later in this preamble.

The proposed employee classes are intended to provide the flexibility needed to achieve increased HRA usability while establishing parameters sufficient to address the health status discrimination and adverse selection concerns described earlier in this preamble. The Departments considered whether employers should be allowed to offer or vary HRAs integrated with individual health insurance coverage for classes of employees based on a very general standard (like the one that generally applies under the HIPAA nondiscrimination rules, with a broad employment-based classification standard) or a more finite list of classes of employees that have been used in other rules for various employee benefits purposes (for example, under section 105(h) and/or 4980H of the Code). The Departments' view is that a broad and open-ended standard would not be sufficient to mitigate health factor discrimination that could increase adverse selection in the individual market. The classes the Departments propose to permit are ones which, based on the Departments' experience, employers use for other employee benefits and other purposes, with the result that an employer would be unlikely to shift employees between the classes simply for purposes of offering an HRA.

The Departments request comments on the proposed classes of employees, the definitions used, and whether additional classes of employees should be provided (for example, classifications based on form of compensation (hourly versus salaried), employee role or title, occupation, or whether the individual is a former employee). The Departments also seek comment on whether any additional classifications within the proposed classes of employees should be allowed, for example, allowing classifications based on more specific geographic locations, multiple gradations of part-time employees, or gradations based on employee tenure. In addition, the Departments request comments on whether the proposed classes of employees, including the class of employees based on employees having a primary worksite in a particular rating area and the rule allowing combinations of classes of employees, and any potential additional classes, are sufficient to mitigate adverse selection and health status discrimination concerns.

c. Salary Reduction Arrangements

The Departments have been made aware that some employers may wish to allow employees to pay the portion of the premium for individual health insurance coverage that is not covered by an HRA integrated with individual health insurance coverage, if any, by using a salary reduction arrangement under a cafeteria plan. Pursuant to section 125(f)(3) of the Code, an employer may not provide a qualified health plan (as defined in section 1301(a) of PPACA) offered through the Exchange as a benefit under its cafeteria plan.

Therefore, an employer may not permit employees to make salary reduction contributions to a cafeteria plan to purchase a qualified health plan (including individual health insurance coverage) offered through an Exchange.

Note that section 125(f)(3)(B) of the Code provides an exception to this prohibition for certain small employers offering employees the opportunity to enroll in the group market through an Exchange.

However, section 125(f)(3) of the Code does not apply to individual health insurance coverage that is not purchased on an Exchange. Therefore, for an employee who purchases individual health insurance coverage outside the Exchange, the employer could permit the employee to pay the balance of the premium for the coverage through its cafeteria plan, subject to all

applicable guidance.

To the extent the arrangement to pay the balance of the premium is a group health plan, such an arrangement would not be considered to be a traditional group health plan for purposes of the proposed integration rules. For a discussion of the application of the same-terms requirement to such an arrangement, see the next section of this preamble. For a general comment solicitation on cafeteria plan premiums arrangements, see later in this preamble.

See

Prop. Reg. 26 CFR 1.125-1(m);

see also

Rev. Rul. 61-146, 1961-2 CB 25.

3. Same-Terms Requirement

To address the Departments' concerns about health status discrimination leading to additional adverse selection in the individual market, the proposed integration rules generally require that a plan sponsor that offers an HRA integrated with individual health insurance coverage 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. For this purpose, a class of employees has the meaning described earlier in this preamble, but see later in this section of the preamble for a discussion of the application of this requirement to former employees. As part of this proposed requirement, the Departments make clear that offering a more generous HRA to individuals based on an adverse health factor violates the integration rules.

The Departments recognize, however, that premiums for individual health insurance coverage obtained by HRA participants and their dependents may vary and thus some variation in amounts made available under an HRA, even within a class of employees, may be appropriate. Therefore, under the proposed integration rules, the maximum dollar amount made available under the HRA for participants within a class of employees may increase as the age of the participant increases, so long as the same maximum dollar amount attributable to that increase in age is made available to all participants of the same age within the same class of employees. In addition, under the proposed integration rules, the maximum dollar amount made available under an HRA within a class of employees may increase 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 that 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. Under this exception, a plan sponsor may increase the HRA amount for a class of employees for both age and family size, which would mean, for example, that a plan sponsor could offer two employees in a class of employees of the same age different HRA amounts if the different HRA amounts are attributable to differences in family size. By permitting such variation, the Departments seek to balance the disparate costs of health insurance in the individual market with the need to prevent health status discrimination against HRA participants and their dependents.

Further, although the proposed integration regulations would generally apply to a former employee in the same way that they apply to a current employee (and former employees are considered to be in the same class that they were in immediately before separation from service), the Departments recognize that eligibility for post-employment health 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 integration rules provide that an HRA may be treated as provided on the same terms even if the plan sponsor offers the HRA to some former employees (for example, to all former employees with a minimum tenure of employment) but fails to offer the HRA to the other former employees within a class of employees. But if a plan sponsor does offer the 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.

For example, if a plan sponsor offers an HRA to all of its current full-time employees and also to its former employees who were full-time employees immediately prior to separation from service who had at least five years of service, the plan sponsor must provide the HRA on the same terms to the eligible former employees and to the current full-time employees, subject to the generally applicable exceptions to the same terms requirement described elsewhere in this section of the preamble.

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.

See

section 9831(a)(2) of the Code and section 732(a) of ERISA. 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 34539 (June 17, 2010). Therefore, a retiree-only HRA need not meet the requirements of any integration test.

The proposed integration rules further provide that if a participant or dependent in an HRA integrated with individual health insurance coverage does not use all of the amounts made available in the HRA to reimburse medical care expenses for a plan year, and the HRA allows for these amounts to be made available to participants and their dependents in later plan years, these carryover amounts would be disregarded for purposes of determining whether the HRA is offered on the same terms, so long as 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 that they may access in future years, is the same for all participants in a class of employees. In addition, the proposed rules provide that 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 a cafeteria plan

is considered to be a term of the HRA for purposes of the proposed integration rules; therefore an HRA shall fail to be treated as provided on the same terms unless such a 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) in a class of employees.

As previously noted, pursuant to section 125(f)(3) of the Code, a cafeteria plan may not permit employees to use salary reduction contributions made to a cafeteria plan to purchase individual health insurance coverage offered through an Exchange.

Further, the Treasury Department and the IRS are aware that an HRA under which the maximum dollar amount varies based on age may face issues regarding the application of section 105(h) of the Code and the regulations thereunder. Accordingly, the Treasury Department and the IRS intend to issue guidance in the near term that describes an anticipated safe harbor that would allow increases in the maximum dollar amount made available under an HRA integrated with individual health insurance coverage, if certain conditions are met, without a consequence under section 105(h) of the Code.

HRAs generally are subject to the rules under Code section 105(h) and its related regulations as self-insured medical reimbursement plans. In general, Code section 105(h) provides that certain amounts paid to highly compensated individuals under self-insured medical reimbursement plans are includible in the income of the highly compensated individual. The regulations under

Code section 105(h) provide that, for purposes of the nondiscriminatory benefits rule under Code section 105(h)(4), “a plan may establish a maximum limit for the amount of reimbursement which may be paid a participant for any single benefit or a combination of benefits. However, any maximum limit attributable to employer contributions must be uniform for all participants and for all dependents of employees who are participants and may not be modified by reason of a participant's age or years of service.”

See

26 CFR 1.105-11(c)(3)(i). The guidance that the Treasury Department and the IRS intend to issue is also anticipated to address the application of the Code section 105(h) uniformity requirement to an HRA integrated with individual health insurance coverage more generally.

4. Opt-Out Provision

As described elsewhere in this preamble, if an individual is covered by an HRA integrated with individual health insurance coverage 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 be better off claiming the PTC than receiving reimbursements under an HRA, the Departments' existing rules regarding integration with non-HRA group coverage and with Medicare require plan sponsors that offer HRAs to allow participants to opt out of and waive future reimbursements from the HRA at least annually.

These proposed rules include the same requirement. Thus, current employees may 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.

See

26 CFR 54.9815-2711(d)(2)(i)(E), (d)(2)(ii)(D), (d)(5)(iv), 29 CFR 2590.715-2711(d)(2)(i)(E), (d)(2)(ii)(D), (d)(5)(iv), and 45 CFR 147.126(d)(2)(i)(E), (d)(2)(ii)(D) and (d)(5)(iv). Note that the rule for integration of an HRA with non-HRA group coverage allows certain HRA amounts that are forfeited to be reinstated in the future, but the proposed rules do not contain a similar provision for HRAs integrated with individual health insurance coverage due to concerns by the Departments about complexity and burden on employers. See 26 CFR 54.9815-2711(d)(3), 29 CFR 2590.715-2711(d)(3), and 45 CFR 147.126(d)(3).

See

elsewhere in this preamble for a discussion of rules being proposed by the Treasury Department and the IRS regarding the circumstances in which an offer of an HRA integrated with individual health insurance coverage is affordable and provides MV. Also 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.

Furthermore, as with the current integration rules, the proposed integration rules require 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 to ensure 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.

5. Substantiation and Verification of Individual Health Insurance Coverage

As discussed earlier in this preamble, the proposed integration rules would require that the individuals whose medical care expenses may be reimbursed under the HRA must be enrolled in individual health insurance coverage. To facilitate the administration of this requirement, under the proposed integration rules, an HRA must implement, and comply with, reasonable procedures to verify that individuals whose medical care expenses are reimbursable by the HRA are, or will be, enrolled in individual health insurance coverage (other than coverage that consists solely of excepted benefits) during the plan year. The reasonable procedures may include a requirement that a participant substantiate enrollment in individual health insurance coverage by providing either: (1) A document from a third party (for example, the issuer) showing that the participant and any dependent(s) covered by the 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 relevant time period); 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 this purpose, an HRA may rely on the documentation or attestation provided by the participant unless the HRA has actual knowledge that any individual covered by the HRA is not, or will not be, enrolled in individual health insurance coverage (other than coverage that consists solely of excepted benefits) for the plan year.

For purposes of the Code provisions affected by the proposed regulations, the otherwise generally applicable substantiation and recordkeeping requirements under section 6001 of the Code apply, including the requirements specified in Rev. Proc. 98-25 (1998-1 CB 689) for records maintained within an Automated Data Processing system.

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 proposed integration rules provide that the HRA may not reimburse a participant for any medical care expenses unless, prior to each reimbursement, the participant provides substantiation (which may be in the form of a written attestation) that the participant and, if applicable, any dependent(s) whose medical care expenses are requested to be reimbursed continue to be enrolled in individual health insurance coverage (other than coverage that consists solely of excepted benefits) for the month during which the medical care expenses were incurred. The attestation may be part of the form used for requesting reimbursement. As with the substantiation of enrollment for the plan year, for this purpose, an HRA may rely on the documentation or attestation provided by the participant unless the HRA has actual knowledge that the participant and any individual seeking reimbursement for the month were not enrolled in individual health insurance coverage (other than coverage that consists solely of excepted benefits) for the month.

6. Notice Requirement

Because HRAs are different from traditional employer-provided health coverage in many respects, the Departments are concerned that individuals eligible for HRAs integrated with individual health insurance coverage may not recognize that the offer and/or acceptance of an HRA will have consequences for PTC eligibility, as described elsewhere in this preamble. Therefore, in order to ensure that participants who are eligible to participate in an HRA integrated with individual health insurance coverage understand the potential effect that the offer of and enrollment in the HRA might have on their ability to claim the PTC, these proposed rules include a requirement that an HRA provide written notice to eligible participants. The HRA would 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 would be required to provide the notice no later than the date on which the participant is first eligible to participate in the HRA.

The proposed written notice would be required to include certain relevant information, including a description of the terms of the HRA, including the maximum dollar amount made available, as used in the affordability determination under the Code section 36B proposed 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 regulations; 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 advance payments of the PTC of the availability of the HRA, the amount of the HRA, the number of months the HRA is available to participants during the plan year, whether the HRA is available to their dependents and whether they are a current or former employee; 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 met; and a statement that it is the responsibility of the participant to inform the HRA if the participant or any dependent whose medical care expenses are reimbursable by the HRA is no longer enrolled in individual health insurance coverage.

The Departments note that in order to comply with the notice requirement, the HRA must determine the amounts that will be newly made

available for the plan year prior to the plan year. A similar requirement applies under the proposed premium tax credit regulations.

See

proposed 26 CFR 1.36B-2(c)(5)(v).

This notice would provide some of the information the participant needs in order for the participant to ascertain the consequences of the HRA for PTC eligibility, and would inform them of their responsibilities for the HRA. If the requirements of the Department of Labor's proposed rules at 29 CFR 2510.3-1(l) are met, the notice would be required to also include a statement to advise participants that individual health insurance coverage integrated with the HRA is not subject to ERISA (see section IV of this preamble and the Department of Labor's proposed rules at 29 CFR 2510.3-1(l) for additional explanation regarding this requirement).

The written notice would be required to include the information required by the proposed integration rules, and would be permitted to include other information, as long as the additional information does not conflict with the required information.

The written notice would not need to include information specific to a participant. More specifically, although the notice must contain a description of the potential availability of the PTC for a participant who opts out of and waives an unaffordable HRA and must include the HRA amount that is relevant for determining affordability under the proposed rules at 26 CFR 1.36B-2(c)(5), the proposed rules would not require the HRA to include in the notice a determination of whether the HRA is considered affordable for the participant. The participant would need additional information (that is, their household income and the premium for the lowest cost silver plan in the Exchange for the rating area where they reside) to determine whether the HRA is affordable under the proposed PTC rules, as described in detail in section III of this preamble.

7. Student Health Insurance Coverage

Federal regulations under PPACA define student health insurance coverage as a type of individual health insurance coverage.

Although those regulations exempt student health insurance coverage from certain provisions of PPACA and HIPAA,

they do not exempt such coverage from sections 2711 and 2713 of the PHS Act. Therefore, given that student health insurance coverage is a type of individual health insurance coverage, and is required to comply with sections 2711 and 2713 of the PHS Act, the Departments clarify that under the proposed integration rules an HRA may be integrated with student health insurance coverage that satisfies the requirements in 45 CFR 147.145.

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 meets any additional requirements that may be imposed under State law.

See

45 CFR 147.145(a).

See

45 CFR 147.145(b).

Self-insured student health plans are not a form of individual health insurance coverage. Therefore, these proposed integration regulations do not provide for HRA integration with self-insured student health plans.

The Departments also wish to confirm that prior guidance,

which provided enforcement relief to institutions of higher education for certain healthcare premium reduction arrangements offered in connection with student health coverage (insured or self-insured), remains in effect, pending further guidance.

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

https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/ACA-FAQ-Set-33-Final.pdf. See also

IRS Notice 2016-17, 2016-9 IRB 358; DOL Technical Release 2016-1, available at

http://www.dol.gov/ebsa/newsroom/tr16-01.html

; and Insurance Standards Bulletin, Application of the Market Reforms and Other Provisions of the Affordable Care Act to Student Health Coverage, February 5, 2016, available at

https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/student-health-bulletin.pdf.

8. Comment Solicitation Regarding Various Integration-Related Issues

In developing the proposed integration rules, the Departments considered whether to allow HRAs intended to satisfy the individual health insurance coverage integration test also 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, because like individual health insurance coverage, group health plan coverage is generally subject to and compliant with PHS Act sections 2711 and 2713. The Departments are not proposing such a rule because allowing such integration would add significant complexity to the individual health insurance coverage integration test.

The Departments request comments regarding whether the Departments should allow for such integration and if so, with respect to PHS Act section 2711 compliance, how such an integration test should be designed to take into account that, while most individual health insurance coverage is required to cover all EHBs, large group market and self-insured group health plans are not required to cover all EHBs. The Departments request comments on the demand for

such a rule, and any problems such a rule may raise.

PHS Act section 2711 applies with respect to the provision of EHBs. Because large group market and self-insured group health plan coverage are not required to provide EHBs, unlike individual health insurance coverage which is generally required to provide 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 regulations under PHS Act section 2711, and in subregulatory guidance that preceded the Departments final 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 regulations 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 EHBs. For additional discussion of the final regulations under PHS Act section 2711 see the discussion earlier in this preamble.

The Departments also considered whether to propose a rule to permit HRAs to be integrated with other types of non-group coverage other than individual health insurance coverage, such as STLDI.

However, while all individual health insurance coverage that is currently written is non-grandfathered coverage, and therefore is subject to and, presumably, compliant with PHS Act sections 2711 and 2713 (and most individual market coverage that is renewed is also non-grandfathered), other types of non-group coverage, such as STLDI, may not be subject to PHS Act sections 2711 and 2713, in which case, integration would not be sufficient to ensure that the combined benefit package satisfies these requirements. The Departments request comments on whether integration with STLDI (which is not required to, but which may, satisfy PHS Act sections 2711 and 2713) should be permitted, including whether integration should be permitted with any other type of coverage that satisfies PHS Act sections 2711 and 2713, how such integration rules should be structured, as well as comments on what, if any, potential benefits and problems might arise from allowing these types of HRA integration. The Departments also seek comment on whether allowing such integration would raise any concerns about health status discrimination leading to additional adverse selection in the individual market.

See

the definition of short-term, limited-duration insurance (STLDI) under 26 CFR 54.9801-2, 29 CFR 2590.701-2, 45 CFR 144.103.

The Departments also seek comment on whether the ability to integrate an HRA with individual health insurance coverage has the potential to increase participation in and strengthen the viability of States' individual market risk pools. Further, the Departments invite comment on whether the proposed integration safeguards are appropriate and narrowly tailored to mitigate adverse selection and the potential for discrimination based on health status, or whether less restrictive safeguards would suffice.

Further, as noted earlier in this preamble, the proposed integration rules do not address cafeteria plan premium arrangements, other than to provide that plan sponsors may offer such an arrangement in addition to an HRA integrated with individual health insurance coverage in certain circumstances. The Departments invite comments on whether employers may seek to provide cafeteria plan premium arrangements, including as a standalone arrangement, and, if so, what additional guidance is needed in order to facilitate the offering of such arrangements. In particular, the Departments solicit comments on whether the definition of the term “account-based group health plan” should include cafeteria plan premium arrangements in order to permit these arrangements to integrate with individual health insurance coverage subject to the requirements of the rule, including how that treatment would be coordinated with other requirements applicable to employee benefit plans.

9. Revisions to PHS Act Section 2711 Regulations Regarding Integration With Other Group Health Plan Coverage and Medicare

The 2015 regulations under PHS Act section 2711 provide methods for integrating HRAs with coverage under another group health plan, and, in certain circumstances, with Medicare parts B and D. These proposed rules do not substantively change the current group health plan or Medicare integration tests under the existing PHS Act section 2711 regulations. However, these proposed rules include minor proposed revisions to those regulations, including changing the term “account-based plan” to “account-based group health plan” and moving defined terms to a definitions section.

More substantively, these proposed rules would amend the regulations 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. Paragraph (d)(4) of 26 CFR 54.9815-2711, 29 CFR 2590.715-2711 and 45 CFR 147.126 is revised accordingly. In addition, for the sake of clarity, the proposed rules add to paragraph (d)(2) in each of the aforementioned PHS Act section 2711 regulations that an HRA integrated with non-HRA group coverage may not be used to purchase individual health insurance coverage (other than coverage that consists solely of excepted benefits), as the Departments previously clarified in Notice 2015-87, Q&A 2.

In addition, the proposed rules update the definition of EHBs set forth in paragraph (c) of the regulations 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 reflects 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.

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.

See

83 FR 16930 (April 17, 2018). The definition of EHB that applies under the PHS Act section 2711 regulations for plan years beginning before January 1, 2020 would not be substantively changed by the proposed rules.

For more information on the revised EHB standard, refer to the preamble to the 2019 Payment Notice, beginning at page 17007.

B. Excepted Benefit HRAs

There may be scenarios in which an employer wishes to offer an HRA that may not be integrated with non-HRA group coverage, Medicare, TRICARE, or individual health insurance coverage. For example, some employers may wish to offer an HRA without regard to whether its employees have other coverage at all or without regard to whether its employees have coverage that is subject to and satisfies the market requirements. Therefore, these proposed rules would utilize the Departments' discretion under section 9832(c)(2)(C) of the Code, section 733(c)(2)(C) of ERISA, and section 2791(c)(2)(C) of the PHS Act, to recognize HRAs as limited excepted benefits, if certain conditions are met.

The proposed rules that recognize certain HRAs as limited excepted benefits do not apply to health FSAs. For a health FSA to qualify as an excepted benefit, the current regulations continue to apply.

As explained earlier in this preamble, the Departments have the authority and discretion to specify in regulations additional limited excepted benefits, that are similar to the limited benefits specified in the statute and that either are insured under a separate policy, certificate, or contract, or are otherwise not an integral part of a plan. The Departments are proposing an excepted benefit HRA that is both consistent with this statutory framework and consistent with the Departments' objective of expanding the availability and usability of HRAs.

The proposed rules provide the following four requirements for an HRA to qualify as an excepted benefit HRA: (1) The HRA must not be an integral part of the plan, (2) the HRA must

provide benefits that are limited in amount, (3) the HRA cannot provide reimbursement for premiums for certain health insurance coverage, and (4) the HRA must be made available under the same terms to all similarly situated individuals.

1. Otherwise Not an Integral Part of the Plan

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, HRAs must meet the statutory requirement to not be “an integral part of the plan.” To satisfy this condition, the proposed rules specify that for an HRA to be an excepted benefit, 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 HRA. Only individuals who are eligible for participation in the other group health plan would be eligible for participation in the excepted benefit HRA. However, while the plan sponsor would be required to make an offer of other group health plan coverage in order to meet this requirement, HRA participants (and their dependents) would not be required to enroll in the other group health plan in order to be eligible for the excepted benefit HRA.

This provision of the proposed excepted benefit HRA is similar to the requirement that applies under the limited excepted benefits regulations 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).

2. Limited in Amount

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. Under the statute, limited benefits may include limited scope vision or dental benefits, benefits for long-term care, nursing home care, home health care, or community-based care, or any combination thereof and may include “such other similar, limited benefits as are specified in regulations” by the Departments.

The Departments consistently have applied limiting principles in prior rulemakings under which discretion was exercised to establish additional types of limited excepted benefits. For example, health FSAs constitute excepted benefits only if the arrangement is structured so that the maximum benefit payable to any participant in the class for a year may not exceed two times the participant's salary reduction election under the arrangement for the year (or, if greater, may not exceed $500 plus the amount of the participant's salary reduction election).

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.

26 CFR 54.9831-1(c)(3)(v); 29 CFR 2590.732(c)(3)(v); 45 CFR 146.145(b)(3)(v).

See

section 125(i) of the Code.

26 CFR 54.9831-1(c)(3)(vii); 29 CFR 2590.732(c)(3)(vii); 45 CFR 146.145(b)(3)(vii).

In the proposed rules, the Departments propose that the 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 is defined in these proposed rules by reference to the Chained Consumer Price Index for All Urban Consumers, unadjusted (C-CPI-U), published by the Department of Labor. The adjusted limit for plan years beginning in a particular calendar year will be made available early in the fall of the prior calendar year.

In proposing this limit, the Departments considered several factors, including the limits on employer contributions to excepted benefit health FSAs (set at $500 in 1997 if there are no employee contributions to the FSA, although it might be much higher if there are employee contributions).

The Departments also considered indexing $500 for medical inflation using the medical care component of the Consumer Price Index for all Urban Consumers (CPI-U). The Departments considered the relationship between $500 and the average cost of insurance in 1997. The Departments also considered a limit of 15 percent-of-the-cost-of-coverage-under-the-primary-plan test, which is the limit used for both supplemental excepted benefits in the group market and limited wraparound coverage, as a benchmark to ensure that the benefits are limited in amount.

In considering how such a limit could be an appropriate limit for excepted benefit HRAs, the Departments considered 15 percent of the cost of group coverage for both employee-only and family coverage. However, the Departments also considered how to determine the primary plan in circumstances in which the participant does not enroll in a traditional group health plan, and concluded that such a determination would likely be difficult for employers. The Departments also considered using the cost of coverage for the second-lowest cost silver plan in various markets. These methodologies produced a wide range of possible excepted benefit HRA limits from $1,100 to $2,850. Consistent with the principle of promoting HRA use and availability, rather than proposing a complex test for the limit on amounts newly made available in the excepted benefit HRA, the Departments are proposing a maximum of $1,800 (indexed for inflation) on amounts newly made available for a plan year. This approximates the midpoint amount yielded by the various methodologies considered.

See

26 CFR 54.9831-1(c)(3)(v)(B); 29 CFR 2590.732(c)(3)(v)(B); 45 CFR 146.145(b)(3)(v)(B).

See

26 CFR 54.9831-1(c)(3)(vii)(B)(2); 29 CFR 2590.732(c)(3)(vii)(B)(2); 45 CFR 146.145(b)(3)(vii)(B)(2).

See also

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

http://www.cms.gov/CCIIO/Resources/Files/Downloads/hipaa_08_01_508.pdf

); and IRS Notice 2008-23 (2008-07 IRB 433).

In proposing to index the amount by C-CPI-U, the Departments considered several factors, including the difficulties of administering an HRA with a changing amount, and the cost, including the cost to the Departments to publish the amount and provide notice every year, as balanced with the decreasing real value of a set HRA limit and the ability of an employer to maintain the HRA benefit at $1,800, should it choose to do so.

The Departments invite comment on the amount of the proposed maximum dollar limit and whether an alternate amount or formula for determining the maximum dollar limit for an excepted benefit HRA would be more appropriate and, if so, what that alternative would be and why. The Departments specifically request comments on whether the proposed HRA maximum amount of $1,800 should be higher if the HRA covers dependents (or alternatively, whether the $1,800 maximum amount should be lower if the HRA only covers the employee). The Departments also invite comments on the measure of inflation used, including whether the amount should be indexed to inflation (and if there are any administrability concerns associated with indexing), if C-CPI-U is the correct measure of inflation, or whether an

alternate measure, such as the overall

medical

care component for CPI-U, or the method specified under section 9831(d)(2)(D) of the Code for QSEHRAs, should be used. The Departments also invite comment on whether the publication of the adjusted limit for plan years beginning in a particular calendar year by early fall of the preceding calendar year will provide employers with sufficient time to adjust the excepted benefit HRA for the upcoming year.

If a participant or dependent in an excepted benefit HRA does not use all of the amounts made available in the excepted benefit HRA to reimburse medical care expenses for a plan year, and the excepted benefit HRA allows for these amounts to be made available to the participant and dependents in later plan years, the Departments propose that these carryover amounts would be disregarded for purposes of determining whether the benefits in the excepted benefit HRA are limited in amount.

Further, the proposed rules provide that if the plan sponsor provides more than one excepted benefit HRA to the participant for the same time period, the amounts made available under such plans are aggregated to determine whether the benefits are limited in amount.

3. Prohibition on Reimbursement of Premiums for Certain Types of Coverage

As the third requirement for an HRA to be recognized as a limited excepted benefit, the Departments propose that the HRA would not be permitted to reimburse premiums for individual health insurance coverage, coverage under a group health plan (other than COBRA or other group continuation coverage), or Medicare parts B or D. However, the proposed rules would allow an excepted benefit HRA to reimburse premiums for individual health insurance coverage that consists solely of excepted benefits or coverage under a group health plan that consists solely of excepted benefits, as well as for STLDI premiums, and for COBRA premiums.

The Departments have concluded that this limit is appropriate in light of the requirement that excepted benefits under this statutory provision provide only limited benefits. In addition, the Departments have concluded that this condition is appropriate because under our concurrent proposal to permit HRAs to be integrated with individual health insurance coverage and the current regulations that allow HRAs to be integrated with group health plan coverage and to reimburse premiums for Medicare parts B and D in certain circumstances, an employer that wishes to provide an HRA that reimburses premiums for individual health insurance coverage, coverage under a group health plan, or Medicare parts B or D may do so under the applicable integration rules. Such an approach ensures that excepted benefit HRAs provide limited benefits different from what a traditional group health plan would provide, similar to limited scope dental or vision plans and benefits for long-term care, nursing home care, home health care, and community-based care.

This proposed condition would not limit the ability of an excepted benefit HRA to reimburse premiums for COBRA or other group continuation coverage (premiums for which are generally paid with after-tax funds) or STLDI. Further, the excepted benefit HRA may reimburse premiums other than those listed as specifically excluded. The Departments request comments on this condition, including whether additional clarity is needed regarding whether premiums for certain types of coverage may be reimbursed under the proposed excepted benefit HRA.

4. Uniform Availability

To prevent a plan sponsor from intentionally or unintentionally, directly or indirectly, steering any participants or dependents with adverse health factors away from the sponsor's traditional group health plan, the fourth and final requirement for an HRA to be recognized as a limited excepted benefit relates to uniform availability. Specifically, an excepted benefit HRA would be required to be made available under the same terms to all similarly situated individuals (as defined in the HIPAA nondiscrimination regulations) regardless of any health factor. In the Departments' view, this condition is necessary 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. Therefore, the Departments are proposing a uniform-availability requirement and wish to make it clear that benefits must be provided uniformly, without regard to any health factor. Accordingly, for example, the HRA could not be offered only to employees who have cancer or fail a physical examination, just as the HRA could not be offered only to employees who are cancer-free or who pass a physical examination. Similarly, an employer could not make greater amounts available to an HRA for employees who have cancer or who fail a physical examination, just as an employer could not make greater amounts available to an HRA for employees who are cancer-free or who pass a physical examination. The Departments request comment on whether additional standards are necessary to prevent abuse and discrimination based on a health factor.

C. Interaction Between HRAs Integrated With Individual Health Insurance Coverage and Excepted Benefits HRAs

Under the proposed rules, an employer would be permitted to offer an HRA integrated with individual health insurance coverage 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 additional conditions discussed elsewhere in this preamble. However, an employer could 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, an employer would not be permitted to offer both an HRA integrated with individual health insurance coverage and an excepted benefit HRA to any employee.

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 HRA that may be integrated with individual health insurance coverage or an excepted benefit HRA.

See

section 9831(d)(3)(B)(ii) of the Code.

III. Overview of the Proposed Rules Regarding the Premium Tax Credit—Department of the Treasury and IRS

A. Premium Tax Credit Under Section 36B of the Code

Consistent with the objectives in Executive Order 13813 to expand the use of HRAs, the proposed rules would amend the regulations under section 36B of the Code to provide guidance for individuals who are offered or covered by an HRA integrated with individual health insurance coverage as described in the proposed integration rules and who otherwise may be eligible for the PTC.

An individual who is covered by an HRA integrated with individual health insurance coverage is ineligible for the PTC. However, see the discussion earlier in this preamble of the related requirement under the proposed integration rules that plan sponsors provide participants with the periodic opportunity to opt-out of and waive future reimbursements under an HRA.

The proposed rules under section 36B of the Code describe the PTC eligibility of an individual who is offered, but opts out of, an HRA that is integrated with individual health insurance coverage. Consistent with section 36B of the Code and the existing regulations thereunder, the proposed rules provide that an employee who is offered, but opts out of, an HRA integrated with individual health insurance coverage, and an individual who is offered such an HRA because of a relationship to the employee (a related HRA individual), are eligible for MEC under an eligible employer-sponsored plan for any month the HRA is affordable and provides MV. Thus, these individuals are ineligible for the PTC for their Exchange coverage for months the HRA is affordable and provides MV.

Under the proposed rules, an HRA integrated with individual health insurance coverage 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)). For this purpose, an employee's required HRA contribution would be 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, or, 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. Under the proposed rules, the monthly self-only HRA amount would be the self-only HRA amount newly made available to the employee from the employee's employer under the HRA for the plan year, divided by the number of months in the plan year the HRA is available to the employee. The monthly maximum amount available to the employee under the HRA, which is relevant if the HRA provides one amount regardless of the number of individuals covered, would be the maximum amount newly made available to the employee under the HRA, divided by the number of months in the plan year the HRA is available to the employee.

The affordability rule in the proposed rules uses 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, without regard to the type of plan in which the employee actually enrolls. 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 section 36B(c)(2)(C)(ii) of the Code for a plan to provide MV. Specifically, section 36B(c)(2)(C)(ii) of the Code and 26 CFR 1.36B-6 provide that an eligible employer-sponsored plan provides MV only if the plan's share of the total allowed costs of benefits provided to an employee under the plan is at least 60 percent.

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 seek to most closely approximate the PTC eligibility rules that apply to offers of eligible-employer sponsored coverage that is not an HRA.

That is, the PTC eligibility rules under the proposed regulations for an HRA offer, as well as under section 36B of the Code for an offer of traditional employer coverage, are both based on the affordability of a plan available to the employee for which the plan's share of the total allowed costs of benefits provided under the plan must be at least 60 percent of such costs. (See the discussion later in this section of when an HRA integrated with individual health insurance coverage is considered to provide MV.) The Treasury Department and the IRS seek comment on whether the silver level plan used for this purpose should be the second lowest cost silver plan,

instead of the lowest cost silver plan, for self-only coverage offered in the Exchange for the rating area in which the employee resides or whether another plan should be used, and any operational or other issues that the use of the plan proposed or any alternative plan would entail. The proposed rules further provide that only amounts that are newly made available for the plan year of the HRA would be taken into account for determining affordability, provided that the amounts are determinable within a reasonable time before the beginning of the plan year of the HRA. Additionally, consistent with the rules for traditional employer coverage,

the proposed rules require affordability to be determined separately for each employment period that is less than a full calendar year or for the portions of the plan year of the HRA that fall within different taxable years of the employee. In addition, the proposed rules include examples of affordability calculations.

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 section 36B(c)(2)(C)(ii) of the Code for a plan to provide MV.

See

45 CFR 156.140.

With regard to an offer of eligible employer-sponsored coverage that is not an HRA, an individual is eligible for the PTC 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

section 36B(c)(2)(C) of the Code.

Note that the monthly premium for self-only coverage for the second lowest cost silver plan in the employee's individual health insurance market is used to determine the affordability of a QSEHRA.

See

section 36B(c)(4)(C) of the Code.

See

26 CFR 1.36B-2(c)(3)(v)(B).

The proposed rules also address the circumstances in which an HRA is considered to provide MV. As noted earlier in this section of the preamble, section 36B of the Code generally provides that an offer of employer coverage prevents an employee from being allowed the PTC for his or her Exchange coverage only if the employer coverage is both affordable and provides MV. With respect to an offer of an HRA integrated with individual health insurance coverage, the individual health insurance coverage that is proposed to be used for purposes of the affordability test is the lowest cost silver level Exchange coverage for the rating area in which the employee resides, which, as previously noted, will always provide MV. A determination that the integrated arrangement is affordable under the proposed regulations is therefore sufficient to ensure that an employee who is offered an HRA integrated with individual health insurance coverage, and that is determined to be affordable, has the ability to purchase affordable coverage that provides MV. Consequently, the proposed rules provide that an HRA integrated with individual health insurance coverage that is affordable is treated as providing MV

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