Health Reimbursement Arrangements and Other Account-Based Group Health Plans

Federal RegisterJun 20, 2019

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 54

[TD 9867]

RIN 1545-BO46

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Parts 2510 and 2590

RIN 1210-AB87

DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Parts 144, 146, 147, and 155

[CMS-9918-F]

RIN 0938-AT90

Health Reimbursement Arrangements and Other Account-Based Group Health Plans

AGENCY:

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

ACTION:

Final rule.

SUMMARY:

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

DATES:

Effective date:

These final rules are effective on August 19, 2019.

Applicability dates:

The final rules generally apply for plan years beginning on or after January 1, 2020. However, the final rules under Code section 36B apply for taxable years beginning on or after January 1, 2020, and the final rules providing a new special enrollment period in the individual market apply January 1, 2020. See Section VI of the

SUPPLEMENTARY INFORMATION

section for more information on the applicability dates.

FOR FURTHER INFORMATION CONTACT:

Christopher Dellana, Internal Revenue Service, Department of the Treasury, at (202) 317-5500; Matthew Litton or David Sydlik, Employee Benefits Security Administration, Department of Labor, at (202) 693-8335; David Mlawsky, Centers for Medicare & Medicaid Services, Department of Health and Human Services, at (410) 786-1565.

Customer Service Information:

Individuals interested in obtaining information from the DOL concerning employment-based health coverage laws may call the EBSA Toll-Free Hotline at 1-866-444-EBSA (3272) or visit the DOL's website (

www.dol.gov/ebsa

). In addition, information from HHS on private health insurance coverage and coverage provided by non-federal governmental group health plans can be found on the Centers for Medicare & Medicaid Services (CMS) website (

www.cms.gov/cciio

), and information on healthcare reform can be found at

www.HealthCare.gov.

SUPPLEMENTARY INFORMATION:

I. Background

A. Executive Order

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

“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.”

82 FR 48385 (Oct. 17, 2017). The executive order was issued on October 12, 2017 and was published in the

Federal Register

on October 17, 2017.

B. HRAs and Other Account-Based Group Health Plans

1. In General

An account-based group health plan is an employer-provided group health plan that provides for reimbursement of expenses for medical care (as defined under Code section 213(d)) (medical care expenses), subject to a maximum fixed-dollar amount of reimbursements for a period (for example, a calendar year). An HRA is a type of account-based group health plan funded solely by employer contributions (with no salary reduction contributions or other contributions by employees) that reimburses an employee solely for medical care expenses incurred by the employee, or the employee's spouse, dependents, and children who, as of the end of the taxable year, have not attained age 27, up to a maximum dollar amount for a coverage period.

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, 2002-2 CB 93; Revenue Ruling 2002-41, 2002-2 CB 75; and 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. This includes a reimbursement arrangement described in Revenue Ruling 61-146, 1961-2 CB 25, or an arrangement under which the employer uses its funds directly to pay the premium for individual health insurance coverage or other non-employer sponsored hospital or medical insurance covering the employee.

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, Q&A-1 and Q&A-3, and IRS Notice 2015-17, Q&A-4 and Q&A-5, 2015-14 IRB 845.

For simplicity, the preamble generally refers only to HRAs, but references to HRAs should also be considered to include other account-based group health plans as defined in the final rules, unless otherwise specified. This term does not include QSEHRAs, under Code section 9831(d); medical savings accounts (MSAs), under Code section 220; or health savings accounts (HSAs), under Code section 223. In addition, for purposes of the final rules, the term “HRA or other account-based group health plan” does not include an employer arrangement that reimburses the cost of individual health insurance coverage through a cafeteria plan under Code section 125 (cafeteria plan premium arrangements); however see later in this preamble for a clarification that plan sponsors may offer such an arrangement in addition to an individual coverage HRA. A QSEHRA is not a group health plan for purposes of the market requirements of the Code (except as provided in Code section 4980I(f)(4)), parts 6 and 7 of ERISA, and titles XXII and XXVII of the PHS Act, and is not included in the definition of HRAs and other account-based group health plans for purposes of the final rules or this preamble. A QSEHRA is, however, considered a group health plan under the PHS Act for purposes of part C of title XI of the Social Security Act (42 U.S.C. 1320d

et seq.

See

PHS Act section 2791(a)(1), as amended by the 21st Century Cures Act (Cures Act), Public Law 114-255, section 18001(c).

2. Application of the Patient Protection and Affordable Care Act to HRAs and Other Account-Based Group Health Plans

The Patient Protection and Affordable Care Act, Public Law 111-148, was enacted on March 23, 2010 and the Health Care and Education Reconciliation Act of 2010, Public Law 111-152, was enacted on March 30, 2010 (collectively, PPACA). PPACA reorganized, amended, and added to the provisions of part A of title XXVII of the PHS Act relating to health coverage requirements for group health plans and health insurance issuers in the group and individual markets. The term “group health plan” includes both insured and self-insured group health plans.

PPACA also added section 715 to ERISA and section 9815 to the Code to incorporate the provisions of part A of title XXVII of the PHS Act, PHS Act sections 2701 through 2728 (the market requirements), into ERISA and the Code, making them applicable to group health plans and health insurance issuers providing health insurance coverage in connection with group health plans. In accordance with Code section 9831(b) and (c), ERISA section 732(b) and (c), and PHS Act sections 2722(b) and (c) and 2763, the market requirements do not apply to a group health plan or a health insurance issuer in the group or individual market in relation to the provision of excepted benefits described in Code section 9832(c), ERISA section 733(c), and PHS Act section 2791(c).

See the discussion later in this preamble for additional background on excepted benefits. In addition, in accordance with Code section 9831(a)(2) and ERISA section 732(a), the market requirements do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year.

While the PPACA amendments to PHS Act section 2722(b) and (c) (formerly PHS Act section 2721(c) and (d)) could be read as restricting the exemption for excepted benefits so it applies only with respect to subpart 2 of part A of title XXVII of the PHS Act, HHS does not intend to use its resources to enforce the market requirements with respect to excepted benefits offered by non-federal governmental plan sponsors and encourages states to adopt a similar approach with respect to issuers of excepted benefits.

See

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

While the PPACA amendments to title XXVII of the PHS Act removed the parallel provision at section 2722(a) (formerly PHS Act section 2721(a)), HHS follows a similar approach for retiree-only non-federal governmental plans and encourages states to adopt a similar approach with respect to health insurance issuers of retiree-only plans.

See

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

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 PPACA section 1302(b). PHS Act section 2711, however, does not prevent a group health plan, or a health insurance issuer offering group or individual health insurance coverage, from placing an annual or lifetime dollar limit for any individual on specific covered benefits that are not EHBs, to the extent these limits are otherwise permitted under applicable law.

PHS Act section 2711 applies to grandfathered health plans, except that the annual dollar limit prohibition does not apply to grandfathered individual health insurance coverage. Grandfathered health plans are health plans that were in existence as of March 23, 2010, and that are only subject to certain provisions of PPACA, as long as they maintain status as grandfathered health plans under the applicable rules.

See

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

For information regarding EHBs, see HHS's February 25, 2013 final rules addressing EHBs under PPACA section 1302 (78 FR 12834 (Feb. 25, 2013));

See also

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

Because MSAs and HSAs generally are not treated as group health plans, these arrangements are not subject to PHS Act section 2713. Health FSAs are group health plans and, unless they are excepted benefits, will fail to satisfy the requirements of PHS Act section 2713 unless they are integrated with other coverage that satisfies these requirements. For more information about the application of PHS Act section 2713 to health FSAs, see IRS Notice 2013-54, Q&A-7; DOL Technical Release No. 2013-03, Q&A-7, issued on September 13, 2013, available at

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

and CMS Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare Arrangements, September 16, 2013, available at

https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/cms-hra-notice-9-16-2013.pdf.

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

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

The rules and guidance generally provide that, if an HRA is “integrated” with other group health plan coverage that complies with PHS Act sections 2711 and 2713, the HRA is considered to be in compliance with those sections because the combined arrangement complies with them. The rules and guidance also provide that HRAs may be integrated with Medicare and TRICARE coverage if certain conditions are satisfied, but may not be integrated with individual health insurance coverage for purposes of complying with PHS Act sections 2711 and 2713.

Rules and subregulatory guidance issued on this topic include: (1) 75 FR 37188 (June 28, 2010); (2) FAQs about Affordable Care Act Implementation (Part XI), available at

https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-xi.pdf

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

(3) IRS Notice 2013-54 and DOL Technical Release No. 2013-03 and CMS Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare Arrangements; (4) IRS FAQ on Employer Healthcare Arrangements, available at

https://www.irs.gov/affordable-care-act/employer-health-care-arrangements;

(5) FAQs about Affordable Care Act Implementation (Part XXII), available at

https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-xxii.pdf

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

(6) IRS Notice 2015-17, issued on February 18, 2015; (7) 80 FR 72192 (Nov. 18, 2015); (8) IRS Notice 2015-87, 2015-52 IRB 889, issued on December 16, 2015; (9) IRS Notice 2016-17, 2016-9 IRB 358, issued on February 5, 2015; DOL Technical Release No. 2016-01, issued on February 5, 2016, available at

https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/16-01;

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

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

(10) FAQs about Affordable Care Act Implementation Part 33, available at

https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-33.pdf

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

(11) FAQs about Affordable Care Act Implementation Part 37, available at

https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-37.pdf

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

(12) 83 FR 54420 (Oct. 29, 2018); and (13) IRS Notice 2018-88, 2018-49 IRB 817, issued on November 19, 2018.

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

More specifically, in the preamble to the 2010 interim final rules under PHS Act section 2711, the Departments provided that HRAs may be integrated with “other coverage as part of a group health plan” that complies with PHS Act section 2711 in order for the HRAs to be considered to satisfy PHS Act section 2711.

The interim final rules did not, however, set forth rules for implementing integration; the integration methods were set forth in later subregulatory guidance and subsequently included in the final rules under PHS Act section 2711 issued in 2015.

See

75 FR 37187, 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 Departments later incorporated the provisions of this guidance into the final rules issued in 2015 under PHS Act section 2711

, which are summarized later in this section of the preamble.

See

CMS Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare Arrangements.

In addition to describing the integration methods, IRS Notice 2013-54 and DOL Technical Release No. 2013-03, in Q&A-5, provided that, whether or not an HRA is integrated with other group health plan coverage, unused amounts that are credited to the HRA while the HRA is integrated with other group health plan coverage may be used to reimburse medical care expenses in accordance with the terms of the HRA after an employee ceases to be covered by the integrated group health plan coverage without causing the HRA to fail to comply with PHS Act sections 2711 and 2713. In IRS Notice 2015-87, Q&A-2, however, the Departments clarified that an HRA that includes terms permitting the purchase of individual health insurance coverage, even if reimbursement is only allowed after the employee ceases to be covered by other integrated group health plan coverage, fails to be integrated with other group health plan coverage and therefore fails to comply with PHS Act sections 2711 and 2713.

See

80 FR 72192 (Nov. 18, 2015).

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

On February 18, 2015, the Treasury Department and the IRS issued Notice 2015-17. Q&A-3 provided that an arrangement under which an employer reimburses (or pays directly) some or all of the medical care expenses for employees covered by TRICARE constitutes an HRA and may not be integrated with TRICARE to comply with PHS Act sections 2711 and 2713 because TRICARE is not a group health

plan for integration purposes. However, Q&A-3 stated that an HRA that pays for or reimburses medical care expenses for employees covered by TRICARE may be integrated with another group health plan offered by the employer for purposes of PHS Act sections 2711 and 2713 if: (1) The employer offers a group health plan (other than the HRA) to the employee that does not consist solely of excepted benefits and that provides minimum value (MV); (2) the employee participating in the HRA is enrolled in TRICARE; (3) the HRA is available only to employees who are enrolled in TRICARE; and (4) the HRA is limited to reimbursement of cost sharing and excepted benefits, including TRICARE supplemental premiums.

Q&A-3 of Notice 2015-17 also provided that an employer payment plan through which an employer reimburses (or pays directly) all or a portion of Medicare Part B or D premiums for employees may not be integrated with Medicare coverage to comply with PHS Act sections 2711 and 2713 because Medicare coverage is not a group health plan. However, under the notice, this type of employer payment plan may be integrated with another group health plan offered by the employer for purposes of PHS Act sections 2711 and 2713 if: (1) The employer offers a group health plan (other than the employer payment plan) to the employee that does not consist solely of excepted benefits and that provides MV; (2) the employee participating in the employer payment plan is actually enrolled in Medicare Part A and B; (3) the employer payment plan is available only to employees who are enrolled in Medicare Part A and Part B or D; and (4) the employer payment plan is limited to reimbursement of Medicare Part B or D premiums and excepted benefits, including Medigap premiums. Notice 2015-17 also includes a general reminder that, to the extent such an arrangement is available to active employees, it may be subject to restrictions under other laws, such as the Medicare secondary payer (MSP) provisions.

See later in this preamble for a discussion of the rules provided in the 2015 rules under PHS Act section 2711 allowing Medicare Part B and D reimbursement arrangements to be integrated with Medicare in certain limited circumstances (that is, generally, for HRAs sponsored by employers with fewer than 20 employees).

See later in this preamble for a clarification of the meaning of this statement included in IRS Notice 2015-17, regarding the MSP provisions.

On November 18, 2015, the Departments finalized the proposed and interim final rules under PHS Act section 2711, incorporating certain subregulatory guidance regarding HRA integration, and making various additional clarifications (the 2015 rules).

The 2015 rules incorporate prior subregulatory guidance that HRAs may not be integrated with individual health insurance coverage for purposes of complying with PHS Act sections 2711 and 2713. Consistent with the initial subregulatory guidance, the 2015 rules provide two methods for integration of HRAs with other group health plan coverage.

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 (Nov. 18, 2015). To the extent the 2015 rules did not incorporate or modify the prior subregulatory guidance, that guidance remains in effect.

These two methods of integration were originally discussed in IRS Notice 2013-54, Q&A-4, and DOL Technical Release No. 2013-03.

See

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

See

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

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 be made available only to employees who are enrolled in non-HRA group coverage, regardless of whether such coverage is provided by the HRA plan sponsor. For both integration methods, the non-HRA group coverage may not consist solely of excepted benefits and, for the MV Integration Method, the non-HRA group coverage offered by the employer and in which the employee enrolls must provide MV.

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 the non-HRA group coverage satisfies the MV Integration Method, an HRA will not be treated as failing to comply with PHS Act section 2711, even if the non-HRA group coverage with which the HRA is integrated does not cover a category of EHB and the HRA is available to cover that category of EHB and limits the coverage to the HRA's maximum benefit.

See

IRS Notice 2013-54, Q&A-6.

The 2015 rules also include a special integration method for certain arrangements offered by employers that are not required to offer, and do not offer, non-HRA group coverage to employees who are eligible for Medicare coverage (generally, employers with fewer than 20 employees), but that offer non-HRA group coverage that does not consist solely of excepted benefits to employees who are not eligible for Medicare.

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), and 45 CFR 147.126(d)(5). The 2015 rules did not address the Medicare integration rules that apply to employers who are required to offer non-HRA group coverage to employees who are eligible for Medicare (generally, employers with 20 or more employees). For a discussion of those rules, see IRS Notice 2015-17 and the discussion in this preamble.

HIPAA Nondiscrimination Provisions

Prior to the enactment of PPACA, titles I and IV of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), Public Law 104-191, added Code section 9802, ERISA section 702, and PHS Act section 2702 (HIPAA nondiscrimination provisions). The Departments published final rules implementing the HIPAA nondiscrimination provisions on December 13, 2006 (the 2006 rules).

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

As amended by PPACA, the nondiscrimination provisions of PHS Act section 2705 largely reflect the 2006 rules and extend the HIPAA nondiscrimination protections (but not the wellness program exception) to the individual market. These provisions generally prohibit group health plans and health insurance issuers in the group and individual markets from discriminating against individual participants and beneficiaries in eligibility, benefits, or premiums based on a health factor.

71 FR 75013 (Feb. 12, 2007).

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

The HIPAA nondiscrimination provisions set forth eight health status related factors. The eight health factors are health status, medical condition (including both physical and mental illnesses), claims experience, receipt of healthcare, medical history, genetic information, evidence of insurability, and disability. These terms are largely overlapping and, in combination, include any factor related to an individual's health. 66 FR 1377, 1379 (Jan. 8, 2001).

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

provided that, if an employer offers only employees with high claims risk a choice between enrollment in a traditional group health plan or cash, the arrangement would not comply with the market requirements, citing PHS Act section 2705 (which is incorporated by reference into Code section 9815 and ERISA section 715), as well as the HIPAA nondiscrimination provisions of Code section 9802 and ERISA section 702. The Q&A explained that these arrangements violate the nondiscrimination provisions regardless of whether: (1) The cash payment is treated by the employer as pre-tax or post-tax to the employee, (2) the employer is involved in the selection or purchase of any individual market product, or (3) the employee obtains any individual health insurance coverage. The Departments explained that offering cash as an alternative to health coverage for individuals with adverse health factors is an eligibility rule that discourages participation in the traditional group health plan, in contravention of the HIPAA nondiscrimination provisions.

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

Code section 9831, ERISA section 732, and PHS Act sections 2722 and 2763 provide that the requirements of chapter 100 of the Code, part 7 of ERISA, and title XXVII of the PHS Act do not apply to excepted benefits. Excepted benefits are described in Code section 9832, ERISA section 733, and PHS Act section 2791.

There are four statutory categories of excepted benefits, including limited excepted benefits. Under the statutory provisions, limited excepted benefits may include limited scope vision or dental benefits, benefits for long-term care, nursing home care, home healthcare, or community-based care, or any combination thereof, and “such other similar, limited benefits as are specified in regulations” by the Departments.

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

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

See

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

See also

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

See

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

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

See

Code section 5000A(f)(3).

See

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

See

Code section 4980H(a)(1) and (b)(1).

See also

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

E. Premium Tax Credit

1. In General

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

Under Code section 36B(a) and (b)(1) and 26 CFR 1.36B-3(d), a taxpayer's PTC is the sum of the premium assistance amounts for all coverage months during the taxable year for individuals in the taxpayer's family.

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

Under Code section 36B(c)(2), a month is not a coverage month for an individual if either: (1) The individual is eligible for coverage under an eligible employer-sponsored plan and the coverage is affordable and provides MV; or (2) the individual is enrolled in an eligible employer-sponsored plan, even if the coverage is not affordable or does not provide MV.

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

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

See

26 CFR 1.5000A-2(c).

See

Code section 5000A(f)(3) 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, under existing rules, an individual is ineligible for the PTC for the individual's Exchange coverage for a month if the individual is covered by an HRA or is eligible for an HRA that is affordable and provides MV for the month.

2. Affordability and Minimum Value

Under Code section 36B(c)(2)(C) and 26 CFR 1.36B-2(c)(3)(v)(A)(

) and (

), 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 the entire plan year of the eligible employer-sponsored plan if, at the time an individual enrolls in a qualified health plan (QHP) offered through an Exchange, the Exchange determines that the eligible employer-sponsored plan is not affordable.

Thus, the employee safe harbor locks in the Exchange's determination of unaffordability, which is based on estimated household income, even if the eligible employer-sponsored plan ultimately proves to be affordable based on actual household income for the tax year.

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

See

45 CFR 156.145.

See also

80 FR 52678 (Sept. 1, 2015).

F. QSEHRAs

1. In General

The 21st Century Cures Act (Cures Act) Public Law 114-255 was enacted on December 13, 2016. Cures Act section 18001 amended the Code, ERISA, and the PHS Act to permit an eligible employer to provide a QSEHRA to its eligible employees. The Cures Act provides that a QSEHRA is not a group health plan for purposes of the market requirements, and, as a result, QSEHRAs are not subject to PHS Act sections 2711 and 2713.

For purposes of these rules, the term “HRA or other account-based group health plans” does not include QSEHRAs, unless otherwise specified.

See

Code section 9831(d)(1), ERISA section 733(a)(1), and PHS Act section 2791(a)(1). However, QSEHRAs are group health plans under the PHS Act definition for purposes of part C of title XI of the Social Security Act (42 U.S.C. 1320d

et seq.

See

PHS Act section 2791(a)(1), as amended by Cures Act section 18001(c). In addition, QSEHRAs were not excluded from ERISA's definition of employee welfare benefit plan under ERISA section 3(1) and, therefore, remain subject to the requirements for employee welfare benefit plans under ERISA.

See

H. Rept. 114-634—Small Business Health Care Relief Act of 2016 (the relevant provisions of this bill were passed into law by the Cures Act). Moreover, because QSEHRAs are employee welfare benefit plans, individual health insurance coverage that is reimbursed by a QSEHRA would not become part of an ERISA plan if the conditions of the DOL safe harbor described later in this preamble are satisfied.

Pursuant to Code section 9831(d), a QSEHRA is an arrangement that generally must be provided on the same terms, subject to certain exceptions, and cannot exceed a prescribed maximum amount.

For the purpose of identifying who can provide a QSEHRA, the statute provides that an eligible employer is an employer that is not an applicable large employer (ALE), as defined in Code section 4980H(c)(2), and that does not offer a group health plan to any of its employees. The statute also requires that an employer providing a QSEHRA satisfies certain notice requirements including a statement that the employee should provide the information about the permitted benefit to the applicable Exchange if the employee applies for advance payments of the premium tax credit (APTC).

See Code section 9831(d) and IRS Notice 2017-67, 2017-47 IRB 517, for additional detail.

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

to provide guidance on the requirements for providing a QSEHRA. If an eligible employer complies with the guidance provided in Code section 9831(d) and Notice 2017-67, it may provide a QSEHRA to its eligible employees and the QSEHRA is not required to comply with PHS Act sections 2711 and 2713 because it is not subject to those requirements.

See IRS Notice 2017-20, 2017-11 IRB 1010, which extended the period for an employer to furnish an initial written notice to its eligible employees regarding a QSEHRA, and see FAQs About Affordable Care Act Implementation Part 35, Q&A-3, available at

https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-35.pdf

and

https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQ-Part-35_12-20-16.pdf.

2. QSEHRAs and the PTC

The Cures Act also added provisions to Code section 36B relating to how participation in a QSEHRA affects a taxpayer's eligibility for the PTC and how participation in a QSEHRA affects a taxpayer's computation of the PTC. Under Code section 36B(c)(4)(A), if an employee is provided a QSEHRA that constitutes affordable coverage for a month, the month is not a coverage month for the employee or the employee's spouse or dependents, meaning that the PTC is not allowed for that month. Code section 36B(c)(4)(C) provides that a QSEHRA constitutes affordable coverage for a month if the excess of the monthly premium for the self-only second lowest cost silver plan in the employee's individual market over

1/12

of the employee's permitted benefit, as defined in Code section 9831(d)(3)(C), does not exceed

1/12

of a specified percentage of the employee's household income.

Code section 36B(c)(4)(B) provides that if an employee is provided a QSEHRA that does not constitute affordable coverage for a coverage month, the PTC otherwise allowable for the month is reduced by

1/12

of the employee's annual permitted benefit under the QSEHRA.

G. Individual Market Special Enrollment Periods

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

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

Group health plans and group health insurance issuers must provide SEPs under certain circumstances and the Departments have jurisdiction over those provisions.

See

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

See also

26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103. Individual health insurance coverage can include dependent coverage and therefore can be self-only coverage or other-than-self-only coverage. “Individual market” means the market for health insurance coverage offered to individuals other than in connection with a group health plan.

See

PHS Act section 2791(e)(1).

See also

26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103. As discussed later in this preamble, “group health insurance coverage” means health insurance coverage offered in connection with a group health plan. Individual health insurance coverage reimbursed by the arrangements described in 29 CFR 2510.3-1(l) (which is finalized in this rule) is not offered in connection with a group health plan, and is not group health insurance coverage, provided all the conditions in 29 CFR 2510.3-1(l) are satisfied.

See

ERISA section 733(b)(4) and PHS Act section 2791(b)(4).

See also

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

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

The Treasury Department and the IRS also proposed rules under Code section 36B for PTC eligibility for individuals who are offered an individual coverage HRA

(the proposed PTC rules). DOL proposed a clarification to provide HRA and QSEHRA plan sponsors with assurance that the individual health insurance coverage the premiums of which are reimbursed by the HRA or QSEHRA does not become part of an ERISA plan when certain conditions are satisfied. Finally, HHS proposed changes to rules regarding SEPs in the individual market that would provide an SEP for individuals who gain access to individual coverage HRAs or who are provided QSEHRAs (the proposed SEP rules).

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

On November 19, 2018, the Treasury Department and the IRS issued Notice 2018-88. IRS Notice 2018-88 described a number of proposals related to the application of Code sections 4980H and 105(h) to individual coverage HRAs. For additional discussion of IRS Notice 2018-88, see elsewhere in this preamble.

The Departments requested comments on all aspects of the proposed rules, as well as requesting comments on a number of specific issues. The Departments received over 500 comments in response to the proposed rules from a range of stakeholders, including employers, health insurance issuers, State Exchanges, state regulators, unions, and individuals. No requests for a public hearing were received. After careful consideration of all of the comments, the Departments are finalizing the proposed rules with certain modifications made in response to comments. These modifications are discussed later in this preamble.

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

Integration Rules

1. Integration—In General

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

and any dependents

covered by the HRA

to be enrolled in individual health insurance coverage 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 ERISA section 3(7). Under ERISA section 3(7), “the term `participant' means any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer or members of such organization, or whose beneficiaries may be eligible to receive any such benefit.”

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.”

The final rules use several terms interchangeably regarding an individual's individual coverage HRA status. These terms generally parallel those used when referring to group or individual health insurance coverage. Specifically, “enrolled in” and “covered by,” both refer to the status of an individual who is participating in an individual coverage HRA and can request reimbursements for medical care expenses reimbursable under the HRA. The date on which an individual coverage HRA “takes effect” or “begins” refers to the first date on which reimbursable medical care expenses may be incurred. For example, an employee whose individual coverage HRA takes effect on June 1 may request reimbursements for medical care expenses incurred on or after that date, if the individual is enrolled in individual health insurance coverage or Medicare on or before June 1.

Further, in order to prevent a plan sponsor from intentionally or unintentionally, directly or indirectly, steering any participants or dependents with adverse health factors away from the plan sponsor's traditional group health plan and into the individual market, the proposed rules prohibited a plan sponsor from offering employees within a class of employees a choice between a traditional group health plan and an individual coverage HRA. The proposed rules also required that an individual coverage HRA be offered on the same terms to all employees within a class of employees, subject to certain exceptions, and the proposed rules included proposed classes of employees that employers could use for this purpose.

The proposed rules also required individual coverage HRAs to allow employees to opt out of and waive future reimbursements under the HRA at certain times, and to provide a notice to eligible participants regarding how the offer of the HRA, or enrollment in the HRA, affects the ability to claim the PTC. This was proposed because an offer of an HRA may affect an individual's eligibility for the PTC, and enrollment in an HRA does affect an individual's eligibility for the PTC.

Each of these conditions, and the related comments received, are discussed in the following sections of this preamble. This section of the preamble addresses the more general comments on allowing HRAs to be integrated with individual health insurance coverage.

Many commenters supported the proposed rules. Some of these commenters expressed general support for the Departments' efforts to expand the availability and use of HRAs and the priority the Departments have placed on HRAs. Some commenters stated that the proposed rules would enable employers to offer more affordable health coverage alternatives to employees and could expand health insurance coverage, including for lower-wage and part-time and other particular groups of employees. Some commenters focused on the potential benefits for small employers, commenting that the proposed HRA expansion would create new options for small employers that have otherwise been unable to offer health insurance coverage due to PPACA-related requirements. These commenters asserted that the proposed HRA expansion would help small employers provide meaningful benefits, attract talent, and keep their workforce healthy. Some commenters expressed general support for allowing employers to move to a defined contribution approach for health insurance coverage, including because this likely permits greater employee choice.

Some commenters noted that allowing individual coverage HRAs could expand and stabilize the individual health insurance market while providing greater administrative simplicity and reducing administrative costs for employers. In particular, some commenters expressed the view that the proposed rules would strengthen the individual market due to an increased number of individuals in the individual market and because working individuals who would be added to the individual market tend to be of lower health risk than those currently comprising the individual market risk pool. Some commenters also stated that employers may not necessarily be incentivized to segment their risk and, therefore, concerns about adverse selection may be overstated.

Some commenters who generally supported the proposed rules emphasized that their support was contingent on any final rules retaining the conditions intended to prevent adverse selection. And some commenters opposed allowing individual coverage HRAs. These commenters stated that the safeguards in the proposed rules were insufficient to prevent market segmentation and destabilization of the individual market. Several of these commenters argued that market segmentation could occur if employers that choose to offer an individual coverage HRA have higher-risk employees than those employers that choose not to offer an individual coverage HRA and that employers may still be able to segment risk based on the proposed classes of employees. Some of these commenters asked that the rules be withdrawn, or at least delayed, until the potential effects on the individual and group markets could be better understood.

More generally, commenters expressed a number of concerns regarding adverse selection and risk-pool effects of the proposed rules, including that the proposed rules would change the composition of the risk pools for the individual and small group markets, making coverage more expensive and less accessible overall. Some commenters were concerned that the proposed rules would be particularly harmful to self-employed individuals and small business employees because those individuals generally rely on coverage in the individual market and, according to the commenters, the proposed rules would increase premiums in the individual market. Some commenters were also concerned that employers may substantially alter traditional group health plans to the detriment of all employees who rely on that coverage and that there could be negative implications in the small group market for states that have merged their individual and small group market risk pools. One commenter stated that the negative effects of the proposed rules, particularly the increase in individual market premiums and the attendant fiscal cost that the commenter expects to occur, are likely to outweigh the benefits to employers and their employees. Another commenter asserted that the proposed rules would increase premiums due to both adverse selection and issuers' increased uncertainty regarding the effect of individual coverage HRAs on the individual market.

The Departments agree with the commenters who asserted that allowing individual coverage HRAs will expand flexibility and use of HRAs to provide additional options for employers and employees to offer and obtain quality, affordable healthcare. The Departments also agree that individual coverage HRAs would expand coverage and may provide greater administrative

simplicity and reduce administrative costs for employers.

The Departments acknowledge the concerns expressed by commenters that allowing individual coverage HRAs could cause adverse selection in the individual market. As explained in the preamble to the proposed rules, allowing individual coverage HRAs could theoretically result in opportunities for employers to encourage higher-risk employees (that is, employees with high expected medical claims or employees with family members with high expected medical claims) to obtain coverage in the individual market, external to the traditional group health plan sponsored by the employer, in order to reduce the cost of traditional group health plan coverage provided by the employer to lower-risk employees. This could happen in a number of ways. For example, if employees were permitted to choose between participating in an employer's traditional group health plan or an individual coverage HRA, some higher-risk employees might have an incentive to select the HRA and enroll in individual health insurance coverage, depending on the relative generosity of the individual coverage HRA and the individual health insurance coverage as compared to the traditional group health plan. There could be significant differences between these coverage options because individual health insurance coverage generally is required to cover all categories of EHBs, and large group market and self-insured group health plans are not required to do so. An employer could also deliberately attempt to steer employees with certain medical conditions away from the employer's traditional group health plan. In either case, if disproportionately higher-risk employees enrolled in individual coverage HRAs, this adverse selection could raise premiums in the individual market.

Both in promulgating the proposed rules and again in response to comments provided on the proposed rules, the Departments considered the possibility that the individual market could instead be positively impacted. Lower-risk employees might choose individual coverage HRAs, while higher-risk employees might elect to remain in their employer's traditional group health plan. Such an outcome could result for a host of reasons, including because higher-risk employees may be more risk averse to changing health benefits. Additionally, individual health insurance coverage might have more restrictive provider networks than traditional group health plans and higher-risk employees are generally more sensitive to the make-up of the provider network than lower-risk employees. In addition, lower-risk employees might prefer an individual coverage HRA because it could allow them to spend less on premiums—reducing or potentially eliminating out-of-pocket premiums and potentially leaving more funds to cover cost sharing. Further, employers might be discouraged by the legal risk involved with attempting to steer higher-risk employees away from the traditional group health plan.

However, employers also would face strong countervailing incentives to maintain (or improve) the average health risk of participants in their traditional group health plans. Therefore, the Departments have determined that there is a risk of some market segmentation and health factor discrimination that could result from allowing individual coverage HRAs, but the Departments also have determined that the risk can be sufficiently mitigated with conditions of the type provided in the proposed rules (and in the final rules) designed to limit adverse selection. Moreover, as discussed in more detail later in this preamble, the Departments considered the comments requesting that the Departments strengthen the conditions intended to limit adverse selection, and the Departments are finalizing those proposed conditions with some changes in response to comments, including adding a minimum class size requirement that will apply to certain classes of employees in certain instances. Regarding the concern raised by commenters that the proposed conditions would not prevent adverse selection if employers with higher-risk employees chose to offer individual coverage HRAs, the Departments took that possibility into account in the regulatory impact analysis.

Therefore, taking all of these considerations into account, the Departments have determined that allowing individual coverage HRAs will produce significant benefits, including increased options and coverage, and is not likely to create a material risk of adverse selection in the individual market due to the sufficiency of, and changes to strengthen, the integration conditions intended to mitigate that risk that are finalized in this rulemaking. Accordingly, the Departments are finalizing the proposed rules, including each of the conditions included in the proposed rules, but with various changes and clarifications, as explained later in this preamble.

A number of commenters expressed concern about the impact on employees shifting from traditional group health plans to the individual market. Some commenters emphasized that in order to achieve the goals of expanding coverage and increasing choice and flexibility for employers, it is vital that the individual market be stable and well-functioning; otherwise, employers will be unwilling to utilize the expanded flexibility. Some commenters recommended that the Departments delay issuing the final integration rules until insurance in the individual market is more affordable or until clearer information is available regarding the long-term stability of the individual market, including the impacts of other recent changes such as the expansion of STLDI and changes to the PPACA section 1332 waiver program. Some commenters asked the Departments to withdraw the proposed integration rules and, instead, take other actions to stabilize the individual market. One commenter requested that HRA integration with individual health insurance coverage be allowed only if each employee is provided at least three choices for coverage in the individual market.

The Departments acknowledge that the extent to which the goals of expanding coverage and options through individual coverage HRAs will be achieved depends on the existence of a stable individual market. Accordingly, the Departments are finalizing the proposed rules with conditions on individual coverage HRAs intended to prevent a negative impact on the individual market. The Departments expect individual coverage HRAs, with the safeguards in the final rules, will substantially increase the size of the individual market and will not result in significant changes in the average health risk of the individual market risk pool. The Departments also understand that currently the stability of the individual market varies a great deal across the country, and that in some places improvement will likely be needed before employers elect to offer individual coverage HRAs. The Departments considered these issues in developing the proposed and final rules and incorporated significant flexibility, including geographic flexibility, to address these issues so that each employer may choose what is best for its workforce. However, the final rules do not require that a minimum number of individual health insurance plans be available to employees in order for the employer to offer an individual coverage HRA. There is no compelling justification for such a requirement, and

it is not necessary to ensure compliance with PHS Act sections 2711 and 2713. Employees often have limited choices with respect to the traditional group health plans they are offered, if any, and adopting this type of requirement would unnecessarily prevent certain employers from offering an individual coverage HRA. Further, suggestions regarding changes to the other rules that affect the individual market, in order to improve the individual market, are outside the scope of this rulemaking.

Some commenters stated that the proposed rules failed to adequately take into account the differences between traditional group health plans and individual health insurance coverage, the increased burden on employees in choosing and enrolling in a plan in the individual market relative to the burden on employees under a traditional group health plan, and the significance of the change, from the employee's perspective. Other commenters stated that individuals in the individual market could face more expensive plans, lower employer contributions, narrower networks, and higher cost sharing. Some commenters stated that these individuals could also face more confusion and be provided less assistance, in part due to decreased federal funding for outreach and assistance in the individual market. Some of these commenters asserted what they believed to be the comparative advantages of traditional group health plans, including that those plans are more robust, cost-effective, and consumer-friendly. One commenter expressed general concern about the shifting of employees from a defined benefit health plan system to a defined contribution health plan system, because, according to the commenter, it may result in less comprehensive coverage.

The Departments considered, and are aware, that an employee's experience enrolling in and having coverage under an individual coverage HRA may be different than the experience of enrolling in and having coverage under a traditional group health plan. The Departments took this into account in developing the proposed and final rules, including by requiring the individual coverage HRA to provide a notice to eligible participants explaining the individual coverage HRA and the possible consequences of the HRA being offered and accepted. The Departments understand that employers tend to act in the best interest of their workers in order to recruit and retain talent. Therefore, an employer offering an individual coverage HRA generally will do so because it is a better alternative for a substantial share of their employees than a traditional group health plan or no offer of employer-sponsored coverage. Further, as described later in this preamble, DOL is also clarifying the extent to which employers may assist employees with regard to enrollment in individual health insurance coverage without resulting in the individual health insurance coverage becoming part of an ERISA plan. In addition, the Departments are continuing to consider ways to assist employees offered an individual coverage HRA, including through clear instructions in the Exchange application process and other possible methods of outreach and assistance. As to the more general comments asserting that traditional group health plans have advantages as compared to individual health insurance coverage, the Departments acknowledge that there are differences. The Departments intend with the final rules to expand the choices available to employers and employees and to make an additional option available for employers, including those that have not previously offered traditional group health plan coverage.

Some commenters questioned the Departments' legal authority with regard to certain aspects of the proposed rules. A few commenters questioned whether the Departments have the authority to allow HRAs to satisfy PHS Act sections 2711 and 2713 by virtue of integration with other coverage, and a few stated that the Departments failed to justify the removal of the regulatory prohibition on integration of an HRA with individual health insurance coverage. Further, a few commenters asserted that the Departments do not have the authority to allow individual coverage HRAs because Congress enacted the Cures Act, which provided a limited exception to the prohibition on HRAs provided in conjunction with individual health insurance coverage in the form of QSEHRAs, and the commenters believe this indicates that Congress did not intend to allow the Departments to otherwise remove the regulatory prohibition on integration of an HRA with individual health insurance coverage.

The Departments disagree with these commenters and, instead, have determined that the final rules are justified and within the Departments' authority. While HRAs are group health plans subject to PHS Act sections 2711 and 2713 and would fail to comply with those provisions if they were offered on their own, PHS Act sections 2711 and 2713 do not speak directly to situations in which an HRA is integrated with other coverage that satisfies those statutory requirements. The Departments have determined that it is reasonable, and consistent with the statutory scheme, to apply PHS Act sections 2711 and 2713 to the integrated arrangement rather than to each of its component parts.

As explained earlier in this preamble, the Departments previously determined that it was reasonable to consider an HRA to be compliant with PHS Act sections 2711 and 2713 as long as individuals covered by the HRA had other employer-provided group health plan coverage (including coverage offered by a different employer, such as a spouse's employer) that satisfied the conditions in PHS Act sections 2711 and 2713, subject to certain other conditions.

In that case, under the combined arrangement, individuals have the protections intended by PPACA, in addition to the HRA that they generally may use to pay for premiums or other medical care expenses not covered by the group health plan. The Departments now extend this same approach to integration with individual health insurance coverage, which the Departments have determined is similarly justified and appropriate, as individual health insurance coverage is generally subject to and compliant with PHS Act sections 2711 and 2713.

The Departments note that under IRS Notice 2015-17, HRAs that reimburse certain Medicare premiums and TRICARE expenses may be considered integrated with the group health plan coverage offered to the employee by the employer although the employee is not enrolled in that group coverage and is instead enrolled in Medicare or TRICARE, subject to certain conditions. Further, under 26 CFR 54.9815-2711(d)(5), 29 CFR 2590.715-2711(d)(5), and 45 CFR 147.126(d)(5), an employer payment plan for Medicare premiums offered by certain employers may be considered integrated with Medicare (and considered to be compliant with PHS Act sections 2711 and 2713), subject to certain conditions.

Further, for the reasons discussed later in this preamble, the Departments have determined that permitting integration of individual coverage HRAs with Medicare is also justified and appropriate, subject to certain conditions. References in this preamble to an individual coverage HRA integrated with Medicare refer to an individual coverage HRA integrated with Medicare Part A and B or Medicare Part C.

In developing the proposed and final rules, the Departments considered that the Cures Act provided for QSEHRAs. However, in creating QSEHRAs, Congress did not enact a general prohibition on integrating an HRA with individual health insurance coverage. Instead, Congress allowed a limited HRA that certain small employers may provide that is not a group health plan subject to the market requirements and, thus, need not be integrated with any

other health coverage to satisfy PHS Act sections 2711 and 2713. The fact that Congress provided some flexibility for certain employers by creating QSEHRAs does not preclude the Departments from providing additional flexibility through rulemaking to allow individual coverage HRAs.

The final rules do not change the ability of eligible employers to provide QSEHRAs. Rather, the final rules provide an opportunity for all employers, including those who may or may not qualify to sponsor a QSEHRA, to sponsor an individual coverage HRA.

Moreover, by virtue of providing for QSEHRAs, Congress acknowledged and left intact the Departments' regulations allowing for integration of HRAs with other group health plan coverage. In so doing, Congress recognized the Departments' authority to allow HRAs to be integrated with other group health plan coverage, which is the same authority the Departments now extend to allow integration of HRAs with individual health insurance coverage.

Congress has granted the Departments the authority to promulgate regulations as may be necessary or appropriate to carry out the provisions of the Code, ERISA, and the PHS Act that were added as a result of HIPAA and PPACA.

See

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

The Departments note that an employer may not both offer an individual coverage HRA and provide a QSEHRA, as a result of the QSEHRA rules under Code section 9831(d) and as a result of the conditions that apply to individual coverage HRAs.

The Departments acknowledge that the final rules, in allowing individual coverage HRAs, remove the prohibition on an HRA being integrated with individual health insurance coverage that the Departments had previously imposed. As noted earlier in this section of the preamble, in the 2015 rules and the guidance that preceded those rules, the Departments determined that HRAs should not be allowed to be integrated with individual health insurance coverage, even though that insurance coverage is generally subject to and compliant with PHS Act sections 2711 and 2713. The Departments at that time declined to allow integration with individual health insurance coverage because of concerns about adverse selection in the individual market. Since that time, the Departments have observed that many employers, especially small employers, continue to struggle to offer health insurance coverage to their employees.

Further, the Departments have had additional time to consider whether, and what type of, conditions would be sufficient to mitigate the risk of adverse selection and health factor discrimination that might otherwise result from allowing HRAs to be integrated with individual health insurance coverage.

In 2018, 57 percent of firms offered health benefits to at least some of their workers; 47 percent of employers with three to nine workers offered coverage, while virtually all firms with 1,000 or more workers offered coverage.

See

Kaiser Family Foundation, “Employer Health Benefits 2018 Annual Survey”, Figure 2.2 at

http://files.kff.org/attachment/Report-Employer-Health-Benefits-Annual-Survey-2018.

The Departments have determined that the advantages to employers and employees of individual coverage HRAs warrant allowing them to be offered,

notwithstanding the concerns regarding potential adverse selection risk to the individual market. This is because the Departments expect that the conditions adopted in the final rules will significantly mitigate the risk of adverse selection. As to the benefits, the final rules will increase flexibility and choices of health coverage options for employers and employees. The increased use of individual coverage HRAs could potentially reduce healthcare spending, particularly less efficient spending, and ultimately result in increased taxable wages for workers in firms that currently offer traditional group health plans. The final rules are also expected to increase the number of low- and moderate-wage workers (and their family members) with health insurance coverage.

HRA expansion is an Administration priority. In October 2017, the President issued Executive Order 13813, directing the Departments “to consider proposing regulations or revising guidance, to the extent permitted by law and supported by sound policy, to increase the usability of HRAs, to expand employers' ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup coverage.” The Executive Order further provides that expanding “the flexibility and use of HRAs would provide many Americans, including employees who work at small businesses, with more options for financing their healthcare.”

Accordingly, the Departments disagree with commenters who asserted that the Departments are precluded from allowing individual coverage HRAs because those arrangements were not previously allowed and that such a change is not sufficiently justified. The Departments have considered whether to allow HRAs to be integrated with individual health insurance coverage, and have determined that a change allowing that integration is warranted, subject to a number of significant conditions intended to protect against the risk of adverse selection and health factor discrimination. This change comes after the Departments' consideration of various factors, including the need to provide employers and employees additional choices with respect to healthcare coverage, the ability of the conditions in the final rules to mitigate against adverse selection and health factor discrimination, and the anticipated effect of the final rules to increase choice and competition and decrease the number of uninsured individuals.

One commenter stated that allowing individual coverage HRAs is contrary to PPACA's intent to create a stable individual market. The Departments acknowledge that allowing individual coverage HRAs in a way that could lead to large-scale destabilization of the individual market could undermine one purpose of PPACA. However, the Departments have carefully designed the final rules to be consistent with Congress's intent in enacting both PPACA and HIPAA.

In developing the proposed and final rules, the Departments considered how to avoid permitting discrimination based on health status or similar practices with respect to offering individual coverage HRAs to employees that might have destabilizing effects on the individual market or lead to higher premiums in that market. The Departments have determined that the risk of market segmentation and health factor discrimination is sufficiently significant to justify including conditions in the final rules intended to mitigate those risks, including strengthening certain conditions provided for in the proposed rules. Additionally, the Departments have determined that the strengthened conditions in the final rules, which are described at length later in this preamble, are both sufficient to mitigate those risks and consistent with HIPAA and PPACA.

In 1996, Congress enacted the HIPAA nondiscrimination provisions, which now generally prohibit group health plans and health insurance issuers in the group and individual markets from discriminating against individual participants and beneficiaries in eligibility, benefits, or premiums based on a health factor. In 2010, Congress enacted PPACA, in part, because individual health insurance coverage was not a viable option for many individuals who lacked access to group health plan coverage, given that individual market issuers in many states could deny coverage, charge higher premiums based on an individual's health risk, or impose preexisting condition exclusions based on an individual's health risk. To address these issues, PPACA included numerous provisions that were intended to create a competitive individual market that would make affordable coverage available to individuals who do not have access to other health coverage, as set forth in detail in the preamble to the proposed rules.

See

83 FR 54420, 54428-54429 (Oct. 29, 2018).

One commenter stated that it would make little sense to expect individual coverage HRAs to comply with PHS Act sections 2711 and 2713 because HRAs function more like bank accounts than health insurance policies. The Departments recognize that HRAs and health insurance policies can function

differently. However, HRAs are group health plans and, therefore, generally are subject to the market requirements under the PHS Act, except to the extent that they are excepted benefits or are retiree-only HRAs. The Departments lack the statutory authority to exempt HRAs that are otherwise subject to the market requirements from the category of group health plans subject to the market requirements. The final rules allow individual coverage HRAs to comply with the requirements of PHS Act sections 2711 and 2713 in a manner that preserves the protections of those sections.

2. Requirement That All Individuals Covered by an Individual Coverage HRA Be Enrolled in Individual Health Insurance Coverage

a. In General

The proposed rules provided that an HRA may be integrated with individual health insurance coverage, and would be considered compliant with PHS Act sections 2711 and 2713, if the HRA requires the participant and any dependent(s) to be enrolled in individual health insurance coverage (other than coverage that consists solely of excepted benefits)

for each month each individual is covered by the HRA. Under the proposed rules, if the participants and dependents merely have the ability to obtain individual health insurance coverage, but do not actually have that coverage, the HRA would fail to comply with PHS Act sections 2711 and 2713.

Throughout this preamble, references to individual health insurance coverage in the context of the integration rules do not include coverage that consists solely of excepted benefits unless otherwise specified. Also, see later in this preamble for a discussion of the conditions that apply if an individual coverage HRA is integrated with Medicare, in which case references to individual health insurance coverage generally are considered to also refer to Medicare.

Many commenters supported this condition and strongly recommended it be included in the final rules. Commenters that supported the condition stated that it would reduce or prevent the risk of adverse selection and would ensure that employees directed out of the group market have access to a stable individual market. The Departments agree that the requirement to have individual health insurance coverage in order to be covered by an individual coverage HRA is essential and, in order to ensure compliance with PHS Act sections 2711 and 2713, the final rules adopt this requirement, generally as set forth in the proposed integration rules, but with some clarifications as explained later in this section of the preamble.

The Departments note that when an individual enrolls in individual health insurance coverage, the coverage generally will have an effective date that is the first day of a calendar month. Other than for mid-month enrollment of a new child, individual health insurance plans generally are not made available for coverage to start mid-month. Therefore, individual coverage HRA plan sponsors will need to take this into account in designing plan terms for eligibility for individual coverage HRAs, both with respect to employees offered the HRA for the full plan year and for those who become covered by the HRA subsequent to the first day of the plan year, to ensure compliance with the enrollment requirement under the final rules.

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

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

b. Individual Health Insurance Coverage With Which an Individual Coverage HRA May Be Integrated

Commenters generally supported the rule that individual coverage HRAs must be integrated with individual health insurance coverage as defined in the PHS Act. As discussed in this section of the preamble, several commenters requested clarification regarding whether integration with various types of individual health insurance coverage would be allowed under the proposed rules.

Some commenters requested that the final rules only permit integration with individual health insurance coverage that covers all EHBs or that provides comprehensive mental health and substance use disorder benefits. The Departments decline to make revisions in response to these comments because under PPACA, individual health insurance coverage generally is required to cover all EHBs, including mental health and substance use disorder services.

See

PPACA section 1302 and PHS Act section 2707(a). However, the Departments note that grandfathered individual health insurance coverage and “grandmothered” individual health insurance coverage subject to the HHS non-enforcement policy might not cover all EHBs. See later in this preamble for a discussion of “grandmothered” individual health insurance coverage.

Commenters also requested that the final rules clarify whether an individual coverage HRA may be integrated with individual health insurance coverage sold in a state that has a waiver under PPACA section 1332.

Some commenters stated that integration with that coverage should be permitted so long as the waiver does not allow coverage to impose annual or lifetime dollar limits or exclude benefits for preventive services. Other commenters argued that integration with that coverage should not be permitted because it might not satisfy all of the PPACA requirements.

Under PPACA section 1332, a state can apply for a state innovation waiver from HHS and the Treasury Department, which allows the state, if approved, to implement innovative programs to provide access to quality healthcare. States seeking approval for a state innovation waiver must demonstrate that the waiver will provide access to health insurance coverage that is at least as comprehensive and affordable as would be provided under PPACA without the waiver, will provide coverage to at least a comparable number of residents of the state as would be provided without a waiver, and will not increase the federal deficit.

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

Other issues with regard to PPACA section 1332 are beyond the scope of this rulemaking.

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

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

sufficient to reach the maximum out-of-pocket limit under PPACA.

However, catastrophic plans are subject to the market requirements, including PHS Act sections 2711 and 2713. Therefore, the final rules do not prohibit integration of an individual coverage HRA with catastrophic plans.

To be eligible for a catastrophic plan, an individual must either be under the age of 30 or qualify for a hardship or affordability exemption under Code section 5000A.

See

PPACA section 1302(e) and 45 CFR 156.155. One commenter suggested that the Departments change the definition of catastrophic plan so that it is available to individuals other than those who are eligible under PPACA section 1302(e). That change is outside the scope of this rulemaking.

One commenter asked that the Departments prohibit integration with “grandmothered” individual health insurance coverage, as it is not compliant with PPACA. Grandmothered individual health insurance coverage refers to certain non-grandfathered health insurance coverage with respect to which CMS has announced it will not take enforcement action even though the coverage is out of compliance with certain specified market requirements. To date, the CMS non-enforcement policy has been extended to apply to renewals of such coverage through policy years beginning on or before October 1, 2020, provided that all such coverage comes into compliance with the specified requirements by January 1, 2021.

The Departments note that although grandmothered individual health insurance coverage is subject to a non-enforcement policy for some market requirements, the non-enforcement policy does not extend to compliance with PHS Act sections 2711 and 2713. Accordingly, grandmothered plans are subject to PHS Act sections 2711 and 2713, and under the final rules, an individual coverage HRA may be integrated with grandmothered individual health insurance coverage.

See

CMS Insurance Standards Bulletin Series—INFORMATION—Extension of Limited Non-Enforcement Policy through 2020 (March 25, 2019), available at

https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/Limited-Non-Enforcement-Policy-Extension-Through-CY2020.pdf.

One commenter requested clarification as to whether individual health insurance coverage sold through a private exchange model qualifies as coverage that may be integrated with an HRA. To the extent coverage sold through a private exchange model is individual health insurance coverage, within the meaning of the PHS Act,

an HRA may be integrated with that coverage. However, the Departments note that as part of the final rules DOL is issuing a safe harbor to clarify to stakeholders when individual health insurance coverage obtained by a participant in an individual coverage HRA would not be part of an employee welfare benefit plan under ERISA, which would avoid the individual health insurance coverage effectively becoming group coverage. See later in this preamble for discussion of how this safe harbor would apply with respect to individual health insurance coverage offered through web-based platforms, such as private exchanges.

See

PHS Act section 2791(b)(5).

One commenter supported the proposal to prohibit integration with individual health insurance coverage that consists solely of excepted benefits, noting that this aspect of the rule is consistent with the limited nature of excepted benefits. The Departments agree. Because coverage consisting solely of excepted benefits is not subject to or generally compliant with PHS Act sections 2711 and 2713, the final rules provide that individual coverage HRAs may not be integrated with individual health insurance coverage that consists solely of excepted benefits. However, as discussed later in this preamble, an HRA that reimburses only excepted benefits is not subject to the market requirements or the final rules.

See later in this preamble for a discussion of comments received regarding integration of HRAs with student health insurance coverage, as well as types of coverage other than individual health insurance coverage. Also, see later in this preamble for a discussion of the conditions under which an individual coverage HRA may be integrated with Medicare.

c. Proxy Approach To Verify Compliance

Under the proposed rules, all individual health insurance coverage (except for coverage that consists solely of excepted benefits) would be treated as being subject to and compliant with PHS Act sections 2711 and 2713. The Departments explained that requiring a participant or an individual coverage HRA to substantiate compliance with PHS Act sections 2711 and 2713 separately for each individual health insurance policy in which a participant or dependent is enrolled would be an unwieldy and overly burdensome task.

The Departments acknowledged that this approach would allow integration with grandfathered individual health insurance coverage, which is not subject to, and might not be compliant with, PHS Act sections 2711 and 2713. However, the Departments reasoned that requiring participants or HRAs to substantiate compliance with PHS Act sections 2711 and 2713 separately for each individual health insurance policy in which a participant or dependent is enrolled would be impracticable. An independent assessment of compliance could require the participant or the HRA to identify for each individual health insurance policy in which a participant or dependent is enrolled: (1) Which benefits are considered EHBs for purposes of PHS Act section 2711, and (2) whether all recommended preventive services are covered without cost sharing as required under PHS Act section 2713.

The Departments also noted that only a small number of individuals currently are enrolled in grandfathered individual health insurance coverage, and that grandfathered individual health insurance coverage may not be sold to new enrollees and may be renewed by current enrollees only so long as the coverage satisfies strict conditions. Additionally, the Departments noted that the number of individuals with grandfathered individual health insurance coverage has declined each year since PPACA was enacted, and the already small number of individuals who have retained grandfathered coverage is expected to continue to decline each year. Further, the Departments stated that because there are few individuals covered by grandfathered individual health insurance coverage, the Departments anticipate that there will only be extremely limited instances in which these individuals will be offered and accept an individual coverage HRA. Moreover, because new enrollees cannot enroll in grandfathered individual health insurance coverage, employers offering traditional group health plans would not be able to shift workers into this coverage. The Departments also explained that although plans are required to disclose grandfathered status in any summary of benefits provided under the plan, the Departments were concerned that the frequency of this disclosure to participants may be insufficient to substantiate compliance if integration with these policies were prohibited.

For these reasons, the Departments preliminarily determined that deeming a policy to be compliant with PHS Act sections 2711 and 2713 for purposes of the proposed rules if it is sold in the individual market, referred to as the proxy approach, strikes an appropriate balance. The Departments also solicited comments on methods by which an HRA could substantiate whether individual health insurance coverage is subject to and complies with PHS Act sections 2711 and 2713, including how an HRA might identify which benefits

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

Some commenters expressed support for the proxy approach, stating that it would be unreasonable to require employers or participants to substantiate that individual health insurance coverage is compliant with PHS Act sections 2711 and 2713. They stated that the proxy approach is reasonable with respect to grandfathered individual health insurance coverage because the number of individuals with that coverage is declining and consumers may not newly purchase grandfathered individual health insurance coverage.

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

However, some commenters encouraged the Departments to prohibit integration with grandfathered coverage because it is not required to comply with the annual dollar limit prohibition or the preventive services requirement.

Some of these commenters questioned whether the Departments had the legal authority to deem such coverage to be in compliance with PHS Act sections 2711 and 2713. One commenter disagreed with the Departments' assumption that employers and employees would be unable to determine if the individual health insurance coverage was compliant with PHS Act sections 2711 and 2713. Another commenter noted that if only a small number of individuals currently are enrolled in grandfathered individual health insurance coverage, prohibiting integration with that coverage should impact very few individuals. One commenter suggested, as an alternative to the proxy approach, that issuers could be required to provide a list of enrolled individuals to the individual coverage HRA.

One commenter objected to the Departments' assertion in the preamble to the proposed rules that only a small number of individuals are currently enrolled in grandfathered individual health insurance coverage. However, the study the commenter cited to support the assertion that there is a substantial amount of grandfathered individual health insurance coverage remaining relates to grandfathered group coverage (not grandfathered individual health insurance coverage).

See

Kaiser Family Foundation, “Employer Health Benefits 2018 Annual Survey”,

http://files.kff.org/attachment/Report-Employer-Health-Benefits-Annual-Survey-2018.

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

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

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

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

d. Forfeiture

The proposed rules provided that the requirement that each individual covered by an individual coverage HRA must be enrolled in individual health insurance coverage would apply for each month that the individual is covered by the HRA. The proposed rules further provided that if an individual covered by the HRA fails to have individual health insurance coverage for any month, the HRA would fail to comply with PHS Act sections 2711 and 2713 for that month. Accordingly, the proposed rules required that an individual coverage HRA provide that if any individual covered by the HRA ceases to be covered by individual health insurance coverage, the individual may not seek reimbursement under the HRA for claims that are incurred after the individual health insurance coverage ceases, subject to any applicable continuation-of-coverage requirements. Further, under the proposed rules, if all individuals in a given family who are covered by the individual coverage HRA cease to be covered by individual health insurance coverage, the participant must forfeit the HRA, in accordance with applicable laws (including COBRA and other continuation-of-coverage requirements).

One commenter requested that the Departments clarify how the COBRA rules apply when an individual loses access to an individual coverage HRA due to failing to maintain individual health insurance coverage. Other commenters generally requested guidance on the interaction between COBRA and individual coverage HRAs.

Generally, HRAs are group health plans subject to COBRA continuation coverage requirements under Code section 4980B and ERISA sections 601 through 608 (COBRA continuation coverage), unless an exception applies.

Under the COBRA continuation coverage rules, certain individuals who lose employer-sponsored coverage may elect to continue the coverage by paying a premium.

In order to qualify for

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

Plans sponsored by certain small employers, churches, or governments are not subject to Code section 4980B.

See

Code section 4980B(d).

See

Code section 4980B and ERISA sections 601-608.

See also

26 CFR 54.4980B-1

et seq.

and 29 CFR 2590.606-1, 2590.606-2, 2590.606-3, and 2590.606-4. Non-federal governmental group health

plans offered by state or local governments to their respective employees are subject to parallel continuation of coverage requirements under the PHS Act.

See

42 U.S.C. 300bb-1

et seq.

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

Alternatively, an employee who loses coverage under an individual coverage HRA for these reasons may qualify for an SEP to change his or her individual coverage either on- or off-Exchange.

See IRS Notice 2002-45 for more information on providing COBRA continuation coverage under an HRA.

See

45 CFR 147.104(b)(2) and 155.420(d)(1)(i).

One commenter requested clarification regarding whether a failure to maintain individual health insurance coverage causes retroactive forfeiture of the individual coverage HRA. Under the final rules, the required forfeiture applies prospectively. The individual coverage HRA must allow an employee who loses coverage under the HRA due to failure to maintain individual health insurance coverage to seek reimbursement for substantiated medical care expenses that were incurred during the coverage period prior to the failure to maintain individual health insurance coverage. However, the individual coverage HRA may limit the time to submit expenses to a reasonable specified period. The final rules include some modifications to clarify these rules. The final rules also clarify that the prohibition on reimbursing amounts for expenses incurred after an individual's individual health insurance coverage ceases applies to the individual coverage HRA, rather than to the individual seeking reimbursement.

One commenter requested clarification regarding whether an individual with individual health insurance coverage who is in an Exchange grace period

is considered to be enrolled in individual health insurance coverage for purposes of this integration requirement. Under the final rules, in the event an individual initially enrolled in individual health insurance coverage fails to pay premiums for the individual health insurance coverage timely and is, therefore, in a grace period, the individual is considered to be enrolled in individual health insurance coverage for purposes of the enrollment requirement, and the HRA must reimburse the individual for expenses incurred during that time period according to the terms of the HRA. If the individual fails to pay the applicable premium(s) by the end of the grace period and individual health insurance coverage is cancelled or terminated, including retroactively, the HRA must require the individual to notify the HRA that the individual health insurance coverage has been cancelled or terminated and the date on which the cancellation or termination is effective. After the individual coverage HRA has received the notice of cancellation or termination, the HRA may not reimburse expenses incurred on and after the date of cancellation or termination of the individual health insurance coverage, which is considered to be the date of termination of coverage under the HRA. Although the commenter specifically asked about grace periods, the final rules have also been revised to address other situations in which coverage is cancelled or terminated retroactively, including rescissions,

and in those cases, the same rules regarding notification, reimbursement, and date of termination of coverage would apply.

The Departments note that while 45 CFR 156.270 provides a specific grace period for individuals enrolled in the Exchange who are receiving APTC, this grace period would not be applicable for an individual covered by an individual coverage HRA because the individual will be ineligible for the PTC and APTC. Outside of the context of Exchange coverage for which APTC is being provided, grace periods are determined by state law.

See 45 CFR 147.128 for rules regarding rescissions of individual health insurance coverage.

The Departments note that in considering whether to attempt to recoup reimbursements paid for medical care expenses under an individual coverage HRA, including expenses incurred during a period in which an individual did not have individual health insurance coverage due to a retroactive cancellation or termination of coverage, the individual coverage HRA must consider PHS Act section 2712, which limits a plan's ability to rescind coverage to instances in which an individual has committed fraud or intentionally misrepresented a material fact.

See

26 CFR 54.9815-2712, 29 CFR 2590.715-2712, and 45 CFR 147.128.

See also

DOL Advisory Opinion 77-08A (advising a health plan that depending on the facts and circumstances, the hardship to the participant or beneficiary resulting from such recovery or the cost to the fund of collection efforts may be such that it would be prudent, within the meaning of ERISA section 404(a)(1)(B), for the fund not to seek recovery from the participant or beneficiary).

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

However, as explained earlier in this preamble, a retiree-only HRA is not subject to the market requirements. Therefore, a retiree-only HRA need not comply with the final integration rules, including the requirement that individuals receiving the HRA enroll in individual health insurance coverage.

3. Prohibition Against Offering a Choice Between an Individual Coverage HRA and a Traditional Group Health Plan to the Same Class of Employees

a. In General

To address the previously described concerns about potential adverse selection and health factor discrimination, the proposed rules provided that a plan sponsor may offer an individual coverage HRA to a class of employees only if the plan sponsor

does not also offer a traditional group health plan to the same class of employees. Therefore, a plan sponsor would not be permitted to offer any employee a choice between a traditional group health plan and an individual coverage HRA.

Many commenters expressed support for the prohibition against allowing a plan sponsor to offer a class of employees a choice between an individual coverage HRA and a traditional group health plan. These commenters generally stated that this prohibition is essential to prevent market segmentation and health status discrimination. They noted that, while on its face allowing a choice between the two types of coverage may seem appealing, in practice it would lead employers to encourage higher-risk employees to go into the individual market, by making plan design changes to traditional group health plans to make them less attractive to higher-risk employees. This, in turn, could have significant detrimental effects on the individual market due to the small size of the individual market compared to the size of the group market. One commenter noted that the prohibition against offering employees a choice between a traditional group health plan and an individual coverage HRA would protect employers from baseless claims of discrimination. Another commenter stated that permitting employers to offer a choice between an individual coverage HRA and a traditional group health plan could raise practical and administrative issues for employers and issuers, including in estimating participation in the traditional group health plan.

A few commenters opposed the prohibition on offering employees a choice between a traditional group health plan and an individual coverage HRA, asserting that such a rule would restrict choice for employees and flexibility for employers. Some of these commenters asserted that the other conditions in the proposed rules, such as the same terms requirement and the prohibition on integration with STLDI, each described later in this preamble, were sufficient to prevent adverse selection.

A few commenters acknowledged the risk of market segmentation by employers in the large group market or that offer self-insured plans, but requested that small employers generally, or small employers offering plans in the fully insured small group market, be allowed to offer their employees a choice between an individual coverage HRA and a traditional group health plan. They noted that small employers would not have an incentive to send their higher-risk employees to the individual market because insured traditional group health plans in the small group market are part of a community rated single risk pool. A few commenters also noted that allowing small employers to offer employees a choice would be consistent with Executive Order 13813, which one commenter noted specifically referred to small employers. One commenter indicated that the prohibition on choice might dissuade employers from offering individual coverage HRAs to their employees. The commenter also noted that if given the choice, lower-risk employees, rather than higher-risk employees, may leave the employer's traditional group health plan and purchase individual health insurance coverage.

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

The Departments generally agree with commenters that stated that permitting employers to offer an employee a choice between an individual coverage HRA and a traditional group health plan could lead to market segmentation.

Although some lower-risk employees may choose to enroll in individual health insurance coverage if offered a choice, many employers would have strong economic incentives to encourage lower-risk employees to retain traditional group health plan coverage and higher-risk employees to enroll in individual health insurance coverage.

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

With respect to the suggestion that the Departments allow employers in the small group market to offer a choice to employees, the Departments acknowledge that the incentives for these employers to segment risk are substantially lower than for other employers offering experience-rated coverage or self-insured plans. However, the Departments would not expect many small employers to offer this choice because the coverage in the small group market and individual market is quite similar and because, as the commenters note, small employers that purchase health insurance would not have an incentive to segment their risk pool. Although allowing small employers to offer a choice would not provide small employers much benefit, it would increase the complexity of the final rules for entities involved in implementation, such as the Exchanges. Additionally, it could cause some uncertainty for issuers, and, therefore, increased premiums, in both the individual and small group markets. Accordingly, in the final rules, the Departments decline to provide an exception for small employers to the condition that a plan sponsor may not offer an employee a choice between a traditional group health plan and an individual coverage HRA. While the Departments are finalizing the proposal to prohibit choice between an individual coverage HRA and a traditional group health plan, the Departments are generally supportive of maximizing employee choice and employer flexibility and so may revisit this issue in future rulemaking once the Departments have had the opportunity to gauge the results of the initial implementation of individual coverage HRAs.

b. Definition of Traditional Group Health Plan

For purposes of the condition that a plan sponsor may not offer any employee a choice between an individual coverage HRA and a traditional group health plan, under the proposed rules, the term “traditional group health plan” was defined as any group health plan other than: (1) An account-based group health plan, or (2) a group health plan that consists solely of excepted benefits.

Several commenters supported the proposed definition, which provided that a “traditional group health plan” excludes a group health plan that consists solely of excepted benefits, so that a plan sponsor may offer an employee both an individual coverage HRA and a group health plan that consists solely of excepted benefits.

After considering these comments, the Departments finalize the definition of “traditional group health plan” in the proposed rules without change. Notwithstanding different QSEHRA rules,

under the final rules, a traditional group health plan does not include a group health plan that consists solely of excepted benefits and, therefore, a plan sponsor generally may offer an employee both an individual coverage HRA and a group health plan that consists solely of excepted benefits.

One commenter asked that the Departments confirm that a traditional group health plan means a major medical plan and not a group health plan that consists solely of excepted benefits. The Departments confirm the definition of traditional group health plan does not include a group health plan that consists solely of excepted benefits. The

commenter also noted that an employer may not provide both a QSEHRA and a group health plan that consists solely of excepted benefits.

See

Code section 9831(d)(3)(B)(ii) and IRS Notice 2017-67.

But see later in this preamble for a discussion of the interaction between excepted benefit HRAs and individual coverage HRAs.

One commenter requested that the Departments clarify that the final rules would not preclude an employer that offers an individual coverage HRA from offering a separate HRA under which only premiums for excepted benefits may be reimbursed. The Departments agree that such an arrangement is not precluded by these final rules. An HRA under which only excepted benefit premiums may be reimbursed is an account-based group health plan (and, therefore, not considered a traditional group health plan). Further, the HRA under which only excepted benefit premiums may be reimbursed is a group health plan that provides only excepted benefits (and, therefore, not considered a traditional group health plan). See later in this preamble for a discussion of the interaction of an excepted benefit HRA and an individual coverage HRA, and the difference between an excepted benefit HRA and an HRA that only provides excepted benefits.

c. Salary Reduction Arrangements

The preamble to the proposed rules noted that the Departments were aware that some employers may want to allow employees to pay the portion of the premium for individual health insurance coverage that is not covered by an individual coverage HRA, if any, through a salary reduction arrangement under a cafeteria plan. Pursuant to Code section 125(f)(3), an employer generally may not provide a QHP offered through an Exchange as a benefit under its cafeteria plan.

Therefore, an employer generally may not permit employees to make salary reduction contributions to a cafeteria plan to purchase a QHP offered through an Exchange.

But see

Code section 125(f)(3)(B).

However, Code section 125(f)(3) does not apply to individual health insurance coverage that is not purchased on an Exchange. Therefore, for an employee covered by an individual coverage HRA who purchases individual health insurance coverage outside of an Exchange, the employer may permit the employee to pay the balance of the premium for the coverage through its cafeteria plan, subject to all applicable cafeteria plan guidance. Such an arrangement would not be considered to be a traditional group health plan for purposes of the final rules.

Some commenters supported allowing a salary reduction arrangement under a cafeteria plan alongside an individual coverage HRA, with one commenter noting that this flexibility is essential to ensuring successful take-up of individual coverage HRAs. One commenter recommended against allowing a salary reduction arrangement alongside an individual coverage HRA unless further guidance is issued on cafeteria plans addressing nondiscrimination rules and penalties. One commenter requested that the Departments work with Congress to eliminate the prohibition, under Code section 125(f)(3), against purchasing Exchange coverage under a cafeteria plan.

Under the final rules, as under the proposed rules, an employer may permit an employee covered by an individual coverage HRA who purchases individual health insurance coverage outside of an Exchange to pay the balance of the premium for the coverage through its cafeteria plan, subject to all applicable cafeteria plan guidance. This arrangement would not be considered to be a traditional group health plan for purposes of the final rules. Changes to the statutory prohibition regarding the use of cafeteria plans to purchase Exchange coverage are outside of the scope of this rulemaking.

Commenters also raised various other issues related to the interaction between individual coverage HRAs and cafeteria plans under Code section 125. A few commenters expressed support for the ability to integrate a stand-alone cafeteria plan with individual health insurance coverage.

And some commenters requested that the Departments provide answers to hypothetical scenarios involving the intersection of cafeteria plans, HSAs, and HRAs. Neither the proposed rules nor the final rules make any changes to the rules under Code section 125. Thus, any issues arising under Code section 125, and any guidance requested by commenters to address those issues, are beyond the scope of this rulemaking. The Treasury Department and the IRS, however, appreciate the comments and will consider whether to address some of these issues in future guidance.

As noted earlier in this preamble, for purposes of the final rules, the term “HRA or other account-based group health plan” does not include an employer arrangement that reimburses the cost of individual health insurance coverage through a cafeteria plan under Code section 125.

4. Same Terms Requirement

a. In General

To address concerns about health status discrimination leading to adverse selection in the individual market, the proposed rules generally required that a plan sponsor that offers an individual coverage HRA to a class of employees must offer the HRA on the same terms (that is, both in the same amount and otherwise on the same terms and conditions) to all employees within the class of employees.

As part of this proposed condition, the Departments made clear that offering a more generous HRA to individuals based on an adverse health factor would violate the integration rules.

The Departments note that if an employer chooses not to distinguish its employees based on the classes of employees permitted under the final rules and offers an individual coverage HRA to all of its employees, the same terms requirement would apply to all of the employer's employees.

Commenters generally supported the same terms requirement as a condition essential to protecting against market segmentation and recommended that it be retained in the final rules. Some commenters specifically supported the ability under the proposed rules to vary the HRA terms and amounts between different classes of employees. Because the Departments have concluded that the same terms requirement is critical to protecting against adverse selection in the individual market, the final rules retain this requirement, but with some revisions and clarifications in response to comments as explained later in this section of the preamble.

One commenter stated that the same terms requirement prohibits discrimination that could occur either by offering less generous benefits to only certain employees in a class of employees or by offering more generous benefits to only certain employees in a class of employees. The commenter stated that it is critical that this prohibition against “benign” discrimination be retained in the final rules. The Departments agree, and this aspect of the rule is being adopted as proposed.

b. Exceptions to the Same Terms Requirement

The Departments recognize that premiums for individual health

insurance coverage obtained by individual coverage HRA participants and their dependents may vary and, thus, some variation in amounts made available under an individual coverage HRA, even within a class of employees, may be appropriate. Therefore, the proposed rules provided that it would be permissible to increase the maximum dollar amount made available under an individual coverage HRA for participants within a class of employees as the age of the participant increases, so long as the same maximum dollar amount attributable to that increase in age was made available to all participants of the same age within the same class of employees.

Commenters generally supported the provision allowing increases in individual coverage HRA amounts based on the participant's age, as premiums in the individual market generally increase based on age. However, some commenters expressed concern that an unlimited ability to increase amounts made available under an individual coverage HRA based on age could be used to shift older, higher cost workers to the individual market. Therefore, these commenters recommended that, to avoid adverse selection, the ability to increase amounts by age be tied to actual variance in premiums for individual health insurance coverage, such as the 3:1 age rating rule in PPACA

or through some other reasonable relationship to the cost of individual coverage.

See

PHS Act section 2701(a)(1)(A)(iii).

The Departments agree that imposing an outer bound on the ability of a plan sponsor to vary the maximum amounts made available under an individual coverage HRA based on a participant's age could further protect against adverse selection in the individual market, while not hampering the ability of a plan sponsor to provide benefits that account for increased costs for older workers in the individual market. Therefore, in response to these comments, the same terms requirement is revised under the final rules to provide that an individual coverage HRA does not fail to be provided on the same terms to a class of employees solely because the maximum dollar amount made available under the terms of the HRA increases as the age of the participant increases, so long as the maximum dollar amount made available under the terms of the HRA to the oldest participant(s) is not more than three times the maximum dollar amount made available under the terms of the HRA to the youngest participant(s). The final rules retain the rule that the same maximum dollar amount attributable to the increase in age must be made available to all participants in a class of employees who are the same age.

The Departments considered a number of different ways to design the limitation on age variation, including by incorporating the federal and state age curves, tying the variation to a specific premium for a specific policy that a participant in the class of employees could purchase, and basing the maximum dollar amount made available by the individual coverage HRA on the degree of age variation in individual market premiums in the rating area where each employee resides. However, the Departments determined that these options would be unduly complex and that imposing the 3:1 limit, which is generally based on the degree of age variation allowed in individual market premiums under PHS Act section 2701, sufficiently limits the potential for abuse.

Relatedly, on November 19, 2018, the Treasury Department and the IRS issued Notice 2018-88, which addressed the application of the rules under Code section 105(h) to individual coverage HRAs. HRAs generally are subject to the rules under Code section 105(h) and its related rules because they are self-insured medical reimbursement plans. However, HRAs that reimburse employees only for premiums paid to purchase health insurance policies, including individual health insurance policies, are not subject to the rules under Code section 105(h) and its related rules.

See

26 CFR 1.105-11(b)(2). Notice 2018-88 described an anticipated safe harbor that would apply to individual coverage HRAs that are subject to Code section 105(h) to address the fact that under the Code section 105(h) rules, variation in employer contributions based on age is not allowed. The Treasury Department and the IRS intend to propose rules under Code section 105(h) in the near term that set forth an age variation standard that is consistent with the rule included in these final integration rules, and the proposed rules under Code section 105(h) will be subject to notice and comment.

One commenter expressed concern that permitting, rather than requiring, increases in the maximum amount available under an individual coverage HRA based on age could invite age discrimination. Thus, the commenter argued that the final rules should require employers to vary individual coverage HRA amounts based on age to account for increases in costs for older workers. The Departments note that other federal laws and rules address age discrimination and are the more appropriate area of regulation in which to address these concerns. Accordingly, the Departments decline to require, but will permit, employers to increase individual coverage HRA amounts based on participants' ages under the final rules. However, individual coverage HRAs may be subject to restrictions imposed under other laws, such as those that protect against age discrimination.

One commenter requested that the Departments clarify the date as of which the age of the participant may be determined for this purpose and suggested the first day of the HRA plan year. The final rules clarify that a participant's age, for purposes of the same terms requirement, may be determined by the plan sponsor using any reasonable method for a plan year, so long as the plan sponsor determines each participant's age for this purpose using the same method for all participants in the class of employees for the plan year and the method is determined prior to the plan year. For example, as the commenter suggests, the plan sponsor may determine each participant's age based on their age on the first day of the individual coverage HRA plan year.

Additionally, the proposed rules included a proposal to permit the maximum dollar amount made available under an individual coverage HRA within a class of employees to increase as the number of the participant's dependents covered under the HRA increased, so long as the same maximum dollar amount attributable to that increase in the number of dependents is made available to all participants in that class of employees with the same number of dependents covered by the HRA. Commenters generally supported this provision, as the cost of individual health insurance coverage generally increases with an increase in the number of dependents covered. Some commenters asked for clarification on the extent to which employers may increase amounts made available under an individual coverage HRA based on an increase in the number of the participant's dependents. One commenter recommended that any permitted increase be tied to individual market premium variance in order to prevent employers from varying HRA amounts to encourage higher-risk employees to shift to the individual market. Another commenter recommended that employers be required to vary individual coverage HRA amounts based on the number of dependents covered by the HRA in order to put employees on equal footing with other individuals and allow them to purchase insurance based on their relevant circumstances.

The Departments considered these comments, but have determined that providing employers flexibility as to if and how they vary HRA amounts based on family size does not raise a significant risk of adverse selection or health factor discrimination and,

instead, avoids unnecessary complexity. Therefore, under the final rules, it remains permissible to vary HRA amounts based on the number of a participant's dependents covered by the individual coverage HRA as proposed. Moreover, there is no specific limit on an employer's ability to increase HRA amounts based on the number of a participant's dependents covered by the HRA, so long as the same maximum dollar amount attributable to that increase in the number of dependents is made available to all participants in that class of employees with the same number of dependents covered by the HRA.

Commenters also suggested additional factors for which employers should be allowed to vary amounts provided under an individual coverage HRA within a class of employees, including earnings or salary, role/title, and geographic region. The Departments note that the suggestions that individual coverage HRA amounts be allowed to vary within a class of employees based on earnings, salary, or role/title raise adverse selection and health factor discrimination concerns, as these classes are more susceptible to manipulation by an employer. Accordingly, the Departments decline to adopt any of these suggestions. Regarding geographic region, the Departments acknowledge that individual health insurance costs vary based on geography, but the Departments decline to adopt this suggestion because the issue is already addressed under the final rules through the ability to classify employees based on the rating area of their primary site of employment.

A few commenters recommended that the Departments consider an employer that contributes the same percentage of an employee's individual health insurance premium (for example, 80 percent) to an individual coverage HRA to be considered to be providing the individual coverage HRA on the same terms to the employees in the class. The Departments decline to adopt this suggestion because this type of rule would add significant complexity to the same terms requirement, particularly with respect to determining how to coordinate the ability to vary based on age and family size, and would also raise adverse selection concerns, as well as more general concerns about the inherent incentives of a percentage-based standard and its effect on healthcare spending.

See later in this preamble for a discussion of the same terms requirement as applied to an employer that offers both an HSA-compatible individual coverage HRA and an individual coverage HRA that is not HSA compatible to the same class of employees and for a discussion of how the same terms requirement applies if an individual coverage HRA makes amounts available based on amounts remaining in another HRA by which the participant was previously covered.

c. Former Employees

The proposed rules generally would apply to an individual coverage HRA that includes participants who are former employees in the same way that they would apply if the HRA only provided benefits to current employees. However, the Departments recognized that eligibility for post-employment group health plan coverage, if any, varies widely and may be subject to age, service, or other conditions. To avoid undue disruption of employers' practices relating to the provision of post-employment health coverage, the proposed rules provided that an individual coverage HRA may be treated as provided on the same terms even if the plan sponsor offers the individual coverage HRA to some, but not all, former employees within a class of employees (for example, to all former employees with a minimum tenure of employment). But, under the proposed rules, if a plan sponsor offers the individual coverage HRA to one or more former employee(s) within a class of employees, the HRA must be offered to those former employee(s) on the same terms as all other employees within the class.

One commenter expressed concern that allowing employers to offer some retirees an individual coverage HRA, but not all retirees, creates the potential for health status discrimination. The Departments note, however, that many nondiscriminatory reasons may influence an employer's decisions whether to offer retiree health coverage. For example, it is not uncommon for employers to offer retiree health coverage only to workers that have been with the company at least 5 years prior to retirement.

Moreover, the HIPAA nondiscrimination rules (as well as other applicable federal and state laws) address discrimination based on a health factor.

See e.g.,

5 U.S.C. 8905(b).

One commenter supported treating former employees under the same terms as all members of the class of employees. Another commenter requested confirmation that employers providing retirees and current employees with different amounts in individual coverage HRAs would satisfy the same terms requirement and requested confirmation that contributing different amounts to former employees based on years of service would satisfy the same terms requirement. The final rules provide that former employees within a class of employees offered an individual coverage HRA need not be offered an individual coverage HRA, but if they are, the HRA must be provided to them on the same terms as other employees in that class of employees (based on the class in which the former employee was included immediately prior to separation from service). Therefore, a plan sponsor would not comply with the same terms requirement if it provided some employees in a class of employees larger or smaller HRA amounts based on years of service or status as a former employee.

Also, eligibility conditions that are based solely on the lapse of a time period are permissible for no more than 90 days under PHS Act section 2708.

See

26 CFR 54.9815-2708, 29 CFR 2590.715-2708, and 45 CFR 147.116.

The Departments received a number of comments on retiree-only HRAs in response to the proposed rules. Although the final rules do not modify the rules for retiree-only HRAs, the Departments note that the market requirements do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year.

Therefore, a retiree-only HRA need not satisfy the requirements of any integration test, including the same terms requirement.

See

Code section 9831(a)(2) and ERISA section 732(a). HHS follows a similar approach for non-federal governmental retiree-only plans and encourages states to adopt a similar approach with respect to issuers of retiree-only plans.

See

75 FR 34537, 34539 (June 17, 2010).

d. New Employees or New Dependents

One commenter asked for clarification regarding the application of the same terms requirement in the case of coverage changes during the plan year, including in cases in which an employee gains a dependent. In response to this comment, in the final rules, the Departments clarify the application of the same terms requirement both for new employees and new dependents. Therefore, in the final rules, the Departments clarify that, under the same terms requirement, in the case of a participant who becomes covered by an individual coverage HRA after the first day of the plan year, the individual coverage HRA may make the full annual amount available or adopt a reasonable proration methodology. The Departments also clarify in the final rules how the same terms requirement

applies if the individual coverage HRA varies the maximum amount available based on the number of a participant's dependents covered by the HRA and the number of the participant's dependents covered by the HRA either increases or decreases during the plan year. In that case, the individual coverage HRA may make available the same amount made available to participants in the class who had the same number of dependents covered by the HRA on the first day of the plan year or may adopt a reasonable proration methodology of that amount for the remainder of the plan year. The method the individual coverage HRA uses to determine amounts made available for participants who enroll during the plan year or who have changes in the number of dependents covered by the HRA during a plan year must be the same for all participants in the class of employees, and the method must be determined prior to the beginning of the plan year.

5. Classes of Employees

a. In General

The proposed and final rules require a plan sponsor that offers an individual coverage HRA to a class of employees to offer the individual coverage HRA on the same terms to each participant within the class of employees, subject to certain exceptions. Also, the proposed and final rules provide that a plan sponsor may offer individual coverage HRAs on different terms to different classes of employees, and may offer either an individual coverage HRA or a traditional group health plan to different classes of employees. However, within a class of employees, a plan sponsor generally may not offer some employees a traditional group health plan and others an individual coverage HRA

(or offer any employee a choice between a traditional group health plan or an individual coverage HRA). The proposed rules enumerated the classes of employees that would apply for these purposes. As discussed in more detail in this section of the preamble, the final rules make a number of changes to the list of permissible classes of employees in response to comments.

The one exception to this general rule, described later in this preamble, is the special rule for new hires. However, even under the special rule for new hires, no employee may be offered a choice between an individual coverage HRA and a traditional group health plan.

Many commenters supported the general ability of a plan sponsor to offer individual coverage HRAs on different terms to different classes of employees and to offer either a traditional group health plan or an individual coverage HRA to different classes of employees. These commenters applauded the flexibility provided by this aspect of the proposed rules, emphasizing that such flexibility is critical for plan sponsors that want to offer individual coverage HRAs.

However, some commenters objected to this aspect of the proposed rules, expressing concerns about the ability of plan sponsors to use the classes of employees to segment risk. These commenters suggested that a plan sponsor that wants to offer an individual coverage HRA should not be allowed to offer a traditional group health plan to any of its employees and, instead, should be required to offer the HRA, on the same terms, to all of its employees and, therefore, fully replace the traditional group health plan(s) it may have offered. One commenter requested that the Departments disallow the use of different classes of employees in applying the final rules as a transitional measure, so that plan sponsors would not be allowed to offer some classes of employees a traditional group health plan and other classes of employees an individual coverage HRA for some transitional period of time. A number of commenters, including some of those who generally supported the ability to vary benefits on a class-by-class basis, expressed concerns about the possibility of adverse selection and, therefore, recommended that additional safeguards be provided, or, at a minimum, no further flexibility be provided.

The Departments considered these comments and have determined that permitting plan sponsors to offer different benefits to certain classes of employees is essential to providing the flexibility needed to achieve increased HRA usability and to maximize employee welfare. The Departments understand that employers commonly use certain job-based classifications for employee benefits and other purposes and that failing to provide flexibility to offer different benefits to different classes of employees, even for a transitional period of time, could reduce the use and availability of individual coverage HRAs. However, the Departments acknowledge the concerns regarding the potential for adverse selection and health factor discrimination and, therefore, have concluded that additional parameters in certain circumstances are needed for employers to offer different benefits to different classes of employees in order to address the potential for adverse selection and health factor discrimination. Accordingly, the final rules permit employers to apply the integration rules on a class-by-class basis, as was allowed under the proposed rules. However, as explained later in this section of the preamble, the final rules make a number of changes, including revisions to the list of permissible classes of employees, the addition of a minimum class size requirement that applies in certain instances, and clarifications of a number of other related issues in response to comments.

b. Proposed and Final Classes

The proposed rules included the following proposed classes of employees: (1) Full-time employees (using either the definition that applies for purposes of Code section 105(h) or 4980H, as determined by the plan sponsor); (2) part-time employees (using either the definition that applies for purposes of Code section 105(h) or 4980H, as determined by the plan sponsor); (3) seasonal employees (using either the definition that applies for purposes of Code section 105(h) or 4980H, as determined by the plan sponsor); (4) employees who are included in a unit of employees covered by a collective bargaining agreement (CBA) in which the plan sponsor participates (as described in 26 CFR 1.105-11(c)(2)(iii)(D)) (the CBA class of employees); (5) employees who have not satisfied a waiting period for coverage (if the waiting period complies with the waiting period rules in PHS Act section 2708 and its implementing rules) (the waiting period class); (6) employees who have not attained age 25 prior to the beginning of the plan year (as described

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