Individual Coverage HRA Proposed Regulations on Discrimination and Shared Responsibility Payment Issued by IRS

Proposed regulations (REG-136401-18[1]) have been issued by the IRS related to the integration of the shared responsibility payment under §4980H and certain nondiscrimination rules that apply to health reimbursement arrangement need due to the creation of individual coverage HRA in TD 9867.

The IRS provides the following initial justification for these proposed regulations:

Taking into account the comments received in response to Notice 2018-88, as well as comments received in response to the proposed integration regulations and proposed PTC regulations, the Treasury Department and the IRS propose the following regulations under sections 4980H and 105 to clarify the application of those sections to individual coverage HRAs and to provide related safe harbors to ease the administrative burdens of avoiding liability under section 4980H and avoiding income inclusion under section 105(h). These proposed regulations do not include any changes to the final integration regulations or the final PTC regulations.[2]

The preamble reminds taxpayers that §4980H only relates to applicable large employers (ALE).  Such employers are those who may be hit with a shared responsibility payment if the the ALE:

  • Fails to offers minimum essential coverage to its employees or

  • Offers such minimum essential coverage but it either fails to provide minimum value or is considered unaffordable to at least one employee.[3]

As such, employer who are not ALEs (generally those that employed fewer than 50 full time employees plus full time equivalents on average in the prior year) are not impacted by the proposed regulations under §4980H.[4]

Safe Harbor for Affordability Based on Individual Coverage Cost (Proposed Reg. §54.4980H-5(f))

One key issue with individual coverage HRAs is determining if the cost of coverage is affordable.  Since such program use employer provided benefits along with an employer purchase of an individual plan the employee obtains, the question becomes how to account for the cost of the individual plan the employee obtains that is in excess of any reimbursement received by the employee under the plan.

Proposed Reg. §54.4980H-5(f) contains proposed safe harbors employers may use who offer such plans.  The regulations provide that these new safe harbors, and not the safe harbors found at Reg. §54-4980H-5(e), apply to individual coverage HRAs.[5]

The set of safe harbors for individual coverage HRA programs are found at Proposed Reg. §54-4980H-5(f).  The regulations note that these rules are not designed to dovetail perfectly with the rules for when employees will qualify for a premium tax credit (PTC) under §36B:

An applicable large employer member that offers an individual coverage HRA is not subject to an assessable payment under section 4980H(b) with respect to any full-time employee receiving the applicable premium tax credit or cost-sharing reduction for a period for which the individual coverage HRA is determined to be affordable and to provide minimum value applying the safe harbors provided in this paragraph (f). The preceding sentence applies even if the applicable large employer member’s offer of an individual coverage HRA that is affordable and provides minimum value applying the safe harbors under this paragraph (f) is not affordable or does not provide minimum value for a particular employee under §1.36B-2(c)(3)(i)(B), (c)(3)(vi), and (c)(5) of this chapter, and an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to that employee.[6]

The regulations provide that these safe harbors only apply “with respect to the full-time employees and their dependents to whom the applicable large employer member offered the opportunity to enroll in an individual coverage HRA.”[7]

If an employer offers the individual HRA program to certain full-time employees and a traditional employer-sponsored program to other employees, these safe harbors may be used for those offered the individual coverage HRA and the general safe harbors under Reg. §54-4980H-5(e) for the other employees.[8]

The use of the safe harbors are optional for any ALE and the ALE may choose to apply the safe harbors any allowed class of employees so long as the ALE does so on a uniform and consistent basis for all employees in the affected class.  Each of the individual coverage HRA safe harbors may be used in combination with other such safe harbors so long as all conditions of the various safe harbors are met.[9]

A individual coverage HRA that meets the requirements to be affordable under Reg. §1.36B-2(c)(5) related to the premium tax credit will be treated as providing minimum value for each month.[10]

Look Back Month Safe Harbor (Proposed Reg. §54-4980H-5(f)(4))

The first safe harbor for individual coverage HRAs is the look back method safe harbor that determines the cost of the plan to the employee.  For purposes of determining an employee’s contribution to the HRA, an ALE may use the monthly premium for the applicable lowest cost silver plan:

  • In the case of calendar year individual coverage HRAs, an ALE may use the monthly premium for the lowest cost silver plan for January of the prior calendar year[11] and

  • For individual coverage HRAs that are on a plan year other than a calendar year, an ALE may use the monthly premium for the applicable lowest cost silver plan for January of the current calendar year.[12]

The regulation provides the following rules to determine an employee’s safe harbor premium:

Application of look-back month safe harbor to employee’s current circumstances. In determining the monthly premium for the applicable lowest cost silver plan based on the applicable look-back month, the applicable large employer member must use the employee’s applicable age for the current plan year and the employee’s applicable location for the current calendar month. In general, the applicable large employer member may use the monthly premium of the applicable lowest cost silver plan for the applicable look-back month for all calendar months of the plan year. However, to the extent the employee’s applicable location changes during the plan year, although the applicable large employer member may continue to determine the monthly premium based on the applicable look-back month, the applicable large employer member must use the employee’s new applicable location, in accordance with the rules set forth under paragraph (f)(6) of this section if applicable, to determine the applicable lowest cost silver plan used to determine the monthly premium.

That is, if the employee’s location changes (generally, the primary place of employment), the employer will need to update the safe harbor premium to reflect the new location.

Affordability Safe Harbor (Proposed Reg. §54-4980H-5(f)(5))

The affordability safe harbors are the same as found in the general affordability safe harbors found in Reg. §54.5480H-5(e)(2)(ii), (iii) and (iv) with a few modifications.

For an employer wising to use the Form W-2 Safe Harbor, the regulations require the following modifications to the standard rule:

An applicable large employer member satisfies the Form W-2 safe harbor of paragraph (e)(2)(ii) of this section with respect to an offer of an individual coverage HRA to an employee for a calendar year, or if applicable, part of a calendar year, if the individual coverage HRA is affordable under the Form W-2 safe harbor under paragraph (e)(2)(ii) of this section but substituting “the employee’s required HRA contribution, as determined taking into account any other safe harbors in paragraph (f) of this section, if applicable” for each of the following phrases -- “that employee’s required contribution for the calendar year for the employer’s lowest cost self-only coverage that provides minimum value”, “the required employee contribution”, “the employee’s required contribution”, and “the employee’s required contribution for the employer’s lowest cost self-only coverage that provides minimum value.”[13]

Similarly, employers looking to use the Rate of Pay Safe Harbor, the following modifications to the standard safe harbor must be taken into account:

An applicable large employer member satisfies the rate of pay safe harbor of paragraph (e)(2)(iii) of this section with respect to an offer of an individual coverage HRA to an employee for a calendar month if the individual coverage HRA is affordable under the rate of pay safe harbor of paragraph (e)(2)(iii) of this section but substituting “the employee’s required HRA contribution, as determined taking into account any other safe harbors in paragraph (f) of this section, if applicable,” for “the employee’s required contribution for the calendar month for the applicable large employer member’s lowest cost self-only coverage that provides minimum value.”[14]

For employers looking to use Federal Poverty Line Safe Harbor, the following modifications are made to the standard safe harbor:

An applicable large employer member satisfies the Federal poverty line safe harbor of paragraph (e)(2)(iv) of this section with respect to an offer of an individual coverage HRA to an employee for a calendar month if the individual coverage HRA is affordable under the federal poverty line safe harbor of paragraph (e)(2)(iv) of this section but substituting “the employee’s required HRA contribution, as determined taking into account any other safe harbors in paragraph (f) of this section, if applicable,” for “the employee’s required contribution for the calendar month for the applicable large employer member’s lowest cost self-only coverage that provides minimum value.”[15]

Location Safe Harbor (Proposed Reg. §54.4580H-5(f)(6))

Since the cost will be based on the lowest cost silver plan for an area, and the prices for such plans vary wildly around the country and even in neighboring jurisdictions, a safe harbor has been established to determine the location of an employee.  As IRS describes in the preamble:

In Notice 2018-88, the Treasury Department and the IRS expressed concerns about the burden on employers that could result from requiring affordability to be determined based on each employee’s place of residence, noting that employees’ places of residence might change over time and employers may have difficulty keeping their records up to date.[16]

The safe harbor provides that the employee’s primary site of employment will be considered the employee’s location to determine the employee’s required HRA contribution based on the lowest cost silver plan available at that location.[17]

The regulation outlines a general rule for what will be considered the employee’s primary place of employment.  The primary place of employment for an employee will generally be the location at which the ALE reasonably expects the employee to perform services on the first day of the plan year.[18]

But what happens if the employee is moved to another work location?  The regulation continues to provide that the primary place of employment will be changed during the year if:

  • The locations at which the employee performs services changes and

  • The employer reasonable expects the change to be permanent or indefinite.[19]

In this case, the change is treated as taking place no later than the first day of the second calendar month after the employee begins performing services at the new location.[20]

But the complexity isn’t quite done—the regulation offers the following special rule if the employer begins offering the plan after the first day of the plan year:

Nonetheless, if an applicable large employer member is first offering an individual coverage HRA to a class of employees, and the change in location occurs prior to the individual coverage HRA’s initial plan year, the employee’s primary site of employment is treated as changing no later than the later of the first day of the plan year or the first day of the second calendar month after the employee has begun performing services at the new location.[21]

Further complicating the issue is determining a work location for workers who work from home but may (or may not) also come into an employer’s location from time to time.  The regulations refer to such workers as remote workers.  For such workers, the primary work location is determined as follows:

  • If the employee regularly performs services from home or another location other than the employer’s premises, but may be requested by the employer to work at or report to a particular employer location, the location at which he/she may requested to report will be the primary work location (the regulation cites the case of “a teleworker with an assigned office space or available workspace at a particular location to which he or she may be required to report” as an example of this situation).

  • If there is no such assigned office space or a particular location to report, then the employee’s residence is the primary site of employment.[22]

If the employer chooses not to apply the location safe harbor, the employee’s applicable location will be where the employee resides for the calendar month.[23]

Employee’s Applicable Age (Proposed Reg. §54-4980H-5(f)(7)(i))

Since the rate an employee will pay depends on the employee’s age, the regulations provide the method for the employer to determine the employee’s applicable age

  • The age for an employee who is or will be eligible for an individual coverage HRA on the first day of the plan year, the employee’s age on that date will be his/her applicable age.

  • If an employee first becomes eligible for an individual coverage HRA during the plan year, the employee’s age on the date he/she first becomes eligible will be his/her applicable age.[24]

Applicable Lowest Cost Silver Plan (Proposed Reg. §54.4980H-5(f)(7)(iii)

The lowest cost self-only coverage for the employee offered through the Exchange for the employee’s applicable location for the month is treated as the applicable lowest cost silver plan under these regulations.[25]

If the same ratings area has different lowest cost silver plans in different portions of the same ratings area, the plan available in the part of the rating area that contains the employee’s applicable location is the plan that will be treated as the applicable lowest cost silver plan.[26]

The lowest cost silver plan identified for employees of all ages is defined as follows:

(C) Lowest cost silver plan identified for use for employees of all ages. The applicable lowest cost silver plan for an employee is the lowest cost silver plan for the lowest age band in the individual market for the employee’s applicable location.[27]

Required HRA Contribution (Proposed Reg. §54-4980H-5(f)(7)(vii)

The required HRA contribution for purposes of the individual HRA rules is computed as follows:

In general, the required HRA contribution means the required HRA contribution as defined in §1.36B-2(c)(5)(ii) of this chapter. However, for purposes of the safe harbors set forth in this paragraph (f), the required HRA contribution is determined based on the applicable lowest cost silver plan as defined in paragraph (f)(7)(iii) of this section and the monthly premium for the applicable lowest cost silver plan is determined based on the employee’s applicable age, as defined in paragraph (f)(7)(i) of this section, and the employee’s applicable location, as defined in paragraph (f)(7)(ii) of this section.[28]

IRS Examples of Applying the Individual Coverage HRA Rules

The IRS provides the following two examples of applying these rules.

Temporary Regulation §54.4980H-5(f)(h) Example 1

Location safe harbor and look-back month safe harbor applied to calendar-year individual coverage HRA)

(A) Facts. For 2020, Employer Y offers all full-time employees and their dependents an individual coverage HRA with a calendar-year plan year and makes $6,000 available in the HRA for the 2020 calendar-year plan year to each full-time employee without regard to family size, which means the monthly HRA amount for each full-time employee is $500. All of Employer Y's employees have a primary site of employment in City A. Employer Y chooses to use the location safe harbor and the look-back month safe harbor. Employer Y also chooses to use the rate of pay safe harbor for its full-time employees. Employee M is 40 years old on January 1, 2020, the first day of the plan year. The monthly premium for the applicable lowest cost silver plan for a 40 year old offered through the Exchange in City A for January 2019 is $600. Employee M's required HRA contribution for each month of 2020 is $100 (cost of the applicable lowest cost silver plan determined under the location safe harbor and the look-back month safe harbor ($600) minus the monthly HRA amount ($500)). The monthly amount determined under the rate of pay safe harbor for Employee M is $2,000 for each month in 2020.

(B) Conclusion. Employer Y has made an offer of affordable, minimum value coverage to Employee M for purposes of section 4980H(b) for each month of 2020 because Employee M's required HRA contribution ($100) is less than the amount equal to the required contribution percentage for 2020 multiplied by the monthly amount determined under the rate of pay safe harbor for Employee M (9.78 percent of $2,000 = $196). Employer Y will not be liable for an assessable payment under section 4980H(b) with respect to Employee M for any calendar month in 2020. (Also, Employer Y will not be liable for an assessable payment under section 4980H(a) for any calendar month in 2020 because it offered an individual coverage HRA, an eligible employer-sponsored plan that is minimum essential coverage, to all full-time employees and their dependents for each calendar month in 2020.)

Temporary Regulation §54.4980H-5(f)(h) Example 2

Location safe harbor and look-back month safe harbor applied to non-calendar year individual coverage HRA

(A) Facts. Employer Z offers all full-time employees and their dependents an individual coverage HRA with a non-calendar year plan year of July 1, 2020 through June 30, 2021, and makes $6,000 available in the HRA for the plan year to each full-time employee without regard to family size, which means the monthly HRA amount for each full-time employee is $500. All of Employer Z's employees have a primary site of employment in City B. Employer Z chooses to use the location safe harbor and the look-back month safe harbor. Employer Z also chooses to use the rate of pay safe harbor for its full-time employees. Employee N is 40 years old on July 1, 2020, the first day of the plan year. The monthly premium for the applicable lowest cost silver plan for a 40 year old offered through the Exchange in City B for January 2020 is $600. Employee N's required HRA contribution for each month of the plan year beginning July 1, 2020, is $100 (cost of the applicable lowest cost silver plan determined under the location safe harbor and the look-back month safe harbor ($600) minus the monthly HRA amount ($500)). The monthly amount determined under the rate of pay safe harbor for Employee N is $2,000 for each month of the plan year beginning July 1, 2020.

(B) Conclusion. Employer Z has made an offer of affordable, minimum value coverage to Employee N for purposes of section 4980H(b) for each month of the plan year beginning July 1, 2020, because Employee N's required HRA contribution ($100) is less than the amount equal to the required contribution percentage for plan years beginning in 2020 multiplied by the monthly amount determined under the rate of pay safe harbor for Employee N (9.78 percent of $2,000 = $196). Employer Z will not be liable for an assessable payment under section 4980H(b) with respect to Employee N for any calendar month in the plan year beginning July 1, 2020. (Also, Employer Z will not be liable for an assessable payment under section 4980H(a) for any calendar month in the plan year beginning July 1, 2020, because it offered an individual coverage HRA, an eligible employer-sponsored plan that is minimum essential coverage, to all full-time employees and their dependents for each calendar month in that plan year.)

Revision to Anti-Discrimination Rules Under §105 for Individual Coverage HRAs

Employer paid medical expense plans (now referred to as HRAs) are generally subject to special anti-discrimination rules that don’t apply to fully insured programs.  Such rules could significantly compromise the use of individual coverage HRAs, so the IRS has added a special discrimination rule under §105(h) to apply to such plans.

The new provision, added at Proposed Reg. §1.105-11(c)(3)(i)(B)(2), provides:

(2) Exception to uniformity rule. With respect to an individual coverage HRA, as defined in §54.9802-4(b) of this chapter, if the maximum dollar amount made available varies for participants within a class of employees set forth in §54.9802-4(d) of this chapter, or varies between classes of employees offered the individual coverage HRA, the plan does not violate the requirements of this paragraph (c)(3) by virtue of that variance; provided that, within a class of employees, the maximum dollar amount made available varies only in accordance with the same terms requirement set forth in §54.9802-4(c)(3) of this chapter, and, with respect to differences in the maximum dollar amount made available for different classes of employees, each of the classes of employees is one of the classes of employees set forth in §54.9802-4(d) of this chapter. Specifically, with respect to age-based variances, in the case of an individual coverage HRA, if the maximum dollar amount made available to participants who are members of a particular class of employees increases based on the age of each participant and the increases in the maximum dollar amount comply with the age-variation rule under the same terms requirement set forth under §54.9802-4(c)(3)(iii)(B) of this chapter, the plan does not violate the requirements of this paragraph (c)(3) with respect to those increases.

However, the IRS warns that this rule does not eliminate the risk of issues.  As the preamble notes:

Nonetheless, the Treasury Department and the IRS note that satisfying the terms of the safe harbors under the proposed regulations does not automatically satisfy the prohibition on nondiscriminatory operation under §1.105-11(c)(3)(ii). Thus, among other situations, if a disproportionate number of HCIs qualify for and utilize the maximum HRA amount allowed under the same terms requirement based on age in comparison to the number of non-HCIs who qualify for and use lower HRA amounts based on age, the individual coverage HRA may be found to be discriminatory, with the result that excess reimbursements of the HCIs will be included in their income.[29]

If an individual coverage HRA fails to provide nondiscriminatory benefits under Reg. §1.105-11(c)(3)(i) solely due to variations in age, it will not be treated as providing discriminatory benefits so long as the individual coverage HRA satisfies the age variation exemption under Reg. §54-9802-4(c)(3)(iii)(B).  That special rule provides:

(B)Variation due to age. An HRA does not fail to be provided on the same terms to participants in a class of employees solely because the maximum dollar amount made available under the terms of the HRA to those participants to reimburse medical care expenses for any plan year increases as the age of the participant increases, so long as the requirements in paragraphs (c)(3)(iii)(B)(1) and (2) of this section are satisfied. For the purpose of this paragraph (c)(3)(iii)(B), the plan sponsor may determine the age of the participant using any reasonable method for a plan year, so long as the plan sponsor determines each participant's age for the purpose of this paragraph (c)(3)(iii)(B) using the same method for all participants in the class of employees for the plan year and the method is determined prior to the plan year.

(1) The same maximum dollar amount attributable to the increase in age is made available to all participants who are the same age.

(2) The maximum dollar amount made available to the oldest participant(s) is not more than three times the maximum dollar amount made available to the youngest participant(s).[30]

Proposed Applicability Date

The preamble to the proposed regulations provides the following proposed applicability date.  Note that these have been issued as reliance proposed regualtions which allows taxpayers to rely upon these regulations for 2020 (and potentially later years):

The proposed regulations under section 4980H are proposed to apply for periods beginning after December 31, 2019, and the proposed regulations under section 105(h) are proposed to apply for plan years beginning after December 31, 2019. The Treasury Department and the IRS recognize that employers may want to offer individual coverage HRAs beginning on January 1, 2020, and, therefore, may need applicable guidance with respect to sections 4980H and/or 105(h) to design and implement programs involving individual coverage HRAs prior to the issuance of any final regulations and in advance of the plan year for which the individual coverage HRAs will be offered. Accordingly, taxpayers may rely on the proposed regulations under section 4980H for periods during any plan year of individual coverage HRAs beginning before the date that is six months following the publication of any final regulations, and taxpayers may rely on the proposed regulations under section 105(h) for plan years of individual coverage HRAs beginning before the date that is six months following the publication of any final regulations.[31]


[1] REG-136401-18, September 27, 2019, https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-20034.pdf, retrieved September 27, 2019

[2] REG-136401-19, p. 11

[3] IRC §4980H

[4] REG-136401-19, p. 12

[5] Proposed Reg. §54-4980H-5(e)(2)

[6] Proposed Reg. §54-4980H-5(f)(1)

[7] Proposed Reg. §54-4980H-5(f)(2)

[8] Proposed Reg. §54-4980H-5(f)(2)

[9] Proposed Reg. §54-4980H-5(f)(2)

[10] Proposed Reg. §54-4980H-5(f)(3)

[11] Proposed Reg. §54-4980H-5(f)(4)(i)(A)

[12] Proposed Reg. §54-4980H-5(f)(4)(i)(B)

[13] Proposed Reg. §54-4980H-5(f)(5)(i)

[14] Proposed Reg. §54-4980H-5(f)(5)(ii)

[15] Proposed Reg. §54-4980H-5(f)(5)(iii)

[16] REG-136401-19, p. 12

[17] Proposed Reg. §54-4980H-5(f)(6)(i)

[18] Proposed Reg. §54-4980H-5(f)(6)(ii)

[19] Proposed Reg. §54-4980H-5(f)(6)(ii)

[20] Proposed Reg. §54-4980H-5(f)(6)(ii)

[21] Proposed Reg. §54-4980H-5(f)(6)(ii)

[22] Proposed Reg. §54-4980H-5(f)(6)(iii)

[23] Proposed Reg. §54-4980H-5(f)(7)(ii)

[24] Proposed Reg. §54-4980H-5(f)(7)(i)

[25] Proposed Reg. §54-4980H-5(f)(7)(iii)(A)

[26] Proposed Reg. §54-4980H-5(f)(7)(iii)(B)

[27] Proposed Reg. §54-4980H-5(f)(7)(iii)(C)

[28] Proposed Reg. §54-4980H-5(f)(7)(vii)

[29] REG-136401-19, p. 52

[30] Reg. §54-9802-4(c)(3)(iii)(B)

[31] REG-136401-19, p. 54