[Federal Register Volume 84, Number 189 (Monday, September 30, 2019)]
[Proposed Rules]
[Pages 51471-51490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20034]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 54

[REG-136401-18]
RIN 1545-BP17


Application of the Employer Shared Responsibility Provisions and 
Certain Nondiscrimination Rules to Health Reimbursement Arrangements 
and Other Account-Based Group Health Plans Integrated With Individual 
Health Insurance Coverage or Medicare

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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

SUMMARY: This document sets forth proposed regulations to clarify the 
application of the employer shared responsibility provisions and 
certain nondiscrimination rules under the Internal Revenue Code (Code) 
to health

[[Page 51472]]

reimbursement arrangements (HRAs) and other account-based group health 
plans integrated with individual health insurance coverage or Medicare 
(individual coverage HRAs), and to provide certain safe harbors with 
respect to the application of those provisions to individual coverage 
HRAs. The proposed regulations are intended to facilitate the adoption 
of individual coverage HRAs by employers, and taxpayers generally are 
permitted to rely on the proposed regulations. The proposed regulations 
would affect employers, employees and their family members, and plan 
sponsors.

DATES: Written or electronic comments and requests for a public hearing 
must be received by December 30, 2019.

ADDRESSES: Submit electronic submissions via the Federal eRulemaking 
Portal at https://www.regulations.gov (indicate IRS and REG-136401-18) 
by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the IRS will publish for public availability any comment received to 
its public docket, whether submitted electronically or in hard copy. 
Send hard copy submissions to: CC:PA:LPD:PR (REG-136401-18), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
136401-18), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Jennifer Solomon, (202) 317-5500; concerning submissions of comments 
and requests for a public hearing, Regina Johnson, (202) 317-6901 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION:

I. Background

A. Individual Coverage HRAs and Related Guidance

    On October 12, 2017, President Trump issued Executive Order 13813, 
``Promoting Healthcare Choice and Competition Across the United 
States.'' \1\ The Executive Order directed the Secretaries of the 
Treasury, Labor, and Health and Human Services 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.'' \2\
---------------------------------------------------------------------------

    \1\ 82 FR 48385 (Oct. 17, 2017).
    \2\ Id.
---------------------------------------------------------------------------

    In response to the Executive Order, on October 23, 2018, the 
Departments of the Treasury, Labor, and Health and Human Services (the 
Departments) issued proposed regulations \3\ under Public Health 
Service Act (PHS Act) section 2711 and the health nondiscrimination 
provisions \4\ of the Health Insurance Portability and Accountability 
Act of 1996 (HIPAA) \5\ and the Patient Protection and Affordable Care 
Act,\6\ as amended by the Health Care Education and Reconciliation Act 
\7\ (collectively, PPACA) (proposed integration regulations). The 
proposed integration regulations included a proposal to expand the 
potential use of HRAs and other account-based group health plans \8\ 
(collectively referred to in this preamble as HRAs) by allowing the 
integration of HRAs with individual health insurance coverage, subject 
to certain conditions.
---------------------------------------------------------------------------

    \3\ See 83 FR 54420 (Oct. 29, 2018).
    \4\ See Code sections 9802 and 9815, Employee Retirement Income 
Security Act (ERISA) sections 702 and 715, and PHS Act section 2705. 
Although Code section 9802 and ERISA section 702 were not amended by 
PPACA, the requirements of PHS Act section 2705 were also 
incorporated by reference into Code section 9815 and ERISA section 
715. PPACA section 1201 moved the PHS Act nondiscrimination 
provisions from section 2702 to section 2705, with some 
modifications.
    \5\ Public Law 104-191.
    \6\ Public Law 111-148.
    \7\ Public Law 111-152.
    \8\ See Sec.  54.9815-2711(d)(6)(i) for the definition of an 
account-based group health plan. This term does not include 
qualified small employer health reimbursement arrangements (QSEHRAs) 
(as defined under section 9831(d)), medical savings accounts (see 
section 220), or health savings accounts (see section 223). In 
addition, for purposes of the integration regulations (both proposed 
and final), the definition does not include an employer arrangement 
that reimburses the cost of individual health insurance coverage in 
a cafeteria plan under section 125.
---------------------------------------------------------------------------

    On June 14, 2019, the Departments finalized the proposed 
integration regulations, generally as proposed but with a number of 
revisions in response to comments (the final integration 
regulations).\9\ The final integration regulations apply for plan years 
beginning on or after January 1, 2020.
---------------------------------------------------------------------------

    \9\ See 84 FR 28888 (June 20, 2019). In addition to the final 
integration regulations: (1) The Departments issued final 
regulations setting forth conditions under which certain HRAs will 
be recognized as limited excepted benefits; (2) the Department of 
Health and Human Services (HHS) issued final regulations to provide 
a special enrollment period in the individual market for individuals 
who newly gain access to an individual coverage HRA or who are newly 
provided a QSEHRA; (3) the Department of Labor (DOL) finalized a 
safe harbor to provide assurance that the individual health 
insurance coverage for which premiums are reimbursed by an HRA or a 
QSEHRA does not become part of an ERISA plan, provided certain 
conditions are satisfied (and the Departments provided a related 
clarification of the definition of the term ``group health insurance 
coverage''); and (4) the Treasury Department and the IRS finalized 
regulations regarding premium tax credit eligibility for individuals 
offered an individual coverage HRA, as explained in this preamble. 
In this document, this package of regulations is referred to 
collectively as the ``final regulations.''
---------------------------------------------------------------------------

B. Premium Tax Credit (Section 36B)

    Section 36B allows the premium tax credit (PTC) to certain 
taxpayers to help with the cost of individual health insurance coverage 
enrolled in through an Exchange.\10\ Under section 36B(a) and (b)(1), 
and Sec.  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.
---------------------------------------------------------------------------

    \10\ Exchanges are entities established under PPACA section 1311 
or 1321, through which qualified individuals and qualified employers 
can purchase health coverage.
---------------------------------------------------------------------------

    An individual is eligible for the PTC for a month if the individual 
satisfies various requirements for the month (a coverage month). Among 
other requirements, under 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 that coverage is 
affordable and provides minimum value (MV); or (2) the individual 
enrolls in an eligible employer-sponsored plan, even if the coverage is 
not affordable or does not provide MV.\11\
---------------------------------------------------------------------------

    \11\ See section 36B(c)(2)(C)(iii) and Sec. Sec.  1.36B-2(c)(3) 
and 1.36B-3(c).
---------------------------------------------------------------------------

    In general, an eligible employer-sponsored plan is affordable for 
an employee if the amount the employee must pay for self-only coverage 
whether by salary reduction or otherwise (the employee's required 
contribution) for a plan does not exceed a percentage (the required 
contribution percentage \12\) of the employee's household income.\13\ 
In addition, in general, 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 and if the plan 
provides substantial

[[Page 51473]]

coverage of inpatient hospitalization and physician services.\14\
---------------------------------------------------------------------------

    \12\ See Sec.  1.36B-2(c)(3)(v)(C). The required contribution 
percentage for 2020 is 9.78 percent (see Rev. Proc. 2019-29).
    \13\ See section 36B(c)(2)(C) and Sec.  1.36B-2(c)(3)(v)(A)(1) 
and (2). See Sec.  1.36B-2(c)(3)(v)(A)(3) for a safe harbor that, in 
certain circumstances, allows an employee to claim the PTC even if 
the offer of coverage ultimately is affordable.
    \14\ See section 36B(c)(2)(C)(ii); see also 80 FR 52678 (Sept. 
1, 2015).
---------------------------------------------------------------------------

    An eligible employer-sponsored plan includes coverage under a self-
insured group health plan\15\ and is minimum essential coverage (MEC) 
unless it consists solely of excepted benefits.\16\ An HRA is a self-
insured group health plan and, therefore, is an eligible employer-
sponsored plan.\17\ Accordingly, an individual is ineligible for the 
PTC for a month if the individual is (1) covered by an HRA, or (2) 
eligible for an HRA that is affordable and provides MV for the month 
(provided the HRA does not consist solely of excepted benefits).
---------------------------------------------------------------------------

    \15\ See Sec.  1.5000A-2(c).
    \16\ See section 5000A(f)(3) and Sec.  1.5000A-2(g).
    \17\ See Notice 2013-54, 2013-40 IRB 287, Q&A 10.
---------------------------------------------------------------------------

    On October 23, 2018, in connection with the proposed integration 
regulations, the Treasury Department and the IRS proposed regulations 
under section 36B to provide guidance regarding the circumstances in 
which an individual coverage HRA would be considered to be affordable 
and to provide MV. On June 14, 2019, in connection with the final 
integration regulations, the Treasury Department and the IRS finalized 
the rules under section 36B, substantially as proposed but with some 
clarifications in response to comments (the final PTC regulations).\18\
---------------------------------------------------------------------------

    \18\ See 84 FR 28888 (June 20, 2019).
---------------------------------------------------------------------------

    Under the final PTC regulations, an individual coverage HRA is 
considered to be affordable for a month if the employee's required HRA 
contribution for the month does not exceed \1/12\ of the product of the 
employee's household income for the taxable year and the required 
contribution percentage. The required HRA contribution is the excess 
of: (1) The monthly premium for the lowest cost silver plan for self-
only coverage of the employee offered in the Exchange for the rating 
area in which the employee resides (the PTC affordability plan\19\), 
over (2) in general, the self-only amount the employer makes newly 
available to the employee under the individual coverage HRA for the 
month (the monthly HRA amount).\20\ Under the final PTC regulations, an 
individual coverage HRA that is affordable is treated as providing MV. 
The final PTC regulations apply for taxable years beginning on or after 
January 1, 2020.
---------------------------------------------------------------------------

    \19\ The term ``affordability plan'' is also used in this 
preamble and refers to the lowest cost silver plan used to determine 
affordability of an individual coverage HRA, which for purposes of 
section 36B means the PTC affordability plan and for section 4980H 
means either the PTC affordability plan or the lowest cost silver 
plan determined under the safe harbors provided in the proposed 
regulations, if applicable.
    \20\ See Sec.  1.36B-2(c)(5)(ii) for more information on how the 
required HRA contribution is determined, including in cases in which 
the employer makes the same amount available for all employees 
regardless of the number of individuals covered.
---------------------------------------------------------------------------

C. Employer Shared Responsibility Provisions (Section 4980H)

1. In General
    The employer shared responsibility provisions under section 4980H 
apply to an employer that is an applicable large employer (ALE). In 
general, an employer is an ALE for a calendar year if it had an average 
of 50 or more full-time employees (including full-time equivalent 
employees) during the preceding calendar year.\21\
---------------------------------------------------------------------------

    \21\ See section 4980H(c)(2) and Sec.  54.4980H-2. See also 
Sec.  54.4980H-1(a) for definitions of the terms used in this 
preamble.
---------------------------------------------------------------------------

    For any month, an ALE may be liable for an employer shared 
responsibility payment under either section 4980H(a) or 4980H(b), or 
neither, but an ALE may not be liable for a payment under both sections 
4980H(a) and 4980H(b).\22\ An ALE generally is liable for a payment 
under section 4980H(a) for a month if it fails to offer coverage under 
an eligible employer-sponsored plan to at least 95 percent of its full-
time employees (and their dependents) and at least one full-time 
employee is allowed the PTC for purchasing individual health insurance 
coverage through an Exchange. An ALE is liable for a payment under 
section 4980H(b) for a month if it offers coverage under an eligible 
employer-sponsored plan to at least 95 percent \23\ of its full-time 
employees (and their dependents), but at least one full-time employee 
is allowed the PTC for purchasing individual health insurance coverage 
through an Exchange, which may occur because the ALE did not offer 
coverage to that particular full-time employee or because the coverage 
the employer offered was unaffordable or did not provide MV.\24\
---------------------------------------------------------------------------

    \22\ For simplicity, this preamble refers to ALEs and employers, 
but to the extent the preamble is addressing the potential for 
liability under section 4980H, those terms refer to an ALE member. 
An ALE member is a person that, together with one or more other 
persons, is treated as a single employer that is an ALE, if 
applicable. Liability under section 4980H applies separately to each 
ALE member. See Sec.  54.4980H-1(a)(5). Further, the reporting 
obligations under section 6056 also apply to ALE members and 
references to employers or ALEs with respect to reporting under 
section 6056 should be read to refer to ALE members.
    \23\ If an ALE offers coverage to all but five of its full-time 
employees (and their dependents), and five is greater than five 
percent of the employer's full-time employees, the employer will not 
be liable for an employer shared responsibility payment under 
section 4980H(a). See Sec.  54.4980H-4.
    \24\ See Sec.  54.4980H-5.
---------------------------------------------------------------------------

2. Section 4980H Affordability Safe Harbors Regarding Household Income
    Whether an employee may claim the PTC depends on the rules under 
section 36B, including the rules for whether an offer of coverage by 
the employer is affordable and provides MV.\25\ However, the 
regulations under section 4980H provide certain safe harbors for 
determining whether an ALE is treated as making an offer of coverage 
that is affordable for purposes of section 4980H. More specifically, as 
noted earlier in this preamble, whether an offer of an eligible 
employer-sponsored plan is affordable, both for purposes of section 36B 
and section 4980H, depends in part on the employee's household income. 
Because an employer generally does not know an employee's household 
income, Sec.  54.4980H-5(e) provides that, for purposes of section 
4980H(b), an employer may substitute for an employee's household income 
an amount based on the employee's wages from the Form W-2, ``Wage and 
Tax Statement,'' the employee's rate of pay, or the federal poverty 
line, using the household income safe harbors (the HHI safe 
harbors).\26\
---------------------------------------------------------------------------

    \25\ See section 4980H(c)(3). See also Sec. Sec.  54.4980H-
1(a)(28) and 54.4980H-5(e)(1).
    \26\ Whether or not an employee has been offered affordable 
coverage for purposes of eligibility for the PTC is determined under 
section 36B(c)(2)(C)(i) and the regulations thereunder (as opposed 
to the section 4980H safe harbors).
---------------------------------------------------------------------------

    The HHI safe harbors are optional and apply only for purposes of 
section 4980H(b). An ALE may choose to use one or more of the HHI safe 
harbors for all of its employees or for any reasonable category of 
employees, provided it does so on a uniform and consistent basis for 
all employees in a category. In addition, an ALE may use an HHI safe 
harbor only if the ALE offers its full-time employees and their 
dependents eligible employer-sponsored coverage that provides MV with 
respect to the self-only coverage offered to the employee. If, in 
applying one of the HHI safe harbors the offer of coverage is 
considered affordable, then the employer will not be subject to an 
employer shared responsibility payment under section 4980H(b) with 
respect to that employee, even if the employee is allowed the PTC.
3. Application of Section 4980H to Individual Coverage HRAs
    In implementing the objectives of Executive Order 13813, the 
Treasury Department and the IRS considered the

[[Page 51474]]

application of section 4980H to an ALE that offers an individual 
coverage HRA. Accordingly, on November 19, 2018, the Treasury 
Department and the IRS issued Notice 2018-88,\27\ which described a 
number of potential approaches related to the interaction of the 
proposed integration regulations and section 4980H.
---------------------------------------------------------------------------

    \27\ See Notice 2018-88, 2018-49 IRB 817.
---------------------------------------------------------------------------

    For clarity, the notice confirmed that an individual coverage HRA 
is an eligible employer-sponsored plan, and, therefore, an offer of an 
individual coverage HRA constitutes an offer of an eligible employer-
sponsored plan for purposes of section 4980H(a). Consequently, if an 
ALE offers an individual coverage HRA to at least 95 percent of its 
full-time employees (and their dependents), the ALE will not be liable 
for an employer shared responsibility payment under section 4980H(a) 
for the month, regardless of whether any full-time employee is allowed 
the PTC.
    The notice also explained how section 4980H(b) (including the HHI 
safe harbors) would apply to an ALE that offers an individual coverage 
HRA, described potential additional affordability safe harbors related 
to offers of individual coverage HRAs, requested comments, and provided 
examples. The Treasury Department and the IRS received a number of 
comments in response to Notice 2018-88, all of which were considered 
and are addressed in this preamble. See part II of this preamble for a 
more detailed discussion of the approaches described in Notice 2018-88 
and the extent to which those potential approaches are included in the 
proposed regulations.

D. Section 105

    In general, section 105(b) excludes from gross income amounts 
received by an employee through employer-provided accident or health 
insurance if those amounts are paid to reimburse expenses for medical 
care (as defined in section 213(d)) incurred by the employee (for 
medical care of the employee, the employee's spouse, or the employee's 
dependents, as well as children of the employee who are not dependents 
but have not attained age 27 by the end of the taxable year) for 
personal injuries and sickness.
    Section 105(h) provides, however, that excess reimbursements (as 
defined in section 105(h)(7)) paid to a highly compensated individual 
(as defined in section 105(h)(5) and Sec.  1.105-11(d)) (an HCI) \28\ 
under a self-insured medical reimbursement plan are includible in the 
gross income of the HCI if either (1) the plan discriminates in favor 
of HCIs as to eligibility to participate in the plan, or (2) the 
benefits provided under the plan discriminate in favor of HCIs 
(nondiscriminatory benefits rule).\29\ Section 105(h)(4) provides that 
a self-insured medical reimbursement plan does not satisfy the 
nondiscriminatory benefits rule unless all benefits provided to HCIs 
are also provided to all other participants.\30\ However, a plan that 
reimburses employees solely for premiums paid under an insured plan is 
treated as an insured plan and is not subject to these rules.\31\
---------------------------------------------------------------------------

    \28\ Generally, section 105(h)(5) and Sec.  1.105-11(d) define 
an HCI to include any employee that is among the highest paid 25 
percent of all employees (including the five highest paid officers, 
but not including employees excludible under Sec.  1.105-
11(c)(2)(iii) who are not participants in any self-insured medical 
reimbursement plan of the employer).
    \29\ See section 105(h)(1) and (2).
    \30\ See Sec.  1.105-11(c)(3)(i).
    \31\ See Sec.  1.105-11(b)(2).
---------------------------------------------------------------------------

    The regulations under section 105(h) provide that, in order to 
satisfy the nondiscriminatory benefits rule under section 105(h)(4), 
all benefits made available under a self-insured medical reimbursement 
plan to an HCI (and the HCI's dependents) must also be made available 
to all other participants (and their dependents).\32\ In addition, the 
regulations provide that ``any maximum limit attributable to employer 
contributions must be uniform for all participants and for all 
dependents of employees who are participants and may not be modified by 
reason of a participant's age or years of service.'' \33\ The 
consequence of a plan failing to satisfy this nondiscriminatory 
benefits requirement is that any excess reimbursements paid under the 
plan to an HCI are includible in the gross income and wages of the HCI.
---------------------------------------------------------------------------

    \32\ See Sec.  1.105-11(c)(3)(i).
    \33\ Id.
---------------------------------------------------------------------------

    HRAs generally are subject to the rules under section 105(h) and 
its related regulations because they are self-insured medical 
reimbursement plans.\34\ However, HRAs that make available 
reimbursements to employees only for premiums paid to purchase health 
insurance policies, including individual health insurance policies, but 
not other expenses, are not subject to the rules under section 105(h) 
and its related regulations.\35\ Notice 2018-88 addressed the 
interaction of individual coverage HRAs and section 105(h) and 
explained potential future guidance. The Treasury Department and the 
IRS received comments in response to the section 105(h) safe harbor in 
Notice 2018-88, all of which were considered and are addressed in this 
preamble. See later in this preamble for a more detailed discussion of 
the approaches described in Notice 2018-88 and the extent to which 
those approaches are included in the proposed regulations.
---------------------------------------------------------------------------

    \34\ See Sec.  1.105-11(b)(1); see also Notice 2002-45, 2002-28 
CB 93.
    \35\ See Sec.  1.105-11(b)(2). HRAs that provide for the 
reimbursement of premiums to purchase health insurance policies in 
addition to other medical care expenses are subject to the rules 
under section 105(h) and the regulations thereunder because the HRA 
amounts may be used to reimburse medical care expenses other than 
premiums for health insurance policies. PHS Act section 2716, as 
incorporated into the Code by section 9815, applies 
nondiscrimination rules similar to section 105(h) to insured 
coverage and may apply to HRAs that only provide for the 
reimbursement of premiums. However, under Notice 2011-1, 2011-2 IRB 
259, the Departments determined that compliance with PHS Act section 
2716 should not be required (and, thus, any sanctions for failure to 
comply would not apply) until after regulations or other 
administrative guidance of general applicability has been issued 
under PHS Act section 2716.
---------------------------------------------------------------------------

II. Explanation of Provisions and Summary of Comments

    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.

A. Section 4980H Proposed Regulations

    The Treasury Department and the IRS note that section 4980H relates 
only to offers of coverage by an ALE to its full-time employees (and 
their dependents). As a result, to the extent an employer is not an 
ALE, or is an ALE but offers an individual coverage HRA to employees 
who are not full-time employees, the employer need not consider the 
application of section 4980H in determining those offers, and, 
therefore, it need not identify an affordability plan for those 
employees.
1. Location-Related Issues
a. Location Safe Harbor--In General
    As noted earlier in part I(B) of this preamble, under the final PTC 
regulations, whether an offer of an individual coverage HRA is 
affordable for an employee depends, in part, on the monthly premium for 
the PTC

[[Page 51475]]

affordability plan for that employee (that is, the lowest cost silver 
plan for self-only coverage of the employee offered through the 
Exchange for the rating area in which the employee resides). 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. 
Accordingly, Notice 2018-88 described a potential safe harbor under 
which, for purposes of determining affordability under section 
4980H(b), an ALE would be allowed to use the lowest cost silver plan 
for the employee for self-only coverage offered through the Exchange in 
the rating area in which the employee's primary site of employment is 
located, instead of the lowest cost silver plan for the employee in the 
rating area in which the employee resides (the location safe harbor). 
The Treasury Department and the IRS requested comments on the location 
safe harbor and whether an alternative safe harbor would be preferable 
and, if so, why.
    One commenter was not supportive of the need for a location safe 
harbor, asserting that employers will likely want to determine 
affordability based on the cost of the lowest cost silver plan where 
the employee resides and disagreeing with the premise that it is 
difficult for employers to track employees' current addresses. However, 
a number of commenters indicated that a location safe harbor is needed, 
but that the anticipated safe harbor is too narrow because it would 
require employers with worksites located in multiple rating areas, 
including national employers, to calculate affordability for section 
4980H(b) purposes separately for numerous rating areas. One commenter 
suggested that larger employers may be unwilling to offer individual 
coverage HRAs if employers are required to track and align HRAs on a 
rating-area basis, noting that for traditional employer-sponsored 
coverage, employers generally need only look to the cost of a single 
plan to determine affordability.
    Some commenters suggested that one lowest cost silver plan be used 
to determine affordability employer-wide, such as the lowest cost 
silver plan in the rating area in which the employer's headquarters is 
located. Some commenters suggested employers be allowed to use one 
lowest cost silver plan to determine affordability for all employees 
with a worksite in a particular state or metropolitan statistical area, 
which, at least one suggested, the Centers for Medicare & Medicaid 
Services (CMS) could determine and make available to the public. Some 
commenters suggested a nationwide affordability plan should be provided 
for purposes of section 4980H, which could apply for all employers, and 
could be calculated based on the national average cost of lowest cost 
silver plans, perhaps averaged over multiple years. One commenter noted 
that although a nationwide plan may have a relatively high cost, it 
would provide simplicity. Some commenters opposed broadening the 
location safe harbor, including providing a nationwide safe harbor, due 
to concerns about evasion of section 4980H and enabling lower 
contributions to individual coverage HRAs, relative to amounts 
determined based on an employee's actual residence.
    As a general matter, the Treasury Department and the IRS 
acknowledge that in determining the affordability of traditional 
employer-sponsored coverage, employers generally use the cost of one 
plan (that is, the lowest cost plan providing MV that the employer 
offers to the employees) and that the cost of that plan does not vary 
by employee (or, in general, varies by broad categories of employees). 
In contrast, the affordability test for individual coverage HRAs is 
based on the cost of the applicable lowest cost silver plan for each 
employee, which will vary by employee, by virtue of the fact that the 
cost of individual health insurance coverage varies on an individual 
basis, including based on an individual's residence and age. The 
Treasury Department and the IRS recognize that this difference may 
impose additional complexity with respect to the application of section 
4980H to individual coverage HRAs, as compared to traditional employer-
sponsored coverage. However, for purposes of section 36B, whether 
coverage is affordable is an employee-by-employee determination and for 
an individual coverage HRA, where there is no traditional employer-
sponsored coverage on which to base an employee contribution, the 
employee's required contribution must be based on the cost of an 
individual health insurance plan, as employees generally are required 
to have individual health insurance coverage in order to enroll in the 
individual coverage HRA. The Treasury Department and the IRS have 
considered ways in which, consistent with the law, application of the 
affordability test under the final PTC regulations can and should be 
modified in applying section 4980H. However, by virtue of the ways in 
which individual coverage HRAs differ from traditional employer-
sponsored coverage, the determination of affordability under section 
36B (and, accordingly, under section 4980H) differs for these two types 
of coverage, and the Treasury Department and the IRS expect that 
employers will take those differences into account in determining 
whether, and to whom, to offer an individual coverage HRA.
    The Treasury Department and the IRS continue to be concerned about 
the burden imposed on employers in determining each full-time 
employee's place of residence, due to the fact that employees' places 
of residence might change with some frequency, and it could be 
difficult for employers to keep their records up to date. The Treasury 
Department and the IRS also recognize the administrative simplicity for 
employers with workers in different locations of being able to use the 
cost of a single plan to determine affordability for all workers. 
However, none of the suggested expansions of the location safe harbor 
would be based on a reasonable proxy for the cost that would determine 
whether the employee would be allowed the PTC (which is the basis for 
the employer shared responsibility payment under section 4980H(b)), and 
none would provide a substitute for a cost that the employer would 
otherwise be unable to identify in advance of the plan year. As a 
result, adoption of any of the suggested expansions of the location 
safe harbor could lead to a significant number of cases in which one or 
more of an ALE's full-time employees are allowed the PTC while the ALE 
is treated as providing those full-time employees affordable coverage, 
with the result that the ALE is not liable for an employer shared 
responsibility payment.
    These concerns are particularly acute because of significant 
differences in individual health insurance plan premiums that exist in 
different geographic locations, including from rating area to rating 
area, not only across the country, but also within many states. 
Accordingly, an affordability plan based on a nationwide average cost 
or, in many cases, a statewide average cost, would allow an ALE with 
full-time employees in locations with above-average lowest cost silver 
plan premiums to offer an individual coverage HRA, the amount of which 
is based on an affordability calculation using the average cost. The 
ALE could then ensure that employees were informed of the ability to 
enroll in an

[[Page 51476]]

Exchange plan subsidized by a potentially larger PTC, if they declined 
the individual coverage HRA. In that case, the ALE would not only avoid 
an employer shared responsibility payment, but also would avoid the 
cost of funding the employees' individual coverage HRAs (or any other 
healthcare benefits). Meanwhile, those employers with employees in 
below-average cost locations generally could use the actual cost in 
those lower-cost locations to determine affordability for those 
employees.\36\ This result would run counter to the language and intent 
of section 4980H, which directly ties liability for an employer shared 
responsibility payment to one or more full-time employees being allowed 
the PTC.
---------------------------------------------------------------------------

    \36\ The Treasury Department and the IRS note that, in addition 
to considering section 4980H, employers will also need to take into 
account other applicable guidance in determining amounts to make 
available in individual coverage HRAs, including the same terms 
requirement (Sec.  54.9802-4(c)(3)) under the final integration 
regulations.
---------------------------------------------------------------------------

    The Treasury Department and the IRS recognize that a safe harbor 
based on the employee's primary site of employment could raise similar 
issues of avoidance of the employer shared responsibility payment, but 
it would be on a much more limited scale. It is possible that the 
premium for the lowest cost silver plan based on an employee's worksite 
will be more expensive or less expensive than the premium for the 
lowest cost silver plan based on the employee's residence, in cases in 
which the employee resides in a location that has a different lowest 
cost silver plan than the location in which the worksite is located. 
However, the Treasury Department and the IRS expect that many employees 
live in relatively close proximity to where they work, in which case it 
is likely that the location used to determine the affordability plan 
for purposes of sections 4980H and 36B would be the same. Further, the 
Treasury Department and the IRS also expect that even if an employee 
does not live and work in the same location for purposes of 
determination of the lowest cost silver plan, the employee is likely to 
live and work in locations that are relatively close, in which case the 
variation between the cost of the lowest cost silver plan where the 
employee lives versus the cost of the lowest cost silver plan where the 
employee works is likely to be less significant than the variation that 
would be introduced by a statewide or national average plan cost.
    Thus, the Treasury Department and the IRS have concluded that the 
cost of the affordability plan at an employee's primary site of 
employment is a reasonable proxy for the cost of the affordability plan 
at the employee's residence for purposes of section 4980H, while 
avoiding the burdens that may arise for some employers in keeping 
records of their employees' current residences. Therefore, the proposed 
regulations provide that for purposes of section 4980H(b), an employer 
may use the lowest cost silver plan for the employee for self-only 
coverage offered through the Exchange where the employee's primary site 
of employment is located for determining whether an offer of an 
individual coverage HRA to a full-time employee is affordable. Further, 
the proposed regulations provide that the location safe harbor may be 
used in combination with the other safe harbors provided in the 
proposed regulations.
    In response to comments asking for a single affordability plan for 
purposes of section 4980H, the Treasury Department and the IRS note 
that an ALE that wants to contribute one set amount to individual 
coverage HRAs that would protect the ALE from liability under section 
4980H(b) could set the amount by determining affordability based on the 
lowest cost silver plan that has the highest cost premium for self-only 
coverage for any of its full-time employees (that is, nationally or 
based on multiple rating areas or states). This would result, however, 
in employees who live in locations with lower premiums receiving a 
benefit beyond the minimum required to protect against liability under 
section 4980H (and, thus, a higher cost to the employer than necessary 
solely to protect against that liability), and permit those same 
employees to purchase more generous plans than employees living in the 
higher-premium locations.
    Nonetheless, in view of the many differences in premiums 
geographically, and in view of the comments requesting a broader 
location safe harbor, the Treasury Department and the IRS recognize the 
simplicity that one or more such safe harbors could provide and the 
value to employers of being able to design uniform health coverage for 
all employees, without needing to tie the uniform amount to the highest 
cost affordability plan. Consequently, the Treasury Department and the 
IRS request comments regarding other methods of determining 
affordability under section 4980H that would not result in significant 
discrepancies between full-time employees being allowed the PTC and 
ALEs avoiding liability under section 4980H, or otherwise allow ALEs to 
avoid the costs of providing healthcare benefits by shifting those 
costs to the Federal government through access to the PTC. To the 
extent any method relies on data such as cost variances across 
geographic locations, variations of employee populations across 
geographic locations, or other similar data, considerations should 
include the availability of the data, including availability of that 
data at times sufficiently in advance to be usable by employers for 
determining plan designs for a subsequent year, how the data would be 
used both by employers and the IRS in determining the affordability 
plan for purposes of section 4980H, and how changes in the data over 
time would be integrated into the suggested methodology.
b. Identifying the Primary Site of Employment Under the Location Safe 
Harbor
    With respect to the location safe harbor, commenters raised a 
number of questions as to how and when to determine an employee's 
primary site of employment. More specifically, commenters noted that 
determining the primary worksite for employees who work in multiple 
locations and do not have a set worksite could be challenging and asked 
that rules allow employers flexibility in making this determination. 
Commenters also asked for clarification on how the primary site of 
employment is determined for employees who telework, which commenters 
noted is increasing the geographic distribution of workers. In 
addition, commenters also asked for clarification about when in 
relation to the plan year an employee's worksite is determined, with 
one suggesting it be determined based on the worksite six months prior 
to the plan year or as of the date of hire. Commenters further 
requested that the proposed regulations address mid-year changes in 
worksite locations and that employers be able to use the initial 
affordability plan for the plan year regardless of later worksite 
changes.
    In response to these comments, for purposes of the location safe 
harbor, the proposed regulations provide that an employee's primary 
site of employment generally is the location at which the employer 
reasonably expects the employee to perform services on the first day of 
the plan year (or on the first day the individual coverage HRA may take 
effect, for an employee who is not eligible for the individual coverage 
HRA on the first day of the plan year), except that the employee's 
primary site of employment is treated as changing if the location at 
which the employee performs services changes and the employer expects 
the change to be

[[Page 51477]]

permanent or indefinite.\37\ In that case, in general, the employee's 
primary site of employment is treated as changing no later than the 
first day of the second calendar month after the employee has begun 
performing services at the new location. This rule is intended to 
strike the appropriate balance between requiring that employee-
specific, up-to-date information be used to determine affordability 
under section 4980H and allowing employers time to address the 
administrative aspects of accounting for an employee's change in 
primary worksite.
---------------------------------------------------------------------------

    \37\ The final integration regulations allow individual coverage 
HRAs to be offered based on different classes of employees. One 
class of employees, as set forth in Sec.  54.9802-4(d)(2)(v), is 
employees whose primary site of employment is in the same rating 
area (with rating area defined in 45 CFR 147.102(b)). The final 
integration regulations do not provide a specific definition for 
primary site of employment, and the definition provided in the 
proposed regulations applies only for purposes of section 4980H.
---------------------------------------------------------------------------

    The proposed regulations also include a special rule for 
determining primary worksite for the first plan year that an employer 
offers an individual coverage HRA (or first offers an individual 
coverage HRA to a particular class of employees). Specifically, if an 
employer is first offering an individual coverage HRA to a class of 
employees, and the change in worksite 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. 
This is to provide certainty to employers first offering individual 
coverage HRAs to account for changes in circumstances that may occur in 
the months leading up to the plan year, including in close proximity to 
the first day of the plan year. For subsequent plan years, the general 
rule should take into account, for instance, changes in residence after 
an open enrollment period but before the beginning of the plan year.
    In the case of an employee who regularly works from home or at 
another worksite that is not on the employer's premises but who may be 
required by his or her employer to work at, or report to, a particular 
worksite, such as a teleworker with an assigned office space, the 
worksite to which the employee would report to provide services if 
requested is the applicable primary site of employment. The proposed 
regulations provide that in the case of an employee who works remotely 
from home or at another worksite that is not on the employer's premises 
and who otherwise does not have a particular assigned office space or a 
worksite to which to report, the employee's residence is the primary 
site of employment.
    The Treasury Department and the IRS recognize that the manner in 
which employees report to work varies widely across employers and 
industries. Therefore, the Treasury Department and the IRS request 
comments on whether any further clarification is needed regarding 
determination of the primary site of employment for purposes of the 
section 4980H location safe harbor.
c. Employee Residence
    Notwithstanding the location safe harbor, one commenter expressed 
an interest in using each employee's residence to determine 
affordability for purposes of section 4980H. The use of the location 
safe harbor under the proposed regulations is optional for an employer, 
and if an employer opts not to use the location safe harbor, then the 
PTC affordability plan (that is, the lowest cost silver plan for the 
employee based on the employee's residence) would be used to determine 
the affordability of the offer of the individual coverage HRA.\38\ 
However, the Treasury Department and the IRS expect that most employers 
will choose to use the location safe harbor, in part because under the 
final integration regulations, an employer may offer and vary 
individual coverage HRAs for a class of employees whose primary site of 
employment is in the same rating area, but the final integration 
regulations do not provide a class of employees based on an employee's 
residence.\39\ Thus, because the final integration regulations do not 
provide for a class of employees based on the location of employees' 
residences, an employer basing affordability on the residences of 
employees would need to use the lowest cost silver plan with the 
highest cost premium for self-only coverage at the residence of any 
employees in the class.
---------------------------------------------------------------------------

    \38\ Note that, as discussed in part II(A)(4) of this preamble, 
although the safe harbors in the proposed regulations are optional, 
if an ALE chooses to use them, it must do so based on the classes of 
employees set forth in the final integration regulations. Also note 
that, later in this preamble, the Treasury Department and the IRS 
explain the extent to which the other safe harbors provided under 
the proposed regulations may apply to the PTC affordability plan, 
for purposes of section 4980H.
    \39\ Section 54.9802-4(d)(2)(v).
---------------------------------------------------------------------------

    This commenter also requested clarification regarding when an 
employer may determine an employee's residence during the calendar year 
to identify the appropriate plan to be used to determine affordability, 
and included specific suggestions including a snapshot date six months 
prior to the plan year or date of hire for those not employed at that 
time. The proposed regulations do not provide any rules addressing the 
ability of an employer to identify the residence of the employee in the 
case of an employer who chooses to determine the affordability of the 
individual coverage HRA based on the residence of each employee instead 
of using the location safe harbor. However, the Treasury Department and 
the IRS request comments on whether, in the case of an individual 
coverage HRA and for purposes of determining the location of the 
employee's residence, rules allowing the use of a snapshot date in a 
specified period prior to the beginning of the plan year, rules 
allowing a short delay in the application of any change in residence, 
or a rule similar to one of those alternatives would be helpful to 
employers, or whether the availability of the location safe harbor, in 
conjunction with the final integration regulations, generally 
eliminates the need for such rules. Similar to the location safe 
harbor, any residence safe harbor would need to include rules providing 
when a change in an employee's residence must be taken into account.
d. Multiple Affordability Plans in One Rating Area
    Although the final PTC regulations refer to the lowest cost silver 
plan offered through an Exchange for an employee in a rating area, 
there is not necessarily one lowest cost silver plan per rating area. 
Rather, CMS has advised the Treasury Department and the IRS that, in 
some rating areas, there are different lowest cost silver plans in 
different parts of the rating area because some issuers only offer 
coverage in parts of rating areas (specifically, by county or zip 
code). For purposes of the PTC, whether an offer of an individual 
coverage HRA to an employee is affordable depends, in part, on the 
premium for the lowest cost silver plan available to that employee, 
which may differ from the lowest cost silver plan available to another 
employee located in another part of the same rating area.
    For the sake of clarity, the proposed regulations, therefore, 
provide that the lowest cost silver plan for an employee for a month, 
for purposes of the safe harbors in the proposed regulations, is the 
lowest cost silver plan in the part of the rating area that includes 
the employee's applicable location. For purposes of this preamble and 
the proposed regulations, an employee's applicable location is either 
the employee's primary worksite, if the

[[Page 51478]]

employer uses the location safe harbor, or the employee's residence, if 
the employer chooses not to use the location safe harbor.
    ALEs should be aware of how this rule interacts with the final 
integration regulations. Specifically, for an ALE using the location 
safe harbor with multiple worksites within a rating area, it may be the 
case that for some employees one lowest cost silver plan applies and 
for other employees, with a worksite in another part of the same rating 
area, a different lowest cost silver plan applies, perhaps with 
substantially different premiums. In that sense, the amount the 
employer needs to make available under the individual coverage HRA, for 
purposes of avoiding potential liability for an employer shared 
responsibility payment under section 4980H(b), may vary by zip code or 
county, rather than by rating area. However, under the final 
integration regulations, employers may not create classes of employees 
based on a geographic area smaller than a rating area.\40\ Accordingly, 
to the extent an ALE has multiple worksites in one rating area, the ALE 
will need to take these different rules into account in determining the 
amounts to be made available under an individual coverage HRA, and, in 
order to avoid potential liability for an employer shared 
responsibility payment under section 4980H(b), may need to base amounts 
made available in the HRA in a rating area on the most expensive lowest 
cost silver plan in any part of the rating area in which at least one 
employee has a primary worksite.
---------------------------------------------------------------------------

    \40\ Section 54.9802-4(d)(2)(v).
---------------------------------------------------------------------------

2. Age-Related Issues
a. Consideration of Age Safe Harbor
    Under the final PTC regulations, for any given employee, the 
premium for the PTC affordability plan is based on the particular 
employee's relevant circumstances, including the particular employee's 
age. Consequently, even for employees residing in the same location (or 
working at the same location if the location safe harbor is applied), 
the cost of the applicable affordability plan is determined on an 
employee-by-employee basis.\41\ In Notice 2018-88, the Treasury 
Department and the IRS acknowledged that determining the premium for 
the affordability plan for each employee based on his or her age might 
be burdensome for some employers, and requested comments on the 
administrative issues and burdens the age-based determination may raise 
and on safe harbors that would ease this burden and be consistent with 
the purpose and policies underlying section 4980H.
---------------------------------------------------------------------------

    \41\ Also note that, under the final integration regulations, a 
plan sponsor of an individual coverage HRA may increase amounts made 
available under the HRA based on increases in the ages of 
participants in a class of employees subject to certain conditions. 
See Sec.  54.9804-2(c)(3). Nothing in the proposed regulations 
affects the rules allowing plan sponsors of individual coverage HRAs 
to vary amounts made available based on participants' ages. However, 
ALEs that offer individual coverage HRAs will need to take into 
account both the final integration regulations and section 4980H in 
designing an individual coverage HRA offered to full-time employees.
---------------------------------------------------------------------------

    One commenter supported an employee-by-employee age-based 
affordability determination and, therefore, opposed an age-based safe 
harbor, asserting that employers will want to make HRA contributions 
based on employee ages. Therefore, the commenter did not see the need 
for an age-based safe harbor. However, several commenters stated that 
requiring the determination of affordability on an employee-by-employee 
basis, based on age, would be very burdensome for employers. These 
commenters requested an age-based safe harbor and indicated that the 
lack of such a safe harbor could discourage some larger employers from 
offering individual coverage HRAs, in particular for employers that 
want to provide a flat amount in the individual coverage HRA regardless 
of age.
    Commenters provided various suggestions for how an age-based safe 
harbor could be designed. One commenter suggested that the safe harbor 
might provide that affordability may be determined based on a composite 
premium for an employer's employees, at a minimum, at a particular 
worksite, and preferably at a combination of regional or national 
worksites. The commenter also suggested a composite premium based on 
the lowest cost silver plan at a specified age (for example, the lowest 
cost silver plan for a 40-year-old person in the rating area of the 
worksite), which an employer could use to determine the cost of the 
affordability plan for all of its employees at the particular worksite. 
Another commenter suggested employers should be allowed to use the 
average age of all employees in each class of employees on the first 
day of the plan year to determine the premium for the section 4980H 
affordability calculation for all employees in that class of employees. 
One commenter suggested an age safe harbor could be based on age bands 
adopted in a state, while another commented that the use of age bands 
to develop a safe harbor would introduce too much complexity and 
variation.
    The Treasury Department and the IRS acknowledge that determining 
the premium for the affordability plan for purposes of section 4980H 
for each full-time employee, based on age, may be burdensome for some 
employers. However, section 4980H incorporates section 36B for purposes 
of determining whether an ALE is subject to an employer shared 
responsibility payment under section 4980H(b), and the authority of the 
Treasury Department and the IRS to provide safe harbors under section 
4980H that deviate significantly from the section 36B rules is limited. 
More specifically, as noted earlier in this preamble, the Treasury 
Department and the IRS have provided other section 4980H safe harbors, 
namely the HHI safe harbors, which have been designed to offer a 
reasonable proxy for information that the employer may not know or 
would bear significant burdens in determining. By contrast, an employer 
typically knows the ages of its employees for a variety of unrelated 
purposes; consequently, it is not the case that employers do not know, 
or would bear a significant burden in determining, an employee's age. 
In addition, the average age of a group of employees generally will not 
be a reasonable proxy for a particular employee's age because, 
depending on the group, the average age may differ markedly from the 
ages of the older and younger members of the group. Accordingly, any 
age-based safe harbor would likely result in a number of employees 
(those with an age greater than the safe harbor age) receiving the PTC 
while the employer would not be subject to an employer shared 
responsibility payment under section 4980H(b), including in some cases 
by employer design.
    For these reasons, the proposed regulations do not provide a safe 
harbor for the age used to determine the premium of an employee's 
affordability plan. Rather, under the proposed regulations as under 
section 36B, affordability of the offer of an individual coverage HRA 
for purposes of section 4980H is determined, in part, based on each 
employee's age.
    The Treasury Department and the IRS also note that as a practical 
matter, if an employer wants to make a single amount available under an 
individual coverage HRA to a class of employees and ensure it avoids an 
employer shared responsibility payment under section 4980H(b), in 
general, the employer can use the age of the oldest employee in the 
class of employees to determine the amount to make available under the 
HRA to that class of employees. However, if the employer does not make

[[Page 51479]]

available the full amount of the cost of the affordability plan under 
the HRA, the employer will also need to compare each full-time 
employee's required contribution to the applicable amount under an HHI 
safe harbor to ensure the offer is affordable for all full-time 
employees. Further, the employer would need to take into account any 
geographic variation in the cost of the affordability plan (that is, 
the employer would need to ensure that it is basing affordability on 
the most expensive lowest cost silver plan available to any employee in 
the class, which may not be the lowest cost silver plan for the oldest 
employee in the class depending on whether the lowest cost silver plan 
of a younger employee in the class in a different geographic location 
has a higher cost).
b. Age Used To Determine Premium for Affordability Plan for an Employee
    One commenter requested information regarding when employers may 
determine the employee's age for purposes of determining the premium of 
the affordability plan, for purposes of section 4980H. To align with 
the rules issued under 45 CFR 147.102(a)(1)(iii) concerning the ability 
of issuers in the individual and small group markets to vary health 
insurance premiums based on age, the commenter requested that the 
Treasury Department and the IRS provide that an employee's age may be 
determined at the time of the policy issuance or renewal or, if an 
individual is added after the policy issuance or renewal date, the date 
the individual is added or enrolled in coverage.\42\
---------------------------------------------------------------------------

    \42\ Under 45 CFR 147.102(a)(1)(iii), issuers are required to 
use the enrollee's age as of the date of policy issuance or renewal.
---------------------------------------------------------------------------

    In response to this comment, and to provide clarity to employers, 
the proposed regulations specify the date as of which an employee's age 
is to be determined for a plan year for purposes of determining 
affordability under the section 4980H safe harbors.\43\ Specifically, 
the proposed regulations provide that 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 for the plan year is the employee's age on the 
first day of the plan year, and for an employee who becomes eligible 
for an individual coverage HRA during the plan year, the employee's age 
for the remainder of the plan year is the employee's age on the date 
the HRA can first become effective for the employee. This rule is based 
on, but not an exact incorporation of, the age determination rule that 
applies for purposes of rate setting in the individual and small group 
markets, which is tied to the individual market policy issuance or 
renewal date. The proposed regulations include a rule based on the HRA 
plan year and HRA effective date instead, to provide more certainty and 
simplicity for employers.
---------------------------------------------------------------------------

    \43\ The age identification rule in the proposed regulations 
does not apply for purposes of the final integration regulations, 
under which, in determining age with respect to variation in amounts 
made available to participants based on age in an individual 
coverage HRA, plan sponsors 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 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. See Sec.  54.9802-
4(c)(3)(iii)(B). However, to the extent an ALE is offering an 
individual coverage HRA, the ALE will need to take into account both 
the final integration regulations and any rules under section 4980H; 
therefore, the Treasury Department and the IRS have provided a 
proposed rule under section 4980H that allows compliance with both 
sets of rules.
---------------------------------------------------------------------------

c. Age Band Used To Identify Affordability Plan for All Employees
    The Treasury Department and the IRS understand that, in almost all 
cases, the plan that is the lowest cost silver plan at one age in a 
particular location will be the lowest cost silver plan for individuals 
of all ages in that location. However, CMS has advised the Treasury 
Department and the IRS that it is theoretically possible that, in some 
cases, one plan might be the lowest cost silver plan at one age and 
another plan might be the lowest cost silver plan at another age, in 
the same location. If that were to occur, however, the differences in 
premium amounts of the different plans at the same age would be 
extremely small (less than two dollars).
    Therefore, in order to avoid the need for employers to determine 
different lowest cost silver plans in one location for employees of 
different ages, and to simplify the information that the Exchanges will 
make available to employers, the proposed regulations provide that for 
purposes of the proposed safe harbors, the lowest cost silver plan for 
an employee for a month is the lowest cost silver plan for the lowest 
age band in the individual market for the employee's applicable 
location.
3. Look-Back Month Safe Harbor
a. In General
    Under the final PTC regulations, the affordability of an individual 
coverage HRA for a month is determined, in part, based on the cost of 
the PTC affordability plan for that month. For example, an employee's 
required contribution for January 2020 for an individual coverage HRA 
would be based on the cost of the PTC affordability plan for January 
2020. Further, Exchange plan premium information for a calendar year 
generally is not available until shortly before the beginning of the 
open enrollment period for that calendar year, which generally begins 
on November 1 of the prior calendar year.\44\ In Notice 2018-88, the 
Treasury Department and the IRS noted that while this time frame is 
sufficient for individuals and Exchanges to determine potential PTC 
eligibility for the upcoming calendar year, the Treasury Department and 
the IRS are aware that employers generally determine the health 
benefits they will offer for an upcoming plan year (including the 
employees' required contributions) well in advance of the start of the 
plan year. Therefore, for an individual coverage HRA with a calendar-
year plan year, employers generally would determine the benefits to 
offer, including the amount to make available in an HRA for the plan 
year, well before mid-to-late fall of the prior calendar year. Further, 
the Treasury Department and the IRS noted that under section 4980H, 
ALEs are intended to be able to decide whether to offer coverage 
sufficient to avoid an employer shared responsibility payment. ALEs are 
only able to make that choice if they have timely access to the 
necessary information.
---------------------------------------------------------------------------

    \44\ See 45 CFR 155.410(e)(3).
---------------------------------------------------------------------------

    To address this issue, Notice 2018-88 provided that the Treasury 
Department and the IRS anticipated issuing guidance that would allow an 
ALE sponsoring an individual coverage HRA with a calendar-year plan 
year to determine affordability for a year using the cost of the 
affordability plan for the employee's applicable location for the prior 
calendar year.\45\
---------------------------------------------------------------------------

    \45\ This safe harbor was referred to in Notice 2018-88 as the 
calendar year safe harbor.
---------------------------------------------------------------------------

    A number of commenters supported this safe harbor, asserting that 
it would be problematic for employers to be required to wait until the 
fall to determine individual coverage HRA amounts for the upcoming 
year. However, one commenter opposed the safe harbor, based on concerns 
that, according to the commenter, the significant volatility in 
premiums in the individual market from year to year could impose 
additional costs on employees because individual coverage HRA amounts 
would be based on prior year individual market premiums and would not 
reflect current year individual market premiums.
    The Treasury Department and the IRS acknowledge that premiums in 
the

[[Page 51480]]

individual market may vary from year to year and that a safe harbor 
based on prior premium information would allow ALEs to determine 
affordability based on premiums that likely will differ from the actual 
current year premiums. However, under section 4980H, ALEs are intended 
to be able to decide whether to offer coverage sufficient to avoid an 
employer shared responsibility payment, and they may only do so if they 
have timely access to the relevant information. Therefore, the proposed 
regulations include a safe harbor that allows employers to use prior 
premium information to determine affordability for purposes of section 
4980H (the look-back month safe harbor), but with some modifications as 
compared to the anticipated safe harbor in Notice 2018-88, as described 
in the remainder of this section of the preamble.
    As anticipated in Notice 2018-88, under the proposed regulations, 
an employer offering an individual coverage HRA with a calendar-year 
plan year may use the look-back month safe harbor. However, the 
proposed regulations provide additional specificity, to take into 
account that even within a calendar year, from calendar month to 
calendar month, the lowest cost silver plan in an employee's applicable 
location may change due to plan termination or because the plan that 
was the lowest cost silver plan closes to enrollment (sometimes 
referred to as plan suppression). Therefore, the proposed regulations 
provide that in determining an employee's required contribution for any 
calendar month, for purposes of section 4980H(b), an employer offering 
an individual coverage HRA with a calendar-year plan year may use the 
monthly premium for the lowest cost silver plan for January of the 
prior calendar year.
    In addition, the proposed regulations provide that employers 
offering individual coverage HRAs with non-calendar year plan years 
(non-calendar year individual coverage HRAs) may also use the look-back 
month safe harbor, although in that case the look-back month is 
different. In this respect, the proposed regulations differ from Notice 
2018-88, which provided that the Treasury Department and the IRS did 
not anticipate allowing employers offering non-calendar year individual 
coverage HRAs to use this safe harbor. However, the rule anticipated in 
Notice 2018-88 was based on the assumption that employers offering non-
calendar year individual coverage HRAs would have the relevant premium 
information by November of the prior calendar year. The Treasury 
Department and the IRS now understand that this would not necessarily 
be the case as the affordability plan may change from month to month 
during the calendar year; thus, which plan is the affordability plan 
for a month generally will not be known until shortly before the 
relevant month.
    Further, in Notice 2018-88, the Treasury Department and the IRS 
requested comments on whether this safe harbor should be allowed to be 
used by employers that offer non-calendar year individual coverage HRAs 
and, if so, the range of plan year start dates to which the safe harbor 
should apply. Some commenters requested that the safe harbor extend to 
non-calendar year individual coverage HRAs. One commenter recommended 
allowing, as a general rule, all employers with an individual coverage 
HRA to use the premiums for the affordability plan in effect six months 
prior to the first day of the plan year. Another commenter recommended 
allowing, as a general rule, all employers with individual coverage 
HRAs to use the premiums for the affordability plan in effect or 
published no longer than 12 months prior to the start of the plan year.
    Based on these comments and that the affordability plan may change 
from month to month during the year and, therefore, may not be known by 
November of the prior year, the proposed regulations allow employers 
offering non-calendar year individual coverage HRAs to use the look-
back month safe harbor, in order to provide those employers timely 
access to the information they need to determine the coverage 
sufficient to avoid an employer shared responsibility payment, as 
contemplated by section 4980H(b). More specifically, for an employer 
offering a non-calendar year individual coverage HRA, the proposed 
regulations provide that in determining an employee's required 
contribution for a calendar month, for purposes of section 4980H(b), an 
employer may use the monthly premium for the affordability plan for 
January of the current calendar year. The proposed regulations provide 
a different look-back month for employers offering non-calendar year 
individual coverage HRAs (that is, January of the current year) than 
those offering individual coverage HRAs with a calendar-year plan year 
(that is, January of the prior year) in order to strike the appropriate 
balance between providing employers with access to information 
sufficiently in advance of the plan year and avoiding the use of 
premium information that could be significantly out of date. The 
Treasury Department and the IRS note that the relevant premium 
information for non-calendar year individual coverage HRAs (that is, 
the premium for January of the current year) will be available by 
November 1 of the prior year, and, therefore, generally ALEs sponsoring 
non-calendar year individual coverage HRAs should have access to the 
necessary premium information sufficiently in advance of the start of 
the plan year. The Treasury Department and the IRS request comments on 
whether the proposed look-back month for non-calendar year individual 
coverage HRAs will be sufficient for individual coverage HRAs with plan 
years that begin relatively early in the calendar year and whether ALEs 
intend to offer individual coverage HRAs on a non-calendar year basis, 
including with plan years that begin early in the calendar year.
    The proposed regulations provide that an ALE may use the look-back 
month safe harbor in addition to the other safe harbors included in the 
proposed regulations, and that an ALE may apply the look-back month 
safe harbor even if the ALE decides not to use the location safe harbor 
and, instead, bases the affordability plan on employee residence.
    The proposed regulations also clarify that, although the look-back 
month safe harbor allows the employer to use premium information from 
the applicable look-back month to determine the cost of the 
affordability plan for each month of the current plan year, in 
determining the applicable premium, the employer must use the 
employee's applicable age for the current plan year and the employee's 
applicable location for the current month. In general, this means that 
the ALE may use the same premium (that is, the premium based on the 
applicable look-back month, applying current employee information) for 
each month of the plan year. However, to the extent the employee's 
applicable location changes during the plan year, although the ALE may 
continue to determine the monthly premium for the applicable lowest 
cost silver plan based on the applicable look-back month, the ALE must 
use the employee's new applicable location to determine that monthly 
premium. See parts II(A)(1)(b) and II(A)(2)(b) of this preamble for a 
discussion of the date as of which an employee's age is determined for 
purposes of the section 4980H safe harbors and the date as of which an 
employee's worksite is considered to have changed, for purposes of the 
location safe harbor.
    Relatedly, Notice 2018-88 also included an anticipated safe harbor 
which allowed ALEs offering individual

[[Page 51481]]

coverage HRAs to assume that the cost of the affordability plan for the 
first month of the plan year is the cost of the affordability plan for 
all months of the plan year (the non-calendar year safe harbor). This 
safe harbor was primarily intended to provide certainty to non-calendar 
year individual coverage HRAs, for which the cost of the affordability 
plan would change mid-plan year (that is, upon the changing of the 
calendar year). Commenters supported the non-calendar year safe harbor, 
and the Treasury Department and the IRS continue to be of the view that 
ALEs need predictability with respect to the affordability plan that 
will apply for each month of the plan year. However, the proposed 
regulations do not include the non-calendar year safe harbor because it 
is generally subsumed by the look-back month safe harbor under the 
proposed regulations. Specifically, under the proposed regulations, the 
look-back month safe harbor applies to non-calendar year individual 
coverage HRAs and provides a look-back month to determine the cost of 
the affordability plan for each month of the plan year. As a result, 
the look-back month safe harbor addresses the issue underlying the non-
calendar year safe harbor, and the Treasury Department and the IRS 
determined that a separate non-calendar year safe harbor would be 
largely duplicative and confusing. However, the Treasury Department and 
the IRS request comments on whether any employers do not intend to use 
the look-back month safe harbor and would, therefore, need a separate 
safe harbor allowing the use of the premium for the first month of the 
current plan year to determine affordability for all months of the plan 
year.
b. Adjustment to Look-Back Month Premium Amounts
    Notice 2018-88 noted that the Treasury Department and the IRS 
considered whether to apply an adjustment to the cost of the 
affordability plan under the look-back month safe harbor, but did not 
anticipate proposing such an adjustment, to avoid complexity and due to 
uncertainty regarding how to determine an appropriate adjustment in all 
circumstances and for all years. The Treasury Department and the IRS 
requested comments on whether such an adjustment should be included in 
future guidance and, if so, how the adjustment should be calculated.
    A number of commenters opposed applying an adjustment, asserting 
that, because of volatility in healthcare costs, it would be difficult 
to develop a benchmark that is representative of the market, and an 
adjustment could contribute to increasing healthcare costs, further 
complicate an already complicated rule, and cause confusion for 
employers. In contrast, a number of commenters supported an adjustment, 
suggesting that without an adjustment an employee with an individual 
coverage HRA may be priced out of the market and employer contributions 
required to satisfy section 4980H would be systematically undervalued.
    Regarding the method for calculating an adjustment, commenters 
suggested basing the adjustment on the average of the three prior 
years' premium increases in the relevant individual market or PPACA's 
premium adjustment percentage. Commenters requested that the Treasury 
Department and the IRS work with HHS to compute these amounts and make 
them available to plan sponsors in a timely manner.
    The Treasury Department and the IRS have considered these comments 
and continue to be concerned about the complexity and burdens that 
would be imposed by the application of an adjustment to the prior 
premiums under the look-back month safe harbor, and agree with 
commenters regarding the difficulty of producing an accurate 
adjustment. The Treasury Department and the IRS are concerned about the 
ability to produce a sufficiently accurate adjustment due to geographic 
variation in premiums (including geographic variations in the relative 
annual increases or decreases in premiums) and that the timing of 
access to information would hamper the ability to apply an adjustment 
based on up-to-date information. The Treasury Department and the IRS 
also considered applying more general adjustments (such as the Consumer 
Price Index overall medical care component or PPACA's premium 
adjustment percentage \46\) but are concerned that those adjustments 
would add complexity to the safe harbor while not reflecting premium 
changes in a way that is sufficiently specific to the employer's 
employees, including their geographic location. Therefore, under the 
proposed regulations, the look-back month safe harbor does not include 
an adjustment to the prior premium information. However, the Treasury 
Department and the IRS request comments on this issue and will continue 
to consider whether an adjustment is warranted, and how any such 
adjustment would be calculated, including in the event that the 
Treasury Department and the IRS observe that use of the look-back month 
safe harbor results in significant discrepancies in the affordability 
determinations as separately applied for purposes of sections 36B and 
4980H.
---------------------------------------------------------------------------

    \46\ See PPACA section 1302(c)(4).
---------------------------------------------------------------------------

4. Consistency Requirement and Conditions for the Safe Harbors
    Notice 2018-88 provided that ALEs would not be required to use any 
of the anticipated section 4980H safe harbors for individual coverage 
HRAs, but that the Treasury Department and the IRS anticipated that 
some level of consistency would be required in the application of the 
anticipated safe harbors by an employer to its employees. The notice 
requested comments on the scope of such a requirement, including 
whether employers should be allowed to choose to apply the safe harbors 
to reasonable categories of employees, such as some or all of the 
categories identified in Sec.  54.4980H-5(e)(2)(i), which apply for 
purposes of the HHI safe harbors.\47\ One commenter supported the use 
of consistency requirements based on the current categories of 
employees used under Sec.  54.4980H-5(e)(2)(i).
---------------------------------------------------------------------------

    \47\ Under Sec.  54.4980H-5(e)(2)(i), reasonable categories 
generally include specified job categories, the nature of 
compensation (hourly or salary), geographic location, and similar 
bona fide business criteria.
---------------------------------------------------------------------------

    Under the proposed regulations, use of any of the safe harbors is 
optional for an ALE. However, rather than providing that a consistency 
requirement applies based on reasonable categories of employees as set 
forth in Sec.  54.4980H-5(e)(2)(i), the proposed regulations provide 
that an ALE may choose to apply the safe harbors for any class of 
employees as defined in the final integration regulations,\48\ provided 
the ALE does so on a uniform and consistent basis for all employees in 
the class. The proposed regulations base the consistency requirement 
for the safe harbors in the proposed regulations on the classes of 
employees in the final integration regulations for the sake of 
consistency with those rules and to reduce complexity for employers in 
complying with both sets of rules.
---------------------------------------------------------------------------

    \48\ Section 54.9802-4(d)(2). The proposed regulations refer to 
the definition of classes of employees in the final integration 
regulations but do not incorporate other related rules, such as the 
minimum class size requirement set forth in Sec.  54.9802-4(d)(3).
---------------------------------------------------------------------------

    In addition, the proposed regulations clarify the conditions for 
using the proposed safe harbors, including the HHI safe harbors as 
applied to offers of individual coverage HRAs. Current regulations 
under section 4980H provide that an ALE may only use an HHI safe harbor 
if the ALE offers its full-time employees (and their dependents)

[[Page 51482]]

eligible employer-sponsored coverage that provides MV with respect to 
the self-only coverage offered to the employee. Because an individual 
coverage HRA is deemed to provide MV by virtue of being affordable (and 
is not an independent determination as it is for other types of 
employer-sponsored coverage), the proposed regulations do not 
separately impose this MV requirement on the use of the safe harbors in 
the proposed regulations.
5. Application of Current HHI Safe Harbors to Individual Coverage HRAs
    As described earlier in this preamble, under section 36B, whether 
an offer of coverage under an eligible employer-sponsored plan is 
affordable is based on whether the employee's required contribution 
exceeds the required contribution percentage of the employee's 
household income. Because an ALE generally will not know an employee's 
household income, the current section 4980H regulations set forth three 
HHI safe harbors under which an employer may compare the employee's 
required contribution to information that is readily available to the 
employer, rather than to actual household income.\49\
---------------------------------------------------------------------------

    \49\ See Sec.  54.4980H-5(e)(2).
---------------------------------------------------------------------------

    Notice 2018-88 provided that the Treasury Department and the IRS 
anticipate providing guidance clarifying that an ALE that offers an 
individual coverage HRA would be permitted to use the HHI safe harbors, 
subject to the applicable requirements, for purposes of section 
4980H(b). Several commenters supported the intent to allow the use of 
the HHI safe harbors to determine the affordability of individual 
coverage HRAs.
    As with other types of employer-sponsored coverage, employers that 
offer individual coverage HRAs will not know employees' household 
incomes. Therefore, the proposed regulations provide that an employer 
offering an individual coverage HRA to a class of employees may use the 
HHI safe harbors in determining whether the offer of the HRA is 
affordable for purposes of section 4980H(b).
    The proposed regulations clarify how the HHI safe harbors apply to 
an offer of an individual coverage HRA. Specifically, the current HHI 
safe harbors assume that the employee's required contribution will be 
based on the lowest-cost self-only coverage that provides MV that the 
employer offers to the employee. The proposed regulations clarify that, 
in applying the HHI safe harbors to an offer of an individual coverage 
HRA, the employee's required HRA contribution is to be used, taking 
into account any other applicable safe harbors under the proposed 
regulations.
    Further, the proposed regulations include technical updates to the 
current HHI safe harbors to reflect that the percentage used to 
determine affordability is the required contribution percentage (rather 
than a static 9.5 percent), which is adjusted in accordance with 
section 36B(c)(2)(C)(iv) and the regulations thereunder. The Treasury 
Department and the IRS clarified this issue in Notice 2015-87 and now 
have the opportunity to reflect that clarification in the regulation 
text.\50\ The proposed regulations do not make substantive changes to 
the current HHI safe harbors as applied to employer-sponsored coverage 
that is not an individual coverage HRA.\51\
---------------------------------------------------------------------------

    \50\ See Notice 2015-87, 2015-52 IRB 889, Q&A 12. In Notice 
2015-87, the Treasury Department and the IRS clarified a number of 
issues related to section 4980H. The proposed regulations do not 
affect the guidance provided in that notice, which remains in 
effect. See also 81 FR 91755, 91758 (Dec. 19, 2016).
    \51\ The proposed regulations also provide technical updates to 
Sec.  54.4980H-4(b), regarding mandatory offers of coverage, where 
the use of 9.5 percent needed to be updated to refer instead to the 
required contribution percentage. The updates incorporate the 
clarification provided in Notice 2015-87, Q&A 12 and are not 
substantive changes.
---------------------------------------------------------------------------

6. Minimum Value
    As described earlier in this preamble, in general, under section 
36B, 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 and if the plan provides substantial 
coverage of inpatient hospitalization and physician services.\52\ 
Because of the differences between individual coverage HRAs and 
traditional group health plans, the final PTC regulations provide that 
an individual coverage HRA that is affordable is treated as providing 
MV.\53\
---------------------------------------------------------------------------

    \52\ See section 36B(c)(2)(C)(ii); see also 80 FR 52678 (Sept. 
1, 2015).
    \53\ See Sec.  1.36B-2(c)(3)(i)(B).
---------------------------------------------------------------------------

    Notice 2018-88 explained that the MV definition under the proposed 
PTC regulations would apply for purposes of determining whether an ALE 
that offers an individual coverage HRA has made an offer that provides 
MV for purposes of section 4980H. Therefore, an individual coverage HRA 
that is affordable (taking into account any affordability safe harbors) 
would be treated as providing MV for purposes of section 4980H.
    One commenter supported the MV rules for individual coverage HRAs, 
and one commenter opposed the rules, suggesting that any metal level 
plan should be allowed to be used to determine if an offer provides MV 
(rather than looking to the lowest cost silver plan). Some commenters 
suggested the use of a different metal level plan in determining 
affordability and MV for individual coverage HRAs more generally. The 
Treasury Department and the IRS considered these issues in connection 
with the final PTC regulations and addressed comments on these topics 
in the preamble to the final PTC regulations.\54\ Further, section 
4908H applies the MV standard by reference to section 36B, and no basis 
has been provided for applying a different standard under section 
4980H. Therefore, under the proposed regulations, an individual 
coverage HRA that is affordable (as determined under the applicable 
section 36B rules, in combination with any applicable section 4980H 
safe harbors), is deemed to provide MV.
---------------------------------------------------------------------------

    \54\ See 84 FR 28888 (June 20, 2019), 28943-28946.
---------------------------------------------------------------------------

7. Reporting Under Sections 6055 and 6056
a. Section 6056
    Section 6056 requires ALEs to file with the IRS and furnish to 
full-time employees information about whether the employer offers 
coverage to full-time employees and, if so, information about the 
coverage offered. An ALE that offers an individual coverage HRA to its 
full-time employees, just like all ALEs, is required to satisfy the 
section 6056 reporting requirements. ALEs use Form 1094-C, 
``Transmittal of Employer-Provided Health Insurance Offer and Coverage 
Information Returns,'' and Form 1095-C, ``Employer-Provided Health 
Insurance Offer and Coverage,'' to satisfy the section 6056 reporting 
requirements.
    Section 6056 and Form 1095-C require ALEs to report each full-time 
employee's required contribution.\55\ Notice 2018-88 provided that the 
Treasury Department and the IRS anticipated that an ALE would not be 
required to report the employee's required contribution that is 
calculated under the proposed PTC regulations. An ALE would, instead, 
be required to report the employee's required contribution determined 
under the applicable safe harbors that were anticipated to be provided 
with respect to the calculation of an employee's required contribution 
for an individual coverage HRA under section 4980H. Notice 2018-88 also 
stated that the Treasury Department and the IRS were continuing to 
consider the application

[[Page 51483]]

of section 6056 to an ALE that offers an individual coverage HRA and 
were anticipating providing additional guidance on these issues.
---------------------------------------------------------------------------

    \55\ See also Sec.  301.6056-1(d)(1)(vi).
---------------------------------------------------------------------------

    One commenter requested new reporting guidance as soon as possible. 
Another commenter requested that any new reporting guidance be provided 
at least 12 months prior to the effective date of any changes in 
reporting and asked the Treasury Department and the IRS to consider 
whether good faith reporting relief would be warranted. Some commenters 
urged the Treasury Department and the IRS to simplify and minimize 
section 6056 reporting generally and with respect to individual 
coverage HRAs.
    The proposed regulations do not propose to amend the regulations 
under section 6056. It is anticipated that guidance regarding reporting 
in connection with individual coverage HRAs will be provided in other 
administrative guidance, including forms and instructions. It is also 
anticipated that the guidance would permit the reporting of the 
employee's required contribution based on the section 4980H safe 
harbor(s) used by the ALE, rather than the employee's required 
contribution determined under the final PTC regulations without 
application of the relevant safe harbors. The Treasury Department and 
the IRS continue to consider whether and how to revise the codes used 
in Form 1095-C reporting to account for the new individual coverage HRA 
safe harbors. The Treasury Department and the IRS recognize the need 
for timely guidance in this area to assist taxpayers, plan 
administrators, and software developers to prepare for the reporting 
associated with individual coverage HRAs.
b. Section 6055
    Section 6055 provides that all persons who provide MEC to an 
individual must report certain information to the IRS that identifies 
covered individuals and the period of coverage, and must furnish a 
statement to the covered individuals including the same information. 
Information returns under section 6055 generally are filed using Form 
1095-B, ``Health Coverage.'' However, self-insured ALEs are required to 
file Form 1095-C and use Part III of that form, rather than Form 1095-
B, to report information required under section 6055.
    Individual coverage HRAs are group health plans and, therefore, are 
eligible employer-sponsored plans that are MEC. Accordingly, reporting 
under section 6055 is required for individual coverage HRAs. In 
general, the employer is the entity responsible for this reporting.\56\
---------------------------------------------------------------------------

    \56\ Section 1.6055-1(c)(2).
---------------------------------------------------------------------------

    The Treasury Department and the IRS note that there are regulations 
under Sec.  1.6055-1(d) that provide exceptions for certain plans from 
the section 6055 reporting requirements.\57\ These regulations include 
exceptions for certain duplicative coverage or supplemental coverage 
providing MEC. More specifically, the regulations provide that: (1) If 
an individual is covered by more than one MEC plan or program provided 
by the same reporting entity, reporting is required for only one of the 
plans or programs; and (2) reporting is not required for an 
individual's MEC to the extent that the individual is eligible for that 
coverage only if the individual is also covered by other MEC for which 
section 6055 reporting is required, but for eligible employer-sponsored 
coverage this exception only applies if the supplemental coverage is 
offered by the same employer that offers the eligible employer-
sponsored coverage for which section 6055 reporting is required.\58\ 
Although an individual enrolled in an individual coverage HRA is 
required to be enrolled in individual health insurance coverage, 
Medicare Part A and B, or Medicare Part C, the employer providing the 
individual coverage HRA generally is not the same entity that provides 
the individual health insurance coverage. Accordingly, these section 
6055 exceptions generally do not apply to individual coverage HRAs.
---------------------------------------------------------------------------

    \57\ See Sec.  1.6055-1(d)(2). See also Prop. Reg. Sec.  1.6055-
1(d)(2) and (3), in 81 FR 50671 (Aug. 2, 2016) (these regulations 
may be relied upon for calendar years ending after December 31, 
2013) and Notice 2015-68, 2015-41 IRB 547.
    \58\ Prop. Reg. Sec.  1.6055-1(d)(2) and (3). Id.
---------------------------------------------------------------------------

    The proposed regulations do not propose to amend the regulations 
under section 6055. However, the Treasury Department and the IRS note 
that because the individual shared responsibility payment under section 
5000A was reduced to zero for months beginning after December 31, 2018, 
the Treasury Department and the IRS are studying whether and how the 
reporting requirements under section 6055 should change, if at all, for 
future years.
8. Application of Tobacco Surcharge and Wellness Incentives to 
Affordability Determination
    One commenter noted that whether an individual is a tobacco user 
can have an impact on premiums for individual health insurance 
coverage. This commenter requested that the Treasury Department and the 
IRS permit employers to use the non-tobacco rate in determining 
affordability for purposes of the PTC and section 4980H.
    In response, and consistent with current related guidance,\59\ the 
final PTC regulations provide that for purposes of determining the 
premium for the lowest cost silver plan used to determine the 
employee's required HRA contribution: (1) If the premium differs for 
tobacco users and non-tobacco users, the premium taken into account is 
the premium that applies to non-tobacco users; and (2) the premium is 
determined without regard to any wellness program incentive that 
affects premiums unless the wellness program incentive relates 
exclusively to tobacco use, in which case the incentive is treated as 
earned.\60\ The proposed regulations incorporate these rules by 
reference for purposes of determining the affordability plan and the 
associated premium.
---------------------------------------------------------------------------

    \59\ See Sec. Sec.  1.36B-2(c)(3)(v)(A)(4) and 1.36B-3(e).
    \60\ Section 1.36B-2(c)(5)(iii)(A). See 84 FR 28888 (June 20, 
2019), 28496-28497.
---------------------------------------------------------------------------

9. Implementation of Section 4980H Safe Harbors and Reliance on 
Exchange Information
    A number of commenters requested that the Treasury Department and 
the IRS ensure that employers have access to the information needed to 
apply section 4980H to individual coverage HRAs. Some commenters asked 
for an online affordability calculator and for lowest cost silver plan 
data to be made available by zip code, for each month, and to be 
retained historically, for use by employers and the IRS.
    The Treasury Department and the IRS recognize that access to 
location-specific lowest cost silver plan premium data, on a month-by-
month basis, which is preserved and includes prior year information, is 
necessary for employers to use the safe harbors included in the 
proposed regulations. As noted in the preamble to the final integration 
regulations, lowest cost silver plan data will be made available by HHS 
for employers in all states that use the Federal HealthCare.gov 
platform to determine whether the individual coverage HRA offer is 
affordable for purposes of section 4980H, and the Treasury Department 
and the IRS are working with HHS to ensure that the necessary 
information is made available. With regard to states that do not use 
the Federal HealthCare.gov platform (State Exchanges), HHS has begun 
discussing the information it plans to make available in order to help 
the State Exchanges prepare to make this information available, and the 
Treasury Department and the IRS also intend to

[[Page 51484]]

work with State Exchanges on this aspect of implementation.
    Further, the Treasury Department and the IRS recognize that 
employers are not in a position to verify whether the lowest cost 
silver plan premium information posted by an Exchange for this purpose 
has been properly computed and identified, and, therefore, employers 
will need to be able to rely on the premium information that Exchanges 
make available. Accordingly, the proposed regulations provide that ALEs 
may rely on the lowest cost silver plan premium information made 
available by an Exchange for purposes of determining affordability 
under section 4980H. Employers are encouraged to retain relevant 
records.\61\
---------------------------------------------------------------------------

    \61\ The regulations under section 4980H do not include specific 
recordkeeping requirements; the otherwise generally applicable 
substantiation and recordkeeping requirements in section 6001 apply.
---------------------------------------------------------------------------

10. Other Comments Related to Section 4980H
    One commenter requested clarification that the offer of an 
individual coverage HRA is an offer of coverage for purposes of section 
4980H, even if the individual offered the individual coverage HRA does 
not take the HRA or enroll in individual health insurance coverage. To 
avoid an employer shared responsibility payment, section 4980H requires 
an ALE to offer its full-time employees (and their dependents) an 
opportunity to enroll in an eligible employer-sponsored plan. Section 
4980H does not require that the full-time employees (or their 
dependents) actually enroll, in order for the employer to avoid an 
employer shared responsibility payment. Moreover, as group health 
plans, individual coverage HRAs are eligible employer-sponsored plans. 
Therefore, the Treasury Department and the IRS confirm, for the sake of 
clarity, that the offer of an individual coverage HRA is an offer of an 
eligible employer-sponsored plan for purposes of section 4980H, without 
regard to whether the employee accepts the offer. The proposed 
regulations do not affect existing guidance with respect to this issue.
    One commenter requested clarification that, for purposes of section 
4980H, an employer that offers an individual coverage HRA will be 
treated as offering the HRA to Medicare-enrolled and Medicare-eligible 
employees, even if those employees are unable to obtain individual 
health insurance coverage on account of their Medicare status. Under 
section 4980H and the regulations thereunder, in general, an employer 
is considered to offer coverage to an employee if the employee has an 
effective opportunity to elect to enroll in coverage at least once with 
respect to the plan year.\62\ Whether an employee has an effective 
opportunity to enroll is determined based on all the relevant facts and 
circumstances. Further, under the final integration regulations, an 
individual coverage HRA may be integrated with Medicare Part A and B or 
Medicare Part C; therefore, an employee enrolled in Medicare may enroll 
in the HRA, even though the employee may not be able to obtain 
individual health insurance coverage due to his or her status as a 
Medicare enrollee.\63\ Thus, if a particular individual coverage HRA 
may be integrated with Medicare, the offer of the HRA to an employee 
who is enrolled in Medicare provides the employee an effective 
opportunity to enroll in the HRA and constitutes an offer of coverage 
to the employee for purposes of section 4980H. As a result, the offer 
is taken into account in determining if the ALE offered coverage to a 
sufficient number of full-time employees (and their dependents) for 
purposes of avoiding an employer shared responsibility payment under 
section 4980H(a). In addition, because an individual enrolled in 
Medicare is not eligible for the PTC \64\ and an ALE will only be 
liable for an employer shared responsibility payment for a month with 
respect to a full-time employee under section 4980H(b) if the full-time 
employee is allowed the PTC for that month, an ALE will not be liable 
for an employer shared responsibility payment under section 4980H(b) 
for a month with respect to a full-time employee enrolled in Medicare 
for that month.\65\
---------------------------------------------------------------------------

    \62\ See Sec.  54.4980H-4(b)(1). The regulations also provide 
guidance on the circumstances in which an employer is considered to 
have made an offer of coverage even if the employee does not have an 
effective opportunity to decline to enroll in the coverage.
    \63\ See 84 FR 28888 (June 20, 2019), 28928-28931.
    \64\ See section 36B(c)(2)(B) and Sec.  1.36B-2(a)(2).
    \65\ The rules under section 4980H for employees eligible for, 
but not enrolled in, Medicare apply as they do for non-Medicare-
eligible employees. However, note that an individual eligible for 
Medicare generally is ineligible for the PTC. See id.
---------------------------------------------------------------------------

    Some commenters inquired about the interaction between section 
4980H and an offer of an excepted benefit HRA,\66\ including the 
consequences to an ALE if the excepted benefit HRA is used to purchase 
short-term, limited-duration insurance (STLDI). Among other 
requirements, in order for an ALE to avoid an employer shared 
responsibility payment, it must offer an eligible employer-sponsored 
plan that is MEC to its full-time employees (and their dependents). 
Although group health plans generally are eligible employer-sponsored 
plans that are MEC, excepted benefits are not MEC.\67\ Consequently, 
the offer of an excepted benefit HRA is not treated as an offer of an 
eligible employer-sponsored plan that is MEC for purposes of section 
4980H, regardless of whether the excepted benefit HRA is, or may be, 
used to purchase STLDI.
---------------------------------------------------------------------------

    \66\ See Sec.  54.9831-1(c)(3)(viii).
    \67\ See section 5000A(f)(3).
---------------------------------------------------------------------------

    However, in order for an HRA to be an excepted benefit HRA, the 
employer must offer the employees who are offered the excepted benefit 
HRA other group health plan coverage that is not limited to excepted 
benefits and that is not an HRA or other account-based group health 
plan.\68\ Because the other group health plan may not be limited to 
excepted benefits, that offer of coverage is an offer of an eligible 
employer-sponsored plan that is MEC for purposes of section 4980H. 
Whether the offer of coverage under the other group health plan in 
connection with the excepted benefit HRA is an affordable, MV offer 
depends on the particular characteristics of the group health plan and 
the coverage offered under that plan. The proposed regulations do not 
affect existing guidance with respect to this issue.
---------------------------------------------------------------------------

    \68\ See Sec.  54.9831-1(c)(3)(viii)(A).
---------------------------------------------------------------------------

B. Proposed Regulations Under Section 105(h)

    Under the final integration regulations, employers may limit the 
offer of an individual coverage HRA to certain classes of employees and 
may vary the amounts, terms, and conditions of individual coverage HRAs 
between the different classes of employees.\69\ Further, within any 
class of employees offered an individual coverage HRA, the employer 
must offer the HRA on the same terms and conditions to all employees in 
the class, subject to certain exceptions (the same terms 
requirement).\70\ One of the exceptions to the same terms requirement 
is that the employer may increase the maximum dollar amounts made 
available under an individual coverage HRA as the age of the 
participant increases provided that (1) the same maximum dollar amount 
attributable to the increase in age is made available to all 
participants in a class of employees who are the same age, and (2) the 
maximum dollar amount made available to the oldest participant(s) is 
not more than three times the maximum dollar amount

[[Page 51485]]

made available to the youngest participant(s).\71\ Other exceptions to 
the same terms requirement include rules allowing the employer to 
prorate amounts made available for employees and dependents who enroll 
in the HRA after the beginning of the HRA plan year, to make available 
carryover amounts, and for employees with amounts remaining in other 
HRAs, to make available those remaining amounts in the current 
individual coverage HRA, each subject to the conditions set forth in 
the final integration regulations.\72\
---------------------------------------------------------------------------

    \69\ See Sec.  54.9802-4(d).
    \70\ See Sec.  54.9802-4(c)(3).
    \71\ Section 54.9802-4(c)(3)(iii)(B). The proposed integration 
regulations included the same terms requirement, including the 
exception for age variation, but did not include the limit on the 
extent to which amounts made available may be increased based on 
age, which was added to the final integration regulations in 
response to comments. See 84 FR 28888 (June 20, 2019), 28904-28907.
    \72\ Section 54.9802-4(c)(3)(ii) and (v).
---------------------------------------------------------------------------

    As explained earlier in this preamble, HRAs, including individual 
coverage HRAs, generally are subject to section 105(h) and the 
regulations thereunder.\73\ Further, the regulations under section 
105(h) provide that ``any maximum limit attributable to employer 
contributions must be uniform for all participants and for all 
dependents of employees who are participants and may not be modified by 
reason of a participant's age or years of service.'' \74\ In Notice 
2018-88, the Treasury Department and the IRS explained that varying the 
maximum amounts made available under an individual coverage HRA for 
different classes of employees would conflict with the requirement in 
Sec.  1.105-11(c)(3)(i) that any maximum limit attributable to employer 
contributions must be uniform for all participants and that, without 
further guidance, certain amounts paid to an HCI under an individual 
coverage HRA that implements an age-based increase would be includible 
in the income of the HCI because the HRA would fail to satisfy the 
requirement in Sec.  1.105-11(c)(3)(i) that prohibits the maximum limit 
attributable to employer contributions to the HRA from being modified 
by reason of a participant's age.
---------------------------------------------------------------------------

    \73\ As noted earlier in this preamble, an HRA that, by its 
terms, only reimburses premiums for individual health insurance 
coverage is not subject to section 105(h) (see Sec.  1.105-
11(b)(2)). Further, section 105(h) and the regulations thereunder, 
including these proposed regulations, are only relevant to an 
individual coverage HRA offered to one or more HCIs and are not 
relevant for an individual coverage HRA that is not offered to any 
HCI.
    \74\ See Sec.  1.105-11(c)(3)(i).
---------------------------------------------------------------------------

    To facilitate the offering of individual coverage HRAs, Notice 
2018-88 described a potential safe harbor under which an individual 
coverage HRA would be treated as not failing to satisfy the 
nondiscrimination requirement in Sec.  1.105-11(c)(3)(i) that prohibits 
the maximum limit attributable to employer contributions from being 
modified by reason of a participant's age. Specifically, Notice 2018-88 
described a potential safe harbor under which the HRA would be treated 
as not failing to satisfy this requirement if it provided that the 
maximum dollar amount made available to employees who are members of a 
particular class of employees increases in accordance with the 
increases in the price of an individual health insurance coverage 
policy in the relevant individual insurance market based on the ages of 
the employees who are members of that class of employees, and further 
provided that the same maximum dollar amount attributable to the 
increase in age would be made available to all employees who are 
members of that class of employees who are the same age. Notice 2018-88 
also stated that the Treasury Department and the IRS anticipated that 
future guidance would provide that an individual coverage HRA would be 
treated as not failing to satisfy the more general requirement in Sec.  
1.105-11(c)(3)(i) that any maximum limit attributable to employer 
contributions must be uniform for all participants, if the HRA provides 
the same maximum dollar amount to all employees who are members of a 
particular class of employees, limited to the classes specified in the 
proposed integration regulations, and subject to the exceptions allowed 
under the same terms requirement.
    Commenters generally supported the potential section 105(h) safe 
harbors, but some commenters requested clarification as to how the 
potential section 105(h) safe harbors would function in practice, and 
commenters requested examples.\75\
---------------------------------------------------------------------------

    \75\ Some commenters addressed the ability to vary individual 
coverage HRA amounts by age for purposes of integration of HRAs with 
individual health insurance coverage, and a full response to those 
comments is included in the preamble to the final integration 
regulations. See 84 FR 28888 (June 20, 2019), 28904-28907.
---------------------------------------------------------------------------

    In light of the final integration regulations, and for the reasons 
described in Notice 2018-88 and earlier in this section of the 
preamble, it continues to be the case that safe harbors are needed 
under the section 105(h) regulations to facilitate the offering of 
individual coverage HRAs. However, with respect to age variance, 
instead of proposing the anticipated safe harbor set forth in Notice 
2018-88, to minimize the complexity and employer burden in complying 
with multiple regulatory requirements, the proposed regulations provide 
that an individual coverage HRA that satisfies the age variation 
exception under the same terms requirement at Sec.  54.9802-
4(c)(3)(iii)(B) will not be treated as failing to satisfy the 
requirements to provide nondiscriminatory benefits under Sec.  1.105-
11(c)(3)(i) solely due to the variation based on age. More generally, 
and as anticipated in Notice 2018-88, the proposed regulations also 
provide that if the maximum dollar amount made available varies for 
participants within a class of employees, or varies between classes of 
employees, then with respect to that variance, the individual coverage 
HRA does not violate the requirement in Sec.  1.105-11(c)(3)(i) that 
any maximum limit attributable to employer contributions must be 
uniform for all participants, if within each class of employees, the 
maximum dollar amount only varies in accordance with the same terms 
requirement and, with respect to differences in the maximum dollar 
amount made available for different classes of employees, the classes 
of employees are classes of employees set forth in Sec.  54.9802-4(d).
    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 Sec.  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.\76\
---------------------------------------------------------------------------

    \76\ See Sec.  1.105-11(c)(3).
---------------------------------------------------------------------------

C. Application of Section 125 Cafeteria Plan Rules to Arrangements 
Involving Individual Coverage HRAs

    The preamble to the proposed and final HRA integration regulations 
noted 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 section 125 cafeteria plan. Pursuant to 
section 125(f)(3), an employer generally may not provide a qualified 
health plan purchased through

[[Page 51486]]

an Exchange as a benefit under its cafeteria plan. Therefore, an 
employer may not permit employees to make salary reduction 
contributions to a cafeteria plan to purchase a qualified health plan 
(including individual health insurance coverage) offered through an 
Exchange. However, section 125(f)(3) does not apply to individual 
health insurance coverage that is not offered through an Exchange 
(referred to as ``off Exchange''). Therefore, for an employee who 
purchases off-Exchange individual health insurance coverage, the 
employer may permit the employee to pay the balance of the premium for 
the coverage through its cafeteria plan. The Treasury Department and 
the IRS appreciate the comments received on this topic in response to 
the proposed integration regulations and request additional comments 
regarding any specific issues raised by the application of the section 
125 cafeteria plan rules to arrangements involving individual coverage 
HRAs for which clarification is needed or for which a modification of 
the applicable rules may decrease burdens.
    Some commenters in response to the proposed integration regulations 
requested that individuals be allowed to use a cafeteria plan to pay 
premiums for qualified health plans offered through an Exchange with 
salary reduction. As discussed in the preceding paragraph, section 
125(f)(3) prohibits using a cafeteria plan to allow employees to pay 
premiums for a qualified health plan offered through an Exchange.

Proposed Applicability Date

    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.

Statutory Authority

    The regulations are proposed to be adopted pursuant to the 
authority contained in sections 7805 and 9833.

Special Analyses

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Department of the Treasury and the Office of 
Management and Budget regarding review of tax regulations. Because this 
regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this 
regulation has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Requests for Public Hearing

    The Treasury Department and the IRS request comments on all aspects 
of the proposed regulations. Before the proposed regulations are 
adopted as final regulations, consideration will be given to any 
comments that are submitted timely to the IRS as prescribed in this 
preamble under the ADDRESSES heading. All comments will be available at 
https://www.regulations.gov. A public hearing will be scheduled if 
requested in writing by any person that timely submits written 
comments. If a public hearing is scheduled, then notice of the date, 
time, and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal author of the proposed regulations is Jennifer 
Solomon of the Office of Associate Chief Counsel (Employee Benefits, 
Exempt Organizations, and Employment Taxes). However, other personnel 
from the Treasury Department and the IRS participated in the 
development of the proposed regulations.

Statement of Availability of IRS Documents

    The Notices cited in this document are published in the Internal 
Revenue Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 54

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

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

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

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

0
Par. 2. Section 1.105-11 is amended by revising paragraphs (c)(3)(i) 
and (j) to read as follows:


Sec.  1.105-11  Self-insured medical reimbursement plan.

* * * * *
    (c) * * *
    (3) * * *
    (i) In general--(A) Benefits. In general, benefits subject to 
reimbursement under a plan must not discriminate in favor of highly 
compensated individuals. Plan benefits will not satisfy the 
requirements of this paragraph (c)(3)(i)(A) unless all the benefits 
provided for participants who are highly compensated individuals are 
provided for all other participants. In addition, all the benefits 
available for the dependents of employees who are highly compensated 
individuals must also be available on the same basis for the dependents 
of all other employees who are participants. A plan that provides 
optional benefits to participants will be treated as providing a single 
benefit with respect to the benefits covered by the option provided 
that all eligible participants may elect any of the benefits covered by 
the option and there are either no required employee contributions or 
the required employee contributions are the same amount. This test is 
applied to the benefits subject to reimbursement under the plan rather 
than the actual benefit payments or claims under the plan. The presence 
or absence of such discrimination will be determined by considering the 
type of benefit subject to reimbursement provided highly compensated 
individuals, as well as the amount of the benefit subject to 
reimbursement.

[[Page 51487]]

    (B) Maximum limits--(1) Uniformity rule. A plan may establish a 
maximum limit for the amount of reimbursement which may be paid a 
participant for any single benefit, or combination of benefits. 
However, except as otherwise provided in paragraph (c)(3)(i)(B)(2) of 
this section, any maximum limit attributable to employer contributions 
must be uniform for all participants and for all dependents of 
employees who are participants and may not be modified by reason of a 
participant's age or years of service.
    (2) Exception to uniformity rule. With respect to an individual 
coverage HRA, as defined in Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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.
    (C) Reference to employee compensation. If a plan covers employees 
who are highly compensated individuals, and the type or the amount of 
benefits subject to reimbursement under the plan are in proportion to 
employee compensation, the plan discriminates as to benefits.
* * * * *
    (j) Applicability date. Section 105(h) and this section, except for 
paragraph (c)(3)(i)(B)(2) of this section, are applicable for taxable 
years beginning after December 31, 1979 and for amounts reimbursed 
after December 31, 1979. In determining plan discrimination and the 
taxability of excess reimbursements made for a plan year beginning in 
1979 and ending in 1980, a plan's eligibility and benefit requirements 
as well as actual reimbursements made in the plan year during 1979, 
will not be taken into account. In addition, this section does not 
apply to expenses which are incurred in 1979 and paid in 1980. 
Paragraph (c)(3)(i)(B)(2) of this section is applicable for plan years 
beginning after December 31, 2019.
* * * * *

PART 54--PENSION EXCISE TAXES

0
Par. 3. The authority citation for part 54 continues to read in part as 
follows:

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


Sec.  54.4980H-4   [Amended]

0
Par. 4. Section 54.4980H-4 is amended by removing ``9.5 percent of'' 
and adding in its place ``the product of the required contribution 
percentage (as defined in Sec.  1.36B-2(c)(3)(v)(C) of this chapter) 
and'' in the first sentence of paragraph (b)(1).
0
Par. 5. Section 54.4980H-5 is amended by:
0
a. Revising paragraph (e)(2) introductory text;
0
b. In paragraph (e)(2)(i):
0
i. Removing ``an'' and adding in its place ``a general'' in the 
heading; and
0
ii. Removing ``affordability'' and adding in its place ``general 
affordability'' in the first sentence;
0
c. Removing ``9.5 percent of'' and adding in its place ``the product of 
the required contribution percentage (as defined in Sec.  1.36B-
2(c)(3)(v)(C)) and'' in the first sentence of paragraphs (e)(2)(ii)(A) 
and (B), the first and second sentences of paragraph (e)(2)(iii), and 
the first sentence of paragraph (e)(2)(iv);
0
d. In paragraph (e)(2)(v):
0
i. Adding a sentence to the end of the introductory text; and
0
ii. Designating Examples 1 through 6 as paragraphs (e)(2)(v)(A) through 
(F), respectively;
0
e. In newly designated paragraphs (e)(2)(v)(A) through (F), 
redesignating the paragraphs in the first column as the paragraphs in 
the second column:

------------------------------------------------------------------------
              Old paragraphs                       New paragraphs
------------------------------------------------------------------------
(e)(2)(v)(A)(i) and (ii)..................  (e)(2)(v)(A)(1) and (2).
(e)(2)(v)(B)(i) and (ii)..................  (e)(2)(v)(B)(1) and (2).
(e)(2)(v)(C)(i) and (ii)..................  (e)(2)(v)(C)(1) and (2).
(e)(2)(v)(D)(i) and (ii)..................  (e)(2)(v)(D)(1) and (2).
(e)(2)(v)(E)(i) and (ii)..................  (e)(2)(v)(E)(1) and (2).
(e)(2)(v)(F)(i) and (ii)..................  (e)(2)(v)(F)(1) and (2).
------------------------------------------------------------------------

0
f. Redesignating paragraphs (f) and (g) as paragraphs (g) and (h), 
respectively;
0
g. Adding a new paragraph (f); and
0
h. Revising newly redesignated paragraph (h).
    The revisions and additions read as follows:


Sec.  54.4980H-5  Assessable payments under section 4980H(b).

* * * * *
    (e) * * *
    (2) Affordability safe harbors for section 4980H(b) purposes. The 
affordability safe harbors set forth in paragraphs (e)(2)(ii) through 
(iv) of this section (general affordability safe harbors) apply solely 
for purposes of section 4980H(b), so that an applicable large employer 
member that offers minimum essential coverage providing minimum value 
will not be subject to an assessable payment under section 4980H(b) 
with respect to any employee receiving the applicable premium tax 
credit or cost-sharing reduction for a period for which the coverage is 
determined to be affordable under the requirements of a general 
affordability safe harbor. The preceding sentence applies even if the 
applicable large employer member's offer of coverage that meets the 
requirements of a general affordability safe harbor is not affordable 
for a particular employee under section 36B(c)(2)(C)(i) and Sec.  
1.36B-2(c)(3)(v) of this chapter, and an applicable premium tax credit 
or cost-sharing reduction is allowed or paid with respect to that 
employee. The general affordability safe harbors apply with respect to 
offers of minimum essential coverage other than the offer of an 
individual coverage HRA, as defined in paragraph (f)(7) of this 
section. Paragraph (f) of this section sets forth affordability and 
minimum value safe harbors that apply to the offer of an individual 
coverage HRA (individual coverage HRA safe harbors).
* * * * *
    (v) * * * For purposes of simplicity, the examples in this 
paragraph (e)(2)(v) assume 9.5 percent is the required contribution 
percentage for 2015 and 2016, although the required contribution 
percentage in 2015 and 2016 was adjusted for those years pursuant to 
Sec.  1.36B-2(c)(3)(v)(C) of this chapter.
* * * * *
    (f) Affordability and minimum value safe harbors for individual 
coverage HRAs--(1) In general. Whether an offer of an individual 
coverage HRA is treated as affordable and providing minimum value, in 
general, is determined under Sec.  1.36B-2(c)(3)(i)(B), (c)(3)(vi), and 
(c)(5) of this chapter. This paragraph (f) sets forth safe harbors that 
an applicable large employer member may use in determining whether an 
offer of an individual coverage HRA is affordable or provides minimum 
value for purposes of section 4980H(b), even if the offer of the 
individual coverage HRA

[[Page 51488]]

is not affordable or does not provide minimum value under Sec.  1.36B-
2(c)(3)(i)(B), (c)(3)(vi), and (c)(5) of this chapter. 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 Sec.  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. To the extent not 
addressed in this paragraph (f), the rules under Sec.  1.36B-
2(c)(3)(i)(B), (c)(3)(vi), and (c)(5) of this chapter apply in 
determining whether an offer of an individual coverage HRA is 
affordable and provides minimum value for purposes of section 4980H(b). 
Further, an applicable large employer member may rely on information 
provided by an Exchange in determining whether the offer of an 
individual coverage HRA is affordable and provides minimum value. See 
paragraph (f)(7) of this section for definitions that apply to this 
paragraph (f), which are in addition to the definitions set forth in 
Sec.  54.4980H-1(a).
    (2) Conditions of using an individual coverage HRA safe harbor. An 
applicable large employer member may use one or more of the safe 
harbors described in this paragraph (f) only 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. The safe harbors in this paragraph (f) apply only to the 
offer of an individual coverage HRA, but to the extent an applicable 
large employer member offers some full-time employees and their 
dependents an individual coverage HRA and other full-time employees and 
their dependents other coverage under an eligible employer-sponsored 
plan that provides minimum value with respect to the self-only coverage 
offered to the employee, the applicable large employer member may use 
the safe harbors under this paragraph (f) for the offers of the 
individual coverage HRA and the general affordability safe harbors 
under paragraph (e)(2) of this section for the offers of other 
coverage. Use of any of the safe harbors in this paragraph (f) is 
optional for an applicable large employer member, and an applicable 
large employer member may choose to apply the safe harbors for any 
class of employees (as defined in paragraph (f)(7) of this section), 
provided it does so on a uniform and consistent basis for all employees 
in the class of employees. Each of the safe harbors set forth in this 
paragraph (f) may be used in combination with the other safe harbors 
provided in this paragraph (f), subject to the conditions of the safe 
harbors.
    (3) Minimum value. An individual coverage HRA that is affordable 
for a calendar month under Sec.  1.36B-2(c)(5) of this chapter, taking 
into account any applicable safe harbors under this paragraph (f), is 
treated as providing minimum value for the calendar month, for purposes 
of section 4980H(b).
    (4) Look-back month safe harbor--(i) In general. In determining an 
employee's required HRA contribution for a calendar month, for purposes 
of section 4980H(b), an applicable large employer member may use the 
monthly premium for the applicable lowest cost silver plan for the 
month specified in either paragraph (f)(4)(i)(A) or (B) of this 
section, as applicable (the look-back month):
    (A) Calendar year plan. For an individual coverage HRA with a plan 
year that is the calendar year, an applicable large employer member may 
use the monthly premium for the applicable lowest cost silver plan for 
January of the prior calendar year.
    (B) Plan year that is not the calendar year. For an individual 
coverage HRA with a plan year that is not the calendar year, an 
applicable large employer member may use the monthly premium for the 
applicable lowest cost silver plan for January of the current calendar 
year.
    (ii) 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.
    (5) Application of the general affordability safe harbors to 
individual coverage HRAs. The general affordability safe harbors set 
forth in paragraphs (e)(2)(ii), (iii), and (iv) of this section may 
apply to an offer of an individual coverage HRA by an applicable large 
employer member to a full-time employee for purposes of section 
4980H(b), subject to the modifications set forth in this paragraph 
(f)(5).
    (i) Form W-2 safe harbor applied to individual coverage HRAs. 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.''
    (ii) Rate of pay safe harbor applied to individual coverage HRAs. 
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

[[Page 51489]]

member's lowest cost self-only coverage that provides minimum value.''
    (iii) Federal poverty line safe harbor applied to individual 
coverage HRAs. 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.''
    (6) Location safe harbor--(i) In general. For purposes of section 
4980H(b), an applicable large employer member may determine an 
employee's required HRA contribution for a calendar month based on the 
cost of the applicable lowest cost silver plan for the location of the 
employee's primary site of employment.
    (ii) Primary site of employment--(A) In general. An employee's 
primary site of employment generally is the location at which the 
applicable large employer member reasonably expects the employee to 
perform services on the first day of the plan year (or on the first day 
the individual coverage HRA may take effect, for an employee who is not 
eligible for the individual coverage HRA on the first day of the plan 
year). However, the employee's primary site of employment is treated as 
changing if the location at which the employee performs services 
changes and the employer expects the change to be permanent or 
indefinite; in that case, in general, the employee's primary site of 
employment is treated as changing no later than the first day of the 
second calendar month after the employee has begun performing services 
at the new location. 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.
    (B) Remote workers. In the case of an employee who regularly 
performs services from home or another location that is not on the 
applicable large employer member's premises, but who may be required by 
his or her employer to work at, or report to, a particular location, 
such as a teleworker with an assigned office space or available 
workspace at a particular location to which he or she may be required 
to report, the location to which the employee would report to provide 
services if requested is the primary site of employment. In the case of 
an employee who works remotely from home or at another location that is 
not on the premises of the applicable large employer member and who 
otherwise does not have an assigned office space or a particular 
location to which to report, the employee's residence is the primary 
site of employment.
    (7) Definitions. The definitions in this paragraph (f)(7) apply for 
purposes of this paragraph (f).
    (i) Applicable 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 applicable age for the plan year is the employee's age on 
the first day of the plan year. For an employee who becomes eligible 
for an individual coverage HRA during the plan year, the employee's 
applicable age for the remainder of the plan year is the employee's age 
on the date the individual coverage HRA can first become effective with 
respect to the employee.
    (ii) Applicable location. An employee's applicable location is 
where the employee resides for the calendar month, or, if the 
applicable large employer member is applying the location safe harbor 
under paragraph (f)(6) of this section, the employee's primary site of 
employment for the calendar month.
    (iii) Applicable lowest cost silver plan--(A) In general. The 
applicable lowest cost silver plan for an employee for a calendar month 
generally is the lowest cost silver plan for self-only coverage of the 
employee offered through the Exchange for the employee's applicable 
location for the month.
    (B) Different lowest cost silver plans in different parts of the 
same rating area. If there are different lowest cost silver plans in 
different parts of a rating area, an employee's applicable lowest cost 
silver plan is the lowest cost silver plan in the part of the rating 
area in which the employee's applicable location is located.
    (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.
    (iv) Class of employees. A class of employees means a class of 
employees as set forth in Sec.  54.9802-4(d)(2).
    (v) Individual coverage HRA. An individual coverage HRA means an 
individual coverage HRA as set forth in Sec.  54.9802-4.
    (vi) Required contribution percentage. Required contribution 
percentage means the required contribution percentage as defined in 
Sec.  1.36B-2(c)(3)(v)(C) of this chapter.
    (vii) Required HRA contribution. In general, the required HRA 
contribution means the required HRA contribution as defined in Sec.  
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.
    (8) Examples. The following examples illustrate the application of 
the safe harbors under this paragraph (f) to applicable large employer 
members that offer an individual coverage HRA to at least some of their 
full-time employees.

    (i) 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

[[Page 51490]]

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.)
    (ii) 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.)
* * * * *
    (h) Applicability date. Paragraphs (a) through (e) and (g) of this 
section are applicable for periods after December 31, 2014. Paragraph 
(f) of this section is applicable for periods after December 31, 2019.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-20034 Filed 9-27-19; 8:45 am]
 BILLING CODE 4830-01-P