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Commission Opinion Letter: Individual Coverage Health Reimbursement Arrangements (ICHRA) under the ADEA

January 7, 2021

OPINION LETTER

[Redacted]

Dear [Redacted]:

This letter responds to your request for a formal opinion letter concerning whether an employer may offer its employees an Individual Coverage Health Reimbursement Arrangement (ICHRA) as a defined contribution for the purchase of an age-rated individual major medical health insurance policy under the Age Discrimination in Employment Act of 1967 (ADEA or the Act).[1]   As a formal written interpretation or opinion of the U.S. Equal Opportunity Commission (EEOC or Commission), approved by vote on January 7, 2021 and signed by the Legal Counsel, this opinion letter provides a defense when acting in good faith conformity to its terms, consistent with Section 7(e) of the ADEA (29 U.S.C. § 626(e)) and EEOC Regulations at 29 C.F.R. § 1626.21.[2] This letter addresses the scenarios described in your request for a formal opinion letter under the ADEA, but we note that the preamble to regulations jointly issued by the Departments of Health and Human Services, Labor, and Treasury (the “Tri-Departments”) provide further guidance on permitted practices with respect to contributions based on an employee’s age.  84 FR 28,888, 28,906 (June 20, 2019).  The EEOC takes no position on whether the scenarios you describe would be permitted under the Tri-Department regulations or any other law or regulations, other than the ADEA.    

I. BACKGROUND

Your request voices the concerns of a professional association representing more than 100,000 licensed health insurance agents, brokers, consultants, and employee benefits specialists.  You explain that the association’s members service the health insurance policies of millions of Americans and aim to help individuals and employers purchase, administer, and utilize health insurance coverage that best fits their needs and budgets, and service their members’ coverage.

Your request concerns ICHRAs—a particular type of Health Reimbursement Arrangement (HRA) created by regulations.[3]  You explain that ICHRAs are intended to provide employers and employees with a tax-advantaged vehicle for employees to purchase individual major medical health insurance, and that individual major medical health insurance policies are generally priced relative to the applicant’s age as well as other factors. As a result, older individuals often are required to pay a higher cost than younger individuals for the same policy purchased through the individual market.

Your request seeks clarification concerning whether an employer may sponsor an ICHRA that offers its employees a defined contribution for the purchase of an age-rated individual major medical health insurance policy without violating the ADEA.

In particular, your association asks the EEOC to consider the ADEA implications of two scenarios.  In the first scenario, the employer provides a defined contribution, meaning each employee receives the same employer contribution to the ICHRA.  Your example involves an employer who provides a $300 per month contribution to an ICHRA for each employee; however, the $300 may cover a much smaller portion of a 55-year-old’s premium costs relative to a 22 year-old, because current law allows age rating of individual major medical health insurance policies following a specified age curve that allows variation in premium costs of up to three to one between the oldest and youngest covered individuals.   In your second scenario, the employer provides a specified percentage of premium costs to all employees.  Your example for the second scenario concerns an employer providing a 30% per month contribution toward the cost of an ICHRA for each employee.  In this example, if the cost for an individual major medical health insurance policy for a 55-year-old is $1,000, then a 30% contribution toward that employee’s ICHRA is $300.  In contrast, you explain, if the cost for the same policy for a 22-year-old is $250, then a 30% contribution toward that employee’s ICHRA is $75.

II.        GENERAL LEGAL PRINCIPLES

A.        ICHRAs

As noted briefly above, an ICHRA is a specific type of HRA created by regulations issued jointly by the Tri-Departments in 2019.[4]  Broadly speaking, an HRA is an employer-funded account-based group health plan that may be used to reimburse employees for certain health-related costs, subject to a maximum fixed-dollar amount for a period.[5]  ICHRAs differ from other HRAs in that they generally must be integrated with individual health insurance coverage.[6]  Prior to the Tri-Departments’ ICHRA rule, HRAs generally could only be integrated with group health plan coverage, not individual health plan coverage.  Therefore, employees generally were prohibited from declining employer-sponsored group coverage and instead using an HRA to purchase coverage on the individual market.   

B.        The ADEA

Under the ADEA, it is “unlawful for an employer ... [to] discriminate against any individual [at least 40 years of age] with respect to his [or her] compensation, terms, conditions, or privileges of employment, because of such individual’s age.” 29 U.S.C. §§ 623(a), 631(a).  Privileges of employment include fringe benefits.  See 29 C.F.R. § 1625.10(a)(2).

The EEOC issued regulations at 29 C.F.R. § 1625.10, subsequently incorporated into the ADEA itself,  concerning the age discrimination implications of employee benefit plans and the defenses allowing employers to account for significant age-based cost considerations in such plans.[7]      Generally, an older employee cannot be required, as a condition of employment, to make greater contributions than younger employees to support an employee benefit plan.  29 C.F.R. § 1625.10(d)(4)(i).  However, older workers may be required as a condition of participating in a voluntary employee benefit plan to make a greater contribution than younger employees only if they are not required to contribute a greater proportion of the total premium costs than younger employees where both the employer and employee contribute to the benefit.  29 C.F.R. § 1625.10(d)(4)(ii)(C).

III.      OPINION

A.        ADEA and Defined Contribution ICHRAs

Your request specifically asks whether offering a defined contribution ICHRA, i.e., your first scenario, could give rise to ADEA liability under 29 C.F.R. § 1625.10, because it could result in older employees bearing both a larger amount and larger proportion of their health insurance premium costs because of age.  To answer this question, it is necessary to assess what constitutes the “employee benefit plan” covered by the ADEA in your scenario.  The answer depends on which plan is at issue, because for purposes of the ADEA, this scenario concerns, in essence, two distinct “plans”: the ICHRA provided entirely by the employer, and the individual health insurance plan that is purchased by the employee using, likely only in part, funds that are drawn from the ICHRA.

1.         Defined Contribution ICHRA Is Lawful Under the ADEA

Because an ICHRA is an employer-funded account provided to employees in exchange for work, it is a fringe benefit of employment and is therefore subject to the ADEA.  In your first scenario, the employer offers its employees a defined contribution ICHRA, meaning that the same amount is made available under the ICHRA to all plan participants regardless of age.  Under these circumstances, the amount of compensation provided to each employee through the ICHRA is the same.  The ICHRA therefore does not violate the ADEA prohibition against providing lesser compensation to older employees on the basis of their older age.

Further, because ICHRAs are funded completely by the employer, they do not meet the definition of a contributory fringe benefit plan subject to 29 C.F.R. § 1625.10(d)(4)(ii)(C) – where both the employer and employee share in the benefit’s cost.  Indeed, employees are neither required nor permitted to contribute to an ICHRA.  Such plans therefore are not subject to the ADEA’s prohibition against requiring older workers to bear a greater proportion of the cost of a fringe benefit than younger workers.    

2.         Employee-Selected Health Plan is Not Subject to the ADEA

An older employee who purchases an individual health insurance plan using funds drawn from an ICHRA may bear a greater proportion of the health insurance plan’s cost relative to the proportion than he or she would bear at a younger age, or relative to the proportion that younger ICHRA participants would bear.  Nevertheless, the arrangement described in your first scenario and the accompanying example does not violate the ADEA under these circumstances.  The ADEA’s prohibition against less favorable health insurance plans for older employees only applies to plans that are offered or provided by the employer.  Individual health insurance plans that are purchased by the employee from independent third parties, with no involvement from the employer in the selection of the plans, do not fall into this category.  Where the employer has no control over the  plans and plays no role in making them available to employees, the individual health insurance plan is not an ADEA-covered employee benefit plan.      

This issue appears to have caused some confusion because, until recently, generally the only type of health insurance that could be integrated with an HRA was a traditional employer-sponsored group health plan.[8]  Traditional employer-sponsored group health plans clearly are fringe benefits subject to the ADEA’s prohibitions against age discrimination, including the prohibition against making older employees bear a greater proportion of the associated cost.  But, of course, those plans are subject to ADEA requirements only because they are made available by the employer—neither the ADEA nor its implementing regulations hold employers responsible for the terms of a health insurance plan that is not offered as a fringe benefit, simply because one of its employees chooses to purchase it.  

B.        ADEA and Other Types of ICHRAs

The other scenario explained in your letter involves an employer providing a set percentage in its employees’ ICHRA, rather than a defined contribution, which likely would result in employers providing larger amounts to older workers. Providing a greater level of compensation to older employees because of their older age does not violate the ADEA.[9]  Therefore, employers that choose to increase the contributions to an older employee’s ICHRA to offset age-based increases to his or her health plan costs will not violate the ADEA.  This is true regardless of whether the contributions reflect a percentage of the employee’s premium for individual health insurance or whether the amounts increase with an employee’s age based on other terms.[10]  Further, because regulations that govern HRAs do not permit employers to decrease the maximum dollar amount available under an ICHRA as the age of the participant increases,[11] no ICHRAs that comply with current Tri-Departments’ regulations will violate the ADEA’s prohibition against providing decreased compensation on the basis of age. 

This letter was approved by vote of the Commission on January 7, 2021 as a written interpretation or opinion of the Commission.  This letter constitutes a formal opinion letter as defined in EEOC Regulations at 29 C.F.R. § 1626.21, which may be relied upon pursuant to ADEA section 7(e) (29 U.S.C. § 626(e)). 

We trust that this letter is responsive to your inquiry.

 

                                                                        On behalf of and as approved by the Commission,

                                                                            /s/

                                                                        Andrew F. Maunz
                                                                        Legal Counsel

 

[1] 29 U.S.C. §§ 621–634 (2019).  While this formal opinion letter also refers to the regulations of other agencies for reference, it only concerns rights under the ADEA and does not in any way address the legality of taking any particular action under those regulations.

[2] This letter is an opinion of the Commission that may be relied upon in good faith as a defense to liability for age discrimination consistent with the statutory and regulatory authority described above.  Furthermore, as a legal opinion directed to a particular party, this opinion letter is exempt from the procedures described in the Commission’s regulations for the issuance of guidance, such as Office of Management and Budget review and public notice and comment.  See 29 C.F.R. § 1695.1(a)(6); see also Exec. Order 13891, sec 4(b) (exempting “pre-enforcement rulings” from certain requirements). 

[3] See Health Reimbursement Arrangements and Other Account-Based Group Health Plans, 84 Fed. Reg. 28,888 (June 20, 2019) (revising various sections of the C.F.R.) (creating ICHRAs under regulations jointly issued by the Departments of Health and Human Services, Labor, and the Treasury, pursuant to Executive Order 13813). 

The Department of the Treasury’s Internal Revenue Service (IRS) has also issued proposed regulations concerning how employers may satisfy their obligation to provide health insurance to their workers under the Affordable Care Act (ACA) through ICHRAs and to address ACA nondiscrimination and affordability requirements.  Health Reimbursement Arrangements Integrated with Individual Health Insurance Coverage or Medicare. 84 Fed. Reg. 51,471 (Sept. 30, 2019) (to be codified in 26 CFR parts 1 and 54).

[4] See supra, note 3. 

[5] See 26 C.F.R. § 54.9815–2711(d)(6)(i); 29 C.F.R. § 2590.715–2711(d)(6)(i); 45 C.F.R. § 147.126(d)(6)(i).

[6] See 26 C.F.R. § 54.9802-4(c); 29 C.F.R. § 2590.702-2(c); 45 C.F.R. § 146.123(c) (generally allowing HRAs to reimburse participants for individual health plan premiums, subject to certain exceptions).

[7] See 29 U.S.C. § 623(f)(2)(b) (providing a defense for employer to observe the terms of an bona fide employee benefit plan “as permissible under section 1625.10, title 29, Code of Federal Regulations (as in effect on June 22, 1989)”).

[8] See Health Reimbursement Arrangements and Other Account-Based Group Health Plans, supra note 3 at 28,890–92.

[9] See Gen. Dynamics Land Sys., Inc. v. Cline, 540 U.S. 581, 600 (2004) (holding that the ADEA “does not mean to stop an employer from favoring an older employee over a younger one”). 

[10]  As noted at the outset of this letter, the EEOC takes no position on whether this would be permitted under the Tri-Departments’ regulations.

[11] See 26 C.F.R. § 54.9802-4(c)(3)(iii)(B); 29 C.F.R. § 2590.702-2(c)(3)(iii)(B); 45 C.F.R. § 146.123(c)(3)(iii)(B) (generally permitting the maximum amount made available to plan participants to increase as the age of the participant increases).