Question: What are the main compliance considerations associated with the (increasingly popular) spousal incentive HRA approach? 

Short Answer: Spousal incentive HRAs face largely the same compliance considerations that employers are widely familiar with for other types of HRAs.  As with all HRAs, these arrangements are group health plans subject to ERISA, COBRA, HIPAA, the ACA, and the other laws governing employer-sponsored group health plans.  However, because of the novel type of the arrangement, there are a few twists to the rules that employers should be aware of when establishing a Spousal Incentive HRA.

What is an HRA? 

Health reimbursement arrangements (“HRAs”) are defined contribution, account-based arrangements that employers can establish to reimburse qualifying medical expenses of employees and their dependents.  In the immediate years following the IRS guidance in 2002 that birthed the modern HRA framework, HRAs were primarily utilized as a cost-sharing vehicle to reimburse a portion of the deductible, coinsurance, and copayment cost-sharing amounts under the employer’s medical plan.  These traditional “cost-sharing HRAs” are often paired with a non-HSA compatible high deductible health plan as a means of driving consumerism.  

In the mid-2010s, a new variety of HRA designed for the purpose of reimbursing expenses not sufficiently covered by the group health plan gained popularity.  These “specialty HRAs” focus on specific types of medical expenses, such as infertility expenses, gender affirmation expenses, mental health expenses, abortion-related travel expenses, and autism-related expenses.    

For more details: 

• Newfront Fringe Benefits for Employers Guide 

• Specialty HRA Needed for Employer to Reimburse Health Expenses 

Beginning 2020, another type of HRA hit the scene that is designed to reimburse employees for the cost of their individual medical coverage premium.  These “ICHRAs” are an alternative to the traditional employer-sponsored group medical plan for employers that instead prefer to cover individual policy premiums.    

For more details: 

• Newfront ICHRA for Employers Guide 

• ICHRA: The Health Plan 401(k) Has Arrived 

What is a Spousal Incentive HRA? 

Spousal incentive HRAs (“SIHRAs”) are yet another new variation of HRA, in this case designed to reimburse cost-sharing amounts through the group health plan sponsored by the employer of the employee’s spouse.  Employees who waive their employer’s group health plan and are instead covered as a dependent on their spouse’s group health plan have access to the SIHRA to reimburse out-of-pocket expenses incurred through the spouse’s plan, such as the deductible, copayments, and coinsurance.  

In other words, instead of the typical incentive approach to offer employees an opt-out credit to waive the medical plan in favor of a spouse’s employer’s plan, the SIHRA offers the carrot of providing actual coverage for the unreimbursed expenses incurred under the spouse’s plan.    

This post walks through the ten main compliance considerations associated with SIHRAs: 

1. ACA Integration Required 

2. HSA Eligibility 

3. Section 105(h) Nondiscrimination 

4. PCORI Fees 

5. ACA Reporting 

6. COBRA Cost of Coverage 

7. No Premium Reimbursement 

8. No Medicare Reimbursement 

9. Domestic Partner Health Plans 

10. The Standard GHP Requirements 

SIHRA Compliance Consideration #1: ACA Integration Required 

The ACA prohibits “stand-alone” non-integrated HRAs.  There is a long history of agency guidance addressing this issue, kicking off with the infamous “Friday the 13^th Guidance” in 2013 and climaxing with the “Potluck Guidance” in 2015.  The epic compliance chronicle effectively concluded with a comprehensive set of tri-agency regulations in 2019 that distilled these forms of guidance into a single set of official regulatory guidance.  

There are four main requirements for employers to satisfy the ACA HRA integration rules for any HRA offered to an employee: 

• Group Health Plan Offer: The employer offers a major medical plan to the employee; 

• Group Health Plan Enrollment: The employee is actually enrolled in an employer-sponsored group major medical plan, whether through that employer or another employer; 

• HRA Eligibility Restricted: The HRA is available only to employees who are enrolled in an employer-sponsored group major medical plan, whether through that employer or another employer; and 

• Right to Opt-Out: The employer must offer the employee the ability to permanently opt-out of the HRA at least annually and upon termination of employment. 

Where the major medical plan involved does not provide minimum value (i.e., it’s a “MEC-only” or “skinny” plan with an actuarial value that is not at least as rich as a Bronze-level plan on the exchange), the integration rules further require that the HRA only provide reimbursement for cost-sharing amounts under the major medical plan and/or non-essential health benefits.  This generally does not present an issue for SIHRAs either way because they are typically limited to only cost-sharing amounts under the spouse’s employer-sponsored plan.  

• For more details: The ACA Integration Rules for HRAs 

In the context of a SIHRA, the covered employees are not enrolled in their employer’s major medical plan.  Rather, they are enrolled as a dependent under their spouse’s major medical plan.  Fortunately, the rules are clear that the employee may enroll in any employer-sponsored group major medical plan, regardless of whether the plan is sponsored by the same employer offering the HRA.    

Tri-agency FAQ guidance confirms that the employer “may rely on the reasonable representation of an employee” that the employee is also covered by another employer-sponsored group major medical plan.  For SIHRA purposes, the employee’s certification of other qualifying coverage should be more than sufficient because the whole purpose of the SIHRA is to cover cost-sharing amounts under the spouse’s plan.  

SIHRA Compliance Consideration #2: HSA Eligibility 

HRAs that are not specially designed to be HSA-compatible will block covered individuals from HSA eligibility.  This is because HRAs (or any other form of health plan) that provide medical coverage prior to satisfying the requisite minimum HDHP deductible are disqualifying coverage.  

SIHRAs therefore in most cases prevent the employee and spouse from making or receiving HSA contributions even if they are enrolled in the spouse’s HDHP plan option made available through the spouse’s employer.  It may therefore be advisable for the spouse to enroll in a non-HDHP plan option to avoid this issue.    

However, where the spouse’s employer does not offer a non-HDHP (or the employee-share of the premium for the non-HDHP is cost-prohibitive), the spouse may still choose to enroll in a HDHP.  In this case, the spouse should notify the spouse’s employer not to make the employer HSA contribution because of the SIHRA.  

The most common approach to preserving HSA eligibility for HRA participants is to structure the HRA as post-deductible for employees enrolled in an HDHP.  Under this approach, the HRA does not cover (i.e., not reimburse) any expenses incurred prior to the employee satisfying the statutory minimum HDHP deductible.    

• For more details: Post-Deductible HRAs Preserve HSA Eligibility 

In the SIHRA context, a post-deductible SIHRA preserves the HSA eligibility of the employee and spouse enrolled in the spouse’s HDHP by only reimbursing expenses incurred after satisfying the minimum statutory HDHP family deductible ($3,300 in 2025).  The employee must provide an EOB or other form of similar substantiating documentation to verify when the employee and spouse have reached that level of expenses.  

SIHRA Compliance Consideration #3: Section 105(h) Nondiscrimination 

HRAs are self-insured group health plans subject to the §105(h) nondiscrimination rules designed to prevent discrimination in favor of highly compensated individuals (“HCIs”).  If the IRS were to audit an employer’s HRA and find its arrangement to be discriminatory under §105(h), the HCIs would be taxed on all portion of the benefits they received from the HRA, referred to as the “excess reimbursement.”  

• For more details: §105(h) Nondiscrimination Rules for HRAs 

 There are three components to the §105(h) nondiscrimination rules for employers sponsoring a SIRHA to consider:  

1. Eligibility Test 
   The eligibility test provides that SIHRAs cannot discriminate in favor of HCIs as to eligibility to participate.  Employers can exclude or provide different eligibility terms for classes of employees under the SIHRA only if the classification is “reasonable and nondiscriminatory”.  Permissible distinctions include those based on the nature of compensation (such as hourly vs. salaried), geographic location, and similar bona fide business criteria.  The SIHRA eligibility approach conditioned on the employee’s waiver of the employer-sponsored group health plan does not present issues because both HCIs and non-HCIs are subject to the same eligibility restriction.  

2. Benefits Test 
   The benefits test requires that all benefits provided to eligible HCIs under the plan also be available to all eligible non-HCIs. Employers must therefore make the same benefits provided to eligible HCIs under the SIHRA available to all eligible non-HCIs.  For example, a plan design approach that provides a richer SIHRA benefit for Class A, and a lower tier SIHRA benefit for Class B, would be problematic because the SIHRA would not provide non-HCIs in Class B the same benefits as those available to HCIs in Class A.  In other words, HCIs should not be able to benefit from the SIHRA in a manner that is not available to all eligible non-HCIs. 

3. Operational Discrimination 
   The operational discrimination component is an umbrella provision preventing plans from discriminating against non-HCIs in operation.  Whether a plan is operationally discriminatory is a facts and circumstances test based on each plan’s specific arrangement.  SIHRAs should avoid any approach that could implicate this prohibition, such as selectively choosing to establish, amend, or terminate the SIHRA in a manner designed to benefit HCIs.  That might include, for example, increasing the SIHRA reimbursement limit based on high numbers of HCIs participating one year, and decreasing it another year based on low HCI participation.  

SIHRA Compliance Consideration #4: PCORI Fees 

An HRA, including a SIHRA, is a self-insured group health plan for which the sponsoring employer is responsible for reporting and paying the Patient Centered Outcomes Research Institute (PCORI) fee on IRS Form 720.  The general rule is that the PCORI fee is calculated based on the average number of total lives covered by the plan, including spouses and dependents.  The current PCORI fee is $3.22 per covered life for calendar plan years.  

• Full details: Increased $3.22 PCORI Fee Due July 31 

SIHRAs can take advantage of a special PCORI rule for HRAs that permits employers to determine the fee based only on the number of covered employees in the SIHRA, thereby excluding spouses and dependents from the covered lives calculation and associated fee.    

SIHRAs cannot take advantage of the other special PCORI rule for HRAs that provide an exception to the fee requirement for an HRA where it is offered along with a self-insured major medical plan that has the same plan year as the HRA. That exception is available only where the employee is enrolled in an HRA and a self-insured plan sponsored by the same employer.  In the case of a SIHRA, the employee is enrolled in the group health plan sponsored by the spouse’s employer, and therefore this exception is not applicable.  

SIHRA Compliance Consideration #5: ACA Reporting 

Employers need to report the months of coverage under the SIHRA on Form 1095-C (ALEs) or Form 1095-B (non-ALEs).  

An employer is an ALE that reports employee coverage on the Form 1095-C if it (along with any members in its controlled group) employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year.  For any employee covered under a self-insured health plan, including an HRA, the employer must enter the months of coverage in Part III of the Form 1095-C.   

An employer that is a non-ALE (i.e., fewer than 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year) reports coverage under a self-insured health plan, including an HRA, in Part IV of the Form 1095-B.  

• For more details: ACA Reporting and Compliance Requirements in 2024 

There is a special ACA reporting rule that allows employers to avoid the coverage reporting requirements for the HRA where the employee is enrolled in other major medical coverage through that employer.  This exception does not apply to SIHRAs because employees have waived the major medical plan option through their employer to gain access to the SIHRA’s benefits.  SIHRA participants are instead enrolled in major medical coverage through the group health plan of the spouse’s employer.  Both the Form 1095-C and Form 1095-B Instructions make clear that the employer is responsible for reporting coverage in that SIHRA scenario.  

The action item for ALEs sponsoring a SIHRA is to include the Part III coverage information component for employees who waive their plan and are covered by the SIHRA.  ALEs are already preparing Forms 1095-C for all full-time employees regardless of enrollment, so this is a relatively modest additional burden.  Nonetheless, ALEs that otherwise sponsor only fully insured medical plans should take note that this is an additional section to complete for SIHRA participants, and should coordinate with their ACA reporting vendor accordingly.    

The action item for non-ALEs sponsoring a SIHRA is to prepare and file Forms 1095-B (and the associated 1094-B transmittal sheet) for employees who waive their plan and are covered by the SIHRA.  Non-ALEs that do not otherwise sponsor a self-insured medical plan would not have any ACA reporting obligations but for the SIRHA.  Such employers therefore have newly imposed reporting obligations to address, including the need to engage with an ACA reporting vendor that can complete the requisite electronic filing with the IRS.  

SIHRA Compliance Consideration #6: COBRA Cost of Coverage 

HRAs, including SIHRAs, are employer-sponsored group health plans subject to COBRA.  Upon experiencing a qualifying event such as termination from employment, SIHRA participants must receive a COBRA election notice that includes the option to continue coverage under the SIHRA.  

• For more details: COBRA for HRAs 

The primary action item for employers subject to federal COBRA (i.e., at least 20 full-time employees, including full-time equivalents, on average in the prior calendar year) is to coordinate with their COBRA TPA to ensure SIHRA participants are included in the election notice and administrative process.  

The COBRA challenges associated with any type of HRA are present with a SIHRA.  The most difficult aspect of applying the standard COBRA rules to an HRA is determining the applicable premium.  The COBRA rules do not naturally lend themselves to an account-based plan such as an HRA.  

The limited IRS guidance available in this area states that the standard COBRA rules apply for determining the SIHRA premium.  Those rules permit the employer to charge up to 102% of a reasonable estimate of the cost for providing the SIHRA to a participant.  As a rule of thumb, employers are generally comfortable setting that reasonable estimate at 60% to 80% of the amount made available annually under the HRA.  This is based on the concept that HRA participants tend to take reimbursement of roughly 60% – 80% full HRA balance made available each year.  That should be reassessed annually for reasonableness to account for actual experience.  

Those who elect COBRA for the SIHRA continue to have the full new annual limit each year available to reimburse cost-sharing under the spouse’s plan for the duration of the COBRA maximum coverage period in the same manner as an active employee. 

 SIHRA Compliance Consideration #7: No Premium Reimbursement 

The SIHRA generally is not able to reimburse employees for the spouse’s cost of coverage under the plan sponsored by the spouse’s employer.  The employee-share of the premium paid by the spouse will in almost all situations be paid on a pre-tax basis through a Section 125 cafeteria plan.  IRS guidance is clear that HRAs cannot reimburse an employee for premiums paid by the employee’s spouse on a pre-tax basis.  

This stems from the general IRS prohibition against using any account-based health plan for an expense that has been reimbursed from another health plan or health coverage that has already been excluded from gross income as employer-provided coverage.  That prohibition includes salary reduction amounts pursuant to a Section 125 cafeteria plan.  

• For more details: The IRS Prohibition of Double-Dipping 

Employers could still offer to reimburse the employee-share of the premium paid by the spouse on a pre-tax basis through the spouse’s employer, but any such reimbursement would have to be made outside of the SIHRA and on a taxable basis.  Including any such amounts in the SIHRA could cause the arrangement to lose its qualified status, resulting in all HRA reimbursements becoming taxable income for all employees.  

SIHRA Compliance Consideration #8: No Medicare Reimbursement 

The Medicare Secondary Payer (MSP) rules prohibit employer-sponsored group health plans from taking into account the Medicare enrollment of a current employee or spouse.  Employers therefore cannot provide financial or other incentives to waive the group health plan in favor of Medicare enrollment.  Prohibited approaches include payment/reimbursement of Medicare premiums, payment/reimbursement of Medicare supplement premiums, and any coverage that is designed to supplement Medicare.  (Note that an exception applies for ICHRAs, but that exception is inapplicable to SIHRAs).  

The MSP rules therefore prohibit the SIHRA from providing any benefit to the employee or spouse where the employee or spouse is enrolled in Medicare.  These MSP restrictions for Medicare entitlement based on age (i.e., reaching age 65) apply to employers with 20 or more employees for each working day for at least 20 calendar weeks in either the current or preceding calendar year.  For more details: 

• MSP Prohibition of Incentives for Employee Medicare Enrollment 

• MSP Employer Size Requirements 

• Newfront Medicare for Employers Guide 

SIHRA Compliance Consideration #9: Domestic Partner Health Plans 

HRAs cannot reimburse a non-tax dependent domestic partner’s health expense because it does not qualify as an eligible §213(d) medical expense under §105(b).    

• For more details: Newfront Health Benefits for Domestic Partners Guide 

However, SIHRAs primarily reimburse the employee’s health expenses, which do qualify as an eligible expense regardless of whether they were incurred through a spouse’s or domestic partner’s employer-sponsored group health plan.  There is therefore no issue with SIHRAs also permitting employees to enroll in the group health plan sponsored by the employee’s domestic partner, and reimbursing employees for cost-sharing expenses incurred through the domestic partner’s plan—in the same manner as with a spouse’s plan.  

If the SIHRA were designed to also reimburse the spouse’s cost-sharing expenses under the spouse’s plan (i.e., in addition to the employee’s cost-sharing expenses), that approach could not extend to non-tax dependent domestic partners.  The employer could only reimburse a non-tax dependent domestic partner’s cost-sharing amounts on a taxable basis.  

SIHRA Compliance Consideration #10: The Standard GHP Requirements 

The SIHRA, as with any type of HRA, is a group health plan subject to the standard legal requirements of any other group health plan.  While the items discussed above highlight a few of the more interesting compliance considerations for SIHRAs that apply in a somewhat different manner than a typical group health plan, all of the basic group health plan requirements still apply.  

For example, the SIHRA is subject to ERISA’s standard requirements that it be administered pursuant to the written terms of its plan document, there be a Summary Plan Description (SPD) summarizing those terms disclosed to employees, and the Form 5500 requirement and standard fiduciary duties apply.  

• For more details: Newfront ERISA for Employers Guide 

The SIHRA is also subject to the standard HIPAA obligations imposed upon health plans as a covered entity, generally requiring that the plan restrict the use and disclosure of Protected Health Information to only those reasons that are permitted or required by the HIPAA privacy and security rules.  

• For more details: Newfront HIPAA Training for Employers Guide 

Summary 

SIHRAs present an interesting and relatively new option for employers to consider both as a method of assisting employees with the cost-sharing amounts under their spouse’s employer-sponsored health plan, as well as potentially reducing cost for the employer by encouraging more employees to waive their plan in favor of the spouse’s offering.  This creative approach to integrating the employer’s HRA offering with a spouse’s health plan offers an interesting plan design alternative for employers. 

SIHRAs come with a variety of compliance considerations to address.  The novelty of the SIHRA approach may present some unforeseen considerations for employers to review if they are going to adopt a SIHRA for their employees.  Fortunately, as with any form of HRA, none of the ten main compliance matters addressed in this post are significant impediments to establishing a SIHRA for employers working with a third-party administrator with expertise in meeting these standards. 

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship.  Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).