United States

Federal agencies finalize rules on health reimbursement arrangements

Employers have two new HRA options starting in 2020

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On June 13, 2019, the Departments of the Treasury, Labor, and Health and Human Services of the federal government jointly published final regulations regarding health reimbursement arrangements (HRAs). HRAs are account-based health plans that employers can use to reimburse employees for their medical care expenses. These final regulations modify the proposed regulations issued in October of 2018. For a summary of the proposed regulations and the background leading up to their issuance, see this article.

The goal of these regulations is to give employers more options for providing health benefits to their employees on a tax-advantaged basis. The regulations create two new types of HRAs starting Jan. 1, 2020: Individual Coverage HRAs and Excepted Benefit HRAs.

Individual Coverage HRAs

Individual Coverage HRAs allow employers to reimburse employees on a tax-free basis for individual health insurance premiums and other medical expenses. Here is an overview of the rules that apply to Individual Coverage HRAs:

  • Eligibility. Any employer can offer an Individual Coverage HRA to its employees. However, the Individual Coverage HRA can only be offered to employees who are not offered a traditional group health plan. In other words, an employer cannot give an employee the choice of being in a traditional group health plan or in an Individual Coverage HRA. For example, if an employer offers a traditional group health plan to its full-time employees, it could offer the Individual Coverage HRA to part-time employees who are not eligible for the traditional group health plan. If the employer does not offer any of its employees a traditional group health plan, the Individual Coverage HRA could be offered to all employees or just to certain classes of employees. Classes may be defined by work status (such as full-time versus part-time or salaried versus hourly), geographic location or other factors.
  • Contributions. An Individual Coverage HRA is funded entirely by the employer, and the employer has discretion to determine the maximum dollar amount that it wants to contribute for a year. In general, the Individual Coverage HRA must be offered on the same terms to all employees within a class of employees, except that the contribution amount can be increased for older workers or for workers with more dependents.
  • Reimbursements. In order to receive funds from an Individual Coverage HRA, an employee must be enrolled in individual health insurance or Medicare. The individual health insurance can be purchased directly from an insurance company or through the Health Insurance Marketplace, also known as the Exchange. Qualifying Medicare coverage includes Parts A and B or C. Employees must attest upon enrollment in the HRA and when submitting claims for reimbursement that they have individual health insurance or Medicare. Funds in the HRA can be used on a tax-free basis to reimburse employees for individual health insurance premiums and other medical expenses for themselves and their family members. At the option of the employer, unused amounts in the HRA can roll over from year to year.
  • Notice. Employers must provide a notice to employees eligible to participate in the Individual Coverage HRA informing them of the terms of the HRA. In addition, the notice must explain the interaction of the HRA with the premium tax credits that employees may be eligible to receive on health insurance purchased through the Exchange. Premium tax credits are government subsidies which lower the cost of the premiums. Since some employees who participate in an Individual Coverage HRA could lose their premium tax credits, employees must have the right to opt out of the HRA.
  • ERISA exemption. Even though the premiums for individual health insurance can be reimbursed through an employer’s Individual Coverage HRA, the insurance is not treated as an employer-sponsored plan under ERISA if certain conditions are met. ERISA is a federal law that governs employee benefit plans. In general, the employer cannot select or endorse any particular insurance carrier or coverage, and cannot receive any cash, gifts or other consideration in connection with an employee’s selection or renewal of the insurance. An employee’s purchase of the insurance must be completely voluntary, and each employee must be notified annually by the employer that the insurance is not subject to ERISA.
  • Employer mandate. Under the Affordable Care Act (ACA), large employers are required to offer ACA-compliant coverage to their full-time employees or pay an employer shared responsibility payment penalty. This requirement is commonly known as the employer mandate. Large employers are those with an average of at least 50 full-time employees (including full-time equivalent employees) in the prior calendar year. In general, the federal government intends to allow Individual Coverage HRAs to count as health coverage under the employer mandate rules if certain requirements are met. One of the requirements is the amount the employer makes available under the HRA. The IRS is expected to issue more guidance on the interaction of Individual Coverage HRAs and the employer mandate in the near future.
  • Other tax provisions. The regulations indicate that employers can allow employees to pay premiums for off-Exchange individual health insurance on a tax-favored basis through the employer’s cafeteria plan. Off-Exchange health insurance is insurance purchased directly from an insurance company rather than through the Exchange. Consequently, if the employer’s Individual Coverage HRA doesn’t fully reimburse the employee for the cost of the coverage, the employee could be given the option to use pretax payroll deductions to pay the balance of the premium.

Excepted Benefit HRAs

Excepted Benefit HRAs are designed to be offered to employees in conjunction with a traditional group health plan; however, employees are not required to enroll in the traditional group health plan in order to participate in the Excepted Benefit HRA. Therefore, this HRA can benefit employees who opt out of their employer’s traditional group health plan. In general, the HRA must be uniformly available to all similarly situated individuals.

Excepted Benefit HRAs are funded solely by employers, and the annual HRA contribution limit is $1,800 per year per employee (indexed for inflation starting in 2021). The HRA can help employees pay for copays, deductibles and other medical expenses that are not covered by a traditional group health plan. It can also be used to reimburse employees for premiums for dental and vision coverage or short-term, limited-duration insurance. However, premiums for individual health insurance, group health insurance (other than COBRA), and Medicare cannot be reimbursed through this HRA. Reimbursements from the HRA are not taxable income to the employees.

Conclusion

Individual Coverage HRAs and Excepted Benefit HRAs are additional means by which employers can help employees pay for health insurance premiums and other medical costs on a tax-advantaged basis. The federal agencies estimate that approximately 800,000 employers, including many small businesses, will adopt these new HRAs.

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