Federal agencies issue new rules on health reimbursement arrangements
Employers may have more HRA options starting in 2020
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On Oct. 24, 2018, the Departments of Treasury, Labor, and Health and Human Services (HHS) jointly published proposed regulations to expand the flexibility and use of health reimbursement arrangements (HRAs). HRAs are account-based health plans funded by employers that reimburse medical care expenses incurred by employees and their family members, up to a maximum dollar amount for a coverage period. These proposed rules would affect both employers and employees.
Prior to the Affordable Care Act (ACA), many middle market employers sponsored HRAs to help employees pay for medical care costs. An employer could reimburse employees on a tax-free basis for medical expenses incurred by employees and their spouses and dependents, up to an annual dollar limit set by the employer. Many HRAs allowed unused amounts to be carried over at year end and used to reimburse medical care expenses incurred in later years. HRAs could reimburse medical, dental and vision expenses that were not covered by insurance (such as deductibles and co-pays), and could reimburse premiums for health insurance that was not sponsored by the employee’s employer. Many small employers that could not afford traditional group health plans offered HRAs to their employees to help them with their medical expenses on a tax-free basis.
After the ACA was implemented, the IRS determined in 2013 that certain HRAs did not comply with the ACA. In particular, the IRS concluded that employers could not offer HRAs to their employees if they did not also offer a group health plan that was integrated with the HRA. Consequently, in order to avoid a potential ACA excise tax of $100 per day per affected person, many small employers terminated their HRAs.
In 2016, Congress passed a law which provided a new type of HRA for small employers called a qualified small employer health reimbursement arrangement (QSEHRA). Therefore, starting in 2017, small employers with less than 50 full-time and full-time equivalent employees could once again reimburse employees for health insurance premiums and medical expense on a tax-free basis without exposure to an excise tax. However, there are numerous rules that apply to QSEHRAs which hamper their use by employers.
In October 2017, President Trump issued an executive order which directed federal agencies to consider proposing regulatory changes that would expand the availability and usability of HRAs. Consequently, the agencies have issued a proposed regulation that intends to provide employers with increased HRA options starting in 2020.
HRAs under the proposed regulation
The proposed regulations primarily address five issues regarding HRAs:
- Integration with individual health insurance coverage. The regulations state that an HRA can be integrated with individual health insurance coverage. Therefore, employers can offer an HRA regardless of whether they also offer a traditional group health plan to employees. In general, the HRA must be offered on the same terms to all employees within a given class of employees. However, an employer cannot offer both a traditional group health plan and an HRA integrated with individual health insurance coverage to the same class of employees (that is, with regard to the new HRA integration, employees cannot be allowed to choose between group health and HRA health coverage). Employees and their family members who are covered by the HRA must actually enroll in individual health insurance coverage. The employer must provide an annual written notice to the employees informing them of their right to opt out of the HRA.
- Excepted benefits. Sometimes an employer wants to offer an HRA to employees who are not covered by an individual health insurance policy or any other health insurance. In this event, the employer can offer an excepted benefit HRA if the following requirements are met:
- The employer also offers other group health plan coverage to the employees.
- The annual HRA contribution for each employee does not exceed $1,800 (adjusted for inflation).
- The excepted benefit HRA cannot be used to reimburse premiums for individual health insurance, group health insurance (except for COBRA and other continuation coverage), or Medicare.
- The HRA must be made available on the same terms to similarly situated individuals regardless of any health factor.
- Premium tax credits. The proposed regulations address how HRAs interact with the premium tax credits that employees may receive on health insurance that they purchase on the Health Insurance Marketplace, also known as the Exchange. Premium tax credits are government subsidies which lower the cost of the premiums. An employee who is covered by an HRA, or who is eligible for an HRA that meets the ACA’s affordability and minimum value requirements, is not eligible for premium tax credits. Consequently, an employee may be giving up a significant dollar amount of premium tax credits in exchange for a small HRA contribution. Because of this, the proposed regulations allow employees to opt out of an HRA integrated with individual health insurance coverage, thereby preserving their eligibility for premium tax credits, unless the HRA is affordable and provides minimum value.
- ERISA status. ERISA is a federal law that requires employee benefit plans to meet certain reporting and disclosure requirements. The proposed regulations do not impact the ERISA status of an HRA or QSEHRA, but they would allow certain individual health insurance coverages reimbursed by such a plan to be excluded from the scope of certain ERISA provisions.
- Special enrollment periods. The proposed regulations provide a special enrollment period in the individual market for employees who gain access to an HRA integrated with individual health insurance or to a QSEHRA during a year. Therefore, employees who gain access to an HRA or QSEHRA are not required to wait until the next annual open enrollment period in the individual market in order to purchase or change their coverage.
The federal agencies are soliciting comments on these proposed regulations. They will take those comments into account when drafting future final regulations. Although employers and employees cannot rely on these proposed regulations, the regulations provide insight into the approach that the federal government is currently considering with regard to HRAs.
Many smaller employers have noted that they were able to provide better benefits to their employees before the ACA changes in 2013, because they were able to reimburse employees for the types of health coverage that the employees chose based on their own needs. These proposed changes, once available, may help employers and employees to benefit under a health plan that is fairly easy to administer. Larger employers could choose to use an HRA arrangement but could be subject to ACA penalties for not offering an ACA group health plan, unless the federal agencies provide a safe harbor from the ACA penalties.