On October 29, 2018, the Departments of Labor, Treasury and Health and Human Services (the Departments) together issued a proposed rule that could in the future allow employers to use health reimbursement arrangements (HRAs) to reimburse employees for the cost of individual health insurance coverage. Here’s what you need to know about the proposed HRA regulations.
How do things stand now?
The current HRA regulations and guidance continue unchanged while the proposed rule winds its way through the rulemaking process. If this rule or a similar version becomes final, it could significantly affect employers and employees by reducing restrictions on HRAs.
Because HRAs impose dollar limits on benefits as an integral part of their design, they are currently barred from funding premiums for employees’ individual health plans. This is because HRAs are treated as group health plans funded by tax-exempt employer contributions and are therefore subject to the Affordable Care Act (ACA) group health plan requirements. ACA prohibits health plans, including HRAs, from imposing annual dollar limits on benefits. However, an exception to the ban on annual limits is made if an HRA is fully integrated with a traditional employer-sponsored group health plan.
Currently, another limited exception to the ban on annual dollar limits is available for employers with fewer than 50 full-time equivalent employees. These employers may fund employee premiums for minimum essential health coverage through standalone qualified small employer HRAs (QSEHRAs) if they meet many specific requirements.
What might change with the proposed HRA regulations?
The proposed rule would allow employers to offer a stand-alone HRA with the same tax advantages for employees and employers as a traditional employer-sponsored group health plan as long as the employee enrolls in an individual health insurance policy (not employer-provided health insurance) and the HRA meets a number of specific requirements.
Employers meeting the requirements would be assured the insurance purchased by an individual would not be considered an ERISA benefit plan. This would relieve the employer from ERISA requirements such as sending plan documents to participants and filing Forms 5500 with IRS.
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Here are some conditions an HRA would have to meet under the proposed rule:
Offering One or the Other
Employers could offer employees either a traditional group health plan or an HRA for individual policy purchase, but they could not offer both to the same employees.
Separate Categories of Employees Allowed
Employers may divide employees into separate classes and offer HRAs to some classes and a group health plan to other classes. However, they may not discriminate based on health factors. Some acceptable class categories include full-time, part-time, seasonal and union employees; employees under the age of 25; and employees whose primary employment sites are within the same regional insurance rating area.
The proposed rule does not allow classes to be categorized as salaried or hourly.
The amount of the HRA reimbursement allowed would have to be the same for each employee in each category, except:
- Employers could offer higher contributions for older employees
- Employers could alter contribution amounts based on the number of dependents covered
The employer offering the HRAs would have to verify that anyone covered by the HRA is actually enrolled in individual health insurance coverage. The verification could include third-party documentation or a direct testimony from the plan member. The employer would have to request this verification both at enrollment and every time the employee requests a reimbursement from the HRA.
The employer would have to provide written notice to employees describing the HRA and explaining the consequences of accepting the HRA, including losing the opportunity for premium tax credits on the ACA public exchange (Exchange).
The employer would have to allow employees to opt out of the HRA coverage if they wanted to so they could be eligible for subsidies on the Exchange.
Employee Pre-tax Contributions Allowed
Employees could make pretax salary reduction contributions to fund individual insurance coverage through a Section 125 cafeteria plan. This would be useful if the cost of the individual premium is more than the employer contribution to the HRA. However, employees could not use this pretax salary deduction for coverage on the Exchange because this is specifically prohibited by ACA. Instead, they could use it towards purchasing individual health insurance policies that are for sale in the private markets outside the Exchange.
Excepted Benefit HRAs
There is another type of HRA addressed in the proposed regulations that would not be integrated with any other coverage. Employers could offer these types of HRAs up to a limit of $1,800. Employees would be able to purchase “limited excepted benefits” such as vision or dental insurance.
Potential Ramifications of Proposed Rule
Loosening current HRA restrictions by allowing all employer HRAs to pay for individual employee premiums on a tax-advantaged basis could have several effects.
Smaller employers might be interested because it would be less restrictive than offering a QSEHRA and possibly less expensive than providing health insurance directly or raising employees’ salaries to enable them to purchase individual health coverage with after-tax dollars.
Employers of many sizes might consider substituting HRAs for direct health care coverage to protect themselves from volatile increases in health care coverage costs. However, in this scenario employees would bear more of the risk of rising premiums and volatile health care costs.
Individual insurance markets, both private and Exchange-based, might grow due to more individuals purchasing coverage with employer-funded HRA money. The pricing of individual insurance policies might become more competitive.
Adverse selection could occur under different scenarios. Healthy individuals might find HRAs for individual insurance attractive, with unhealthier individuals gravitating towards employers offering group plans. On the other hand, if an increased number of unhealthy individuals end up in the individual insurance markets, the cost of individual coverage could rise significantly.
Individual insurers would not necessarily offer coverage as robust as most employer-sponsored group health plans. Employees could be confused by the whole process and may not realize their individual health policy covers different things than the employer group plan.
What happens now?
The Departments are requesting comments from the public on the proposed rule by December 28, 2018. They will then review the comments and probably make some changes to the proposed rule.
If and when the HRA regulations are published in their final form, they would be effective January 1, 2020 at the earliest.
- Proposed Regulations, Federal Register, October 29, 2018
- Proposed U-Turn on Employers Paying for Individual Policies Leave Questions Unanswered, HUB, International, October 26, 2018
- Departments Propose Regulations Permitting HRAs for Individual Policies, ABD Compliance Alert, October 23, 2018
- IRS Notice 2018-88, Internal Revenue Service, November 20, 2018
Lois Gleason, CEBS
E-Learning/Online Course Instructional Designer at the International Foundation