By Ross D. Weiler
Principal, Day Health Strategies
Under current law, Health Reimbursement Arrangements (HRAs) qualify for preferential (i.e. pre-tax) treatment because they are considered group health plans. As group health plans, HRAs must meet certain Patient Protection and Affordable Care Act (ACA) requirements. The use of HRAs to purchase health insurance on the individual market is generally prohibited because HRAs do not meet the ACA’s minimum benefit and annual dollar cap requirements for health insurance plans offered by employers. Rather, HRA funds may only be used in conjunction with an ACA-compliant group health plan. Under IRS guidance employers who offer HRAs for the purchase of individual health insurance are subject to substantial penalties.
Individual market means the market for health insurance coverage offered to individuals other than in connection with a group health plan, or other than coverage offered pursuant to a contract between the health insurance issuer with the Medicaid, Children’s Health Insurance Program, or Basic Health programs.
The 21st Century Cures Act Changed These Requirements for Some Employers
The Small Business Health Care Relief Tax Act of 2016 was designed to allow employers with fewer than 50 full-time employees that do not offer group health plans to any of their employees to use HRAs under certain circumstances to reimburse employees who purchase individual health insurance coverage. The legislation was signed into law on 12/13/16 and became effective for plan years beginning after 12/31/16. Among other things, the Act (also known as the 21st Century Cures Act) amended the Internal Revenue Code, the ACA, and other laws to exempt qualified small employer HRAs from certain requirements that apply to group health plans.
Under the Act, a qualified small employer HRA can be offered by employers that have fewer than 50 full-time employees and do not offer group health plans to any of their employees. HRAs that meet these requirements are not considered group health plans and are exempt from various requirements that apply to group health plans, including coverage and cost-sharing requirements.
The new HRA regulations, issued on June 13, 2019 by the Departments of Health and Human Services, Labor, and Treasury expand these exemptions to all employers regardless of size, whether or not they previously offered a group health plan.
The new HRA regulations are the last of three final regulations related to President Trump’s Executive Order issued in October 2017, the others being related to short-term and association health plans. While the other final rules have already been released, the final HRA rule supports the Executive Order’s desire to “increase the usability of HRAs, to expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup coverage.”
The new regulations are effective January 1, 2020.
Summary of Final HRA Regulations
The final regulations make two major changes to how employers and eligible employees may use an HRA:
• Employers may offer “individual coverage HRAs” that employees may use (on a tax preferred basis) to pay for the cost of health insurance coverage purchased in the individual market. This provision includes restrictions for certain types of coverage such as short-term, limited-duration insurance and coverage that consists solely of “excepted” benefits such as vision and dental coverage. Employers may place requirements on how the HRA funds can be used, including limiting their use to premiums, cost-sharing, and/or specific medical expenses.
• Employers may also offer an “excepted benefit HRA” of up to $1,800 per year (indexed to inflation after 2020) to reimburse an employee for certain qualified medical expenses, including premiums for vision, dental, COBRA, and short-term, and limited-duration insurance. This option is available even if the employee does not enroll in the employer’s group health plan.
The Federal government estimates that “this expansion of HRAs will benefit approximately 800,000 employers, including small businesses, and more than 11 million employees and family members, including an estimated 800,000 Americans who were previously uninsured.”
A special enrollment period in the individual market will be available for employees eligible for an individual coverage HRA. Employees who are offered an “affordable” individual coverage HRA are ineligible for premium tax credits. However, employees offered an individual coverage HRA may opt out and apply for premium tax credits. Like other types of coverage, these tax credits are only available if the individual coverage HRA is considered unaffordable and does not provide minimum value.
Discrimination Concerns Addressed
The final regulations provide safeguards against employers forcing less healthy employees into the individual market. If this occurred, it could adversely impact the individual insurance market’s risk pool and drive up premium costs – potentially resulting in more healthy individuals dropping coverage, adding to the uninsured and driving up individual market premiums even more.
Under the final regulations, an employer can’t offer both an individual coverage HRA and a traditional group health plan to the same class of employees. An employer could, however, offer a traditional group health plan to one class of employees (e.g. full-time employees) while offering an individual coverage HRA to a different class (e.g. part-time employees). Whatever the employer offers to an employee class, it must treat all employees in that class the same. There are also minimum size requirements for classes of employers offering both traditional group health coverage and an individual coverage HRA that are designed to further protect against discrimination based on health status.
For employers and eligible employees:
• Employers who are struggling to or don’t provide health insurance to their employees will have a more flexible and potentially more affordable alternative.
• Many employers are interested in transitioning to a defined contribution approach of providing employer sponsored health benefits. These regulations provide a new pathway for moving from an employer-provided to an employer-facilitated approach. It is possible that this approach could result in employers dropping existing group health coverage or reducing the amount of their contribution, especially among smaller employers.
• Employers offering HRAs to pay for individual market insurance must continue to comply with the Affordable Care Act’s affordability and coverage (i.e. minimum value) requirements.
• Employees who are eligible for and better off claiming the ACA premium tax credit will need to opt out of the HRA option.
• One potential drawback for employees is that the tax-preferred HRA can only be funded by employer contributions. However, employers may allow employees to pay for any portion of the individual health insurance premium not covered by HRA funds for “off-exchange” individual health insurance coverage on a tax-favored basis through the employer’s cafeteria plan. The Internal Revenue Code does not allow employee salary reduction contributions through a cafeteria plan for the purchase of coverage individual through a public exchange.
• Some employers may decide to help historically excluded classes of employees (e.g. part-time, seasonal) pay for health insurance coverage for the first time.
• Individuals may only claim reimbursement from an individual health insurance coverage HRA if they are enrolled in individual market coverage. Employers will generally enforce this requirement through an attestation from the covered individual indicating that they have enrolled in qualifying coverage. However, it will be difficult for employers to enforce this important requirement and the enforcement requirements in the regulations are limited.
For the individual health insurance market:
• While the final regulations include safeguards against discrimination, the adverse selection risk (and premiums) in the individual market will increase if less healthy workers are disproportionately encouraged directly or indirectly to use their HRAs for coverage on the individual market. This may be less likely within individual employers because of the “class” requirements, but employers with poor claims experience are disproportionally likely to move all eligible employees into an HRA arrangement – sending their less healthy employee population to the individual market.
• If employers are unable to effectively enforce the qualifying coverage requirement and employees use the HRA funds to purchase plans that do not qualify (e.g. short-term duration plans) individual health insurance coverage HRAs will end up subsidizing non-individual-market coverage, potentially increasing the risk to the individual market.
For public and private marketplaces
• While the new HRA regulations could negatively impact the already low SHOP enrollment in public exchanges (i.e. Healthcare.gov and State-based Marketplaces), it could provide a significant boost to public exchange individual markets and result in net enrollment growth. It could therefore represent a viable alternative or complement to SHOP exchanges.
• Private exchanges that offer access to the individual health insurance market also have an opportunity to grow their enrollment.
• However, public and private exchanges will need to prepare quickly to meet the January 1, 2020 effective date. That includes being able to determine eligibility and manage the online shopping and enrollment experience, as well as effectively communicating the option to potential enrollees.
• If exchanges are not ready, some consumers could receive financial assistance that they are not eligible for and must be repaid later – resulting in, at the minimum, consumer dissatisfaction and potentially creating financial hardships.
Sources: IRS Notice 2013-54
https://www.irs.gov/affordable-care-act/employer-health-care-arrangements  45 CFR § 144.103 – Definitions
https://www.law.cornell.edu/cfr/text/45/144.103  H.R. 34 (114th): 21st Century Cures Act
https://www.govtrack.us/congress/bills/114/hr34  Health Reimbursement Arrangements and other Account-Based Group Health Plans (84 FR 28888); A Rule by the Internal Revenue Service, the Employee Benefits Security Administration, and the Health and Human Services Department; published in the Federal Register on 06/20/2019
https://www.federalregister.gov/documents/2019/06/20/2019-12571/health-reimbursement-arrangements-and-other-account-based-group-health-plans  Presidential Executive Order Promoting Healthcare Choice and Competition Across the United States; October 12, 2017
https://www.whitehouse.gov/presidential-actions/presidential-executive-order-promoting-healthcare-choice-competition-across-united-states/  U.S. Departments of Treasury, Health and Human Services and Labor Expand Access to Quality, Affordable Health Coverage Through Health Reimbursement Arrangements; Press Release; June 13, 2019