This past week the Department of Labor (DOL), Treasury Department and Department of Health and Human Services (HHS) have jointly released proposed regulations which will expand the use of health reimbursement arrangements (HRAs) by employers.
HRAs allow employers to reimburse their employees for medical expenses in a tax-favored way. With the enactment of the Affordable Care Act (ACA), limits were placed on the use of HRAs by employers due to the ACA’s prohibition of annual and lifetime limits on benefits and the requirement of cost-free preventive services. HRAs that were integrated with the employer’s group health coverage were permitted under the ACA but HRAs could not be integrated with individual health insurance coverage. Retiree only plans and excepted benefits were exempt from the ACA HRA rules.
These proposed regulations provide additional opportunities for employers to offer HRAs to their employees. The proposed regulations would not alter the tax treatment of traditional employer-sponsored coverage. It would merely create a new tax-preferred option for employers of any size to use when funding employee health coverage. A benefit is that while the employer would fund the cost of individual health insurance coverage, the employee would own the coverage, allowing the employee to keep the coverage even if he or she left the employer and was no longer covered by the HRA. The proposed rules retain the current types of permitted HRAs and also allow two new types of HRAs:
- An individual health insurance premium reimbursement HRA. This HRA could be integrated with, and reimburse premiums for, individual health insurance coverage if certain conditions are met. Employees and dependents covered by the HRA would have to be enrolled in individual coverage (other than coverage that consists solely of excepted benefits) with some type of verification of enrollment required when participation commences and when expenses are reimbursed. The HRA would have to be offered on the same terms and conditions to all employees within a class with exceptions available due to age or family size. Employees would have to be able to opt out and waive future HRA reimbursements at least annually (in the event they want to pursue a premium subsidy on the Marketplace). In order to utilize this option, the employer cannot also offer a “traditional” group health plan to the same class of employees. Essentially, this option is only available to those employers who currently offer no other health insurance arrangement to its employees.
- An excepted benefit HRA that generally allows up to $1800 per year (plus carryover amounts) in reimbursement for medical expenses provided that employees are offered coverage under another group health plan sponsored by the employer. Reimbursement does NOT include health insurance premiums. This means employers could offer non-integrated HRAs if they meet the following requirements: (1) The employer makes other non-excepted, non-account-based group health plan coverage available to the HRA participants (enrollment is not required); (2) no more than $1,800 (indexed) is available to each participant for each plan year (carryovers permitted under the arrangement would be disregarded); (3) the HRA does not reimburse premiums for individual health coverage, non-COBRA group coverage, or Medicare Parts B or D (an excepted HRA may, however, reimburse the cost of short-term, limited duration coverage); and (4) the HRA is made available under the same terms and conditions to all similarly situated individuals. An excepted benefit HRA could not be offered to employees who are also offered an HRA that is integrated with individual health insurance.
The guidance also provides rules regarding the premium tax credit consequences for individuals who are offered or covered by an HRA that is integrated with individual health insurance.
There are a few other items of note in these proposed regulations. Employers with HRAs that are integrated with individual health insurance could allow employees to use pre-tax cafeteria plan salary reductions to pay any portion of their individual insurance premiums not covered by the HRA and which are not offered through an Exchange. If offered, salary reductions would have to be made available on the same terms and conditions to all employees within a class.
The rule does not change the ACA's employer mandate, which requires employers with 50 or more employees to offer coverage to 95% of full-time employees. These new HRA rules will have the biggest impact on small businesses with less than 50 employees but you could also see a decrease in the use of premium subsidies. If the HRA is considered "affordable" based on the amount provided by the employer, the employee would not be eligible for a premium tax credit. If the HRA fails to meet those minimum requirements, the employee could choose between a premium tax credit and the HRA.
Also, the terms “employee welfare benefit plan” and “welfare plan” as used in ERISA would not include individual health insurance funded by an HRA if certain requirements are met. Among other things, the purchase of the insurance must be completely voluntary for participants and beneficiaries; the employer or other plan sponsor must not select or endorse any particular insurer or coverage; and participants must be notified annually that the individual coverage is not subject to ERISA.
Finally, there would be established an Exchange special enrollment period for employees and their dependents who gain access to an HRA that is integrated with individual health insurance coverage or are provided with a QSEHRA, allowing them to enroll in individual insurance coverage or change from one individual coverage plan to another.
The Departments state that the finalized regulations will not be effective until plan years beginning on or after January 1, 2020, and that taxpayers cannot rely on the proposed regulations prior to their finalization.
If finalized as proposed, two new types of HRAs would be available to employers of any size. The proposal also indicates that the agencies are open to allowing cafeteria plan reimbursement of individual major medical policies.