Stand-alone health reimbursement arrangements (HRAs) have, in most cases, been a casualty of the Patient Protection and Affordable Care Act (PPACA) — because they generally set limits on the maximum employer contribution, they typically can be found to violate the ACA’s ban on annual and lifetime coverage limits. The potential penalties are steep, and the rules for offering a compliant HRA are complex enough to dissuade many employers from making the effort.
However, for some small business clients, this popular method for reimbursing employer healthcare expenses may be making a comeback — recent legislation has been introduced that could allow certain small business clients to continue using the stand-alone HRA, thus reviving a popular and tax-preferred method for offering health coverage to employees.
Current HRA landscape
In recent years, the Treasury has issued guidance that prohibits the use of most stand-alone HRAs, which are vehicles that have commonly been used to reimburse employees for out-of-pocket health expenses, as well as the cost of premiums for individual health insurance coverage purchased independently by employees. Because only the employer can contribute to an HRA, it is treated as a group health plan that is subject to the ACA market reform provisions, including the prohibition on annual benefit limits (by definition, an HRA imposes an annual benefit limit because the employer contributes a fixed amount).
As a result, employers that offered a stand-alone HRA would become subject to a $100 per day, per employee penalty, up to a cap of $36,500 per year, beginning July 1, 2015 — which caused many employers to discontinue HRA programs.
Treasury guidance did provide a method whereby an employer could offer an HRA that was “integrated” with other group health coverage in order to avoid violating the prohibition on annual benefit limits. Generally, if the employee is enrolled in a group health plan (or a spouse’s employer-sponsored group health plan) that does not violate the ACA market reform provisions, an HRA can be integrated without penalty (note that an HRA cannot currently be integrated with individual health coverage).
The HRA can only be made available to employees who are enrolled in a non-HRA group health plan.
Further, the employee must be given the opportunity to opt out of the HRA coverage. HRAs that are offered to fewer than two current employees (including retirees) are exempt from the market reform provisions.