Look Before You Leap: The New Expanded HRAs

The DOL, Department of Health and Human Services (HHS) and Treasury recently released new proposed regulations that would expand the potential value of health reimbursement arrangements (HRAs), which, under the new rules, could be used to reimburse employees for the cost of individually purchased health insurance plans.

The expanded HRA rules would become effective in 2020, and could provide employers with a powerful new tool for providing employees with health coverage options.

Despite this, the proposal is complex, and, although not yet finalized, employers and employees alike should carefully analyze the potential consequences before jumping in.

HRAs and Individual Health Insurance Premium Reimbursement

Generally, HRAs fail the ACA requirements that prohibit establishing lifetime or annual limits on the value of essential health benefits.

After the Affordable Care Act (ACA) became effective, the Treasury Department issued guidance that, when it came to reimbursing health insurance premium costs, effectively prohibited the use of most HRAs that were not “integrated” with other group health coverage provided by the employer (or a spouse’s employer). As a result, employers that offered a stand-alone HRA would risk subjecting themselves to steep penalties, which caused many applicable large employers to discontinue HRA programs in favor of providing group health insurance coverage.

This prohibition was also put into place in order to prevent employers from encouraging less healthy employees to use HRAs to fund purchase of insurance through the health insurance marketplaces, while allowing more healthy workers access to traditional employer-sponsored health coverage.

New Rules Expand Access to HRAs

The new rules would allow employers to reimburse premiums for individual health insurance coverage through HRAs if the following conditions are satisfied (1) all individuals enrolled in the HRA are also enrolled in individual coverage, (2) the employer does not offer integrated HRA-individual coverage to one class of employees if it offers group health coverage to others in the same class of employees, and (3) the HRA must be offered on the same terms to members of employees within a given class of employees where consistent definitions are used to determine employee classifications.

Classes of employees could include part-time employees, full-time employees, employees who have yet to reach age 25 and seasonal workers.

As was the case under earlier guidance, the HRA program must include an opt-out provision that will allow the employee to claim the premium tax credit. The terms of the HRA program must also require that the employer obtain substantiation of individual health coverage, and that the employer satisfy certain notice requirements.

The new regulations propose a safe harbor that would protect employers from becoming subject to the employer mandate’s penalty if they choose to offer reimbursements for individual coverage via an HRA. The proposal does, however, require that affordability be determined on an employee-by-employee basis, considering each employee’s income, any required HRA contribution and the lowest cost silver marketplace plan that is available to that employee.

Although not yet developed, Treasury intends to release a safe harbor rule for the “location” component of the equation, so that the employer could use the lowest cost silver plan based on its primary site of employment, rather than each employee’s residence. Another safe harbor would allow the employer to determine affordability based on the employee’s W-2 wages, his or her pay rate or by using the federal poverty line, to alleviate the burden of determining the employee’s actual household income.

Evaluating the Pros and Cons

Although the rules have yet to be finalized, and changes to the current proposal are anticipated, one potential benefit of offering reimbursement through an HRA is that the employee’s health insurance plan would no longer be formally tied to the employer. This could provide an incentive for employers with frequent turnover, or employees who are dissatisfied with the coverage options chosen by their employer.

Depending upon how the location safe harbor is eventually drafted, it seems that employers who maintain offices in different states would be required to calculate affordability based on plan availability in each state where its employees work, creating an administrative burden that many employers might shy away from.

For employees, uncertainty regarding the safe harbors that Treasury has floated must be taken into consideration. If employers are not required to consider the employee’s place of residence or actual household income, or could use the prior year’s premium costs, in determining affordability, it is possible that employees could be left shouldering a larger percentage of the premium costs while the employer avoids the employer mandate.

Conclusion

The new HRA proposal is detailed and complicated, and leaves much to be decided before any final regulations are released. For the time being, they offer employers and employees a potential new choice to evaluate in determining the future of employer-sponsored health insurance.

Read previous coverage of qualified small employer HRAs (QSEHRAs) in Advisor’s Journal.
For in-depth analysis of the rules governing HRAs, see Advisor’s Main Library.
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Look Before You Leap: The New Expanded HRAs