Beginning in 2020, employers will have a new tax-preferred option for providing individual health insurance coverage to employees—the health reimbursement arrangement (HRA).
Under prior law, employers could not reimburse employees for individual health insurance premiums via the tax-preferred HRA structure because HRAs were deemed to fail certain prohibitions imposed by the ACA. However, upon direction from the Trump administration, the DOL, Department of Health and Human Services (HHS) and Treasury developed a new set of rules to expand employer options for providing coverage via HRAs.
While the option will be welcome to most employers seeking options for providing health coverage, the final rules, like the proposed rules, are detailed and complex—and must be carefully followed in order to avoid loss of the HRA tax benefits.
Qualifying for the Expanded HRA Option
The new rules would allow employers to reimburse premiums for individual health insurance coverage through HRAs if the several specific conditions are satisfied. First, all individuals enrolled in the HRA are also enrolled in individual coverage. If an individual ceases to be enrolled in individual coverage, the HRA must stop reimbursing their medical expenses (applied prospectively only). Individuals who are still within the grace period with respect to paying their premiums for individual coverage are considered enrolled in individual coverage.
The employer cannot offer integrated HRA-individual coverage to one class of employees if it offers group health coverage to others in the same class of employees. Finally, 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. Exceptions to this rule include an exception for age and for family size, although differing contributions based upon age cannot vary by more than 3:1.
Permissible classes of employees include part-time employees, full-time employees, seasonal workers, hourly workers, salaried workers, new hires and workers employed or not employed through a temporary staffing agency. In response to concerns that the expanded HRA option could allow employers to push sicker workers into the individual markets by manipulating the “class of employees” requirement, the agencies imposed strict limits on the class sizes in certain situations.