New HRA Rules

New rules expanding the availability of health reimbursement arrangements (HRAs) have recently been finalized, generating the question of the impact that these newly expanded HRAs could have on the health insurance markets generally. Individual coverage HRAs will allow employers to use the HRA vehicle to reimburse employees for the cost of health insurance that the employee purchases on the generally available health insurance marketplace. The rules provide guidelines for how employers can classify employees, but the employer is permitted to offer traditional group health coverage to some classes of employees and individual coverage HRAs to other groups.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions to discuss the potential impact that HRAs might have both on employer-sponsored health insurance and the individual markets.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes

Bloink

Their Reasons:

Byrnes: This expansion of the HRA rules is a much-needed improvement over the failing status quo system. Traditional group health insurance costs have risen so dramatically in recent years that many employers simply can’t afford to offer these plans on the same terms to all employees. The individual coverage HRAs given employers a way to offer health coverage on a tax-preferred basis while at the same time reducing the employer’s cost for providing that valuable benefit.

Bloink: While I’m all for encouraging employers to offer health benefits to employees—even if the ACA doesn’t require it—the individual coverage HRA rules are going to create important problems of their own. They encourage employers to find ways to offer coverage to employees at the lowest available price point—meaning that it’s inevitable that some employers may be motivated to push older, sicker workers into classes that are offered HRA reimbursement instead of traditional group coverage. That in itself will create significant problems.

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Byrnes: The individual coverage HRA rules have been structured to avoid any discrimination issues. What we’re going to see is more employees receiving offers of some type of employer assistance with health insurance premiums. The fact is, the Affordable Care Act hasn’t made health coverage more affordable for anyone. Individual coverage HRAs will give more employees access to health coverage while giving employers a valuable option to help save on costs.

Bloink: My take is that individual coverage HRAs are likely to cause health insurance premium costs in the health insurance marketplaces to spike. When employers can group some employees into classes that qualify for traditional coverage and others that have to purchase their insurance on the marketplace, we can all guess what the results will be. There are too many workarounds in the way that employers can classify employees for health coverage purposes.

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Byrnes: The ACA system that we have in place right now isn’t working. The cost of coverage is much too high. Using HRAs to reimburse employees for health insurance that they can choose and pay for on their own gives the employee more control and the employer a potentially cheaper way of funding health benefits. And that combination is good for all parties involved.

Bloink: For individual coverage HRAs to work, we’re going to need substantially more detailed and strict guidance about the potential discrimination issues that are likely to arise. As our system stands today, the introduction of a secondary option for employers is going to cause individual premiums to soar across the board. The rules add a secondary system that’s supposed to somehow work alongside the traditional employer-sponsored health system. As the rules are formulated now, they just seem to give employers a workaround to provide sub-par options while avoiding the employer mandate.