Proposed Regulations Would Allow HRAs Integrated with Individual Health Insurance in 2020
Newly published proposed regulations from the U.S. Departments of Treasury, Health and Human Services, and Labor, if implemented, would significantly change the landscape in the healthcare market, reinstating (in new form) some health care reimbursement options that existed prior to the Affordable Care Act.
Not intended to be effective until final regulations are issued and not before 2020, the proposed rules seek to implement President Trump’s October 12, 2017, Executive Order 13813, which directed the agencies to propose guidance to expand employers’ ability to offer health reimbursement arrangements (HRAs) to their employees. The proposed rules would seek to restore some plan options to employers that ACA regulations subjected to a potential $100 per day per employee penalty. Comments are sought on the proposed regulations through December 28, 2018.
Before the ACA, many small businesses, including farming businesses reimbursed their employee for the cost of coverage they purchased on their own. This reimbursement was tax free to the employee and deductible by the employer. The ACA imposed a number of new “market reforms” that had to be included in all group health insurance policies.
IRS Notices 2013-54 and 2015-17 established that employer reimbursement plans and standalone HRAs are “group health plans.” Consequently, if an employer reimburses its employees for the cost of acquiring health insurance on the individual market, the employer has established a “group health plan” subject to ACA market reforms. Because such a plan imposes an annual dollar limit up to the cost of the individual market coverage purchased, it violates the “no annual dollar limits” requirement of the ACA. Similarly, because standalone employer payment plans do not provide preventive services without cost-sharing in all instances, they violate the preventive services requirements of the ACA. As such, the agencies made clear that such arrangements did not comply with the law and that their sponsors were subject to an excise penalty in an amount up to $100 per day per employee per violation.
- Plans with fewer than two participants who are current employees were allowed to continue without penalty (known as the retiree-only exception, this exception allows employers with only one employee to continue to reimburse the cost of their health coverage or to provide an HRA to that sole employee.)
- HRAs established to reimburse employees for excepted benefits such as limited dental and vision benefits and some long-term care coverage were also allowed to continue without penalty.
In December of 2016, Congress passed a law (as part of the 21st Century Cures Act) that allowed small employers to again offer some HRAs to their employees. Called Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs), these plans are helpful for some employers. If the plan complies with the law, the QSEHRA is deemed not to be a “group plan” subject to ACA market reforms. Significant restrictions, however, have limited their usefulness for many small employers. In particular, if employees must buy coverage on the Marketplace, the QSEHRA will make them ineligible for a premium tax credit (PTC) or, if the coverage is “unaffordable,” the PTC is still reduced by the amount offered by the QSEHRA. The fact that the employer offers the plan (even if the employee does not receive a benefit) triggers the PTC reduction. There is no opt-out. If an employee has insurance coverage through a spouse’s employer, the QSEHRA may reimburse for those premiums. If the spouse can pay those premiums on a tax-free basis, however, the QSEHRA reimbursement is taxable. In other words, the employer could provide the same economic benefit to the employee by raising wages.
If finalized, the proposed regulations would allow employers to establish new forms of payment plans and HRAs to help their employees purchase health care insurance or pay medical expenses. Here are some highlights:
- The proposed regulations would allow employers to provide HRAs to their employees who purchase individual health insurance on their own. Existing regulations allow HRAs to be “integrated” or provided only in conjunction with employer group health insurance. The proposed regulations would allow integration of an HRA with individual health insurance coverage. These policies could be purchased on the ACA healthcare exchange or on the individual market. The proposed regulations would allow an HRA to be integrated with a grandfathered plan as well. To receive reimbursements from the HRA, however, the employee (and any dependents) would have to prove actual enrollment in the insurance plan.
- To prevent employers from using these new regulations to encourage high risk employees to purchase insurance on the individual market rather than enroll in a current group health plan, the regulations include anti-discrimination provisions designed to protect against abuse. The employer could offer either group coverage or an HRA/employer payment plan to each class of employees, but it could not offer both. The plan offered would have to be the same for everyone in the same class of employment. The proposed regulations list the following types of classes: (1) full-time, (2) part-time, (3) seasonal, (4) collective-bargaining employees, (5) employees who have not satisfied the waiting period, (6) employees who have not attained the age of 25, (7) non-resident aliens with no U.S.-based income and (8) employees whose primary site of employment is in the same rating area.
- Individuals covered by an HRA integrated with individual health insurance coverage are ineligible for the PTC. However, the proposed integration rules allow employees of employers who offer an HRA or payment plan to opt out and waive future reimbursements under the plan. Current employees would thus be allowed the PTC if they are otherwise eligible, if they opt out of and waive future reimbursements from the HRA, and if the HRA is either unaffordable or does not provide minimum value (note that the regulations provide that affordable coverage will always provide minimum value). If the employee opts out because the plan is unaffordable, the “offered” HRA reimbursements would not reduce the employee’s allowable PTC. Affordability is established if the premium for the second lowest cost silver plan on the marketplace minus the permitted benefit under the HRA is less than (the employee’s household income times 9.56% (in 2018))
- The proposed regulations would allow employers to set up salary reductions through a cafeteria plan so that employees could pay the balance of an individual health insurance plan purchased outside of the Exchange.
- The employer would be required to give notice to employees to ensure that they are aware of the impact of the HRA on their PTC eligibility.
- The individual coverage purchased with the premiums reimbursed by the HRA or employer payment plan would not become part of an ERISA plan.
- The proposed regulations would allow employers to establish a stand-alone HRA offering up to $1,800 of excepted benefits, meeting these requirements: (1) The HRA must not be an integral part of the plan, (2) the HRA must provide benefits that are limited in amount, (3) the HRA cannot provide insurance premium reimbursement, and (4) the HRA must be made available on the same terms to all similarly situated individuals. The employer could not offer excepted benefit HRAs in addition to an HRA integrated with individual health insurance coverage.
These proposed regulations are in the early stages. We will stay tuned to see how they evolve. In the meantime, individuals who must purchase their health insurance on the individual market continue to struggle with affordability if they are not eligible for premium tax credits.
We will keep you posted.
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.