In a reversal of previous Obama Administration guidance, the Trump Administration recently finalized regulations that provide for a new type of health reimbursement arrangement—the individual coverage HRA. In a previous blog, we briefly discussed the potential for the individual coverage HRA to provide large employers who are subject to the Affordable Care Act (ACA) employer coverage mandate with a cost-effective alternative for meeting those requirements. To recap, under the ACA, large employers (those with 50 or more full-time employees) must offer full-time employees ACA-compliant coverage or face potential penalties. Under current rules, simply offering an HRA without also offering more traditional group health plan coverage would not satisfy those requirements.

The new regulations change that result. If the HRA meets certain requirements, it can be offered in lieu of traditional group health plan coverage and be used by employees to purchase individual health insurance coverage. Providing an individual coverage HRA that meets the various regulatory requirements would satisfy an employer’s obligations under the ACA employer coverage mandate. From our perspective, this provides large employers with a potentially more flexible and cost-effective way to meet ACA requirements. What follows is a more in-depth look at the individual coverage HRA requirements.

What is an individual coverage HRA?

HRAs are tax-free, employer-funded accounts that reimburse employees for qualified medical expenses up to a certain amount. In establishing an HRA, employers set aside a fixed amount for which employees may be reimbursed each year, determine which medical expenses are covered (subject to IRS rules), and decide whether funds are rolled over each year.

HRAs can provide employers with a cost-effective way to provide medical benefits to employees and can also give employees greater flexibility to make healthcare decisions. However, the utility of HRAs were limited under previous rules, as standalone HRAs—HRAs that were not also paired with traditional group health plan coverage—were essentially prohibited under ACA guidance, both because they did not satisfy the employer coverage mandate requirements and because they violated other ACA coverage requirements.

But, the tides are now changing. The final rule, which goes into effect on Jan. 1, 2020, creates the individual coverage HRA. The individual coverage HRA is unique in that it can be offered as a standalone benefit that can be used to pay for employees’ individual health insurance premiums. More importantly, if the arrangement is designed properly, the offer of the individual coverage HRA will satisfy a large employer’s obligations under the ACA employer coverage mandate.

Individual coverage HRA requirements

An HRA must meet various requirements to qualify as an individual coverage HRA:

  • Employee/dependent must be enrolled in individual health insurance coverage. To comply with ACA requirements, all individuals enrolled in the HRA must be enrolled in individual health insurance coverage (g., individual insurance coverage purchased on or off an ACA exchange or Medicare coverage). This does not include short-term, limited duration insurance or insurance that consists only of excepted benefits. If an individual ceases to be covered under an individual policy, he or she forfeits the HRA and will no longer be reimbursed for his or her medical premiums incurred after termination of the coverage.
  • Employer must substantiate coverage. The employer must have reasonable procedures in place to substantiate that the covered employee/dependents are actually enrolled in individual health insurance coverage. Employers may rely on an employee’s attestation that he or she truly purchased individual health insurance coverage. The Department of Labor has provided a model attestation form that can be used for this purpose.
  • Employer must offer only one option per class of employees. Employers may designate certain classes of employees based upon nine specified classes outlined in the regulations (g., full-time, part-time, etc.). The employer cannot offer both individual coverage HRAs and traditional group health coverage to the same class of employees. However, employers can offer an individual coverage HRA to one class of employees (i.e., hourly) but offer traditional group health plan coverage to another class of employees (i.e., salaried). Similarly, an employer could take a “grandfathering” approach by offering traditional group health plan coverage to existing employees, while offering the individual coverage HRA to new employees. Furthermore, an employer is allowed to offer an individual coverage HRA to some, but not all, former employees within a class.To combat employer manipulation—that is, choosing to only offer individual coverage HRAs to certain high-cost employees—a minimum class size is required in cases where different classes receive different offers. However, this rule does not apply to a “new hire” class. The minimum class size requirements depend on the size of the workforce:
    • Employers with >200 employees need at least 20 employees per class
    • Employers with 100-200 employees need the smaller of 20 employees or 10% of the workforce
    • Employers with <100 employees need only 10 employees
  • Employers must offer the individual coverage HRA on the same terms to each employee within a class. Individual coverage HRA must be offered on the same terms to all employees within the same class. An exception allows employers to offer higher HRA contributions based upon family size or an employee’s age (which is capped at an amount three times as much as the HRA’s youngest participate). The increase in contributions must be made on a uniform basis to all similarly situated participants.
  • Employers must provide detailed written notices to eligible employees. Because individuals covered under an individual coverage HRA may lose their premium tax credit eligibility, employers must provide each eligible participant a written notice at least 90 days before the beginning of each plan year. Notice must be provided no later than the effective date for those who enroll after the beginning of the plan year. The notice must include information such as the maximum dollar amount for each participant, potential implications of enrollment on premium tax credit eligibility, and a note that participants must be enrolled in individual health insurance coverage. The Department of Labor has provided a model notice that employers may use to satisfy this requirement.
  • Employees must be able to opt out. Individual coverage HRA participants must be able to opt out of coverage and waive future reimbursements on an annual basis before the start of the next plan year. Employees may decide to opt out of an individual coverage HRA in order to receive a premium tax credit, but may only receive that credit if the HRA is unaffordable or does not provide minimum value. In the event of termination, the employee must be able to opt-out and waive future reimbursements from the individual coverage HRA.

Benefits to employers

The individual coverage HRA is not an ideal solution for everyone. Employees have become accustomed to the traditional group health plan model, so moving away from that approach could put some employers at a competitive disadvantage. However, this does provide employers who are subject to the ACA employer coverage mandate with an interesting alternative to group health insurance coverage. Individual coverage HRAs may be more cost-effective and may also provide employers with predictability and control because employers set the approximate maximum expense for the HRA amount each year. And, if the employer completely eliminates the traditional group health plan, the employer would no longer be required to administer a complicated group health plan. That may be particularly attractive to mid-size employers who wish to attract employees via some sort of benefit offering, but who cannot afford traditional group health plans.

In any event, this is definitely something for employers to consider as they start looking at their overall benefits offerings for 2020 and beyond. Keep checking back, as we will follow-up with a third installment where we discuss the new excepted benefit HRA.