Final health reimbursement arrangement (HRA) regulations, issued on June 13, significantly expand the flexibility and use of employer-sponsored HRAs to health insurance in the individual insurance market.
The lengthy final rule, which takes effect for plan years beginning on or after January 1, 2020, allows HRAs to be used to reimburse premiums and out-of-pocket costs associated with individual health insurance coverage and creates opportunities for employers to subsidize that individual coverage for certain groups of employees who may not currently be eligible for group health plan coverage.
An HRA is a group health plan that allows employers to fund medical care expenses for their employees on a pre-tax basis. An HRA is funded solely by employer contributions, and can only be used to reimburse an employee for certain IRS-defined medical care expenses up to a threshold amount. HRAs qualify for pre-tax treatment because the applicable IRS guidance deems them to be group health plans, but historically they were not allowed to be used to pay premiums for coverage in the individual market.
The final regulations provide for two new types of HRAs.
I. Individual-coverage HRAs (ICHRAs)
The final regulations remove the prohibition that disallows employers from offering HRAs that reimburse employees for the cost of individual health coverage if the requirements detailed below are satisfied:
- The individual covered by the ICHRA must be enrolled in health insurance coverage purchased in the individual market and must substantiate and verify that he or she has coverage. The regulations do not specify any procedures to verify coverage; they only require that the procedures be reasonable. To assist plan sponsors, the final rule includes model forms for both substantiating coverage and requesting a reimbursement for medical expenses.
- If an individual covered by an ICHRA ceases to be covered by individual health insurance coverage, the individual may not seek reimbursement for claims that are incurred after the individual health insurance coverage ceases. Notably, if an individual loses coverage because of cessation of individual health insurance coverage, COBRA will not be available. However, if HRA coverage is lost due to a COBRA qualifying event (such as termination of employment), COBRA would be available.
- A plan sponsor may not offer a choice between an ICHRA and traditional group health coverage to any class of participants.
- The ICHRA must be offered on the same terms to all members of a class. The regulations provide examples of separate classes of individuals, including:
- full-time employees
- part-time employees
- employees who have not satisfied a waiting period for coverage
- nonresident aliens with no US source income
- salaried employees
- non-salaried employees
- employees whose primary site of employment is in the same rating area
- temporary employees or
- a combination of these categories
- There are certain permitted exceptions to the same terms requirement, including plan sponsors being allowed to offer a higher dollar amount on the basis of age or family size, so long as the increase is proportionate and made available to all participants in the class of employees who are of the same age or have the same number of dependents.
- Individuals can be in two different classes based solely on their hire date. This means that employees hired before a designated new hire date could participate in a traditional group health, while individuals hired after such date participate in an ICHRA.
- Minimum class size requirements (eg, at least 10 employees) apply in certain circumstances if a plan sponsor offers a traditional group health plan to one class of employees, and offers an ICHRA to another class of employees.
- Participants can opt out and waive future reimbursements. Opt-out rights must be offered by plan sponsors to participants on an annual basis.
- There is a general notice requirement to qualify as an ICHRA. The plan sponsor must provide a written notice to each participant at least 90 calendar days before the beginning of each plan year. For participants not eligible for coverage as of the beginning of the plan year, a notice must be provided no later than the date on which the HRA may first take effect for the participant. The agencies have provided an model notice that plan sponsors may use for this purpose.
II. Excepted-benefits HRAs (EBHRAs) The regulations also create an EBHRA, which can be used to reimburse excepted benefits (such as limited-scope vision or dental benefits) as well as other types of medical expenses that do not qualify as excepted benefits.
There are four requirements that must be satisfied for an HRA to qualify as an EBHRA: The HRA must not be an integral part of the employer's group health plan. Other group health plan coverage that is not limited to excepted benefits (and not an HRA) must be made available to the participant. There are no notice requirements for EBHRAs.
- The HRA must not be an integral part of the employer's group health plan. Other group health plan coverage that is not limited to excepted benefits (and not an HRA) must be made available to the participant. There are no notice requirements for EBHRAs.
- The benefits must be limited in amount. The regulations limit the annual benefit to $1,800 (indexed for inflation after December 31, 2020). Unused amounts can be carried over to the following plan year, and such amounts will not count against the limit for that plan year.
- Only certain medical expenses can be paid from the EBHRA. The EBHRA cannot reimburse premiums for individual health insurance coverage, group health plan coverage (other than COBRA continuation coverage), or Medicare.
- The EBHRA must be made uniformly available and on the same terms to all similarly situated individuals (as defined under existing HIPAA rules), regardless of any health factor. A separate group of participants may be viewed as similarly situated individuals if the difference is based on a bona-fide classification.
ERISA and ACA considerations
An individual health insurance policy that is integrated with an ICHRA will not be considered an ERISA plan if certain safe harbor conditions are met. Among other things, to satisfy this safe harbor, the purchase of individual policies must be voluntary for employees and the ICHRA sponsor cannot endorse the insurance coverage.
The final regulations clarify that an offer of an ICHRA is deemed as an offer of coverage under the ACA's employer-shared responsibility rules. An employer may face penalty assessments if its offer of an ICHRA is not affordable. Affordability is based on the amount of funds each employer makes available under the HRA to employees. The IRS indicated that it would provide additional guidance on how the employer shared responsibility rules would apply to ICHRAs. Guidance on certain additional topics is also expected.
Action items for employers
- Determine whether your company wishes to offer ICHRAs or EBHRAs to certain classes of employees beginning on January 1, 2020.
- If considering a change, contemplate (1) who your desired classes of employees will be and (2) how to implement (and integrate) these HRAs with your current group health plan coverages.