On June 20, the U.S. Departments of Labor, Treasury, and Health and Human Services (the Departments) released a final rule expanding the availability of health reimbursement arrangements (HRAs) employers can use to pay for or reimburse employees for qualifying medical expenses, including premiums for individual health insurance coverage. The rule, which becomes effective Jan. 1, 2020, will significantly expand employers’ options for offering healthcare benefits.
HRAs are account-based group health plans employers can offer employees, providing employees with a designated amount of funds to pay for or reimburse qualifying medical expenses on a pre-tax basis. Because HRAs are group health plans, they are also subject to certain provisions of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code of 1986 (Code). Employees are not permitted to contribute to HRAs. However, unlike funds in healthcare flexible spending accounts, unused HRA funds can carry over into subsequent plan years.
Following passage of the Affordable Care Act (ACA), agency guidance implementing health reform greatly restricted employers’ ability to offer HRAs to active employees, as the guidance took the position that HRAs failed to satisfy two of the ACA’s market reforms: no annual dollar limits on essential health benefits and coverage of preventive services without cost sharing. The prior Department guidance also contained complex HRA integration rules, thereby making them less attractive for employers. The new rule was issued in response to a 2017 presidential executive order directing the Departments to modify the HRA rules to increase their usability, including in connection with non-group health coverage.
Individual Coverage HRAs
One of the most significant effects of the new rule is that it removes a prior ACA-related restriction on integrating HRAs or other account-based group health plans (such as employer payment plans or health FSAs) with individual health insurance obtained in the market or Medicare as long as certain conditions are satisfied. The rule refers to these as “individual coverage HRAs.” As noted above, prior to the new rule, HRAs generally could be integrated only with traditional group health plan coverage offered by an employer.
Based on this change, the door is open for employers to consider scaling back traditional group health coverage in favor of individual coverage HRAs integrated with individual insurance policies purchased by employees on the insurance market, similar to what some employers have already chosen to do with respect to retiree-only medical plans (which are exempt from ACA regulation). Although many factors would go into such a decision, the cost savings to employers and (nearly as important) the predictability of employee healthcare spend on a year-to-year basis could make individual coverage HRAs a very attractive alternative to traditional group health plan coverage.
Of course, individual coverage HRAs would need to meet certain requirements, including the following:
- All individuals covered by an individual coverage HRA must be enrolled in individual health insurance for each month in which the individual is enrolled in the individual coverage HRA.
- Employers offering individual coverage HRAs must establish reasonable procedures to verify that individuals covered by the HRAs are enrolled in individual health coverage prior to reimbursement of expenses in any given month. Acceptable methods of substantiation include verification by a third party (e.g., insurer) or participant attestation.
- To prevent adverse selection in the individual insurance market, employers are prohibited from offering a choice between an individual coverage HRA and traditional group health plan coverage to the same class of employees. A “traditional group health plan” for this purpose would not include health FSAs or other account-based plans or plans limited to excepted benefits only (see discussion of excepted benefits below).
- An employer that offers an individual coverage HRA to a class of employees must offer the individual coverage HRA on the same terms to all employees within the class.
- Permissible classes for this purpose would include full-time, part-time, seasonal, salaried, hourly, collectively bargained, leased and non-resident alien employees, as well as employees whose primary work location is in the same rating area and employees who have not satisfied certain waiting period requirements, subject to certain minimum thresholds for class size.
- It is permissible to increase HRA contributions as employees get older (up to a maximum of three times the contribution the youngest employee receives), as long as the same increase is provided to all employees of the same age within the class, and to vary contributions based on the number of dependents an employee has, again as long as the same variation is applied to all employees within the class with the same number of dependents.
- It is also permissible for employers to implement individual coverage for HRAs for new hires while leaving traditional group health coverage in place for existing employees, subject to certain requirements.
- Employers must allow employees covered by individual coverage HRAs to opt out of such coverage on at least an annual basis.
- Individual coverage HRAs must provide annual written notice to eligible participants, including a description of the HRA terms and the opt-out right, and a description of the consequences to an employee regarding the employee’s eligibility for the premium tax credit if the employee accepts or waives coverage. The Departments have provided model language for portions of the notice. The notice must be delivered at least 90 days prior to the beginning of each plan year, but there are two helpful exceptions:
- For employees hired after the beginning of the plan year, notice must be provided no later than the date on which the individual coverage HRA may first take effect.
- For individual coverage HRAs established by employers less than 120 days prior to the beginning of the first plan year of the HRA, the notice must be provided no later than the date on which the individual coverage HRA may first take effect.
The new rule provides additional guidance regarding use of an employer cafeteria plan to pay premiums not otherwise covered by the individual coverage HRA on a pre-tax basis, as well as further information regarding the integration of individual coverage HRAs with certain other types of coverage, including Medicare and Tricare, spousal group health plans, HSAs and short-term, limited-duration insurance.
Excepted Benefit HRAs
The new rule also creates an “excepted benefit HRA.” In general, following the Departmental guidance issued under the Health Insurance Portability and Accountability Act (HIPAA), certain benefits are considered “excepted benefits” and are exempt from many of the federal healthcare requirements under ERISA and the ACA. Where they meet the applicable requirements, “excepted benefits” can include limited-scope dental and vision, long-term care plans, hospital indemnity plans, employee assistance or EAP plans and on-site medical clinics. The excepted benefit HRA is intended to constitute an excepted benefit that can be offered in conjunction with a traditional group health plan to help cover the cost of copays, deductibles or other non-covered expenses.
For an excepted benefit HRA to qualify as an excepted benefit, the new rule requires the following:
- Unlike the individual coverage HRA, the excepted benefit HRA must be offered in conjunction with a traditional group health plan. However, an employee is not required to enroll in the traditional plan (or in any other coverage) in order to use the HRA.
- The annual HRA contribution per employee must be limited to $1,800 per year, which will be indexed for inflation beginning in 2021.
- The HRA cannot be used to reimburse premiums for individual coverage, group coverage (other than COBRA) or Medicare. However, it can reimburse premiums for other excepted benefits coverage, as well as for short-term, limited-duration insurance.
- The HRA must be uniformly available to all similarly situated individuals, as required under (HIPAA). For example, the excepted benefit HRA cannot provide greater contributions for employees who have an adverse health factor.
Application of ERISA to New HRAs
Importantly for employers, the new rule distinguishes between the individual coverage HRA (subject to ERISA) and the insurance coverage that the HRA is used to purchase, which is not subject to ERISA if certain safe harbor criteria are met:
- The purchase of any individual health insurance is completely voluntary for employees.
- The employer, employee organization or other plan sponsor does not select or endorse any particular issuer or insurance coverage. (This may be problematic for employers hoping to use individual coverage HRAs as part of a private exchange.)
- Reimbursement for non-group health insurance premiums is limited solely to individual health insurance coverage.
- The employer, employee organization or other plan sponsor receives no consideration in the form of cash or otherwise in connection with the employee’s selection or renewal of individual insurance coverage.
- Each plan participant is notified annually that the individual health insurance coverage is not subject to ERISA.
ACA Compliance: Premium Tax Credit, Employer Mandate, Special Enrollment Periods
An employee is not eligible for a premium tax credit under Section 36B of the Code for any month in which the employee is offered an individual coverage HRA that is “affordable.” To determine affordability, an employer sponsoring an individual coverage HRA can look to the lowest-cost silver-rated plan for self-only coverage available in the exchange in which the employee resides. The rule also uses this affordability guideline for determining that the individual coverage HRA provides “minimum value,” which is another requirement of the ACA.
One of the key provisions of the ACA for applicable large employers (employers with 50 or more full-time equivalent employees) is the employer mandate. The employer mandate imposes penalties on applicable large employers that: (a) do not offer coverage to at least 95 percent of full-time employees and at least one full-time employee receives a premium tax credit (the Section 4980H(a) penalty), and/or (b) do not offer affordable minimum value coverage to full-time employees and at least one full-time employee receives a premium tax credit (the Section 4980H(b) penalty). The preamble to the rule indicates that the Treasury Department and IRS intend to propose rules under Section 4980H of the Code that will apply to applicable large employers sponsoring individual coverage HRAs.
The ACA, as part of the introduction of the healthcare exchange marketplace, provides a “special enrollment period” for individuals to enroll in coverage offered in the marketplace. The new rule adds parameters for a new special enrollment period for employees who, as a result of individual coverage HRA eligibility, need access to the marketplace outside of the regularly scheduled open enrollment period. The timing of an employee’s special enrollment period is complicated, but is generally tied to a “triggering event” (the first day on which HRA coverage can take effect) and the applicable notice period for the individual coverage HRA in which the employee is eligible. Because determining the timing of the special enrollment period may be confusing, the Department of Health and Human Services has committed to developing additional guidance by Nov. 1, 2019, including a process for verifying special enrollment period eligibility on HealthCare.gov.
Other Important Information
The introduction of these two new types of HRAs is likely to have some employers revisiting their approach to group health plan coverage as we move toward the autumn open enrollment season.
The rule is generally effective for plan years beginning on and after Jan. 1, 2020. The guidance regarding the premium tax credit is applicable for tax years beginning on and after Jan. 1, 2020, and the guidance regarding special enrollment periods applies beginning Jan. 1, 2020, as well.