Proposed IRS and DOL regulations have been issued expanding permitted uses for health reimbursement arrangements (HRAs). These proposals follow recent regulations on association health plans, both stemming from President Trump’s October 2017 Executive Order to promote healthcare choice. See our detailed advisories here and here.
For employers of all sizes, the key points to note are that starting in 2020: (1) employers of any size not offering health coverage to all or certain employee classes could use HRAs to reimburse those employees for the cost of individual health insurance coverage (IHIC), subject to certain conditions; and (2) employers offering traditional group coverage could provide an HRA up to $1,800 annually (indexed) to reimburse employees for certain qualified medical expenses.
While these benefits could not be offered as alternatives to the same class of employees, they would expand the available options. However, employers would still need to carefully coordinate compliance under the Affordable Care Act’s (ACA) employer mandate, and employees’ health savings account eligibility.
HRAs in a Nutshell HRAs are employer-funded accounts that are group health plans under the Employee Retirement Income Security Act (ERISA) to be used for reimbursement of medical care expenses (as defined in Section 213(d) of the Internal Revenue Code (“Code”)), incurred by the employee, the employee’s spouse, children, or tax dependents. There are no employee contributions, and employers contribute a fixed dollar amount for a period, usually the plan year. Reimbursements from HRAs are excludable from the employee’s income and wages for federal income and employment tax purposes. Some HRAs are designed to permit carryovers of unused account balances, whereas others forfeit any unused balances.
Solving the ACA Problem with HRAs
HRAs are group health plans subject to the ACA, but due to their design, they fail to comply with certain ACA mandates. For example, under the ACA, group health plans cannot establish any lifetime or annual limits on the dollar value of certain “essential health benefits.” HRAs violate this requirement because they have annual limits on the amount of available reimbursement, and those annual limits are not set by statute. In addition, the ACA requires preventive services to be provided without any cost-sharing. HRAs generally do not comply, because they reimburse only up to the maximum dollar amount for the coverage period, not the full cost of preventive services.
The solution provided by current guidance is to integrate HRAs with other group health plan coverage complying with the ACA mandates, with specific rules on how to integrate. However, while this works for group health plan coverage, HRAs cannot currently be integrated with IHIC, and cannot be offered on a standalone basis.
The proposed regulations reverse the current position on integration with IHIC and allow some stand-alone HRAs.
Proposed Regulations: HRAs Integrated with Individual Health Insurance Coverage
The proposed regulations would remove the current prohibition against integrating an HRA with IHIC, provided that the IHIC does not consist solely of excepted benefits. There is no minimum employer size or employee class size, and the proposals are especially intended to assist small and mid-sized employers struggling to offer traditional employer-sponsored coverage by allowing them to help employees buy individual insurance instead.
Under the proposed regulations, HRAs would be treated as integrated with IHIC and could reimburse employees for the cost of IHIC if the following conditions are met:
1. The HRA requires that the participant and dependents are enrolled in IHIC for each month the individuals are covered by the HRA.
2. The HRA requires that, subject to COBRA or other continuation requirements:
a) if any individual ceases to be covered by the IHIC, he or she cannot be reimbursed for claims incurred after the IHIC ceases; and b) if the participant and all of the dependents covered by the participant’s HRA cease to be covered by the IHIC, the participant must forfeit the HRA.
3. If an employer offers any class of employees an HRA integrated with IHIC, the employer cannot also offer a traditional group health plan to the same class of employees. This is intended to prevent employers from “steering” more costly employees into the individual market.
- The permitted classes are: full-time employees, part-time employees, seasonal employees, collectively bargained employees, employees in a waiting period, employees under age 25 at the beginning of the plan year, non-resident aliens with no U.S. based income, employees whose primary site of employment is in the same rating area, or a group using a combination of these categories. Former employees offered HRAs are considered to be in the same class they were in immediately before termination.
- The permitted classes are defined in the proposed regulations, borrowing in some cases alternative definitions from the employer mandate (Code Section 4980H) and self-insured plan nondiscrimination rules (Code Section 105(h). Employers can choose the applicable definition, so long as the same set of definitions is used where there is an option.
4. The HRA must be offered on the same terms (e.g. amount) to all participants within the class. This requirement includes a number of nuances stretching beyond the terms of the HRA itself (e.g. availability of cafeteria plan elections to pay for premiums not covered by the HRA). There are also exceptions for increased HRA contributions for older participants, and for participants covering dependents.
5. Employees can buy IHIC outside of the Exchange. However, to ensure participants can choose a premium tax credit for Exchange coverage instead of the HRA benefit, a participant otherwise eligible for coverage must be able to opt out of and waive future reimbursements from the HRA at least annually. Upon termination of employment the remaining amounts in the HRA must be forfeited, or the participant could choose to opt out of and waive future reimbursements.
6. The HRA must implement and comply with reasonable procedures to verify that participants and dependents are (or will be) enrolled in IHIC for the plan year. This could be met through documents from the issuer, or an attestation including prescribed information.
7. Prior to each reimbursement, the participant must substantiate continued enrollment in IHIC.
8. Participants must be provided with a written notice at least 90 days’ before the beginning of the plan year, or for those not yet eligible to participate, no later than the date when the participant can first participate. The proposed regulations include detailed content requirements, including the impact of the HRA on any available premium tax credits.
Proposed Regulations: Standalone HRAs up to $1,800 are Excepted Benefits
In recognition that employers may wish to offer non-integrated HRAs (i.e. a pure reimbursement account), the proposed regulations would expand the current definition of “excepted benefits” to include a standalone HRA option (similar to an excepted benefit FSA). The net result would permit HRAs with up to $1,800 annually in employer contributions, provided that the employer offers other group health plan coverage to HRA-eligible participants, and the HRA is made available on similar terms to all similarly situated individuals.
Excepted benefit HRAs could not reimburse premiums for IHICs, coverage under a group health plan (except COBRA), or Medicare Parts B or D. However, they could be used to reimburse for IHICs or group coverage consisting solely of excepted benefits, COBRA premiums, and short-term, limited duration insurance. It appears these HRAs could also reimburse other eligible medical expenses.
Proposed Regulations: QSEHRAs
The proposed regulations would not treat qualified small employer health reimbursement arrangements (QSEHRA) as “HRAs” for purposes of the proposed regulations, but include some provisions also applicable to QSEHRAs. QSEHRAs remain an option for small employers, with the advantages described in our previous advisory.
Proposed Regulations: ERISA Status of IHIC
The proposed regulations clarify that even if premiums for an IHIC are reimbursed from an HRA or QSEHRA, the IHIC is not itself an ERISA welfare benefit plan, if the following conditions are met:
a) Purchase of any IHIC must be completely voluntary.b) The employer must not endorse or select any particular issuer or insurance coverage (although providing general contact information is permitted).c) Reimbursement for premiums is limited solely to individual health insurance.d) The employer receives no kickbacks in connection with the employee’s selection or renewal of any IHIC.e) Each participant is notified annually that the IHIC is not subject to ERISA.
This means the IHIC purchased with an HRA will not be subject to group health mandates such as COBRA.
Proposed Regulations: New Special Enrollment Period
The proposed regulations would provide a special enrollment period in the individual market for individuals who gain access to an HRA integrated with IHIC or who are provided with a QSEHRA. This is intended to cover situations where employers provide the HRA or QSEHRA to employees but the timing does not coordinate with Exchange open enrollment periods.
Proposed Regulations: Impact on ACA Employer Mandate
Treasury and IRS will be issuing guidance describing a safe harbor for purposes of determining whether an HRA/IHIC coverage would be affordable and minimum value under the ACA’s employer mandate. This could provide employers with planning opportunities for their employer mandate compliance strategy.
Proposed Regulations: Impact on Premium Tax Credit
No premium tax credits are available if an employee accepts the HRA, or if the employee opts out and the HRA/IHIC coverage is affordable. Premium tax credits are available only if the employee opts out of the HRA and the coverage is unaffordable.
Next Steps Comments on the proposed regulations are requested by December 28, 2018. If finalized, the regulations would be effective for plan years beginning on and after January 1, 2020. Employers should not rely on the proposed regulations in formulating benefits for 2019.