Employers may begin offering health reimbursement arrangements (HRAs) as soon as January 1, 2020, to employees who enroll in individual health coverage, under a rule finalized by the Trump administration.
Funds in this new “individual coverage HRA” (ICHRA) will be available to reimburse premiums for individual health insurance, whether offered on or off an Affordable Care Act (ACA) exchange, as well as Medicare coverage. The rule, developed jointly by the U.S. Departments of Labor (DOL), Health and Human Services (HHS), and the Treasury, also creates an “excepted benefit HRA” (EBHRA) that can help cover copayments and deductibles, as well as dental, vision, and short-term coverage.
“The HRA final rule offers millions of American workers more health coverage choices and portability,” said Labor Secretary Alexander Acosta in a statement. “HRAs create a great opportunity for job creators to support their employees and for those employees to be empowered to make the best healthcare decisions for their families.”
For any portion of the individual health insurance premium not covered by an ICHRA, employers may offer pretax salary reduction through a cafeteria plan. This applies only to off-exchange coverage because the cafeteria plan rules prohibit the use of funds for exchange coverage.
An offer of an ICHRA will count as an offer of coverage under the ACA employer mandate, though to avoid penalties an applicable large employer also must fund ICHRA sufficiently to meet affordability requirements. The final rule amends the ACA premium tax credit regulations to specify how the affordability analysis applies in this context.
The rule, originally proposed in October 2018, amends the ACA rules so HRAs can be considered “integrated” with individual health coverage for ACA compliance purposes if certain conditions are met. Stand-alone HRAs not integrated with other coverage previously could not comply with the ACA’s prohibition on annual dollar limits and required first-dollar coverage of preventive services.
The new rule comes in response to Executive Order 13813, issued by President Trump in October 2017. Among other things, the order called on the DOL, HHS, and Treasury to look for ways to increase the usability of HRAs, expand employers’ ability to offer HRAs to their employees, and allow HRAs to be used in conjunction with nongroup coverage.
An HRA is a type of tax-favored account for reimbursing healthcare expenses, including premiums. Unlike a health flexible spending account, an HRA must be funded entirely by the employer and balances may be carried over from year to year. Unlike a health savings account, an HRA need not be tied to a high-deductible health plan but also is not “portable” when an individual leaves employment.
The relief finalized by the agencies is separate from the qualified small employer HRAs (QSEHRAs) first authorized in 2016 by the 21st Century Cures Act and fleshed out in 2017 guidance from the Internal Revenue Service (IRS). QSEHRAs, limited to certain small employers, were simply excluded from the definition of a group health plan for most purposes. The final rule, on the other hand, applies to employers of all sizes and does not affect the status of HRAs as group health plans.
An ICHRA can reimburse employees for their medical expenses (and sometimes their family members’ as well), up to a maximum dollar amount that the employer makes available each year. The employer can allow unused amounts in any year to roll over from year to year.
Employees must enroll in individual health insurance (or Medicare) for each month the employee (or family member) is covered by the ICHRA. This cannot be short-term, limited-duration insurance (STLDI) or coverage consisting solely of dental, vision, or similar “excepted benefits.”
An ICHRA must be offered on the same terms to all employees within a class, except that the amounts offered may be increased for older workers and for workers with more dependents. In a change from the proposed rule, the final rule caps the maximum age-based disparity at a three-to-one ratio, consistent with ACA insurance rating requirements.
An employer cannot offer an ICHRA to any employee to whom it offers a traditional group health plan. However, the employer could decide to offer an ICHRA to certain classes of employees and a traditional group health plan (or no coverage) to other classes of employees.
Employers may group employees into distinct classes based on the following status:
- Full-time employees;
- Part-time employees;
- Employees working in the same geographic location (generally, the same insurance rating area, state, or multistate region);
- Seasonal employees;
- Employees in a unit of employees covered by a particular collective bargaining agreement;
- Employees who have not satisfied a waiting period;
- Nonresident aliens with no U.S.-based income;
- Salaried workers;
- Nonsalaried workers (such as hourly workers);
- Temporary employees of staffing firms; or
- Any group of employees formed by combining two or more of these classes.
To prevent adverse selection in the individual market, a minimum class size rule applies if an employer offers a traditional group health plan to some employees and an ICHRA to others based on full-time versus part-time status, salaried versus nonsalaried status, or geographic rating area if smaller than a state. Generally, the minimum class size rule also applies any of these classes are combined with other classes. The minimum class size is:
- 10 employees, for an employer with fewer than 100 employees;
- 10% of the total number of employees, for an employer with 100 to 200 employees; and
- 20 employees, for an employer with more than 200 employees.
These class size requirements were added to the final version of the rule in response to concerns that the proposed rule did not go far enough to keep employers from sending sicker employees into the individual market while keeping healthier ones on the group plan.
The final version of the rule also allows employers to offer new hires an Individual Coverage HRA while grandfathering existing employees in a traditional group health plan.
Notice and Opt-out
An employer offering an ICHRA must provide a notice to eligible participants regarding its interaction with the ACA premium tax credit. The employer also must have reasonable procedures to substantiate that participants and dependents are enrolled in individual health insurance or Medicare while covered by the ICHRA. A model notice and substantiation form were issued along with the final rule.
Employees must also be permitted to opt out of an ICHRA at least annually so they may claim the premium tax credit if they are otherwise eligible and if the ICHRA is considered unaffordable.
The employer generally will not have any obligations regarding the individual health insurance itself that an employee purchases, because it will not be considered part of the employer-sponsored plan, provided:
- An employee’s purchase of any individual health insurance is completely voluntary;
- The employer does not select or endorse any particular insurance carrier or insurance coverage;
- The employer does not receive any cash, gifts, or other consideration in connection with an employee’s selection or renewal of any individual health insurance; and
- Each employee is notified annually that the individual health insurance is not subject to the Employee Retirement Income Security Act (ERISA).
The final rules also set forth the conditions under which certain HRAs and other account-based group health plans will be recognized as excepted benefits, which are exempt from ACA rules such as the prohibition on annual dollar limits.
An EBHRA may be offered in addition to a traditional group health plan—for example, to help cover the cost of copays, deductibles, or noncovered expenses. EBHRAs generally allow for higher levels of employer contributions than health flexible spending arrangements (FSAs) and can permit rollover of unused amounts from year to year.
To qualify as excepted benefits:
- The annual HRA contribution must be limited to $1,800 per year (indexed for inflation beginning in 2021).
- The HRA must be offered in conjunction with a traditional group health plan, although the employee is not required to enroll in the traditional plan.
- The HRA cannot be used to reimburse premiums for individual health insurance, a group health plan (other than continuation coverage), or Medicare, though it can reimburse premiums for excepted benefits, such as dental and vision coverage, as well as STLDI.
- The HRA must be uniformly available to all similarly situated individuals, though the employer may apply bona fide employment-based classifications.
EBHRAs, which can reimburse medical care expenses other than excepted benefits, are different from an HRA that reimburses only excepted benefits. Employers can continue to offer HRAs that reimburse only excepted benefits, and those HRAs need not meet the requirements for EBHRAs.
Implementation Time Frame
Employers can start offering ICHRAs and EBHRAs on January 1, 2020.
An employer that decides to offer an ICHRA for 2020 must take certain actions before then, including providing the required notice to eligible participants. Employees who want to take advantage of an ICHRA with a start date of January 1, 2020, will need to enroll in individual health insurance during the open enrollment period at the end of 2019 (between November 1 and December 15), unless they have Medicare.
| David A. Slaughter, JD, is a Senior Legal Content Specialist. He focuses on providing, editing, and updating content related to employee benefits and privacy compliance, including the Thompson HR benefits products. Before coming to BLR, he was an employee benefits compliance editor with Thompson Information Services.
Mr. Slaughter received his law degree from the University of Virginia and his B.A. from Dartmouth College. He is an associate member of the Virginia State Bar.Questions? Comments? Contact David at firstname.lastname@example.org for more information on this topic.