On October 29, 2018, the Internal Revenue Service, Department of Labor and Department of Health and Human Services (the “Departments”) jointly released proposed regulations in response to President Trump’s executive order calling for an expansion of the ability of employers to offer health reimbursement arrangements (“HRAs”) to their employees and to allow HRAs to be used in conjunction with nongroup coverage.
By way of background, an HRA is an employer-funded group health plan from which employees are reimbursed tax-free for qualified medical expenses (and/or health care premiums) up to a fixed dollar amount per year. Under current Affordable Care Act (“ACA”) guidance, HRAs can, in general, only be offered to employees to the extent that they are appropriately “integrated” with other group health plan coverage. The proposed regulations introduce two additional types of permitted HRAs: (1) HRAs integrated with individual health insurance coverage (“Integrated HRAs”), and (2) HRAs that reimburse employees for certain expenses (“Excepted Benefit HRAs”). Below is a summary of these two new HRAs and their potential impact.
The proposed regulations lift the current prohibition on using an HRA to fund individual health insurance coverage if the following requirements are met:
- Participants and any dependents covered by the Integrated HRA must be enrolled in individual health insurance coverage (other than coverage that consists solely of excepted benefits, such as limited scope dental/vision benefits or certain employee assistance programs).
- The employer may not offer the Integrated HRA and a traditional group health plan to the same class of employees. This requirement is intended to prevent employers from steering selected employees away from group health plan coverage in favor of individual coverage funded by an Integrated HRA. Permitted classes of employees include full-time employees, part-time employees, seasonal employees, collectively bargained employees, employees that have not satisfied the waiting period for coverage, employees who have not reached age 25 prior to start of the plan year, non-resident aliens with no U.S.-based income, and employees whose primary site of employment is in the same rating area.
- The employer must offer the Integrated HRA on the same terms to all employees within a particular class, with some permitted variations (e.g., offering a higher dollar amount to certain individuals within a class on the basis of family size or age). The Departments also intend to issue guidance addressing the interaction of the nondiscrimination requirements for self-insured health plans with Integrated HRAs.
- Participants must be allowed to opt-out of the Integrated HRA at least annually. Under the current ACA rules, HRA participants are not eligible for a premium tax credit on the Exchange. Allowing employees to opt out of the Integrated HRA will permit them to take advantage of the premium tax credit (if they are otherwise eligible for such credit).
- The plan sponsor must provide written notice of the Integrated HRA to eligible participants at least 90 days before the beginning of the plan year for which such HRA will be in place. This notice must include a description of the terms of the Integrated HRA (including the annual dollar amount that the employer will credit), the participant’s ability to opt out, and the premium tax credit consequences if the Integrated HRA is used.
While we do not anticipate that larger employers will adopt Integrated HRAs wholesale, smaller employers (especially those who are not required to offer group health coverage under the employer mandate) may find Integrated HRAs attractive. In addition, Integrated HRAs could be an effective means for employers of all sizes to assist employees (part-time workers, for example) who are not otherwise eligible under the employer’s group health plan in obtaining individual coverage.
Excepted Benefit HRAs
The proposed regulations also allow for a standalone HRA that could be used to reimburse participants for certain limited benefits. This Excepted Benefit HRA must meet the following requirements:
- Plan sponsors must make other group health insurance coverage available to employees who are offered the Excepted Benefit HRA, but enrollment in the group health plan is not required for participation in the Excepted Benefit HRA.
- Employers can make an annual contribution credit of up to only $1,800 per year under an Excepted Benefit HRA.
- The Excepted Benefit HRA can only reimburse medical expenses and premiums for (1) excepted benefits such as limited-scope dental or vision coverage or certain employee assistance plans, (2) short-term limited-duration policies, and (3) COBRA. The Excepted Benefit HRA may not be used to reimburse premiums for individual health coverage, non-COBRA group coverage, or Medicare Parts B or D coverage.
- Plan sponsors must make Excepted Benefit HRAs available to all similarly situated individuals (based on bona fide employer classifications) on the same terms.
As noted above, HRAs must be integrated with a group health plan to be compliant under the ACA. However, under the proposed regulations, employers who wish to offer a tax-free reimbursement arrangement without regard to whether or not employees have qualified insurance coverage could do so through an Excepted Benefit HRA. As such, we expect that this would be a welcome change for employers.
The Departments are currently accepting comments on the proposed regulations until December 28, 2018. As currently drafted, the proposed regulations would (once finalized) go into effect for plan years beginning on or after January 1, 2020.