On June 13, 2019, the Departments of Labor, Health and Human Services, and the Treasury released an advance copy of a Final Rule on Health Reimbursement Arrangements (HRAs). It will be published in the Federal Register on June 20, 2019. The rule expands the types of HRAs that can be offered starting in 2020.
An HRA is a tax-preferred health plan account for employees. Employers that choose to offer HRAs pay all the costs. The HRA is funded with employer contributions that employees can use for specific health care-related expenses. HRAs offer significant tax advantages. Contributions are tax deductible to the employer and HRA benefits are excluded from the employee’s compensation for income tax and payroll tax (e.g., FICA) purposes. HRAs are not simple, however, and must be designed and administered in accordance with complex rules under the Internal Revenue Code.
Several types of HRAs are allowed under current tax rules and those rules are not changing. The new rule adds two new types of HRAs starting in 2020: Individual Coverage HRA and Excepted Benefit HRA.
Individual Coverage HRA (ICHRA)
The ICHRA is designed for employers that either do not have a group medical plan or do not offer group coverage to some classes of employees. The key rules include:
- Integration. ICHRAs can be used to pay individual (not group) medical insurance premiums, or Medicare premiums, and out-of-pocket costs. This means employees who are not offered group coverage at work and buy an individual policy either on or off the Exchange (or enroll in Medicare). The individual policy must comply with the Affordable Care Act (ACA) requirements. Short-term limited-duration insurance (STLDI) is not ACA-compliant and cannot be integrated with an ICHRA.
- Nondiscrimination. Employers choosing to offer an ICHRA must do so uniformly for all employees in a class. Permissible classes include full-time versus part-time, salaried versus hourly, bargained versus non-bargained, and employees in a specific geographic area (e.g., an insurance rating area). Within a class, the employer may offer different ICHRA benefit amounts for older workers, or workers with more dependents, to account for their higher insurance premiums. Employers also will be able to offer ICHRAs to new hires who are not yet eligible for the employer’s traditional group medical plan.
- Employer mandate. For employers that are subject to the ACA’s employer mandate (also called “play or pay”), providing ICHRAs will probably satisfy the coverage offer requirement. Whether the ICHRA also will satisfy the mandate’s requirement for affordable minimum value coverage may depend on how the ICHRA benefit amount compares to insurance premium costs in the local market. The IRS is expected to provide clarification on this matter, and on the effect of ICHRAs on Exchange premium subsidies, shortly.
- Notices. Employees offered an ICHRA must be given a disclosure notice explaining how the ICHRA affects their ability to qualify for an Exchange subsidy (called a premium tax credit). Employees may opt not to take an ICHRA. Those accepting the ICHRA must attest to the employer that they have or will purchase an ACA-compliant individual insurance policy. For approved models, see model notice and model attestation.
- Cafeteria plans. Another feature of the new rule is that employees may pay premiums for off-Exchange insurance on a pretax basis through the employer’s cafeteria plan (also called a § 125 plan). Cafeteria plans are prohibited from covering individual Exchange policy premiums, but the employer may amend its cafeteria plan to include premiums for off-Exchange policies. If the ICHRA benefit is too low to cover the entire premium, this arrangement will enable employees to pay some premiums with pretax dollars from their paycheck.
Excepted Benefit HRA (EBHRA)
The second type of new HRA that will be allowed in 2020 is the EBHRA. It is very different from the ICHRA summarized above, and different from traditional HRAs. Employers will be able to offer EBHRAs only to employees who also are eligible for traditional group coverage, although actual enrollment in the group plan will not be required. Examples include all ACA-compliant group medical plans, such as major medical plans, PPOs and HMOs.
The employer may fund up to $1,800 per year for the employee’s health expenses and/or premiums for excepted benefits (e.g., dental, vision, short-term limited-duration insurance). The $1,800 limit will be adjusted for inflation after 2020. Medical insurance premiums for individual insurance, group coverage (other than COBRA), or Medicare will not be eligible under the EBHRA.
Lastly, the same employee cannot be offered both an ICHRA and an EBHRA. The ICHRA requires integration with individual ACA-compliant medical insurance and is limited to employees not eligible for the employer’s traditional group plan. The EBHRA, on the other hand, can only be offered to employees who are eligible for traditional group coverage, regardless of whether they choose to enroll.
In announcing the new rule, Labor Secretary Acosta stated “The HRA final rule offers millions of American workers more health coverage choices and portability.” The Secretary neglected to mention that the rule may offer more options, but only if the worker’s employer chooses to provide HRAs and the type of HRA.
As with any tax-preferred benefit, the rules are quite complex. Many questions remain and additional clarification and rules are expected from the federal regulators. In the coming months, employers and their advisors will want to consider their current health plan offerings, or their decision not to offer a group plan, and the pros and cons of traditional HRAs or the new ICHRA and EBHRA options.