When the Affordable Care Act (ACA) was passed in 2010, employers (and by default employees) had limited choices.
Employers had to play by the strict limited rules and offer compliant programs or pay a penalty of $2,000 per person. Consequently, employees had limited options.
These reasons and other rules that were enacted effectively prohibited the practice of health reimbursement accounts (HRAs) to be used by employees to purchase individual health insurance.
The U.S. departments of the Treasury, Health and Human Services and Labor recently issued a rule to address concerns about health reimbursement arrangements, an employer-funded benefit that reimburses workers for out-of-pocket medical expenses. The proposed regulations remove the restrictions on using HRA funds to purchase individual market health insurance coverage (if certain conditions are met) by creating individual coverage HRAs (ICHRA), or the use of stand-alone HRAs that employees can use to pay for out-of-pocket medical expenses, which are labeled as excepted benefit HRAs (EBHRAs).
The rule sets out four main stipulations for an HRA to qualify as an EBHRA:
- Other group plan coverage must be made available to the employee
- In 2020, employers could not offer more than $1,800, an amount that would grow by inflation for subsequent years
- The HRA could not be used for premiums for individual health insurance, group health insurance, or Medicare parts B or D, although it could be used for STLDI or COBRA premiums and
- EBHRAs must have uniform availability—employers cannot discriminate based on health status
How does the proposal impact employers and employees?
- The proposed regulations permit an employee to pay for premiums on a pre-tax basis for any for individual health coverage that is not covered by the ICHRA, but only for coverage that is purchased off exchange. The ability to purchase this coverage on a totally tax-free basis (not subject to payroll and income taxes) lowers the cost.
- The ACA individual insurance premiums can increase by up to 300% based on an individual’s age, and proposed regulations do not alter that. However, what they do is permit an employer to increase the maximum amount available to a participant under an ICHRA based on an increase in a participant’s age. The proposed regulations make clear, however, that the same increase must apply to all similarly aged participants in the same class of employees. This is a great advantage to employers as they can skew more to their more senior employees on a favorable advantaged basis. We expect safe harbor rules to be issued, which ultimately facilitates the creation of this benefit feature and would not create testing requirements for non-discrimination.
- The maximum dollar amount available under an ICHRA may also increase as the number of the participant’s dependents covered under the ICHRA increases. The advantage for the employee with multiple dependents is to potentially receive a larger allocation than those who are single or have fewer dependents.
- Proposed regulations provide that employers who offer ICHRAs must allow participants to opt out of and waive future reimbursements from the ICHRA at least annually. Additionally, upon termination of employment, either the amount in the ICHRA must be forfeited or participants must be given an opportunity to permanently opt out of future reimbursements. This is done to permit employees to decide which is better – the premium tax credit afforded under the exchange that can reduce cost of coverage or the HRA.
- The proposed rules create an expected benefit health reimbursement arrangement (EBHRA), an ideal design that employers should offer if they intend to provide a modest annual amount to employees (up to $1,800). This can be used on a tax-free basis for a full range of medical expenses by employees and the best news for employers – they do not have to monitor the type of coverage, if any, that employees select.
- An HRA is an employer-sponsored plan that can satisfy the employer mandate requirements created under the ACA and require certain employers to offer compliant plans that included minimum levels of essential benefits at an affordable cost.
Does this all really matter?
The intention, it appears, is that employers could offer tax-free money for health benefits completely separate of a qualified individual or group plan. This is a big deal as employers could offer tax-free money to employees to pay for everything except certain qualified health plans and presumably for other medical plans, short-term plans, dental, etc. Although the benefit level might not be attractive to some, it should be well received for certain classes of employees who often go without insurance. Also, this arrangement can be used for programs such as direct primary care clinics, short-term plans, telemedicine plans or certain worksite provider solutions.
Expanded HRAs are a real part of the shift going on in the healthcare industry from defined benefit to defined contribution health plans. This should sound familiar as this mirrors the move from employers providing pension retirement benefits to the 401(k) model. Like the 401(k) move, these proposed regulations will shift a greater burden of responsibility onto the employee.
The Treasury expects that 10 million employees spread across 800,000 employers would have insurance through HRAs, and almost 1 million of those employees would be newly insured. The proposed regulations will be effective as of January 1, 2020.
HRAs were an unnecessary loss of the ACA. This proposed rule should give employers, who were forced into all-or-nothing decisions regarding their employees’ healthcare, clearly more flexibility and relief. In addition, employees will have more options and if more people actually participate in the Marketplace Exchange, this may also have a favorable impact on stabilizing costs.
The Department of Labor estimated that only 30 percent of businesses with 3-24 employees offer health plan benefits, and 44 percent of businesses 25-50 employees offer insurance plans. Access to the new HRA structure may allow a greater number of employers to provide insurance benefits to their employees, a potential improvement for smaller employers.
Health reimbursement arrangements can provide another way for employers of all sizes to help employees to access quality, affordable health coverage.
Elliot Dinkin is president and CEO at Cowden Associates, Inc., specializing in helping corporate clients find the best solutions, both for the enterprise and its employees, with regard to compensation, healthcare benefits, retirement and pension issues, and Taft-Hartley fund consulting.
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