If the final Health Reimbursement Accounts (HRAs) ruling issued last month works as designed, it will have a significant impact on the health insurance market while simultaneously creating a defined contribution alternative.

In addition to allowing employers to make an established contribution into an HRA, employees will be able to purchase individual coverage and get reimbursed for premiums.

The U.S. Department of Health and Human Services, the Department of Labor and Department of Treasury issued a final ruling mid-June to expand the use of HRAs by employers. This expansion will fund employee premiums in the individual health insurance market effective January 1, 2020. The new ruling provides an alternative to employers who may be facing the ultimatum to either provide benefits or cancel coverage.

The regulations permit employers to contribute any amount to individual-coverage HRAs (ICHRA) if they are available on the same terms to all individuals within a class of employees. There are some exceptions when it comes to amounts offered to older employees or employees with more dependents.

The HRA Breakdown

For large employers, offering an ICHRA counts as an offer of coverage under the employer mandate. According to the mandate, the employer’s payment responsibility after the implementation of an ICHRA depends on the affordability of the HRA. Establishing affordability is done through the premium-tax credit rule (issued as part of the HRA rule) and is based on the set amount the employer makes available to each employee.

To meet the affordability requirement and avoid an employer mandate payment, companies will need to contribute enough for the offer of the ICHRA. The IRS is expected to provide more guidance on how the employer mandate applies to ICHRAs in the future.

If the ICHRA does not fully cover premiums for individual insurance coverage, employers may permit employees to pay the balance through a pre-tax Section 125 cafeteria plan. The IRS prohibits employers from allowing employees to pay for coverage through an exchange on a pre-tax basis. This exclusion does not apply to coverage that is purchased outside of an Affordable Care Act (ACA) exchange.

Employers need to permit employees to opt out of an ICHRA so they may claim the ACA premium tax credit, but only if they are otherwise eligible for the premium-tax credit and an ICHRA is considered unaffordable.

It is also important to note that employers cannot offer an ICHRA to any employee already offered a traditional group health plan. Employers may decide to offer an ICHRA to certain classes of employees through distinctions based on the following statuses:

• Full-time employees
• Part-time employees
• Employees working in the same geographic location (generally, the same insurance rating area, state, or multi-state region)
• Employees in a unit covered by a particular collective bargaining agreement;
• Employees who have not satisfied a waiting period
• Non-resident aliens with no US-based oncome
• Salaried workers
• Non-salaried workers (such as hourly workers)
• Temporary employees of staffing firms
• Any group of employees formed by combining two or more of these classes

Minimum class size rules apply to prevent adverse selection in the individual market. For example, an employer cannot offer traditional group health plans to some employees and an ICHRA to others based on full-time versus part-time status, salaried versus non-salaried status or geographic location.

A participant must enroll in individual health insurance coverage or the HRA becomes noncompliant. To ensure compliance, employer sponsors of ICHRAs must develop a process to account for effective dates for employees to enroll in individual coverage. These measures could include submission of documentation from a third party or an attestation stating the participant’s intent to enroll for coverage on a specified date. 

An HRA can rely on a participants’ documentation or attestation, unless it has actual knowledge that the employee or dependents are not enrolled, or will not enroll, in individual coverage. An inaccurate attestation or document will not cause the HRA lose its integrated status unless it has actual knowledge of the inaccuracy. If the HRA knows of an inaccuracy, it cannot reimburse for expenses. While the rule requires ongoing verification, this requirement could be satisfied through attestations. Beyond the attestation, the HRA would not have to confirm that an individual is enrolled in qualifying coverage in the individual market.

How Employers and Employees Can Benefit

Small employers will particularly benefit by having an option to better attract, retain and motivate employees without the costs and complexities of offering health coverage.

Employees will have increased portability of coverage and options to meet individual needs through the market or exchange. Employees will also benefit because employers can create an HRA of up to $1,800 per year even if they offer traditional health plans. To be eligible, employees cannot enroll in the traditional group health plan. If eligible, they can be reimbursed for qualified medical expenses including vision, dental and short-term duration insurance.

The Market Impact

An analysis by the Treasury Department asserts that these changes could boost individual enrollment, stabilizing the individual market and decreasing the number of uninsured. Payer industry groups and healthcare organizations, however, say that the changes could result in higher costs, limit accessibility and cause employees to drop ACA-compliant coverage for association health plans (AHPs). If that happened, ACA premiums would higher because of a less healthy risk pool. The American Medical Association and other leading provider organizations have objected to short-term health plan rules that don’t cover essential health benefits for three years.

As employers begin to comply with this new rule, we expect a major impact on healthcare markets and traditional health plan coverage offerings that will initially be most noticeable in the small group market.

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.