Alert / Employee Benefits
IRS-proposed regulations would reinvigorate HRAs, but add complexity too

Shortly after passage of the Affordable Care Act (ACA), the IRS quashed the ability of employers to offer stand-alone health reimbursement arrangements (HRAs) subsidizing an employee’s purchase of health insurance in the individual health insurance market. This week, responding to instructions from the Trump administration, the IRS proposed regulations that unwind that prohibition.

The proposed regulations leave current HRA options (discussed below) substantially untouched while creating two new HRA opportunities.

First, an employer could offer employees, in lieu of group medical coverage, an HRA reimbursing the employees for their premium expense (and if desired, out-of-pocket medical expenses) for coverage purchased on the individual medical insurance market. This new HRA could only provide benefits to individuals actually enrolled in individual market coverage (including student health insurance).

Lockton comment: Employers too small to be subject to the ACA employer mandate may, under current law, use qualifying small-employer HRAs, or “QSEHRAs,” to help employees defray the cost of individual market health insurance. Thus, the newly proposed rules would allow larger employers to do the same.

Second, the regulations would permit employers to offer a new kind of HRA called an “excepted benefit HRA.” Under this type of an HRA, an employer could annually reimburse up to $1,800 (adjusted for inflation) of an employee‘s unreimbursed medical expenses (e.g., copays or coinsurance). The HRA could also be used for group or individual market insurance premium, but only for excepted benefits like dental, vision and select other limited coverages; the HRA could not be used to reimburse premiums for individual or group medical insurance coverage (except for COBRA premiums), nor for premiums for Medicare Parts B or D.

The most interesting aspect of an excepted benefit HRA is that, while the employer who offers it must also offer the HRA enrollees coverage under a group medical plan, the HRA enrollees don’t have to be covered under the group medical plan to have the HRA. Thus, an employee could have coverage under an excepted benefit HRA, and no other coverage at all.

Lockton comment: While employers subject to the ACA’s employer mandate may find the excepted benefit HRA useful, these employers might have difficulty taking advantage of the first category of HRA. It’s unclear how the HRA could meet the ACA employer mandate’s obligation to offer medical coverage that provides minimum value and is affordable.

The IRS pledges to supply additional guidance on this point. The guidance is expected to create a safe harbor allowing the employer to satisfy the minimum value requirement if the employee’s individual health insurance policy meets “minimum value” (at least 60 percent actuarial value) standards and if, taking into account the employer’s subsidy through the HRA, the premium cost to the employee is affordable.

The proposed rules, if finalized, won’t apply before 2020. In the meantime, employers are not permitted to rely on them. In other words, interested employers should not rush out to establish new HRAs for 2019. Because the rules are merely proposed we will address here the highlights and main components of the rules but leave to another day – after the rules are finalized – a more detailed discussion of their many requirements and nuances.

Background: The tangled web that is the contemporary HRA

In simpler times, before Alexa, driverless cars and scooters for rent on every street corner, many employers offered HRAs alongside – and sometimes in lieu of – major medical coverage. Where the HRA was in lieu of other group health coverage employers typically allowed the HRA to reimburse premium expenses for individual market coverage.

The ACA dismantled much of that in short order. Regulators didn’t want employers dumping their employees, particularly those with the worst health risks, into a post-ACA individual market that bans pre-existing condition restrictions, requires insurers to issue a policy to any applicant, and provides heavy federal subsidies to most insurance purchasers.

The regulators primarily used the ACA’s ban on dollar limits to put the kibosh on HRAs reimbursing individual market premium, at least for active employees. HRAs by their very nature, of course, impose dollar limits. The employer only makes available a finite number of dollars in any employee’s HRA account each year.

Lockton comment: HRAs, considered alone, also don’t meet the ACA’s preventive care mandate.

Regulators said they’d nevertheless allow HRAs to survive to the extent they’re coupled with (the rules say “integrated with”) other group medical coverage. As long as the HRA enrollee is offered (and is enrolled in) other coverage that meets the ACA’s ban on dollar limits, the preventive care mandate, and other ACA requirements, the HRA is permitted to survive.

However, under current rules an HRA can never integrate with – can never be used to support the purchase of – an individual health insurance policy for an active employee.

The first crack in the HRA-quashing dam occurred in late 2016, when Congress, under GOP leadership long opposed to the ACA, expressly authorized small employers – those too small to be subject to the ACA’s employer mandate – to offer individual market premium reimbursement through QSEHRAs.

Then a year ago the Trump administration issued an executive order directing federal agencies to consider how to expand the use of such HRAs for larger employers.

The order directed federal agencies to “consider proposing regulations or revising guidance, to the extent permitted by law and supported by sound policy, to increase the usability of HRAs, to expand employers' ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup coverage.”

The newly proposed regulations are the regulators' response to that order.

Lockton comment: The newly proposed rules don’t affect the regulations currently in effect regarding HRAs integrated with group major medical coverage (e.g., HRAs providing for reimbursement of out-of-pocket medical expenses under the group plan). The proposed rules would simply expand the universe of HRA options available to employers.

The potential future state of HRAs reimbursing individual health insurance policy premium

Choose one: Group coverage or a premium-reimbursing HRA

While the proposed regulations would allow an employer to offer its employees an HRA to reimburse medical insurance premium expenses in the individual market, the regulations would force the employer to choose between offering either such an HRA or group medical coverage to the employee. The employer could not offer both.

Lockton comment: This ban on offering a choice between group coverage and an HRA reimbursing individual market premium is designed to prevent employers from offering group coverage to a group of employees and then incentivizing the poorest health risks to decline the employer’s coverage and leap into the community rated individual market. Such an event could quickly deteriorate the risk profile in the individual market, forcing premiums and federal subsidies to spike.

Whatever choice the employer makes would have to apply to the same class of employees, and on the same terms. The employer would be permitted, however, to vary the HRA benefit within a given class based on age or family size of the employee if each employee (in the relevant class) of the same age or with the same family size receives the same HRA benefit.

Permissible employee classifications include: full-time, part-time, seasonal, bargaining unit, under age 25, in a waiting period for medical coverage, non-resident alien, and assigned to a worksite in the same individual market rating area.

Lockton comment: For example, an employer would be allowed to offer group major medical coverage to full-time employees but only an HRA to part-time employees, or offer group major medical coverage to employees in one state but only an HRA to employees in another state.

HRA coverage would be contingent on corresponding individual market medical coverage

Just as current HRA rules require that an employee can’t have HRA coverage unless enrolled under other group coverage, an employee offered HRA coverage under this new breed of individual market-related HRA may have that coverage only if the employee demonstrates he or she (and any dependents covered by the HRA) has medical insurance through the individual market. That coverage may include fully insured student health insurance.

If that individual market coverage were to lapse, the employee would forfeit the HRA benefit.

Lockton comment: The proposed rules are silent on how the COBRA rules might apply, if at all, in this scenario.

The employer is required to adopt reasonable procedures to ensure the HRA enrollee has individual market medical insurance. The proof may be as simple as the employee showing his or her insurance ID card, or supplying an attestation providing details of the coverage.

Just about anything other than “excepted benefits” such as dental or vision coverage is adequate individual market medical insurance to allow for the employee’s coverage under the HRA.

Lockton comment: Interestingly, a day before the IRS offered the proposed HRA regulations, the Department of Health and Human Services (HHS) issued rules easing a state’s ability to obtain waivers from certain ACA requirements that would otherwise apply to individual medical insurance offered in the state.

The timing of the IRS and HHS rules is not a coincidence. It’s clear the administration wants states to have greater flexibility to offer skimpier health insurance than the ACA would otherwise allow and wants employers to have the freedom to help pay for the coverage through an HRA, in lieu of group medical coverage.

Of course there’s a notice requirement

What would a new set of federal health plan-related regulations be without a new notice requirement? Employers offering one of the new HRAs must notify eligible employees upon initial eligibility and before the beginning of each plan year regarding the HRA benefit, the right of the employee to opt out, the effect of the HRA’s coverage or what impact opting out has on the employee’s ability to obtain federal subsidies in an ACA marketplace, and other matters.

The potential future state of excepted benefit HRAs

As noted above, the proposed regulations would also create an excepted benefit HRA. The excepted benefit HRA would differ significantly from the HRA offering reimbursement of individual market medical insurance premiums. The following rules apply to excepted benefit HRAs. The HRA:

  • If offered, would have to be offered only to employees to whom the employer also offers group medical coverage (though the employee need not enroll in the group plan, or any group or individual plan, for that matter).
  • Could not offer a benefit of more than $1,800 per year, indexed for inflation.
  • Could reimburse unreimbursed medical expenses (e.g., copays and coinsurance) and premiums for group COBRA coverage, for individual short-term limited insurance, and for group or individual excepted benefit coverage, such as dental and vision coverage.
  • Could not reimburse premiums for individual market medical insurance, group medical insurance other than COBRA, or Medicare Parts B and D.
  • Could cover the employee even if he or she is not enrolled in any other healthcare coverage.
  • Could not be offered in conjunction with an HRA reimbursing individual medical insurance premiums (the first new type of HRA described in this Alert).
  • Must be offered on the same terms to similarly situated employees.
  • Need not provide an additional notice to enrollees.
  • Is not subject to ACA prohibitions on annual or lifetime limits or ACA minimum essential coverage reporting requirements.

Lockton comment: The value of an excepted benefit HRA could be that they provide a limited benefit to employees who decline the employer’s group coverage, without subjecting the employer to numerous (and sometimes onerous) compliance requirements. A risk to employers for such an offering might be creating an incentive for healthy employees to decline the employer’s group health plan, leaving the group plan with an increasing number of more costly participants.

DOL to clarify that individual policies funded through the new HRAs are not subject to ERISA

The Department of Labor (DOL) has also weighed in with some proposed rules of its own, addressing the application of ERISA to the individual health insurance policies purchased by employees with help from one of the HRAs described in the IRS’s proposed rules.

The DOL’s rules would ensure the individual health insurance purchased through the HRA would not be considered part of the employer’s ERISA plan if certain conditions are met, such as: the employee’s participation in the HRA must be voluntary, the employer can’t dictate or endorse the employee’s insurance carrier, the employer can’t receive compensation related to the employee’s purchase, and the employer notifies the employees each year that ERISA doesn’t apply to individual market policies.

The HRA itself would be subject to ERISA.

Conclusion

We can expect federal regulators to finalize the proposed rules in 2019, likely in time to allow for implementation for 2020, for employers that wish to consider substituting individual market premium reimbursement for group coverage.

There are perils in doing so, including the fact that individual market inflation has far outstripped inflation in the group market over the past several years, individual market premiums can vary significantly by location, and employers lose most of their ability to access employee health data and manage employee health risks when coverage moves from the group to the individual market.

Still, the rules will be of interest to some employers, most likely smaller employers.

Not Legal Advice: Nothing in this Alert should be construed as legal advice. Lockton may not be considered your legal counsel and communications with Lockton's Compliance Services group are not privileged under the attorney-client privilege.

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