On June 13, 2019, the Departments of Labor (DOL), Health and Human Services (HHS) and the Treasury (Departments) issued a final rule that expands the usability of health reimbursement arrangements (HRAs). Effective in 2020, the final rule establishes two new types of HRAs:
- Individual Coverage HRA: Allows employers to offer an HRA to be used to reimburse the cost of individual market premiums on a tax-preferred basis, subject to certain conditions, as an alternative to traditional group health plan coverage.
- Excepted Benefits HRA: Allows employers that offer traditional group coverage to provide an HRA of up to $1,800 per year (as adjusted) to reimburse certain qualified medical expenses.
Individual Coverage HRA:
The final rule allows employers to offer a new “individual coverage HRA” as an alternative to traditional health plan coverage, subject to certain conditions. The rule allows these HRAs to be integrated with individual insurance coverage for purposes of compliance with the Affordable Care Act (ACA), eliminating the existing prohibition on this type of arrangement. This means that HRAs may be used to reimburse employees for the cost of individual health coverage on a tax-preferred basis, if the following conditions are met:
- The HRA must require that the participant and any dependents are enrolled in individual health insurance coverage for each month that the individual(s) are covered by the HRA;
- A plan sponsor that offers an individual coverage HRA to any class of employees may not also offer a traditional group health plan to the same class of employees;
- Employers may make class distinctions, using classes based on the following status:
- Full-time employees,
- Part-time employees,
- Employees working in the same geographic location (generally, the same insurance rating area, state, or multi-state region),
- Seasonal employees,
- Employees in a unit of employees covered by a particular collective bargaining agreement,
- Employees who have not satisfied a waiting period,
- Non-resident aliens with no U.S.-based income,
- Salaried workers,
- Non-salaried workers (such as hourly workers),
- Temporary employees of staffing firms, or
- Any group of employees formed by combining two or more of these classes.
- Employers may make class distinctions, using classes based on the following status:
- If a plan sponsor offers an individual coverage HRA to any class of employees, the HRA must generally be offered on the same terms to all participants within the class;
- Participants must be allowed to opt out of and waive future reimbursements from the HRA once per plan year (and, upon termination of employment, either the amounts remaining in the HRA are forfeited or the participant is allowed to permanently opt out of and waive future reimbursements);
- The HRA must implement and comply with reasonable procedures to substantiate that participants and dependents are (or will be) enrolled in individual health insurance coverage for the plan year.
Unfortunately, the final rule did NOT contain any final rule on how Applicable Large Employers (ALEs) subject to the Employer Mandate are supposed to determine the affordability of the coverage offered to its employees. However, based upon a proposed regulation issued in IRS Notice 2018-88, each employee would have his or her coverage tested individually for affordability using the lowest cost silver plan available to that employee in the individual market, based upon the zip code of the employee’s place of employment and that individual employee’s age. This provision, along with the substantiation and notice requirements, may make offering an HRA option administratively burdensome to most larger employers.
Additionally, please note that neither age nor Medicare-eligibility is one of the enumerated classed listed above. Therefore, for group health plans subject to the Medicare Secondary Payer (MSP) provisions, offering an HRA to reimburse Medicare premiums is impermissible if it provides a financial incentive for Medicare beneficiaries to decline enrollment in the employer’s group health plan and make Medicare the primary payer. An employee receiving reimbursement for Medicare coverage would need to incidentally be inside of one of the above-named classes.
Written Notice Requirement
The final rule includes a disclosure provision to ensure that employees understand the benefit. Under this disclosure requirement, an HRA must provide written notice to eligible participants including, among other things, the following information:
- A description of the terms of the HRA, including the amounts newly made available as used in the affordability determination under the Code Section 36B proposed regulations;
- A statement of the participant’s right to opt out of and waive future reimbursement under the HRA;
- A description of the potential availability of the premium tax credit for a participant who opts out of and waives an HRA if the HRA is not affordable under the proposed premium tax credit regulations; and
- A description of the premium tax credit eligibility consequences for a participant who accepts the HRA.
The HRA must provide the written notice to each participant at least 90 days before the beginning of each plan year (or no later than the date the participant is first eligible to participate in the HRA, for participants who are not eligible to participate at the beginning of the plan year). The Departments have provided a model notice with instructions that individual coverage HRAs may use to satisfy this notice requirement.
Individual coverage HRAs must implement and comply with reasonable procedures to satisfy two substantiation requirements:
- The annual coverage substantiation requirement: The HRA must substantiate that participants and each dependent covered by the HRA are, or will be, enrolled in individual health insurance coverage or Medicare Part A and B or Medicare Part C for the plan year (or for the portion of the plan year the individual is covered by the HRA, if applicable).
- The ongoing substantiation requirement: The HRA may not reimburse a medical care expense unless, prior to the reimbursement, the participant substantiates that the individual on whose behalf the reimbursement is requested is (or was) enrolled in individual health insurance coverage or Medicare Part A and B or Medicare Part C for the month during which the medical care expense was incurred.
Each of these substantiation requirements may be satisfied by a participant attestation, among other permissible methods (such as providing a third party document or, for the ongoing substantiation requirement, direct payment of insurance premiums). The Departments have developed model attestations for HRAs that choose to use attestation to satisfy either the annual coverage substantiation requirement or the ongoing substantiation requirement.
The Departments are concerned that allowing HRAs to be integrated with individual health coverage could cause employers to encourage higher risk employees (that is, those with high expected medical claims) to obtain individual market coverage, instead of enrolling in the employer-sponsored plan, to reduce the cost of offering the employer-sponsored plan to lower risk employees. As a result, the final rule includes protections to prevent a plan sponsor from steering participants or dependents with adverse health factors away from the employer-sponsored plan and into the individual market.
Excepted Benefit HRAs
In addition, the final rule expands the definition of limited excepted benefits by establishing a certain type of HRA that would qualify as excepted benefits that are not subject to some ACA requirements (called an “excepted benefit HRA”). This change allows employers offering traditional employer-sponsored coverage to offer an HRA of up to $1,800 per year (indexed annually for inflation) to reimburse an employee for certain qualified medical expenses, including premiums for:
- Individual health coverage that consists solely of excepted benefits (such as stand-alone vision and dental plans, accident-only coverage, workers’ compensation coverage or disability coverage);- Coverage under a group health plan that consists solely of excepted benefits; and
- COBRA coverage.
However, an excepted benefit HRA cannot reimburse premiums for individual health coverage, coverage under a group health plan (other than COBRA or other group continuation coverage), or Medicare Parts B or D.
This final rule was issued in response to a 2017 executive order directing federal agencies to expand access to HRAs. The rule is effective for plan years beginning on and after Jan. 1, 2020, so employers should quickly consider whether they could make use of either of these HRA options for employees. Additionally, attorneys general from four states argued in a comment letter that the HRA policy is at odds with the Affordable Care Act and could cause premiums to rise, suggesting that a lawsuit could be forthcoming – similar to what we have seen transpire with the administration’s Association Health Plan Rule.