Health Reimbursement Arrangements (HRAs): New Options For Employers
Health Reimbursement Arrangements (HRAs): New Options For Employers
At least since the enactment of the Affordable Care Act (ACA) in 2010, employers have been searching for ways to assist their employees in managing rising health care costs. A Health Reimbursement Arrangement (HRA) is one available tool, but legal restrictions have historically limited the utility of HRAs. In recent years, however, new government rules have substantially expanded the availability of HRAs. Beginning in 2020, two new types of HRAs will be among the choices offered to employers – the Individual Coverage HRA (ICHRA) and the Excepted Benefit HRA (EBHRA).
An HRA is an employer-sponsored group health plan providing for the payment or reimbursement of medical expenses (including, in some cases, premiums for health insurance) incurred by employees. The term “Health Reimbursement Arrangement” began to be used regularly following 2002 IRS guidance (Notice 2002-45) outlining the tax treatment and other rules governing these arrangements. The ACA substantially limited the use of HRAs, however, as the IRS ruled in 2013 (via Notice 2013-54) that an arrangement under which an employer pays or reimburses employees for premiums on individual health insurance policies (referred to as an “employer payment plan”) constitutes a group health plan that violates the ACA, due to failure to satisfy the prohibition of annual and lifetime limits on essential health benefits and the preventative care mandate. (HRAs that were “integrated” with an employer’s insured group health plan to satisfy these rules were still permitted.) As a result, employers who wanted to help their employees by paying all or a portion of their costs for individual policies could not do so without facing major penalties ($100 per employee per day).
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA):
In response to the above-described dilemma, the 21st Century Cures Act passed in December 2016 created a new type of HRA, called the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), effective for 2017 and subsequent years. Under a QSEHRA, an employer is permitted to pay or reimburse employees for premiums paid for individual health insurance policies (and, if permitted by the terms of the plan, other medical expenses), provided that all of the requirements set forth in IRS guidance (Notice 2017-67) are met. In particular, an employer is eligible to sponsor a QSEHRA only if the employer (a) has fewer than 50 full-time employees (counting full-time equivalents), and (b) does not maintain any group health plan covering employees. For this purpose, the term “group health plan” is construed broadly to include plans such as dental and vision plans, and health flexible spending arrangements (FSAs) that are part of Section 125 cafeteria plans. In addition, employer
contributions under a QSEHRA are subject to annual limits of $5,150 per single employee and $10,450 per employee with family coverage (2019 limits).
Executive Order and New Regulations:
In October 2017, President Trump issued Executive Order 13813, directing the Secretaries of the Treasury, Labor and Health and Human Services Departments (the “Departments”) to propose regulations increasing the utility of HRAs, to expand the ability of employers to offer HRAs to their employees, and to allow HRAs to be used in conjunction with “non-group coverage” (i.e., individual policies). The Departments in fact issued proposed regulations in October 2018, and then final regulations in June 2019, to be effective in 2020. The ICHRA and the EBHRA, discussed in further detail below, are products of these regulations.
Individual Coverage Health Reimbursement Arrangement (ICHRA):
Prior to the new regulations, an HRA (other than a QSEHRA) could not be integrated with an individual health insurance policy. Beginning in 2020 and via an ICHRA, an employer will be permitted to pay or reimburse employees for premiums paid for individual policies secured through either an ACA-compliant exchange or outside of the exchange (or Medicare). Unlike the QSEHRA, the ICHRA is available to any employer without regard to size, and is not subject to any annual contribution limits. However, the ICHRA is subject to the following rules:
- Coverage Verification. The ICHRA must have reasonable procedures to verify that the participant is enrolled in individual insurance (or Medicare) for each month of ICHRA coverage. The enrollment must be confirmed by the participant with each request for reimbursement. A model attestation has been provided by the Departments for this purpose.
- No Group Health Plan Coverage. The ICHRA may not be available to any employee to whom the employer offers traditional group health plan coverage, and no choice between the two may be offered by the employer.
- Same Terms Within a Class. If an ICHRA is offered to a class of employees, it must be offered on the same terms (i.e., same amount and conditions) to all employees within the class. (Variations based on age or family size are permitted, subject to certain limitations.) For this purpose, the regulations define permissible classes to include full-time employees, part-time employees, seasonal employees, employees covered by collective bargaining, employees with less than 90 days of service, employees under age 25, employees working at a particular location, salaried employees, and hourly employees. Classes must also meet certain minimum size requirements. For example, for an employer with more than 200 employees, the minimum class size is 20.
- Opt Out. Each employee eligible for the ICHRA must have the opportunity to opt out and waive future reimbursements from the ICHRA at least annually. This allows individuals who are eligible for a premium tax credit (PTC) to offset the cost of premiums paid for marketplace health insurance. To ensure that individuals understand how ICHRA participation can affect the availability of PTC, a written notice must be provided by the employer at least 90days before the beginning of each plan year (or no later than the date on which the individual first becomes eligible to participate in the ICHRA). Model notices have been provided by the Departments for this purpose.
- Other Laws. While an ICHRA (like any other HRA) is generally subject to ERISA, the individual insurance coverage funded by the ICHRA is not subject to ERISA, provided that (a) purchase of the insurance is completely voluntary for employees, (b) the employer does not select or endorse any particular insurer or coverage, (c) the employer receives no consideration in connection with the employee’s selection of individual coverage, (d) reimbursements for premiums are limited to individual coverage that does not consist solely of “excepted benefits,” and (e) participants are notified annually that the individual coverage is not covered by ERISA. Other laws that generally apply to employer-sponsored group health plans, including COBRA and HIPAA, apply to ICHRAs.
Excepted Benefit Health Reimbursement Arrangement (EBHRA):
The EBHRA, a more-limited form of HRA, can only be offered in conjunction with an employer’s traditional group health plan, although employees are not required to enroll in the traditional plan in order to participate in the EBHRA. Under the EBHRA, the employer can reimburse employees for expenses such as (a) limited excepted benefits (e.g., limited scope dental and vision expenses, long-term care and nursing home care), and (b) out-of-pocket medical care expenses such as cost sharing (deductibles and copays) associated with either group or individual health plan coverage. However, unlike the QSEHRA and the ICHRA, the EBHRA may not provide for reimbursement of premiums paid for health insurance coverage (group or individual). The maximum amount that can be contributed for an employee by an employer under the EBHRA is $1,800 per year (2020 limit, to be adjusted for subsequent years), although unused amounts can be carried over from year to year, if permitted by the terms of the EBHRA.
Choosing the Right HRA:
Given all of the HRA options that will be available for 2020 and later years, which option (if any) is best for a particular employer? The answer to this question depends on a number of factors, including employer size, group health plan coverage (or lack thereof), and the costs the employer is willing to bear. This chart comparing the features of the various types of HRAs is provided to assist employers in making this decision.
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