In October 2017, President Trump issued an Executive Order that called for regulations to expand the use of Health Reimbursement Arrangements (HRAs) as well as association and short-term health plans; however, HRA rules were not proposed until this October, and we do not expect them to be finalized until the end of Q119.
The proposed HRA rules are expected to help the individual market without negatively impacting any other markets. The proposed rules do not create any new rules because most, if not all, of the HRA rules mirror the rules in the group market. The proposed HRA regulations create two new types of HRAs:
We will look at these two HRAs a lot closer.
1. HRA to Purchase an Individual Market Plan Tax-free
If an employer chooses to offer this arrangement, the HRA must be offered to all employees in a specific class of employees, mirroring the rule in the group market that requires health benefits to be offered on the same terms and conditions to all similarly-situated employees.
There is no cap on the amount of money that can be put into the HRA to purchase an individual market plan, but the employer must contribute the same amount to all employees of the same class with exceptions based on age and family size. Should an employer vary its HRA contributions by age and/or family size, the employer must give the same contribution amount to all employees in the same class who are the same age or have the same family size.
In order for the HRA to be tax-free, the employee must purchase an individual market plan that is Affordable Care Act (ACA) compliant.
By class, the employer will have to decide whether they want to offer employees a group health plan or the HRA. The employer cannot offer a group health plan to some of its employees in a single class and then the HRA to others in the same class. Instead, the employer must decide between the two.
Classes break down by full time employee, part time employee, union employee, seasonal employee, foreign employee, employees in a waiting period, employees under age 25, and employees in different geographic locations.
Expanding access to the traditionally under-served
Today, employers do not typically offer healthcare coverage to part time, seasonal, or employees in a waiting period because current law doesn’t require it. However, this proposed HRA rule will give employers a new option to help these under-served employees purchase comprehensive individual healthcare coverage on a tax-free basis.
This is great news for employees who have never been offered healthcare coverage by their employer! And, we will even venture to say that this policy change could increase the number of lives in the individual market risk pool too!
The effect on ACA premium subsidies
The proposed HRA regulations develop a general rule that says – like with an employer-sponsored plan – if the HRA is affordable and the individual market plan provides minimum value, then the employee that's offered access to the HRA will not be eligible for a premium subsidy, and the opposite is also true. If the HRA is unaffordable or the individual market plan does not provide minimum value, then the employee is eligible for a premium subsidy.
Should an employee opt into their employer’s HRA, even if the contribution is only $50 for example, the employee would not be eligible for a subsidy (just like the current law eligibility rules for premium subsidies). This even applies to plans that are deemed unaffordable and do not provide minimum value.
An affordability test, under the HRA rules, looks at the cost of the lowest cost sliver self-only plan in an employee’s rating area. If the contribution makes the cost of this plan exceed 9.56% of the employee’s household income, the HRA is deemed unaffordable. If the employee does not elect the employer’s HRA, they can qualify for a premium subsidy.
HRA regulations confirm that the ACA Exchange is the entity that determines whether a plan is unaffordable, not the employer; however, the employer will be required to determine whether the HRA contribution is affordable in accordance with the employer mandates that follow in the next section.
The employer mandate
The offer of an HRA to purchase an individual market plan is equitable to an offer of an employer-sponsored plan; therefore, the proposed HRA rules tell us that an employer with 50 or more full time employees (FTEs) will satisfy the employer mandate’s “A-penalty” if the ability to use the HRA is offered to at least 95% of the employer’s full-time employees and their dependents.
Additionally, if the HRA is deemed affordable, an employer with 50 or more FTEs will satisfy the employer mandate’s “B-penalty” too. Because the affordability test looks to the lowest cost silver plan, by definition, this plan will satisfy the minimum value test because it provides at least 66% actuarial value – automatically satisfying the minimum value test that requires the plan to cover at least 60% of the cost benefits covered under the plan.
The Treasury and IRS issued additional guidance relating to the employer mandate – notice 2018-88 – to ease the administrative burden associated with making an employee-by-employee determination by looking at each employee’s rating area. This notice allows an employer to look at the lowest cost silver plan offered in the rating area where the employee worksite is located, rather than where the employee resides.
Generally, the affordability determination for each employee would be based on the employee’s age; however, the Treasury and the IRS believe that such a determination may be difficult for an employer. As a result, the Treasury and the IRS will allow an employer to determine affordability based on the prior year cost of the lowest cost silver self-only plan. In reality, an employer will look to the cost of the lowest cost silver plan in the current year when planning their HRA contributions amounts for the following year and determining whether their contribution is sufficient to satisfy the affordability test in the following year.
The Treasury and IRS also confirmed that an employer offering an HRA can rely on the employer mandate’s affordability safe harbors available to employers that offer a group health plan – using the employee’s W-2 income or hourly rate of pay to determine if the HRA contribution is affordable.
Lastly, the Treasury and IRS confirmed that employers with 50 or more FTEs that offer an HRA to employees to purchase an individual market plan are still subject to the employer mandate’s reporting requirements. They also intend to issue guidance on how these employers should determine the employee’s required contribution that must be reported on the 1095-C.
An attractive feature of this proposed HRA is that when certain requirements are met, the HRA will not be subject to ERISA requirements. This is an important feature for employers who simply want to give their employees a defined contribution to purchase health insurance while not being hassled by all of the rules and regulations that go along with offering a group health plan.
The aforementioned “certain requirements” that must be met to avoid ERISA compliance require that the:
Allowing employers to avoid ERISA, while contributing money toward the purchase of health insurance, will keep employer dollars in the game that may otherwise not be contributed. And, even though the HRA used to purchase an individual market plan is not subject to ERISA, the HRA – as a group health plan – is subject to ERISA. The Treasury and IRS have requested comments from the public on whether subregulatory guidance should be issued to tell employers how to comply with ERISA requirements as it relates to the HRA itself.
2. The Excepted Benefit HRA
According to regulations, an employer may offer an excepted benefit HRA to its employees if (and only if) the employer also offers group health plan coverage. The employee is not required to enroll in the group health plan to gain access to the excepted benefit HRA.
The contribution amount in the excepted benefit HRA is limited to $1,800 and is indexed to increase each year by the new chained consumer price index (CPI). These contributions cannot be used to pay for group health plan premiums, an individual market plan, or Medicare Parts B and D. But, contributions can be used to pay for short-term health plans, COBRA, and other excepted benefits, such as disability, vision and dental. The excepted benefit HRA must be available to all similarly-situated employees.
Employees can choose not to enroll in the group health plan, take the $1,800, and purchase a short-term health plan, but employers cannot require an employee to elect a short-term health plan.
Should the cost of the group health plan be deemed unaffordable, the employee can purchase a subsidized Exchange plan, providing that they are income eligible.