Proposed Rules Would Permit HRAs to Reimburse Individual Health Insurance Costs

October 29, 2018

The U.S. Departments of Treasury, Health and Human Services, and Labor have released proposed rules that would change regulations that govern health reimbursement arrangements (HRAs) and other account-based group health plans. Under the proposed regulatory changes, employers would be able to integrate HRAs with individual health insurance coverage when certain conditions are met. HRAs would be permitted to reimburse employees for the cost of health insurance coverage. The proposed rules would generally be effective on or after January 1, 2020, or for plan years starting on or after January 1, 2020. Since the Affordable Care Act (ACA) was proposed, SESCO has provided guidance to all types of employers to ensure ACA compliance. If employers have questions on whether their policies or practices comply with the ACA and related issues, we recommend they contact SESCO to ensure compliance.

The proposed rules also set forth conditions under which certain HRAs would be recognized as limited excepted benefits. The Department of the Treasury and the IRS have in addition proposed rules pertaining to premium tax credit eligibility for individuals offered coverage under an HRA integrated with individual health insurance coverage. The DOL has also proposed a clarification that would give plan sponsors assurances that the individual health insurance coverage premiums reimbursed by an HRA or a qualified small employer health reimbursement arrangement (QSEHRA) do not become part of an ERISA plan when certain conditions are met. Finally, HHS has proposed rules that would provide a special enrollment period in the individual market for those who gain access to an HRA integrated with individual health insurance coverage or who are provided a QSEHRA.

The proposed regulations come in response to President Trump’s Executive Order 13813, “Promoting Healthcare Choice and Competition Across the United States.” The DOL said that they “will benefit hundreds of thousands of businesses and millions of workers and their families in the coming years.”

Changes to HRAs. HRAs permit employers to reimburse employees for medical expenses in a tax-favored way. Under the current regulations, employers are prohibited from using HRAs to reimburse employees for the cost of individual health insurance coverage. The proposed regulations would get rid of that prohibition and allow HRAs to reimburse employees for the cost of individual health insurance coverage.

An employer may integrate an HRA with individual health coverage only if:

  • participants and dependents are actually enrolled in individual health insurance coverage (though not coverage that consists solely of excepted benefits) for each month they are covered by the HRA;
  • coverage is offered to a class of employees to whom a traditional group health plan is not offered;
  • coverage is offered on the same terms in amount and conditions to all employees within each class (though certain variations based on age are allowed);
  • an opt out option is provided for individuals who prefer Patient Protection and Affordable Care Act exchange coverage, but would not be eligible for the premium tax credit if enrolled in an employer health plan such as an HRA; and
  • substantiation and notice requirements are met.

Tax advantages. Because medical expense reimbursements from HRAs are tax-preferred, HRAs—used to purchase coverage of the employees’ choice—provide the same tax advantage enjoyed by traditional employer-sponsored coverage. The proposed regulations would not alter the tax treatment of traditional employer-sponsored coverage, but rather would create a new tax-preferred option for employers of any size to use when funding employee health coverage. Although the employer would fund the cost of individual health insurance coverage, the employee would own the coverage. This means that the employee would be able to keep the coverage after the employee has left the employer and is no longer covered by the HRA, the DOL pointed out.

Short and long term impacts. The DOL said that in the near term, the proposed regulations would give employers, especially small and mid-size employers who have struggled to offer coverage, opportunities to fund the cost of individual health insurance coverage on a tax-preferred basis. Currently, many employers simply cannot afford to offer traditional, employer-sponsored coverage to their employees as a result of the significant costs, including the administrative burdens, associated with identifying and managing such health plans, according to the DOL.

In the long term, by increasing choice, the proposed regulations have the potential to spur a “truly competitive, value-driven health insurance market that empowers people to shop for their own health plans and, by virtue of consumer choice, drive health plans to deliver higher quality coverage at lower cost,” the DOL claims. The federal agency said that the proposed regulations hold “the potential of transformative impact on the health insurance landscape in the coming years.”

Traditional employer-sponsored coverage. The proposed regulations also would permit 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 short-term, limited-duration insurance plans.

QSEHRAs. The proposed rules would plough a lot of the same ground as QSEHRAs, but also be available to large employers. Reimbursement plans are typically more popular with medium and small employers, so it remains to be seen how much difference the proposed regulations would make for larger employers.

Estimated use. Preliminary estimates by the Treasury Department indicate that once employers and employees have “fully adjusted” to the new rule, about 800,000 employers are expected to provide HRAs to pay for individual health insurance coverage to more than 10 million employees. It’s also “possible” that the proposed regulations would “produce better incentives for both consumers and providers and thus will improve the overall health care system, as well as potentially increase workforce investment and wages,” the DOL said.

Moreover, the proposed regulations would also “better enable businesses to focus on what they do best—on serving their customers—and not on navigating and managing complex health benefit designs,” according to the DOL.

The DOL also has provided a fact sheet that provides additional information about the proposed regulations.

Comments. Interested parties may submit comments on the proposed rules by December 28, 2018. Comments, identified by REG-136724-17, may be submitted through the Federal eRulemaking Portal at www.regulations.gov; or mailed to: CC:PA:LPD:PR (REG-136724-17), Room 5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.