SHRM: Regulations Aim to Let Employees Use HRAs to Buy Health Insurance
President Donald Trump’s administration issued proposed regulations that would let employers use health reimbursement arrangements (HRAs) to reimburse employees who buy individual-market insurance, including insurance purchased on the public exchanges formed under the Affordable Care Act (ACA). Some predict that this change could transform the employer-provided health care landscape.
Similar to health savings accounts (HSAs), HRA contributions are made with pretax dollars, and employees use these funds to pay for qualified medical expenses without paying taxes on the distributions. Unlike HSAs, which are employee-owned and can be funded by employers and employees, HRAs are exclusively employer-funded, and when employees leave the organization, their HRA funds go back to the employer.
The rules now in place prevent large employers from using HRAs to reimburse workers for the cost of nongroup health insurance premiums—a prohibition that would end under the proposed regulations, which will be published Oct. 29 in the Federal Register by the departments of Labor, Health and Human Services (HHS) and the Treasury.
“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,” said the HHS announcement.
“This proposal offers relief for workers who may have previously faced a choice between an unaffordable on-exchange plan or no coverage at all, and it accomplishes this while upholding a commitment to workers with pre-existing conditions,” said Joel White, president of the Council for Affordable Health Coverage, which promotes policies that lower health costs through increased competition.
Comments on the proposed regulations are requested by Dec. 28, 2018. If finalized, the regulations would be effective for plan years beginning Jan. 1, 2020.
New Types of HRAs
The proposed regulations keep the kinds of HRAs currently permitted (such as HRAs integrated with health plans and those for retirees-only) and would allow two new types of HRAs:
- An individual health insurance premium-reimbursement HRA. Employers would be allowed to fund premium-reimbursement HRAs only for employees not offered a group health plan. The proposed regulations describe how the ACA’s premium tax credit would interact with the new HRAs.
- An excepted-benefit HRA. These are limited to reimbursing expenses for vision and dental coverage or other benefits exempt from ACA requirements. Under the proposal, excepted-benefit HRAs also may reimburse COBRA continuation coverage premiums andshort-term insurance coverage. Contributions would be capped at $1,800 per year. These HRAs would only be permitted if employees are offered coverage under a group health plan sponsored by the employer.
QSEHRAs and HRAs
Currently, qualified small-employer HRAs (QSEHRAs), created by Congress in December 2016, allow small businesses with fewer than 50 full-time employees to use pretax dollars to reimburse employees who buy nongroup health coverage. The proposal would:
- Allow all employers, regardless of size, to pay premiums for individual policies through a premium-reimbursement HRA.
- Clarify that when employers use an HRA or a QSEHRA to reimburse employees who purchase individual health insurance coverage, the HRA or QSEHRA does not become part of a health plan subject to the Employee Retirement Income Security Act (ERISA), provided that certain conditions are met related to nondiscrimination, providing ERISA notices and having no other group health plan coverage.
- Create a special enrollment period in the ACA’s individual market for those who gain access to a premium-reimbursement HRA or a QSEHRA to purchase individual health insurance coverage.
The proposed regulations are in response to Trump’s October 2017executive order on health care choice and competition. Health and Human Services Secretary Alex Azar stated, “More access to association health plans, short-term insurance, and flexible HRAs complement the work we are doing at HHS” to lower the cost of health care services.
A Transformative Potential?
According to preliminary estimates from the Treasury Department, once employers and employees have fully adjusted to the new rule, roughly 800,000 employers are expected to provide HRAs to pay for individual health insurance coverage for more than 10 million employees. “The proposed regulations hold the potential of transformative impact on the health insurance landscape in the coming years,” HHS stated.
“HRA expansion is the spark that could ignite a 401(k)-like defined contribution model for employer-based health coverage in the U.S.,” said Shandon Fowler, founder and principal of benefits consultancy Four8 Insights in Charleston, S.C. “There are thousands of employers with hourly workforces that would gladly exchange administering an HRA for all of the work that goes into administering a health plan for their employees.”
“The proposed regulations could certainly have an upside for employees—and especially for smaller employers that have struggled to offer health coverage but want to provide some benefits to their employees,” said Arthur Tacchino, J.D., principal and chief innovation officer at Baton Rouge, La.-based Sync Stream, a software firm that helps employers comply with complex regulations.
However, “the amount of tax-advantaged funds that can be used by an employee is likely to be much less than the actual cost of an individual health plan,” Tacchino pointed out. In 2018, for instance, annual employer contributions to QSEHRAs are capped at $5,050 for a single employee and $10,250 for an employee with a family.
Kim Buckey, vice president of client services at Birmingham, Ala.-based DirectPath, a benefits education, enrollment and health care transparency firm, doubts that the regulations would upend employer health care benefits.
“I don’t think we’ll see much interest from large employers, as the plans they already offer provide them with a competitive advantage,” Buckey said. “Small to midsize employers seeking to provide some level of support for their employees and to avoid the employer mandate penalty may well be interested if they are not put off by the compliance and administrative aspects of setting up an HRA.”
Under the proposed regulations, she noted, “employers would have to determine whether their [premiun-reimbursement] HRA met affordability requirements—once that guidance is provided.”
Responsibility Shifts to Employees
“It’s great to make these benefits available to employees. However, if they are not educated on how to take advantage of the opportunity, it’s ultimately squandered or missed,” Tacchino said. The combination of employer adoption and employee education “will determine if the expanded availability of HRAs is a success in the long term.”
“We should be cautiously optimistic that employees aren’t just dumped into the individual market,” Fowler noted. “But if they can shop on public marketplaces and obtain a portion of the ACA subsidy, they could end up saving money from their employer-based coverage, while their employer also saves money.”
“Everyone should resist the temptation to make sweeping assumptions—good or bad—about the impact of the proposed rule,” said James A. Klein, president of the American Benefits Council, an employers group. “It still is proposed and there are many questions to be answered. Overall, though, we believe it is a positive step forward.”
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(Stephen Miller, CEBS is the Online Manager/Editor, Compensation & Benefits from SHRM Online.)