Final Rules Ease Restrictions on Health Reimbursement Arrangements

14 June 2019 - Mercer

Final rules issued June 13 expand the flexibility and use of employer-sponsored health reimbursement arrangements (HRAs) and other account-based group health plans. Under the revised rules, active employees can use employer-funded “individual coverage HRAs” to buy individual health insurance or pay for Medicare premiums when certain conditions are met. Employees can pay the balance of their premiums for individual health insurance policies — but only those offered outside of Affordable Care Act (ACA) insurance exchanges — with pretax cafeteria plan salary reductions. The complex and wide-ranging rules, which take effect for plan years starting on or after Jan. 1, 2020, also create a new "excepted benefit HRA.” The changes aim to ease mostly small and mid-size employers’ ability to subsidize health coverage and include guardrails to protect the individual market. For larger employers, the rules create interesting opportunities to subsidize on a tax-favored basis individual health insurance for certain cohorts of employees — such as part-timers — who may not currently be eligible for their employer’s group health plan.

Constraints on Some Account-Based Plans Relaxed

The rules are part of a push by the Trump administration to expand healthcare choice, as outlined in a 2017 executive order. This regulatory action is aimed at creating a more consumer-driven insurance market by increasing the usability of HRAs and other account-based plans (such as employer payment plans). (This GRIST is focused exclusively on HRAs.) The regulations generally relax current guidance restricting the use of HRAs for active employees and ease other requirements affecting HRAs. However, none of the changes directly affect health savings accounts (HSAs).

Current HRA Restrictions
Healthcare reform guidance currently constrains employers from offering stand-alone HRAs for use by active employees. To avoid violating the ACA's group health plan mandate for preventive services and the law's ban on annual and lifetime dollar limits, HRAs for active employees must be "integrated" with other ACA-compliant group health plan coverage. Present integration requirements extend to certain arrangements with after-tax employer contributions and arrangements covering employees' spouses and dependents.

Arrangements used to pay only excepted-benefit policy premiums — such as limited-scope dental and vision plans — are permitted, and retiree-only arrangements are subject to separate rules. Several years ago, Congress enacted a law (IRC § 9831(d)) that allows employers exempt from the ACA's employer shared-responsibility provisions to sponsor stand-alone qualified small employer HRAs (QSEHRAs), which can be used to help employees buy individual health insurance policies. But that law offers no relief for large employers (those with 50 or more full-time or full-time-equivalent employees) and has a number of parameters that may be difficult to meet.

Notable Expansions
The new rules eliminate the prohibition against integrating an HRA with individual health insurance, allow for pretax salary reductions for certain individual health insurance not sold on the ACA exchanges and create a new excepted-benefit HRA for some employees. Highlights of these changes are summarized below.

Individual-Coverage HRAs

An individual-coverage HRA, which can reimburse all types of medical care (as defined in IRC § 213(d), may be integrated with individual health insurance if the following requirements are met:

• Participants (and their dependents, if applicable) are enrolled in Medicare or individual health insurance that covers more than excepted benefits.
• Employees in the same class do not have the choice of enrolling in an individual-coverage HRA or a traditional group health plan.
• All employees in the same class are generally offered the same level of HRA benefits under the same terms and conditions.
• Employees enrolled in an individual-coverage HRA have an opportunity to opt out at least once a year.
• Employers have reasonable procedures to substantiate that individual-coverage HRA participants (and their dependents, if applicable) have or soon will have individual health insurance or Medicare.

Enrollment in Individual Health Insurance or Medicare Mandatory
Participants and any dependents covered by an individual-coverage HRA for any month must provide proof of enrollment in Medicare or individual health insurance (other than coverage that consists solely of excepted benefits, such as limited-scope dental or vision coverage or short-term, limited-duration insurance). The individual health insurance can be purchased on or off a public exchange.

No Offer of Traditional Group Health Plan Coverage
To protect the individual market from disruption, plan sponsors cannot offer the same class of employees (e.g., full-time, part-time, hourly, salaried or collectively bargained employees or employees working in the same geographic area) a choice between a traditional group health plan and an individual-coverage HRA. This restriction is intended to reduce potential adverse-selection issues.

However, a plan sponsor can decide to offer an individual-coverage HRA to certain classes of employees and a traditional group health plan (or no coverage) to other classes of employees. In addition, under a special “new hire subclass” rule, a plan sponsor that offers a traditional group health plan to a class of employees may prospectively offer new hires within that class an individual-coverage HRA, while continuing to offer grandfathered existing employees a traditional group health plan.

A minimum class size rule applies if a plan sponsor offers a traditional group health plan to some employees and an individual-coverage HRA to other employees based on full-time vs. part-time status, salaried vs. non-salaried status, or a geographic location smaller than a state.

'Same Terms' Requirement
Although no annual cap applies to employer contributions, individual-coverage HRAs generally must offer the same benefit amount on the same conditions to all employees within the same employee class. But the maximum dollar amount can increase as participants age, as long as the maximum dollar amount available to the oldest participants is no more than three times the maximum amount for the youngest participants and is the same level for all participants of the same age. In addition, the maximum dollar amount can increase if the participant adds covered dependents. In determining uniform benefit levels, any HRA amounts carried over from prior years or transferred from a prior HRA are disregarded, assuming the same HRA carryover and transfer conditions apply equally within the class.

Plan sponsors may allow participants with individual health insurance — other than public exchange policies — to pay for the portion of their health premiums that exceeds their HRA funds using pretax dollars via a cafeteria plan. This pretax-payment opportunity must be made available to all participants in an employee class (other than former employees).

For participants who begin coverage or add or drop dependents after the beginning of the plan year, the maximum dollar amount may be prorated for the remainder of the plan year. Finally, a plan sponsor may offer a class of employees a choice between an individual-coverage HRA and an HRA that is compatible with health savings account (HSA) eligibility.

Opt-out
Employees with individual-coverage HRAs must be able to opt out and waive future reimbursements. Opting out will restore qualifying individuals’ eligibility to receive a premium tax credit for enrolling public exchange coverage. The opt-out opportunity must be available only once with respect to each plan year and generally must be offered before the start of a new plan year. Participants eligible for coverage under an individual-coverage HRA must receive information on how the offer of or enrollment in the HRA affects their ability to claim ACA premium tax credits.

Reasonable Procedures for Coverage Substantiation
Individual-coverage HRAs must have reasonable procedures to substantiate that participants and any covered dependents are or soon will be enrolled in individual health insurance or Medicare for the plan year (or for the portion of the plan year they are covered by the HRA). The plan sponsor may establish a deadline for employees to provide this substantiation, which generally must be supplied by the first day of the plan year.

Substantiation procedures also apply before individual-coverage HRAs can reimburse any medical expense. For each reimbursement request, a participant must substantiate that the person who incurred the expense had individual health insurance or Medicare for the month during which the expense was incurred.

For both of these substantiation requirements, a plan sponsor generally may rely on the participant’s documentation or attestation. The agencies have provided an Individual Coverage HRA Model Attestation that plan sponsors may use for both purposes. However, reliance on a participant’s attestation or documentation does not apply if the plan sponsor — or any other entity authorized to act on the HRA’s behalf — has actual knowledge that any person covered by the HRA is not, or will not be, enrolled in individual health insurance or Medicare for the plan year.

Notice
The plan sponsor must provide a written notice to each participant at least 90 calendar days before the beginning of each plan year. For participants not eligible for coverage as of the beginning of the plan year, a notice must be provided no later than the date on which the HRA may first take effect for the participant. The agencies have provided an Individual Coverage HRA Model Notice that plan sponsors may use for this purpose. 

Excepted-Benefit HRAs

Employers can offer excepted-benefit HRAs to employees if the following requirements are met.

Traditional Group Health Plan Coverage Must Be Offered
Participants offered an excepted-benefit HRA must also have the option to enroll in traditional group health plan coverage. However, actual enrollment in traditional group health plan coverage is not required.

Maximum Annual Benefit Amount
The maximum annual benefit newly allowed each year is $1,800 (annually indexed for inflation after 2020). Carryover amounts, if allowed, are disregarded in determining the annual benefit amount. If a plan sponsor provides more than one HRA or another account-based group health plan (e.g., a health flexible spending arrangement) to the participant for the same time period, the amounts made available under all such plans are aggregated to determine whether the benefits exceed the $1,800 limit. However, HRAs or other account-based group health plans that reimburse only costs for excepted benefits (like dental and vision expenses) are not included in the calculation.

Eligible Expenses
Funds in an excepted-benefit HRA can reimburse medical care (as defined in IRC § 213(d)), such as copays, coinsurance, deductibles or expenses not covered by a primary plan. But an excepted-benefit HRA cannot reimburse premiums for individual health insurance, group health plan coverage (other than COBRA or other continuation coverage), or Medicare. However, this type of HRA may reimburse premium costs for other HIPAA excepted benefits, such as dental or vision coverage. Special rules apply as to whether an HRA may reimburse short-term, limited-duration insurance.

Uniform Availability
Plan sponsors must offer these HRAs under the same terms to all similarly situated individuals (as defined under existing HIPAA rules) who are also eligible for traditional group health plan coverage. By definition, an employer cannot offer an individual-coverage HRA and an excepted-benefit HRA to the same employee.

Other Provisions

The regulatory package includes other provisions designed to ease requirements for HRAs:

• Special enrollment. The final rules expand special enrollment rights in the individual health insurance market for individuals who gain access to HRAs integrated with individual health insurance.
• ERISA safe harbor. If certain safe harbor conditions are met, individual health insurance policies with premiums reimbursed under an individual-coverage HRA won't be considered part of an ERISA plan. As an example, an employer could contract with a private exchange that displays information about all coverage options in a state and facilitates enrollment. To meet the safe harbor, the platform must present individual policies in a neutral and unbiased manner — for example, the platform can’t limit users’ ability to select a coverage option or promote one option over another. An otherwise neutral platform can, however, allow users to select certain criteria (such as to search only for HDHPs) that will limit the options available without falling outside of the safe harbor.
• HRA offers counted for ESR purposes. The final rules confirm that an offer of an individual-coverage HRA counts as an offer of coverage under the ACA’s employer-shared responsibility (ESR) rules. Whether an applicable large employer that offers individual-coverage HRAs to its full-time employees (and their dependents) might face ESR assessments will depend on whether the HRA is affordable. Under the premium tax credit rule issued as part of the HRA regulations, affordability is based, in part, on the amount the employer makes available under the HRA. The IRS says it will “soon” provide additional guidance on how the ESR rules apply to individual-coverage HRAs.