November 14, 2018
On October 23, 2018, the U.S. Departments of the Treasury, Health and Human Services, and Labor (collectively, the Departments) issued a proposed regulation that would expand the permissible uses of an employer-sponsored health reimbursement arrangement (HRA). The regulation, if finalized, is proposed to be effective for plan years beginning on and after January 1, 2020. NOTE: Taxpayers may not rely upon these regulations until they are finalized. Current law restricting the use of HRAs to reimburse individual insurance premiums remains in effect.
HRAs provide employers a tax-favored way to reimburse employees for medical expenses. Current regulations prohibit large and mid-sized employers from using HRAs to reimburse employees for the cost of individual health insurance coverage. The proposed regulation would permit employers to offer HRAs to reimburse employees for the cost of individual health insurance coverage, subject to certain conditions. In addition, the proposed regulation would allow 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.
Comments on the proposed regulation are requested from stakeholders by December 28, 2018.
HRAs to Reimburse Individual Health Insurance Premiums
If finalized, the proposed regulation will permit employers to offer an HRA that may be used to reimburse premiums for individual health insurance policies. However, a number of requirements must be met in order to use an HRA for this purpose. To receive reimbursement from such an HRA, the following conditions must be met:
- The HRA must be offered on the same terms and conditions to all similarly situated employees.
- Employers are not permitted to offer employees within the same class a choice between group health plan coverage and an HRA that reimburses individual premiums.
- Individuals and their dependents must be enrolled in individual health insurance for each month reimbursement is received.
- Employers are required to maintain reasonable procedures for obtaining substantiation of enrollment, both at the time of initial enrollment in the HRA and each time reimbursement is sought.
- Current and former employees must be given the opportunity to opt out and waive future reimbursements from the HRA at least once each plan year.
- Employers must provide notice meeting certain content requirements to those eligible for the HRA at least 90 days prior to the start of the plan year.
HRAs as Limited Excepted Benefits
Current law recognizes several categories of excepted benefits, including most limited-scope dental and vision plans. These plans are not subject to HIPAA’s portability requirements and are exempt from many of the Patient Protection and Affordable Care Act’s (PPACA) market reform requirements, including the prohibition on annual and lifetime dollar limits and the requirement to cover preventive care without cost-sharing. The proposed regulation would create a new category of limited excepted benefits for HRAs that meet specific requirements.
An HRA designed as a limited excepted benefit would be limited to $1,800 in value (indexed annual for inflation) and would not be permitted to reimburse individual health insurance premiums. However, this type of HRA could be designed to reimburse premiums for dental and vision plans, short-term limited duration insurance, and COBRA premiums. The proposed regulation would require the HRA to be offered on the same terms to all similarly situated employees. Employers would not be permitted to offer both an HRA to reimburse individual health insurance premiums and a limited excepted benefits HRA.
FREQUENTLY ASKED QUESTIONS
The proposed regulation addresses some questions while others remain unanswered. Additional guidance is anticipated before the proposed regulation is finalized. We have addressed some of the most common questions about the proposed regulation below.
1. Will employers with more than 50 full-time equivalent employees be able to offer an HRA that reimburses individual health insurance premiums to satisfy the requirement to offer coverage under PPACA’s Employer Mandate?
If finalized, the proposed regulation would permit employers to use an HRA that reimburses individual health insurance premiums to satisfy the requirement to offer coverage under the Employer Mandate. The proposed regulation provides that this type of HRA would be considered Minimum Essential Coverage (MEC), and would protect the employer from penalties under Code 4980H(a), sometimes referred to as the sledgehammer penalty. However, to protect the employer from penalties under Code 4980H(b) (the icepick penalty) as well, the HRA would need to be both minimum value and affordable. The proposed regulation indicates that additional regulations must be issued to address how an employer would determine that the HRA meets minimum value and affordability requirements.
2. If an employer chooses to offer an HRA to reimburse individual health insurance premiums in 2020, will employees offered the HRA be able to enroll in individual coverage outside of Marketplace open enrollment?
Yes. The proposed regulation would provide employees who are newly eligible for an HRA that reimburses individual health insurance premiums to qualify for a Special Enrollment Period (SEP) to purchase coverage outside of Marketplace open enrollment. This SEP would apply for coverage purchased both through the Marketplace and directly from a health insurance carrier. Individuals would be permitted to apply for individual health insurance up to 60 days in advance of the first day of eligibility for reimbursement under HRA. The proposed regulation also outlines the effective date of the individual coverage purchased through a SEP. Employers who decide to offer an HRA on a non-calendar year cycle will be most impacted by this rule, as SEPs are not generally necessary for employees moving between a calendar year group health plan and the Marketplace.
3. For employers that are subject to ERISA, will the individual health insurance policies purchased by employees covered under an HRA become subject to ERISA?
ERISA will apply to an HRA offered by an employer subject to ERISA. However, the individual health insurance policies reimbursed by the HRA may be exempt from ERISA if certain requirements are met. ERISA currently contains a safe harbor that exempts voluntary plans meeting certain requirements from compliance with ERISA. While there is some overlap with this safe harbor, the proposed regulation contains additional requirements, including an annual notification requirement and limitations on reimbursements. Employers considering offering an HRA to reimburse individual health insurance premiums should carefully evaluate the terms of the regulations when finalized, as ensuring ERISA compliance for individual health insurance policies that the employer does not sponsor may be unworkable.
4. If an employer chooses to offer an HRA that reimburses individual health insurance premiums, may the employer offer different amounts of reimbursement to different categories of employees?
Generally, no. While employers may offer different amounts of reimbursement based on age and family size, the HRA must be offered on the same terms and conditions to all employees within the same class. For this purpose, only the following classes of employees are permitted:
- Collectively bargained
- Employees in the same PPACA geographic rating area
- Employees who have not satisfied the waiting period for plan coverage
- Employees who are under age 25 when the plan year begins
- Non-resident aliens with no U.S.-based income
Notably, offering an HRA on different terms to salaried and hourly employees is not permitted under the proposed regulation.
No employer action is required at the current time. The proposed regulations also provide some guidance on a number of other issues including:
- The potential impact of cafeteria plan rules.
- The impact of the Code’s nondiscrimination rules on HRAs that reimburse individual premiums.
- How coverage under an HRA could affect an individual’s eligibility for a premium tax credit for Marketplace coverage.
- The effect of the proposed rules on certain other account based plans such as Qualified Small Employer Health Reimbursement Arrangements and Employer Payment Plans.
We will continue to monitor additional guidance as it is published as we await final regulations and guidance addressing these additional questions.
HCW will continue to keep you updated through our Compliance Alerts. In the meantime, if you have any questions, please contact your consultant or client manager.