New HRA Rules Provide Employers of All Sizes with Additional Benefit Options
The Departments of Labor, Health and Human Services (HHS), and Treasury (collectively, the Departments) recently issued a final rule that allows employers to reimburse employees for premiums of individual health insurance policies, and allows employers to offer a Health Reimbursement Arrangements (HRAs)to employees, regardless of whether an employee is also enrolled in a traditional group health plan. The Departments’ final rule is not effective until January 1, 2020.
These rules are an about-face from the Departments’ previous HRA rules. And, since employers that are subject to the Affordable Care Act’s (ACA’s) pay or play penalty may use HRAs that reimburse employees for premiums of individual health insurance policies to comply with the employer’s obligations under the pay or play penalty, we suspect employers will be interested in offering these HRAs to at least some of their employees.
HRAs are account-based group health plans in which an employer credits employee accounts with a specific dollar figure that can be used to reimburse the employee for eligible medical expenses. While employees are not permitted to contribute to the employee’s HRA, employers generally vary the HRA amount by the coverage tier in which the employee enrolls. Additionally, an employee’s unused amounts in an HRA may or may not—at the employer’s discretion—be carried forward from year-to-year.
The ACA contains various insurance market reforms that are problematic to HRAs. Namely, the ACA’s requirements that group health plans: (1) are prohibited from imposing an annual or lifetime dollar limit on essential health benefits; and (2) if non-grandfathered, the plan is required to cover preventive care services on a first-dollar basis. HRAs, by design, violate both of these requirements.
To prevent HRAs from going extinct, the Departments previously issued guidance that allowed HRAs to be “integrated” with another traditional group health plan that complied with these ACA requirements. The integration rules are technical, but essentially required anyone who was covered by an HRA to also be covered by a group health plan. The Departments were clear that HRAs could not be integrated with individual health insurance policies, including by reimbursing employees for premiums for individual health insurance policies because such an arrangement would violate these ACA requirements.
In direct conflict with its previous guidance, the Departments’ new HRA rule allows: (1) HRAs to be integrated with individual health insurance policies and Medicare (called “Individual Coverage HRAs” or ICHRAs); and (2) employees to enroll in HRAs, regardless of whether the employee has coverage under a traditional group health plan (called “Excepted Benefit HRAs” or “EBHRAs”).
Here is a summary of the requirements that Individual Coverage HRAs and Excepted Benefit HRAs must satisfy to be permissible under the Departments’ new rule:
Individual Coverage HRAs
As indicated above, ICHRAs may reimburse employees for the cost of individual health insurance policies and Medicare. Additionally, at the discretion of the ICHRA sponsor, ICHRAs may also reimburse employees for out-of-pocket medical expenses that qualify under Section 213(d) of the Internal Revenue Code (the “Code”). The final rule sets forth the following six requirements for ICHRAs:
- Individuals covered under an ICHRA must also have coverage under an individual health insurance policy or Medicare
Individuals (employees and their covered spouses and dependent children) who are enrolled in an ICHRA must also have coverage under an individual health insurance policy or Medicare. For this purpose, an individual health insurance policy includes:
- Any individual health insurance policy, regardless of whether the policy was obtained through the ACA Marketplace, that satisfies the ACA’s insurance market requirements (including policies that are “deemed” to satisfy the ACA, such as certain catastrophic coverage and “grandmothered” policies).
- Fully insured student health insurance coverage. (Self-funded student health insurance coverage is not permissible.)
No other coverage options are permissible to be “integrated” with ICHRAs, including coverage under any group health plan.
- Substantiation of individual health insurance policy or Medicare
Employers that sponsor ICHRAs must use “reasonable procedures” to substantiate that individuals who are enrolled in the ICHRA are actually covered by an individual health insurance policy or Medicare. Employers have some flexibility in designing these substantiation procedures, such as require an employee to provide third party documentation such as a copy of a health insurance card or explanation of benefits (EOB), or require an employee to provide a written attestation. We suspect that many employers will simply require employees to provide a written attestation, especially since the Departments also issued a “model” attestation that employers may use to satisfy the substantiation requirement.
Employees must provide substantiation of coverage under an individual health insurance policy or Medicare at least annually (by no later than the first day of the plan year) and each time an employee requests reimbursement from the ICHRA.
For ICHRAs that reimburse employees for out-of-pocket medical expenses under Section 213(d) of the Code, there will be two substantiation requirements when an employee requests reimbursement of medical expenses (vs. reimbursement of premiums): (1) substantiation that the individual that incurred the medical expense is covered by an individual health insurance policy or Medicare; and (2) substantiation that the medical expense is an eligible expense under the ICHRA and Section 213(d) of the Code. Unlike the substantiation of coverage under an individual health insurance policy, employees must provide third-party documentation of the medical expense for which reimbursement is requested (i.e., an employee’s written attestation, alone, is not sufficient).
- Employees who are eligible for an ICHRA cannot be eligible for a traditional group health plan sponsored by the same employer
Employees who are eligible for an ICHRA from their employer cannot also be eligible for a traditional group health plan from their employer. In other words, an employee cannot chose between a traditional group health plan and an ICHRA.
If an employer offers an ICHRA to some of its employees, this doesn’t mean that it is prohibited from offering a traditional group health plan to other employees. An employer may offer a traditional group health plan or an ICHRA to different classes of employees based only on the following classes:
- Full-time employees
- Part-time employees
- Seasonal employees
- Union employees (employees covered by separate CBAs may be treated as separate classes)
- Employees who haven’t satisfied the waiting period for a traditional group health plan sponsored by the same employer
- Non-resident aliens
- Rating area (employees whose primary site of employment is within the same rating area)
- Salaried employees
- Non-salaried employees
- Temporary employees (employees of a temporary staffing firm who are placed at an unrelated employer)
If an employer offers a traditional group health plan in addition to an ICHRA, the following classes are subject to a minimum class size that is determined using the number of employees that the employer reasonably expects to employ on the first day of the ICHRA plan year: full-time, part-time, rating area, salaried, and non-salaried. The minimum class sizes require that the ICHRA be offered to a class that has at least the following number of employees: (1) 10 employees for employers with less than 100 employees; (2) 10% of the total number of employees for employers with between 100 and 200 employees; and (3) 20 employees for employers with more than 200 employees.
Finally, for employers that a part of a “controlled group” of companies under Section 414 of the Code, these classes are determined at the employer-level (not the controlled group-level).
- An ICHRA must be offered on the same terms to employees of the same class
With certain exceptions, an ICHRA must be offered on the same terms to each employee within the same class. Even “benign” discrimination—which is discrimination in favor of employees with adverse health conditions—is prohibited. Those exceptions are:
- Age. The maximum reimbursement under an ICHRA may increase with a participant’s age as long as the increase is available to all employees in the same class, and the maximum reimbursement for the oldest participant in the class is not more than three times the maximum reimbursement for the youngest participant in the class.
- Number of dependents. The maximum reimbursement under an ICHRA may increase as the number of the employee’s dependents increase and the ICHRA may prorate the maximum reimbursement as an employee’s dependents increase or decrease during the plan year.
- Former employees. An ICHRA may be offered to some, but not all, former employees within a class based on the class in which the former employee belonged when the former employee terminated employment.
- HSA eligibility. An HSA-compliant ICHRA—which doesn’t reimburse a participant’s out-of-pocket medical expenses other than preventive care before the minimum HDHP deductible is satisfied—and a non-HSA-compliant ICHRA may be offered to employees in the same class.
- Phasing-in ICHRA. The Department’s determined that employers may want to “phase-in” an ICHRA. As a result, an employer may offer an ICHRA to only employees hired on or after a certain date (as long as that date is on or after January 1, 2020), even if employees hired before this date in the same class are eligible for a traditional group health plan.
- Opt-out option
Participants in an ICHRA must be offered the opportunity to opt-out and waive future reimbursements under the ICHRA at least once per plan year (e.g., during the annual open enrollment period). Upon termination, the remaining ICHRA amounts must automatically be forfeited (subject to COBRA) or the ICHRA must allow the participant to permanently opt-out and waive future reimbursements (e.g., in the event that the ICHRA allows former employees to spend down their ICHRA).
- Notice requirement
Every employee who is eligible for an ICHRA must receive an annual notice at least 90 days before the beginning of the plan year. However, for new ICHRAs that are established within 120 days of the first day of the plan year, this notice—for the first plan year only—may be provided by the ICHRA’s effective date for the employees. The Departments also issued a “model” notice that may be used to satisfy this requirement. This notice is in addition to any other applicable notices (e.g., SBC, SPD and Marketplace notice).
Excepted Benefit HRAs
The Departments’ final rule also created a new form of “excepted benefit” HRA, which is subject to similar rules that apply to health flexible spending accounts that are excepted benefits. (These new EBHRAs should not be confused with HRAs that otherwise qualify as excepted benefits, such as limited-scope dental and/or vision HRAs or retiree-only HRAs). An EBHRA may reimburse an employee’s out-of-pocket medical expenses (that are eligible under the EBHRA and Section 213(d) of the Code), regardless of whether the employee is enrolled in another group health plan, if the EBHRA satisfies the following requirements:
- The EBHRA cannot be an integral part of another group health plan. In order for an EBHRA to satisfy this requirement, any employee who is eligible for the EBHRA must also be eligible for a traditional group health plan sponsored by the same employer. The employee is not, however, required to be enrolled in a traditional group health plan in order to enroll in the EBHRA.
- Maximum reimbursement. The maximum reimbursement under an EBHRA is $1,800. This amount is annually revised (before each June 1) for cost-of-living adjustments. Furthermore, any carryover is not included for purposes of determining compliance with the maximum reimbursement amount.
- The EBHRA cannot provide reimbursement for most health insurance premiums. An EBHRA may only reimburse a participant for the following health insurance premiums: (1) COBRA premiums; (2) premiums for insurance that covers only excepted benefits (e.g., accident or hospital indemnity policies); or (3) short-term limited-duration insurance (“STLDI”).
- Uniform availability. An EBHRA must be made available under the same terms to all similarly situated individuals, regardless of health factors. An EBHRA may distinguish between similarly situated employees as long as the distinction is based on a bona fide employment-based classification that is consistent with the employer’s usual business practices (e.g., full-time v. part-time, employees in different geographical locations, union v. non-union employees, union employees covered by different CBAs, date of hire, length of service, current v. former employee status, different occupations, etc.)
Miller Johnson’s Comments
Here are some factors that employers should consider when implementing an ICHRA or EBHRA:
- Pay or play penalty. Applicable large employers that are subject to the ACA’s “pay or play” penalty may use an ICHRA to comply with the pay or play penalty’s requirement that the employer offer its full-time employees health insurance that is affordable and of minimum value. An ICHRA is affordable if the employee’s required contribution towards the premium for the lowest-cost silver plan available to the employee on an ACA Marketplace, after taking into account the reimbursement under the ICHRA, does not exceed the applicable percentage of the employee’s household income (which is 9.86% in 2019 and 9.78% in 2020). An ICHRA that is affordable is automatically determined to be of minimum value. The Treasury Department and IRS promised that they would issue additional guidance on the application of the pay or play penalty to ICHRAs, including the use of various safe harbors.
- Salary reduction arrangement. An employer may allow an employee to pay for any portion of the premium for an individual health insurance policy that is not covered by an ICHRA on a pre-tax basis through a Section 125 Cafeteria plan, as long as the individual health insurance policy was not purchased on an ACA Marketplace. Employers that want to offer this salary reduction arrangement will need to amend their Section 125 Cafeteria plan.
- ERISA status of ICHRAs. An ICHRA is subject to ERISA (assuming that it is not sponsored by a church or governmental employer). However, the individual health insurance policy that is “integrated” with the ICHRA, is not subject to ERISA as long as it meets the requirements applicable to ERISA’s safe harbor exception for “voluntary plans.” We suspect that most ICHRAs will easily satisfy this safe harbor exception. However, employers that are interested in offering an ICHRA in connection with a private exchange should be careful. Private exchanges often limit employees’ choices with respect to insurance carriers or coverage options. This may run afoul of the safe harbor exception to ERISA for voluntary plans.
- Eligibility for a premium tax credit. An employee who is eligible for an ICHRA that is “affordable” or any employee who is enrolled in an ICHRA (regardless of whether it is affordable) is not eligible for a premium tax credit when purchasing an individual health insurance policy on the ACA Marketplace. Eligibility for or enrollment in an EBHRA, however, will not impact an individual’s eligibility for a premium tax credit.
Employers that are interested in offering either an ICHRA or EBHRA (or both) in 2020 should start making arrangements now. These employers must work with legal counsel to draft plan documents, SPDs, SBCs and other notices, as applicable. Additionally, employers that want to offer ICHRAs should also prepare a communication strategy to inform employees how ICHRAs work and the requirement to enroll in an individual health insurance policy or Medicare.
If you have questions about ICHRAs or EBHRAs, please contact the author (or another member of the Employee Benefits Practice Group).