A new proposed regulation would expand the usability of health reimbursement arrangements (HRAs) if certain conditions are met. If finalized, the proposal would be effective for plan years beginning on or after January 1, 2020. This proposed regulation is in response to President Trump’s Executive Order on “Promoting Healthcare Choice and Competition Across the United States” and fulfills the President’s commitment to foster competition and choice, and to provide employees who work at small businesses with more options for financing their healthcare. For more, see the DOL Press Release and Fact Sheet.
HRAs allow employers to reimburse their employees for medical expenses in a tax-favored way. HRAs are funded solely by employer contributions that reimburse an employee for medical expenses incurred by the employee or the employee’s spouse and dependents up to a maximum dollar limit per covered period. HRA reimbursements are excluded from income and payroll taxes and unused amounts at the end of a year may carry over to later years, depending on the terms of the HRA. Current rules prohibit large employers from using HRAs to reimburse employees for the cost of individual health insurance coverage.
Proposed Changes The proposed rules would permit HRAs to reimburse employees for the cost of individual health insurance coverage, subject to certain conditions. These conditions mitigate the risk that health-based discrimination could increase adverse selection in the individual market, and include a disclosure provision to ensure employees understand the benefit. The proposed regulation would not alter the tax treatment of traditional employer-sponsored coverage. It would merely create a new tax-preferred option for employers of any size to use when funding employee health coverage. While the employer would fund the cost of individual health insurance coverage, the employee would own the coverage, allowing the employee to keep the coverage even if he or she left the employer and was no longer covered by the HRA.
Two new types of HRAs would be available:
The proposal, once finalized, would permit HRAs to reimburse premiums for individual health insurance policies only if all individuals covered by the HRA verified that they are, or will be, enrolled in individual health insurance coverage. Also, the HRA must be offered on the same terms to all employees within a defined class, and no class of employees can be offered a choice between a traditional group health plan and the HRA. Participants must be permitted to opt out of the HRA annually, and employers must provide eligible participants with a written notice describing the features of the HRA.
Separately, in addition to allowing HRAs to reimburse the cost of individual health insurance coverage, the proposed regulation would allow employers offering traditional employer-sponsored coverage to offer an “excepted benefit” 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.
Other proposed details include:
ERISA – The terms “employee welfare benefit plan” and “welfare plan” as used in ERISA would not include individual health insurance funded by an HRA if certain requirements are met. Among other things, the purchase of the insurance must be completely voluntary for participants and beneficiaries; the employer or other plan sponsor must not select or endorse any particular insurer or coverage; and participants must be notified annually that the individual coverage is not subject to ERISA.
Cafeteria Plans – Employers with HRAs that are integrated with individual health insurance could allow employees to use pre-tax cafeteria plan salary reductions to pay any portion of their individual insurance premiums not covered by the HRA. If offered, salary reductions would have to be made available on the same terms and conditions to all employees within a class.
Premium Tax Credit – Proposed rules would provide guidance regarding the premium tax credit consequences for individuals who are offered or covered by an HRA that is integrated with individual health insurance.
Exchange Special Enrollments – Proposed rules would establish an exchange special enrollment period for employees and their dependents who gain access to an HRA that is integrated with individual health insurance coverage, allowing them to enroll in individual insurance coverage or change from one individual coverage plan to another.
If finalized as proposed, the rules will establish two new types of HRAs that would be available to employers of any size. While the proposed HRA approach may not fit the benefit strategies for all employers, it may be attractive to those employers and employees who are seeking a more defined contribution approach to health care coverage. Conner Strong & Buckelew will provide alerts and updates as new information becomes available. Should you have questions, contact your Conner Strong & Buckelew account representative toll free at 1-877-861-3220. For a complete list of Legislative Updates issued by Conner Strong & Buckelew, visit our online Resource Center.