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Final regulations expand HRAs

Individual coverage allowed

Posted June 17, 2019

On June 13, the U.S. Departments of Health and Human Services, Labor, and the Treasury issued a final regulation that will expand the use of health reimbursement arrangements (HRAs).

Under the regulation, starting in January 2020, employers that do not offer a group plan will be able to use what are referred to as individual coverage HRAs to provide their workers with tax-preferred funds to pay for the cost of health insurance coverage that workers purchase in the individual market, subject to certain conditions. This includes coverage on the Affordable Care Act (ACA) public exchanges.

In effect, individual coverage HRAs extend the tax advantage for traditional group health plans (exclusion of premiums, and benefits received, from federal income and payroll taxes) to HRA reimbursements of individual health insurance premiums. Employers may also allow employees to pay for off-exchange health insurance on a tax-favored basis, using a salary reduction arrangement under a cafeteria plan, to make up any portion of the individual health insurance premium not covered by the employee’s individual coverage HRA.

An individual coverage HRA reimburses employees for their medical care expenses (and sometimes their family members’ medical care expenses), up to a maximum dollar amount that the employer makes available each year. The employer may allow unused amounts in any year to roll over from year to year. Employees must enroll in individual health insurance (or Medicare) for each month the employee (or the employee’s family member) is covered by the HRA. This cannot be short-term, limited duration insurance or coverage consisting solely of dental, vision, or similar “excepted benefits.” There are other important requirements, too.

Employers who offer an HRA must offer it on the same terms to all individuals within a class of employees, except that the amounts offered may be increased for older workers and for workers with more dependents. They may not offer an HRA to any employee to whom they offer a traditional group health plan. They may, however, 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. Employers may contribute as little or as much as they want to an HRA.

An offer of an HRA counts as an offer of coverage under the ACA’s employer mandate. In general, whether an applicable large employer that offers an HRA to its full-time employees (and their dependents) owes a payment under the employer mandate will depend on whether the HRA is affordable. This is determined under the premium tax credit rule being issued as part of the HRA rule and is based, in part, on the amount the employer makes available under the HRA. Therefore, if an employer is an applicable large employer and wants to avoid an employer mandate payment by offering an HRA, in general, the employer will need to contribute a sufficient amount for the offer of the HRA to be considered affordable.

This article was written by Darlene M. Clabault, SHRM-CP, PHR, CLMS, of J. J. Keller & Associates, Inc.

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