Ice Miller LLP: Insights

A Move Forward for Defined Contribution Health Care: Final Rule Permits Employers to Offer Individual Coverage HRAs

On June 13, 2019, the Departments of the Treasury, Labor, and Health and Human Services released a final rule that will allow employers to offer individual coverage health reimbursement arrangements (referred to as "individual coverage HRAs") beginning as early as January 1, 2020. An individual coverage HRA can reimburse employees for the cost of individual health insurance coverage purchased on or off a Health Insurance Marketplace Exchange (Exchange) and may also be used in connection with Medicare coverage. This reimbursement structure was specifically prohibited in most circumstances under the Obama administration. The change is in response to President Trump's Executive Order on "Promoting Healthcare Choice and Competition Across the United States." While the rule is expected to particularly benefit small employers, it opens the door for mid- and large-size employers who are required to offer coverage under the employer mandate to move away from traditional group health plan coverage toward a more "defined contribution" approach to health care.

An HRA is an employer-funded group health plan that reimburses employees and their dependents for medical care expenses they incur on a tax-free basis, up to a certain dollar amount. An HRA – by itself – cannot satisfy certain market reforms that were enacted under the Patient Protection and Affordable Care Act of 2010 (ACA) – specifically, the prohibition on annual dollar limits for essential health benefits and the requirement to cover certain preventive services at first dollar. Accordingly, the Departments have required that an HRA be "integrated" with other coverage that satisfies the market reforms in order to comply with the ACA. Since January 1, 2014, an HRA subject to the market reforms has been required to be integrated with other non-HRA group health plan coverage to comply with the ACA. The final rule expands the types of coverage with which an HRA can be integrated to include individual health plan coverage, including Medicare.

Basic Requirements

Under the final rule, an individual coverage HRA must meet the following requirements:

Enrollment in individual coverage. The HRA must require that the participant and any eligible dependents be enrolled in individual health insurance coverage (including fully insured student health insurance) or Medicare Part A and Part B or Part C (Medicare Advantage) for any month in which the individual HRA coverage applies. The individual coverage cannot be coverage that is limited to excepted benefits, such as dental or vision care, nor will enrollment in short-term limited duration insurance coverage or health care sharing ministry coverage satisfy this requirement.
Reimbursements. The HRA may be designed to reimburse only the premiums for the individual coverage, or it can also be designed to reimburse qualified medical expenses.
No choice between individual and group coverage. If the employer offers any class of employees an individual coverage HRA, the employer cannot also offer a traditional group health plan to that same class of employees (other than a traditional group health plan limited to excepted benefits, such as dental or vision care). The final rule permits employers to distinguish between certain classes of employees, including full-time and part-time employees, salaried and non-salaried (e.g., hourly) employees, employees working in the same geographic location, employees who have not met a waiting period, collectively bargained employees, seasonal employees, temporary employees of staffing firms, and non-resident aliens with no U.S. source income. If an employer offers a traditional group health plan to a class of employees and an individual coverage HRA to another class of employees, minimum class size rules may apply to prevent employers from shifting highest cost claimants to the individual market.
Same terms requirement. There is no minimum or maximum dollar reimbursement for an individual coverage HRA, but the HRA must be offered on the same terms to all participants within a class of employees, except that an employer may vary reimbursements based on the number of dependents and the age of the participant. The variations must be applied in a uniform manner, and the maximum reimbursement for older participants may not be greater than three times the maximum reimbursement for younger participants. The HRA may be designed to permit carryover balances year-to-year without a violation of the same terms requirement. In addition, new employees can receive reimbursements that are pro-rated based on their dates of hire or the addition or deletion of dependents. An employer may also design an HRA that is compatible with eligibility for health savings accounts (HSAs) and provide employees within the same class an option between an HRA that is HSA-compatible and an HRA that is not HSA-compatible.
Opt-out. Under the terms of the HRA, a participant must be permitted to opt out of and waive future reimbursements on behalf of the participant and eligible dependents from the HRA at least annually. This allows an HRA participant to preserve eligibility for a premium tax credit for coverage purchased on an Exchange, which may be more cost effective for the participant.
Substantiation of other coverage. The HRA must have reasonable procedures to substantiate that participants and each dependent who is covered by the HRA are, or will be, enrolled in individual health insurance coverage for the plan year. The substantiation must be provided annually at enrollment and upon each request for reimbursement. An employer may accept the participant's attestation of coverage or may require third party substantiation. The Departments have published model attestations employers may use to meet this requirement.
Notice requirement. The HRA must provide written notice to each participant at least 90 days before the beginning of each plan year (and to new employees upon eligibility) that meets the content requirements of the final rule. The notice provides information regarding the individual coverage HRA and its interaction with the premium tax credit. The Departments have published a model notice that employers may use to meet this requirement.

Impact on Employer Mandate

Importantly, an applicable large employer who is subject to the employer mandate will be able to satisfy its offer of coverage to full-time employees with an individual coverage HRA. In other words, the individual coverage HRA will qualify as minimum essential coverage (MEC). Moreover, if the individual coverage HRA is "affordable," an employee who receives the offer of coverage will not be eligible for a premium tax credit even if the employee declines the coverage. This will allow the employer to avoid application of penalties related to the employer mandate. The Treasury Department and the Internal Revenue Service intend to issue guidance that will provide safe harbors for purposes of determining affordability for individual coverage HRAs. This option will allow applicable large employers new flexibility to move away from traditional group health insurance coverage without a risk of an employer shared responsibility penalty.

Other Types of HRAs

Excepted Benefit HRAs. In addition to the individual coverage HRA, the final rule establishes a new standalone HRA called an excepted benefit HRA. This type of HRA can be used to reimburse medical expenses generally (such as co-pays, deductibles, and other expenses not reimbursed by other coverage) and COBRA, dental or vision premiums, but cannot be used to reimburse premiums for individual or group health coverage or Medicare. An excepted benefit HRA must be offered in conjunction with a traditional group health plan, but the employee is not required to be enrolled in the group health plan to take advantage of the HRA. The excepted benefit HRA is subject to an annual maximum reimbursement of $1,800 (indexed for inflation beginning in 2021).
QSEHRAs. The final rule does not change the rules for qualified small employer HRAs (or "QSEHRAs") that are available to small employers (under 50 full-time equivalents). A QSEHRA is not treated as a group health plan for purposes of the market reforms and is subject to specific limitations that do not apply to the individual coverage HRA.
HRAs integrated with group health plan coverage. These HRAs continue to be permitted, subject to the integration rules that apply to HRAs with group health plans.
HRAs that reimburse expenses for excepted benefits only. HRAs that cover expenses for excepted benefits only, such as vision and dental expenses, are not subject to the market reforms and continue to be permitted. This type of HRA is not required to be integrated with other coverage.
Retiree-only HRAs. HRAs established for the benefit of former employees are not subject to the market reforms and continue to be permitted. This type of HRA is not required to be integrated with other coverage.

For more information about how the final rule on HRAs might apply to your employee benefit plans, please contact Shalina Schaefer, Tara Sciscoe, Chris Sears, or the Ice Miller LLP Employee Benefits attorney with whom you work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.