ACA News & Publications

ACA Pathways: Rule Proposed to Expand the Use of HRAs

October 31, 2018

The Departments of Labor (DOL), Health and Human Services (HHS) and the Treasury (Departments) recently issued a proposed rule that would expand the usability of health reimbursement arrangements (HRAs). HRAs are tax-favored, employer-funded accounts that reimburse employees for health care expenses.

This proposed rule was issued in response to a 2017 executive order directing federal agencies to expand access to HRAs. Under current regulations, HRAs cannot reimburse employees for the cost of individual health coverage. This proposed rule is part of the Departments' efforts to implement the executive order's directives. Key features of the proposal include:

  1. Allowing HRAs to be used to reimburse the cost of individual market premiums on a tax-preferred basis, subject to certain conditions.
  2. Allowing employers that offer traditional group coverage to provide an HRA of up to $1,800 per year (as adjusted) to reimburse certain qualified medical expenses that are "excepted benefits"; and
  3. Allowing employers with HRAs that are integrated with individual health insurance to permit their employees to pay any portion of their individual insurance premiums not covered by the HRA, on a pre-tax basis through the cafeteria plan.

Comments on the proposed rule will be accepted until December 28, 2018. The rule, if finalized, is proposed to be effective for plan years beginning on and after January 1, 2020.

Reimbursing the Cost of Individual Market Premiums

The proposed rule would allow HRAs to be integrated with individual insurance coverage for purposes of complying with the Affordable Care Act (ACA), eliminating the existing prohibition on this type of arrangement. This means that HRAs could be used to reimburse employees for the cost of individual health coverage on a tax-preferred basis as long as the following conditions are met:

  • The HRA must require that the participant and any dependents be enrolled in individual health coverage for each month that the individual(s) is covered by the HRA;
  • A plan sponsor that offers an HRA integrated with individual health coverage to any class of employees may not also offer a traditional group health plan to the same class of employees;
  • If a plan sponsor offers an HRA integrated with individual health coverage to any class of employees, the HRA must generally be offered on the same terms to all participants within the class;
  • Participants must be allowed to opt out of and waive future reimbursements from the HRA at least annually (and, upon termination of employment, either the amounts remaining in the HRA are forfeited or the participant is allowed to permanently opt out of and waive future reimbursements); and
  • The HRA must implement and comply with reasonable procedures to verify that participants and dependents are (or will be) enrolled in individual health insurance coverage for the plan year.

The proposed rule also contains a disclosure provision to ensure that employees understand the benefit. Under this disclosure requirement, an HRA must provide written notice to eligible participants including, among other things, the following information:

  • A description of the terms of the HRA, including the amounts newly made available as used in the affordability determination under the Code Section 36B proposed regulations;
  • A statement of the participant's right to opt out of and waive future reimbursement under the HRA;
  • A description of the potential availability of the premium tax credit for a participant who opts out of and waives an HRA if the HRA is not affordable under the proposed premium tax credit regulations; and
  • A description of the premium tax credit eligibility consequences for a participant who accepts the HRA.

The HRA must provide the written notice to each participant at least 90 days before the beginning of each plan year (or no later than the date the participant is first eligible to participate in the HRA, for participants who are not eligible to participate at the beginning of the plan year).

Excepted Benefits HRAs

The proposed rule would expand the definition of limited excepted benefits by establishing certain types of HRAs that would qualify as excepted benefits that are not subject to some ACA requirements (called an "excepted benefit HRA"). This change 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:

  • Individual health coverage that consists solely of excepted benefits (such as stand-alone vision and dental plans, accident-only coverage, workers' compensation coverage or disability coverage);
  • Coverage under a group health plan that consists solely of excepted benefits;
  • Short-term, limited-duration insurance plans; and
  • COBRA coverage.

However, an excepted benefit HRA cannot reimburse premiums for individual health coverage, coverage under a group health plan (other than COBRA or other group continuation coverage), or Medicare parts B or D.

Payment of Premiums Through a Cafeteria Plan

Employees participating in HRAs that are integrated with individual health insurance may also be able to pay any portion of their individual insurance premiums not covered by the HRA, on a pre-tax basis through the cafeteria plan. If offered, salary reductions would have to be made available on the same terms and conditions to all employees within a class.

Related Regulations

A number of additional provisions were also included in the proposed rule relating to the proposed expansion of HRAs, including the following:

  1. Premium Tax Credit Eligibility. The IRS proposed rules regarding premium tax credit eligibility for individuals offered coverage under an HRA integrated with individual health insurance coverage. Generally, an individual who is covered by an HRA integrated with individual health coverage is ineligible for the premium tax credit.
  2. ERISA Applicability. The DOL proposed a clarification to provide plan sponsors with assurance that the individual health coverage, the premiums of which are reimbursed by an HRA, does not become part of an ERISA plan, provided certain conditions are met.
  3. Special Enrollment Period. HHS proposed rules that would provide a special enrollment period in the individual market for individuals who gain access to an HRA integrated with individual health coverage.

For More Information
For more information about this ACA Pathways or about any other health care reform-related provisions, please contact your Burnham Benefits consultant or Burnham Benefits at:

Burnham Benefits

Burnham Benefits does not engage in the practice of law and this publication should not be construed as the providing of legal advice or a legal opinion of any kind. The consulting advice we provide is intended solely to assist in assessing its compliance with the Patient Protection and Affordable Care Act and other applicable federal and state law requirements, and is based on Burnham Benefit’s interpretation of federal guidance in effect as of the date of this publication. To the best of our knowledge, the information provided herein, and assumptions relied on, are reasonable and accurate as of the date of this publication. Furthermore, to ensure compliance with IRS Circular 230, any tax advice contained in this publication is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.

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