ACA Pathways: Regulations Establishing Two New HRAS Finalized
June 18, 2019
New rules released by the Departments of Labor, Health and Human Services, and the Treasury (collectively, the Departments) will permit employers to offer two new types of health reimbursement accounts (HRAs), an "Individual Coverage HRA" and an "Excepted Benefits HRA," beginning January 1, 2020, as long as certain requirements are satisfied.
These rules finalized a proposed rule that 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.
Individual Coverage HRAS
The new rule allows 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. In addition to reimbursing employee medical expenses (and those of family members, if applicable), an Individual Coverage HRA could be used to reimburse the cost of individual market premiums for health insurance coverage (purchased either inside or outside the Marketplace), on a tax-preferred basis.
An offer of an Individual Coverage HRA will count as an offer of coverage under the ACA's employer mandate, which requires employers to offer coverage that is affordable and provides minimum value to at least 95 percent of their full-time employees to avoid a potential penalty in the event that at least one full-time employee receives a Premium Tax Credit (subsidy) through individual coverage purchased in the Marketplace. Accordingly, whether or not a penalty will be owed under the mandate will depend on whether the HRA is considered affordable. This will be determined in part, on the amount contributed by the employer to the HRA. The Internal Revenue Service plans to issue additional guidance on the applicability of the employer mandate to Individual Coverage HRAs in the near future.
To establish Individual Coverage HRAs for its employees, certain conditions must be met, including the following:
- The HRA must be offered as an alternative to traditional group health plan coverage.
- The HRA must require that the participant and any dependents be enrolled in individual health coverage (or Medicare) for each month that the individual(s) is covered by the HRA. However, the coverage enrolled in cannot be short-term limited duration insurance coverage, nor can it be coverage solely for excepted benefits, such as stand-alone dental or vision benefits;
- The HRA must be funded solely by employer contributions. The annual amount that may be contributed is determined by the employer-there are no dollar limits other than the Individual Coverage HRA that must be offered on the same terms to all employees within the same class. Notwithstanding, an employer may increase the amount available based on the employee's age or number of dependents;
- Unused balances in participant's accounts may be rolled over from year-to-year;
- 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. Classes of employees could be based on the following status:
To prevent adverse selection in the individual market, a minimum class size rule of between 10 and 20 employees will apply (depending on the employer's total number of employees) if an employer offers a traditional group health plan to some employees and an Individual Coverage HRA to others in the same class, if the class is based on either full-time versus part-time status, salaried versus non-salaried status, or geographic locations smaller than a state;
A new hire rule will permit the employer to only offer an Individual Coverage HRA to new employees, while grandfathering existing employees in a traditional group health plan;
Participants must be allowed to opt-out of and waive future reimbursements from the HRA at least annually so they may be able to claim the subsidy if they are otherwise eligible and if the HRA is considered unaffordable;
The employer must comply with certain notice and substantiation requirements:
- Full-time employees;
- Part-time employees;
- Employees working in the same geographical location (generally, the same insurance rating area, state or multi-state region);
- Seasonal employees;
- Employees in the same collective bargaining unit;
- Employees who haven't satisfied a waiting period;
- Non-resident aliens with no U.S. based income;
- Salaried Workers;
- Non-salaried workers (e.g., hourly workers)
- Temporary employees of staffing firms, or
- Any group of employees formed by combining two or more of the above classes.
A model notice and substantiation form have been created (and are available to download here, and a model attestation form is available to download here); and
Existing HRA rules must still be complied with.
- Notice must be provided to eligible participants 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);
- In addition, the Individual Coverage HRA must implement and comply with reasonable procedures to verify that participants and dependents are enrolled in individual health insurance coverage or Medicare, while covered by the HRA. In this respect, there are two substantiation requirements: (1) an annual coverage substantiation requirement, and (2) an ongoing substantiation requirement. Each of these substantiation requirements may be satisfied by a participant attestation, among other permissible methods (such as providing a third party document or, for the ongoing substantiation requirement, direct payment of insurance premiums).
Lastly, employers will generally not be responsible for the individual health coverage option elected by its employees, provided the following conditions are complied with:
- The employee's purchase of the coverage was completely voluntary;
- The employer doesn't select or endorse any particular insurance carrier or insurance coverage option;
- The employer doesn't receive any cash, gifts, or other consideration in connection with the election or renewal of an insurance coverage option; and
- The employer notifies each employee annually that the individual health insurance is not subject to the Employee Retirement Security Act (ERISA).
Excepted Benefits HRAS
An Excepted Benefit HRA can be offered in addition to a traditional group health plan, and would allow employers to contribute up to $1,800 per year (indexed annually for inflation beginning in 2021) 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 Benefits 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.
Other requirements stipulate that the HRA must be uniformly available to similarly situated individuals, although an employee is not required to enroll in the traditional group health plan to enroll in the Excepted Benefit HRA. Thus, it need not be integrated with the group health plan.
Payment Of Premiums Through A Cafeteria Plan
Employees participating in Individual Coverage HRA 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 as long as the coverage purposed is purchased outside the Marketplace.
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 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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