On June 13, officials from the Departments of Labor, Health and Human Services, and the Treasury issued a final regulation that expands options for employers of all sizes to use tax-preferred health reimbursement arrangements (HRAs) to help workers buy their own health insurance, improve their employer-sponsored coverage, or purchase low-cost plans with limited benefits starting in 2020.
HRAs are already available to employers and workers, but the Trump administration's new rule has the potential to increase their uptake. Administration officials said the expansion of HRAs is aimed in particular at small businesses that are not required to offer health insurance and medium-sized businesses that offer their workers a single plan, and that struggle with cost of health insurance premiums. The White House has estimated that when employers have adjusted to the new rule, 800,000 employers and more than 11 million workers and family members will benefit from these changes, including an estimated 800,000 Americans who were previously uninsured.
Starting January 1, 2020, employers will have the option to fund individual coverage HRAs (ICHRAs) that employees can use to reimburse premiums paid for individual market health insurance, including insurance obtained on the Affordable Care Act (ACA) exchanges, as an alternative to providing these employees with traditional group health coverage. The health insurance purchased with ICHRA funds must, however, meet certain coverage requirements, and cannot be short-term, limited-duration insurance (STLDI). This change rescinds previous IRS guidance from the Obama administration that effectively prohibited employers from offering standalone HRAs that allow employees to purchase coverage on the individual market.
HRAs were formally introduced in 2002 as employer-funded arrangements that workers can use to request reimbursement for qualified medical expenses, such as payments for prescription medications or for certain types of care not covered by their primary insurance. Under these past and revised rules, the funds employers contribute to the accounts are tax-free to workers and tax-deductible for the employer. Any funds funds left over in an individual employee's HRA at the end of the year can be rolled over to future years. However, when a worker leaves the company, the employee's HRA funds remain with the employer.
The final rule on HRAs is in response to the Trump administration's October 2017 executive order, "Promoting Healthcare Choice and Competition Across the United States," which directed the relevant federal departments to prioritize three areas for improving current regulations that "limit choice and competition" in the health insurance market. Among these priorities are "to increase the usability of HRAs, to expand employers' ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup coverage."
The executive order also resulted in an earlier final rule on association health plans (AHPs) that is currently being challenged in the courts after a federal judge struck down the regulation, and a final rule allowing low-cost, short-term insurance that provides less coverage than a standard ACA plan. The administration estimates that the HRA rule, combined with the AHP and short-term policy rule, will increase the number of people with private insurance coverage by nearly two million.
While employers can contribute as little or as much as they choose an individual coverage HRA, companies that offer ICHRAs are required to provide them 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 a greater number of dependents. The classes may be distinguished by whether employees are, for example, full-time, part-time, seasonal, hourly, salaried, or in a particular geographic location. Employers cannot offer an ICHRA to any employee who is also being offered a traditional group health plan, but they can choose to offer an ICHRA to certain classes of employees and a traditional group health plan—or no health plan—to other classes of employees. To prevent adverse selection in the individual market, a minimum class size rule applies to employers that offer a traditional group health plan to some employees and an ICHRA to others.
The final regulation also includes a provision for Excepted Benefit HRAs (EB-HRA), which will allow employers that offer traditional group health plans to contribute up to $1,800 a year (indexed for inflation) to a separate employee EB-HRA account. Employees are permitted use the funds to pay for certain qualified medical expenses, including copays, deductibles, or non-covered expenses, but not to pay for premiums for traditional group health insurance.
The EB-HRA funds can, however, be used to reimburse premiums for dental and vision coverage, as well as for STLDI plans, which typically cost 40% to 60% less than ACA plans. Administration officials noted that employers can offer EB-HRA plans to employees who do not enroll in the employer's traditional group health plan, and that this provision is likely to benefit employees who have been opting out of their employer's plan because they find the employee share of premiums is too expensive.
"President Trump is delivering on his promise to offer Americans more health coverage choices and lower healthcare costs," said Treasury Secretary Steven T. Mnuchin. "This new rule gives businesses a better way to offer health insurance to employees and allows workers to select coverage that best fits their and their families' needs."
