Individual Coverage and Excepted Benefit Health Reimbursement Arrangements

Starting in 2020, employers that qualify can set up “individual coverage” health reimbursement arrangements (HRAs).  Employers will also be able to set up “excepted benefit HRAs.”  HRAs have a long history, and involve employee accounts through which employers can reimburse certain health costs.

The innovation here is that employees would be able to use individual coverage HRAs to buy their own individual or family coverage.  This kind of coverage would provide ACA-mandated essential health benefits and cover any preexisting condition.

Employees would be able to use excepted benefit HRAs to buy short-term, limited-duration insurance.  This kind of coverage is cheap, but can exclude preexisting conditions and does not have to provide essential health benefits.

Reimbursements and Health Reimbursement Accounts

Employer reimbursement of employee medical costs has tax benefits. These include:

  • tax deduction for the employer; and
  • no taxation of the employee.

The IRS has allowed these benefits to apply to the cost of premiums for an employee’s individual health insurance coverage.  These plans could be informal. Historically, this was a popular way for small employers that did not want to bother with a group plan to provide health plan benefits.

HRAs are more formalized versions of this kind of plan.  Employers make reimbursements available through individual employee accounts. HRAs are often integrated with an employer’s traditional health plan to pick up deductibles or co-pays. They are also used with stand-alone vision, dental, or long-term care plans.

Premium Reimbursements and the ACA

Starting in 2014, the ACA market reforms prohibited employers from reimbursing premiums for an employee’s individual coverage. The rule change did not affect the income tax treatment of these plans, but they did change the rules for what group health plans must offer.  Group health plan rules are enforced through a $100 per-day, per-affected employee excise tax.

The ACA market reforms also affected HRAs. Going forward, they had to follow elaborate rules for integration into a traditional employer group plan.  Employers were banned from integrating them with individual coverage whether or not it was obtained through on Exchange or directly from a private   insurer.

QSEHRAs – Congress’s Legislative Fix

Congress chipped away at the rule against premium reimbursements when it invented Qualified Small Employer HRAs (QSEHRAs). Beginning in 2016, small employers have been able to adopt QSEHRAs that employees could use to buy individual coverage either on or off an ACA Exchange.  Only small employers qualify. They are limited to reimbursing no more than $5,150 annually for individual coverage and $10,450 for family coverage for a 2019.

Individual Coverage HRAs – Administration’s Regulatory Fix

The QSEHRA approach has been extended by regulation.  Unlike QSEHRAs, the new regulations do not impose a dollar limit. In addition, they can be used by both large and small employers.  Note, however, that because they are merely regulations, a subsequent administration could eliminate them.

Integrating an HRA with individual health coverage requires that:

  • participants are enrolled in individual health coverage (which could include Medicare) for each month they are covered by the HRA;
  • coverage is offered to a class of employees to whom a traditional group health plan is not offered;
  • coverage is offered on the same-terms in amount and conditions to all employees within each class;
  • an opt out option is provided; and
  • substantiation and notice requirements are met.

The opt-out would be for individuals who prefer ACA Exchange coverage, but would not be eligible for the premium tax credit if enrolled in an employer health plan such as an HRA.

Risk to Individual Markets

The worry for insurance markets is that employers will encourage less healthy employees to move to ACA Exchange plans in order to make their traditional plan less costly.  At the very least, individual coverage HRAs would enable unhealthy employees to self-select into more robust ACA Exchange plans.  In either case, individual coverage HRAs will cause upward pressure on premiums for Exchange plans as less healthy people as a group are drawn or nudged towards Exchange coverage.

To counter these concerns, individual coverage HRAs are subject to a number of rules intended to make it harder for Exchange-bound employees to skew unhealthy. These rules play out in the class and class-size rules.

Different Treatment of Different Classes of Employees

Employers with both traditional plans and individual coverage HRAs may not offer both plans to the same employees.  Nor can they simply pick and choose which employees would be offered one kind or the other.  The only way employers can offer both kinds of plans is to separate their employees into distinct classes.

Permissible classes of employees include:

  • full-time employees;
  • part-time employees;
  • salaried employees;
  • nonsalaried employees;
  • seasonal employees;
  • employees who are included in a unit of employees covered by a collective bargaining agreement in which the plan sponsor participates;
  • employees who have not satisfied a waiting period for coverage;
  • employees whose primary site of employment is in the same rating area;
  • nonresident aliens with no U.S.-based income; and
  • groups combining any of these classes of employee.

Minimum Class Size

A minimum class size requirement applies if an employer offers a traditional plan to at least one class of employees, and an individual HRA plan to at least one class of employee.  They only apply a class that is offered individual HRA coverage. In addition, they only apply to following kinds of classes:

  • full-time employees;
  • part-time employees;
  • salaried employees;
  • nonsalaried employees; and
  • employees whose primary site of employment is in the same rating area (unless the area is a state or two or more entire states).

The minimum sizes are:

  • 10, for an employer with fewer than 100 employees; and
  • 10 percent of the total number of employees for employers with 100-200 employees; and
  • 20 for an employer that has more than 200 employees.

Note that cafeteria plans may include individual coverage HRAs, but only to for off-Exchange health insurance.

Excepted Benefit HRAs

The ACA does not regulate excepted-benefit only HRAs such as stand-alone vision or dental plans.  Accordingly, these plans are allowable as long as they do not also reimburse normal medical expenses that a health care plan would be expected to pick up.  They cannot be integrated with individual or traditional group plan coverage.

Innovations

Under the new rules, “excepted benefit HRAs” can be used to reimburse HRA to fund short-term, limited-duration coverage.  Short-term, limited duration insurance is treated as an excepted benefit so this is a continuation of the existing approach. However, there are two innovations.

  1. short-term, limited duration insurance has been extended from less than 90 days to less than a year, making this coverage far more useful.
  2. the new “excepted benefit HRA” is not just limited to excepted benefits as it can also pick up other medical costs associated with the coverage.

Short-Term, Limited-Duration Insurance

Because short-term, limited-duration coverage is not subject to ACA rules, it can exclude pre-existing conditions. In addition, it and does not have to provide what are considered essential health benefits under the ACA such as birth control.

For the young, the healthy, and the male part of the population, short-term, limited-duration coverage might be work just fine.

Excepted Benefit HRA Requirements

The final rules impose the following requirements for excepted benefit HRA:

  • the HRA must not be an integral part of the plan so an alternative plan must be available;
  • the HRA must provide benefits that are limited to $1,800 per year (adjusted for inflation after 2020);
  • the HRA cannot provide reimbursement for premiums for certain health insurance coverage; and
  • the HRA must be made available under the same terms to all similarly situated individuals.

Note that the $1,800 limit is unique HRA employer contributions.

More HRA Options Meet Different Employee Needs

Individual coverage HRAs are an option for employers that would prefer to avoid the trouble of providing a traditional plan, but want to provide good coverage for employees.  Excepted benefit HRAs are an option for employers that want to provide a low-cost alternative alongside their traditional plan for employees whose medical needs are few.

By James Solheim, J.D.

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CCHTaxGroup

All stories by: CCHTaxGroup