New HRA Options Could Transform Employer-Sponsored Health Insurance

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The high cost of health benefits disproportionately impacts small employers.  While overall premiums increased by 10.5 percent in 2017, costs for small employers went up on average by 12.3 percent. However, a new rule proposed by the United States Department of Labor holds great promise for giving employers of any size relief from rising health care costs through new health-reimbursement arrangements (HRAs).

Soon employers could offer tax-free money to employees for health benefits rather than offer a group plan.  

In October, the USDOL proposed a rule on HRAs that would allow employers to offer workers tax-exempt dollars to buy their own health insurance in the individual market. Prior to the enactment of the Affordable Care Act (ACA), HRAs served as a vehicle that allowed employees to purchase a non-group plan of their choice. Employees submitted receipts, for which their employers would reimburse them with pre-tax dollars. Several requirements in the ACA, including the creation of essential health benefits and removal of annual and lifetime limits on health insurance, curtailed this option, in part to protect the small group market.

The regulation will most likely be finalized until probably the end of the First Quarter of 2019. Below the radar until now, the final rule could transform how healthcare is sponsored by employers, allowing employers to meet the requirements of the ACA by letting employees purchase their own insurance.

Employers Can Give Workers Money to Buy their Own Insurance

First, an employer must decide (1) whether it wants to offer its employee a “group health plan” or (2) whether it wants to offer its employee the HRA arrangement.  An employer will not be able to offer a group health plan to some of its employees and also an HRA arrangement to other employees.  Instead, the employer must decide between offering a group health plan or HRA.

The proposed HRA regulations created 2 new types of HRAs – (1) an HRA that can used to purchase an “individual” market plan on a tax-free basis and (2) an “excepted benefit HRA” that can offer up to $1,800 to pay for medical expenses other than premiums for an “individual” market plan, a “group health plan,” and Medicare.

When it comes to the HRA that can used to purchase an individual market plan on a tax-free basis, if an employer chooses to offer such an arrangement to its employees, the HRA must be offered to all employees in a specified “class” of employees.  

The “classes” break-down like this:  1) Full-Time Employee 2) Part-Time Employee 3) Union Employee 4) Seasonal Employee 5) Foreign Employee 6) Employees in a waiting period 7) Employees under age 25, and (8) Employees in different geographic location.

Importantly, the amount of money that can be put in the HRA to purchase an “individual” market plan is uncapped.  In other words, no dollar limit is placed on the HRA contribution.  And while employer must give the same HRA contribution amount to all employees of the same class., an employer can vary the HRA contribution by “age” and by “family size.”  In other words, an employer can give an older person a higher contribution amount than a younger person.  Additionally, an employer can give an employee +1 dependent and employees with multiple dependents higher contribution amounts than single employees. 

This makes sense because the more dependents you have, the more expensive the health insurance gets.  However, if the employer varies its HRA contributions by age and/or family size, the employer must give the same contribution amount to all employees in the same class who are the same age and or have the same family size.

In order to treat the HRA contribution as tax-free, the employee must purchase an individual market plan.  In the case of those employers that decide to adopt the HRA arrangement once the regulations are finalized (where employees will be purchasing individual market plans for the first time), the individual market plan must comply with the ACA coverage requirements.   

Meeting the Large Employer ACA Mandate

Because the offer of an HRA to purchase an individual market plan is equivalent to an offer of an employer-sponsored plan, the proposed HRA states that an employer with 50 or more FTEs (i.e., a large employer subject to the ACA employer mandate) will satisfy the employer mandate if the ability to use the HRA is offered to at least 95% of the employer’s “full-time employees” and dependents.  

In addition, an employer with 50 or more FTEs will satisfy the employer mandate if the HRA is “affordable.”  Importantly, because the “affordability” test looks to the lowest cost “silver” plan, this plan will by definition satisfy the “minimum value” test because the plan will provide at least a 66% actuarial value (which automatically satisfies the “minimum value” test which requires the plan to cover at least 60% of the cost benefits covered under the plan).  

The “affordability” test is satisfied if the HRA contribution offered by an employer subject to the employer mandate requires the employee to pay less than 9.56% of their “household income” for the lowest cost “silver” self-only plan in the employee’s “rating area.”

Less Administrative Hassles for Employers

An attractive feature of the new HRA arrangement that allows employees to purchase an individual market plan is that the HRA arrangement will not be subject to ERISA’s requirements.  This is an important feature because employers who simply want to give their employees a defined contribution to purchase health insurance, and not be hassled by the rules and requirements that go along with offering a “group health plan” – can now do so without triggering ERISA’s requirements.

Other HRA Options

The second type of HRA that the proposed regulations create is the “excepted benefit” HRA.  According the proposed regulation, an employer may offer this HRA to its employees, but only if the employer also offers group health plan coverage.  The employee is not required to actually enroll in the group health plan to get access to the excepted benefit HRA.

The contribution amount in the “excepted benefit” HRA is limited to $1,800.  This $1,800 is indexed to increase each year by the new chained CPI.  The HRA contribution amounts cannot be used to pay for premiums for a group health plan, or an individual market plan, or Medicare Parts B and D.  However, contributions can be used to pay for short-term health plans, COBRA, and other “excepted benefits” (e.g., disability, vision, and dental).  The excepted benefit HRA must be made available to all similarly situated employees.