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Final Regulations Expand Use of Health Reimbursement Arrangements
(Parker Tax Publishing June 2019)
The U.S. Departments of Health and Human Services, Labor, and Treasury issued final regulations which expand the use of a new type of health reimbursement arrangement (HRA) and allow those HRAs to be integrated with individual health insurance coverage. When employers have fully adjusted to the regulations, the Departments estimate that the expansion of HRAs will benefit approximately 800,000 employers and more than 11 million employees and family members, including an estimated 800,000 Americans who were previously uninsured. T.D. 9867.
Background
Health reimbursement accounts or health reimbursement arrangements (HRAs) are employer-funded group health plans from which employees are reimbursed tax-free for qualified medical expenses up to a fixed dollar amount per year. Unused amounts may be rolled over to be used in subsequent years. The employer funds and owns the account.
On June 13, in T.D. 9867, the Departments of Labor, Health and Human Services, and Treasury issued final regulations which permit employers to offer a new "Individual Coverage HRA" as an alternative to traditional group health plan coverage, subject to certain conditions. The final regulations, which are effective beginning in January of 2020, also introduce another new HRA, the Excepted Benefit HRA.
Individual Coverage HRA and Excepted Benefit HRA
Among other medical care expenses, the new Individual Coverage HRAs can be used to reimburse premiums for individual health insurance chosen by an employee as well as subsidizing an employee's premiums in the individual Exchange (i.e., Obamacare) market. These HRAs promote employee and employer flexibility, while also maintaining the same tax-favored status for employer contributions towards a traditional group health plan.
The final regulations also increase flexibility in employer-sponsored insurance by creating a second limited kind of HRA, the "Excepted Benefit HRA" that can be offered to employees in addition to a traditional group health plan. These "Excepted Benefit HRAs," the benefits of which are capped at $1,800, permit employers to finance out-of-pocket medical care costs (for example, the cost of copays, deductibles, or other expenses not covered by the primary plan) even if the employee declines enrollment in the traditional group health plan.
Mechanics of an Individual Coverage HRA
An Individual Coverage HRA reimburses employees for their medical care expenses (and sometimes their family members' medical care expenses), up to a maximum dollar amount that the employer makes available each year. The employer can allow unused amounts in any year to roll over from year to year. Employees must enroll in individual health insurance (or Medicare) for each month the employee (or the employee's family member) is covered by the Individual Coverage HRA. This can be individual health insurance offered on or off an Exchange. However, it cannot be short-term, limited-duration insurance (STLDI) or coverage consisting solely of dental, vision, or similar "excepted benefits." There are many other important requirements as well.
The following are some of the features and/or requirements of Individual Coverage HRAs:
(1) an employer must offer the same terms to all participants within a class, with the exception that an employer can (i) offer higher HRA contributions based on an employee's age (limited to up to three times as much as the contribution to the HRA's youngest participant), and (ii) offer higher HRA contributions based on an employee's family size;
(2) employers that offer traditional group health insurance coverage to current employees can offer Individual Coverage HRAs to new employees in the same class;
(3) Individual Coverage HRAs allow for the combination of classes of employees but, in certain circumstances, apply a minimum class size requirement;
(4) a minimum class size requirement, which varies based on employer size, applies to certain classes of employees in certain circumstances in which the potential for health factor discrimination is greatest;
(5) a minimum class size requirement applies for Individual Coverage HRAs only if the plan sponsor offers a traditional group health plan to at least one other class of employees and offers an Individual Coverage HRA to at least one class of employees;
(6) if the minimum class size requirement applies, it applies only to certain classes that are offered an Individual Coverage HRA and does not apply to a class of employees offered a traditional group health plan or to a class of employees that is not offered any group health plan;
(7) where the minimum class size rules apply, the minimum class size is equal to 10 employees for an employer with fewer than 100 employees; equal to 10 percent of the total number of employees (rounded down to a whole number), for an employer with 100 to 200 employees; and equal to 20 employees for an employer that has more than 200 employees;
(8) Individual Coverage HRAs are not the property of the employee and employers may limit the amount that can be carried over from year-to-year or accessed by the employee after separation, subject to applicable COBRA or other continuation of coverage requirements;
(9) Individual Coverage HRAs do not require that a minimum number of individual health insurance plans be available to employees in order for the employer to offer an Individual Coverage HRA; and
(10) Individual Coverage HRA may include full-time employees and part-time employees as separate permitted classes.
Individual Coverage HRA and Premium Tax Credit
The premium tax credit (PTC) provided in Code Sec. 36B was enacted as part of the Affordable Care Act. It is a refundable tax credit for eligible individuals and families who purchase health insurance through an insurance Exchange. The PTC, which is payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an Exchange and is available for lower income taxpayers.
A taxpayer cannot claim the PTC for Exchange health insurance coverage for any month the taxpayer is covered by the Individual Coverage HRA. Nor can a taxpayer claim the PTC for the Exchange coverage of any family members for any month those members are covered by the Individual Coverage HRA. If a taxpayer opts out of the Individual Coverage HRA and the HRA is considered unaffordable, the taxpayer may claim the PTC for him or herself and any family members enrolled in Exchange coverage if such taxpayers are otherwise eligible. If a taxpayer opts out of the HRA and the HRA is considered affordable, the taxpayer may not claim the PTC for him or herself or any family members.
Advantages and Disadvantage of the Final Regulations
Many healthcare professionals have weighed in on whether these new rules will favorably or unfavorably impact employees and the health insurance market in general. On the plus side, Individual Coverage HRAs provide tax advantages because the reimbursements provided to employees under the HRA aren't includible in employees' taxable wages and the expenses are deductible by employers. Individual Coverage HRAs extend the tax advantage for traditional group health plans to HRA reimbursements of individual health insurance premiums. Employers may also allow employees to pay for off-Exchange health insurance on a tax-favored basis, using a salary reduction arrangement under a cafeteria plan, to make up any portion of the individual health insurance premium not covered by the employee's Individual Coverage HRA. The term "off-Exchange health insurance" refers to a health insurance policy that is purchased directly from a health insurance carrier or through an agent or broker, outside of the official Affordable Care Act-created health insurance exchange.
According to HHS, in most cases, the Individual Coverage HRA rule is advantageous because it will increase worker options for health insurance coverage by allowing workers to shop for plans in the individual market and select coverage that best meets their needs. It will also result in coverage being more portable for many workers. Citing a 2018 Kaiser Family Foundation Employer Health Benefits Survey, HHS said that 81% of small to midsized employers (i.e., those with fewer than 200 employees) and 42% of larger employers (i.e., those with at least 200 employees) offering health benefits in 2018 provided only one type of health plan to their employees.
The HRA rule should also help small employers, who face larger administrative costs from offering a traditional group health plan, compete for talent. HHS noted that a significant number of small employers have stopped offering coverage since 2010. According to the 2018 Kaiser survey, between 2010 and 2018, the percentage of firms offering coverage declined from 59% to 47% at firms with 3-9 workers, from 76% to 64% at firms with 10-24 workers, from 92% to 71% at firms with 25-49 workers, and from 95% to 91% at firms with 50-199 workers. Expanding the number of employers providing healthcare coverage means a broader market over which the healthcare risks are distributed and this could lead to a lowering of premiums for that market.
Other healthcare professionals are taking a wait-and-see approach, noting that the new rules will shake up the insurance market with respect to employer-provided health insurance, but it is unclear how that will play out. Some commented on the fact that many opponents of the Medicare-for-All insurance plan have used the fact that such a plan would disrupt employer-provided health insurance as a reason to oppose the plan.
According to the Brookings Institute, a nonprofit public policy organization based in Washington, D.C., changes in employer coverage arrangements under the new rules will create winners and losers within firms to the extent that firms do not make offsetting changes to their compensation structures, with younger and higher-income workers generally benefiting at the expense of older and lower-income workers. The final rule's limitation on how much contributions to Individual Coverage HRAs can vary by age makes such effects more likely. The Brookings Institute also noted that the proliferation of HRA varieties and the complex rules attendant to each one could leave employees confused, potentially resulting in unexpected tax liability or additional fiscal cost. These concerns are especially acute for 2020, when the Exchanges will not be ready to make accurate eligibility determinations for individuals offered HRAs. In addition, the Brookings Institute noted, the Individual Coverage HRAs do not comply with ACA consumer protections, including the prohibition on annual and lifetime limits and the requirement to cover preventive services.
For a discussion of HRAs, see Parker Tax ¶120,125.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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