By Jordan Ge, Milliman Inc.
Under the Patient Protection and Affordable Care Act, starting in 2014 individuals and small businesses will have more options to purchase affordable and quality health insurance through government-run health insurance exchanges. While employers with 50 or more full-time employees may face federal penalties if they send their employees to an exchange, employers can allow retirees under the Medicare-eligible age of 65 to purchase health insurance through an exchange without a federal penalty.
The exchanges may spur more employers to set up tax-advantaged programs such as retiree-only health reimbursement arrangements (HRAs) for the early retiree group. This is because the exchanges are designed for individuals—such as early retirees—to purchase insurance that is suitable for their needs (e.g., different levels of coverage at various price points, but all of them providing "essential health benefits"). HRAs offer employers the means to continue or newly provide subsidies to early retirees.
In general, an HRA is an employer-funded program that reimburses an individual for medical expenses (such as premiums, co-pays, co-insurance, deductibles and services) up to a specified dollar amount for a coverage period. Contributions to the HRA are made solely by the employer (and are tax deductible), and for the individual are tax free (i.e., excluded from income) when used for qualified expenses. Under current regulations, some or all of the credit balance in an HRA may be rolled over from year to year, a design consideration determined by the plan sponsor.
For early retirees, an HRA would allow them to use the employer subsidies to purchase health insurance from the exchange or to pay for other qualifying medical expenses. Unlike a health savings account (HSA), an HRA does not require coverage under a high-deductible health plan, and HRAs may be used to pay insurance premiums. From an employer's perspective, an HRA can control health care costs by giving the employer the right to determine the subsidy amounts and to specify the covered medical expenses.
An HRA can be stand-alone or integrated with another group health plan. If the HRA is integrated with another group health plan, the HRA is not required to satisfy the annual limit restrictions imposed by the PPACA, as long as the other group health plan alone satisfies the PPACA's annual limit restrictions. Note that a standalone HRA is permissible through Jan. 1, 2014, if it was in effect prior to Sept. 23, 2010, without having to obtain from the Department of Health and Human Services a waiver from the annual limit restrictions. Guidance for integrated HRAs in 2014 and after could limit HRA offerings for active workers. Standalone HRAs covering retirees only (or covering "excepted benefits" such as dental or vision benefits), however, will remain permissible after Jan. 1, 2014.
HSAs vs. HRAs
Other tax-advantaged programs such as health savings accounts (HSAs) may not offer effective financial support for early retirees as an HRA does in purchasing health insurance. Once an individual retires, he or she can spend down his/her HSA to pay for qualified medical expenses. However, premiums cannot be treated as qualified medical expenses under HSAs unless the premiums are for long-term care insurance, health care continuation coverage (such as COBRA), health care coverage while receiving unemployment compensation under federal or state law, or Medicare and other health care coverage (excluding Medicare supplemental policies) if an individual is aged 65 or older.
Jordan Ge, ASA, CFA, is an associate actuary in the Washington, D.C., office of Milliman, a global consulting and actuarial firm. The article was peer reviewed by John Muehl, FSA, a consulting actuary in the Washington, D.C. office of Milliman.
This article above is an excerpt from "Health Insurance Exchanges and Early Retiree Health Coverage," which originally appeared June 2012 issue of Milliman's "Benefits Perspectives" and is reposted with permission. © 2012 by Milliman, Inc. All rights reserved.
Related SHRM Articles:
Employers Reconsider Retiree Medical Strategies, SHRM Online Benefits, October 2012
Estimate: Retiring Couples Will Need $240,000 to Pay Medical Expenses, SHRM Online Benefits, May 2012
Consumer-Driven Decision: Weighing HSAs vs. HRAs, SHRM Online Benefits, update May 2012
Build a Bridge to Health Exchanges for Early Retirees, SHRM Online Benefits, February 2011
Health Savings Accounts Can Build Retirement Wealth, SHRM Online Benefits, October 2010
It's Complicated: Coordinating Medicare, Employer Health Plans, SHRM Online Benefits, April 2011
Group Policies vs. Subsidized Individual Coverage—The Impact of Exchanges, SHRM Online Benefits, April 2010
HSAs Could Play Larger Role in Retiree Medical Care, SHRM Online Benefits, August 2008
Related SHRM Video:
Funding Retiree Health, SHRM Multimedia
SHRM Online Benefits DisciplineSHRM Online Health Care Reform Resource Page