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Regs Limit Use of HRAs for Exchange-Purchased Coverage

By Stephen Miller, CEBS  1/30/2013

Updated on 9/19/2013 

Update:

On Sept 13, 2013, federal agencies issued further guidance via IRS Notice 2013-54 and DOL Technical Release 2013-03, reiterating that health reimbursement arrangements (HRAs), premium reimbursement arrangements (PRAs) and other employer payment plans cannot be used to pay for individual policy premiums on a pretax basis, such as when indivdiual coverage is purchased by employees through a public health insurance exchange or on the individual market.

For a true “retiree-only plan” under the tax code and ERISA, employers can still sponsor an HRA or PRA and reimburse individual policy premiums on a pretax basis.

Also, employers can provide their active employees with a defined dollar amount, on a pretax basis, to purchase group coverage through a private exchange, as explained in the SHRM Online articles "On Private Health Exchange, Choice Drives Satisfaction" and "Time for Defined Contribution Health Benefits?"

A set of frequently asked questions and answers (FAQs) issued by federal regulators on Jan. 24, 2013, will limit the use of employer-provided health reimbursement arrangements (HRAs) to fund employee purchases of individual (nongroup) coverage on government-run health care exchanges, scheduled to launch in 2014.

HRAs are employer-funded notional accounts that are often, but not always, linked to high-deductible group health plans. They typically consist of an employers' promise to reimburse an employee's out-of-pocket medical expenses through a dollar amount contributed annually to the employee's HRA, with unused amounts carried over to help reimburse medical expenses in future years. When the employment relationship ends, the HRA reverts back to the employer since, unlike a health savings account (HSA), an HRA is not employee owned and not portable. (To learn about HRAs and how they operate, see the SHRM Online article "Consumer-Driven Decision: Weighing HSAs vs. HRAs.")

The new guidance, jointly issued by the U.S. Departments of Health and Human Services, Labor and Treasury, distinguished between HRAs that are "integrated" with other coverage as part of a group health plan and HRAs that are not integrated ("stand-alone" HRAs).

The FAQs clarify that an HRA that is not integrated with group health plan coverage but provided as a stand-alone benefit is subject to the Patient Protection and Affordable Care Act (PPACA) prohibition on limiting the amount of an employee's annual health care spending subject to insurance coverage.  Beginning in 2014, for employers with more than one employee, restricted annual dollar limits are not permitted.

Because of the prohibition on annual dollar limits, an employer-sponsored, stand-alone HRA cannot be used to fund the purchase of individual market coverage, or an employer plan that provides coverage through individually purchased policies, including those that might be purchased on a government-run exchange.

Public Exchanges and HRAs Don't Mix

"Some employers had hoped that with the advent of the [government-run] exchanges in 2014, they would be able to offer their employees a fixed-dollar contribution through an HRA, which would permit the employee to take advantage of the tax subsidies currently available through HRA coverage but get the employer out of the health insurance business," explained Timothy Jost, a professor at the Washington and Lee University School of Law in Virginia, in a commentary about the new FAQs posted on the journal Health Affairs' blog.

In addition, "some consumer advocates had hoped that employees would be able to couple funds offered by employers through HRAs with advance premium tax credits available through the exchanges to make individual health policies truly affordable," Jost wrote.

However, he noted, the FAQs clarify that this approach will not be permitted. "The agencies intend to issue further guidance on the issue but have concluded that stand-alone HRAs used to purchase individual coverage will not be considered to be integrated coverage that complies with the annual dollar limit requirement" under the PPACA.

Moreover, if employees are offered an HRA and group coverage but decline the latter, they still may not use the HRA to purchase individual policies, Jost said.

Not a Blanket Prohibition?

However, according to Peter Antoine, a compliance communications specialist at Middleton, Wisc.-based Employee Benefits Corporation, the fact that under the FAQ guidance a stand-alone HRA is subject to the no-limit provision does not mean that it can’t be used to reimburse the cost of an individual plan, even one purchased on an exchange. Rather, “the non-integrated HRA would have to have an unlimited benefit available, unless certain exemptions apply that weren’t spelled out in the FAQs,” he told SHRM Online.

Moreover, Antoine explained that “we believe that non-integrated HRAs that operate as health flexible spending accounts (FSAs), as described in IRS Notice 2002-45 and Internal Revenue Code Section 106, are not subject to the no-limit provision. Consequently, a stand-alone HRA that satisfies the health FSA definition could have a limited benefit, reimburse individual plan premiums and comply with health care reform.”

However, an analysis by law firm McKenna Long & Aldridge LLP concludes:

"Note that some experts have challenged whether the annual dollar limit prohibition even applies to an HRA used to fund individual premiums, since the law only prohibits annual dollar limits on EHBs [essential health benefits]. ... Other experts argue that the HRA premium reimbursement arrangements for individual market coverage should be exempt from the annual dollar limit prohibition as health flexible spending accounts meeting the definition of Code Section 106(c)(2) (i.e. the maximum amount available for reimbursement under the plan may not exceed 500% of the value of the coverage). However, the Departments apparently take a different view given the clear statement in the FAQ that HRAs reimbursing employees for individual market insurance premiums will violate the annual dollar limit prohibition."

SHOPs Allow Pretax Premium Reimburesment

Under the PPACA's Small Business Health Options Program (SHOP), eligible employers can reimburse employees for premium payments, explains Keith R. McMurdy, a partner at law firm Fox Rothschild LLP, in a blog post. He notes, "small employers who participate in the SHOP exchange can reimburse employees with pretax dollars," although "SHOP exchange reimbursement programs are still subject to the Section 125 cafeteria plan rules."

Private Exchanges: Employer's Subsidy and Employee's Contributions Remain Pretax

In Aon Hewitt's private Corporate Health Exchange, which launched in fall 2012 for plan year 2013, "the contracts between insurers and employers are traditional group contracts" covered under the Employee Retirement Income Security Act (ERISA), Ken Sperling, Aon Hewitt national health exchange strategy leader, explained to SHRM Online. "The employee contributions are still covered under Section 125, so the employer subsidy is deductible and the employee contributions are pretax, just like today. Nothing changes from a tax perspective." 

Private exchanges are not eligible for government-subsidized coverage, and thus differ from the new public exchanges (to learn more, see the SHRM Online article "On Private Heatlh Exchange, Choice Drives Satisfaction.")

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related External Articles:

What Is the Future of HRAs Following Health Care Reform?, Kushner & Co., October 2013

No pretax reimbursement for individual insurance under ACA; employee assistance programs OK, PricewaterhouseCoopers, September 2013 

Pretax Individual Medical Coverage Dealt a Significant Blow, Kilpatrick Townsend, September 2013

A Limited Future for HRAs after 2014?, McKenna Long & Aldridge LLP, June 2013

How Health Reimbursement Arrangements Will Work in 2014 and Beyond, Segal's Health Care Reform Insights, March 2013

Quick Links:

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SHRM Online Health Care Reform Resource Page

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