New Final Rule Lets Employees Use HRAs to Buy Health Insurance



updated June 20, 2019

On June 13, the U.S. departments of Health and Human Services, Labor and the Treasury issued a final rule allowing employers of all sizes that do not offer a group coverage plan to fund a new kind of health reimbursement arrangement (HRA), known as an individual coverage HRA (ICHRA). The departments also posted FAQs on the new rule.

Starting Jan. 1, 2020, employees can use employer-funded ICHRAs—pronounced "ick-rahs" by benefits advisors and vendors—to buy individual-market insurance, including insurance purchased on the public exchanges formed under the Affordable Care Act (ACA).

Under IRS guidance from the Obama administration, IRS Notice 2013-54, employers were effectively prevented from offering stand-alone HRAs that allow employees to purchase coverage on the individual market.

"Using an individual coverage HRA, employers will be able to provide their workers and their workers' families with tax-preferred funds to pay all or a portion of the cost of coverage that workers purchase in the individual market," said Joe Grogan, director of the White House Domestic Policy Council, during a June 13 conference call. "The departments estimate that once employers fully adjust to the new rules, roughly 800,000 employers will offer individual coverage HRAs to pay for insurance for more than 11 million employees and their family members, providing them with more options for selecting health insurance coverage that better meets their needs."

The new rule "is primarily about increasing employer flexibility and worker choice of coverage," said Brian Blase, special assistant to the president for health care policy. "We expect this rule to particularly benefit small employers and make it easier for them to compete with larger businesses by creating another option for financing worker health insurance coverage."

"Employers and employees alike will have more options for health care coverage as a result of the new rules," said James A. Klein, president of the American Benefits Council, which represents employers that sponsor health and retirement plans.

The final rule is in response to the Trump administration's October 2017 executive order on health care choice and competition, which also resulted in:

• An earlier final rule on association health plans that is now being challenged in the courts.
  

• A final rule allowing low-cost short-term insurance that provides less coverage than a standard ACA plan.

New Types of HRAs

Existing HRAs are employer-funded accounts that employees can use to pay out-of-pocket health care expenses but may not use to pay insurance premiums. Unlike health savings accounts (HSAs), all HRAs, including the new ICHRA, are exclusively employer-funded, and, when employees leave the organization, their HRA funds go back to the employer. This differs from HSAs, which are employee-owned and portable when employees leave.

The proposed regulations keep the kinds of HRAs currently permitted (such as HRAs integrated with group health plans and retiree-only HRAs) and would recognize two new types of HRAs:

• Individual coverage HRAs. Employers would be allowed to fund ICHRAs only for employees not offered a group health plan.
  

• Excepted-benefit HRAs. These would be limited to paying premiums for vision and dental coverage or similar benefits exempt from ACA and other legal requirements. These HRAs are only permitted if employees are offered coverage under a group health plan sponsored by the employer.
  

What ICHRAs Can Do

Under the new HRA rule:

• Employers may either offer an ICHRA or a traditional group health plan but may not offer employees a choice between the two.
  

• Employers can create classes of employees around certain employment distinctions, such as salaried workers versus hourly workers, full-time workers versus part-time workers, and workers in certain geographic areas, and then offer an ICHRA to certain classes while providing traditional group coverage for other classes.
  

• Employers that offer an ICHRA must do so on the same terms for all employees in a class of employees, but they may increase the ICHRA amount for older workers and for workers with more dependents.
  

• Employers can maintain their traditional group health plan for existing enrollees, with new hires offered only an ICHRA.
  

ICHRAs that reimburse solely for individual coverage premiums "would not disqualify contributions to an HSA if the individual otherwise meets the requirements of being enrolled in a high-deductible health plan with no other disqualifying coverage," noted Katie Keith, a former research professor at Georgetown University's Center on Health Insurance Reforms and a contributor to the Health Affairs blog. 

However, ICHRAs also can only be used to reimburse medical expenses consistent with existing HRA rules. If the ICHRA reimbursed for first-dollar cost-sharing as well as individual market premiums, it would not be compatible with an HSA, Keith explained.

Under some circumstances, ICHRAs can be used to reimburse premiums for Medicare and Medicare supplemental ("Medigap") health insurance, she added.

If an employee buys individual health insurance outside an ACA exchange and the HRA doesn’t cover the full premium, the employer could permit the employee to pay the balance of the premium for the coverage on a pretax basis through its cafeteria plan, subject to other applicable regulations, according to the agencies' FAQs. However, the tax code states that an employer may not permit employees to make salary reduction contributions to a cafeteria plan to purchase coverage offered through an ACA exchange.

Employee Classifications

If an employer decides to offer only some employees an ICHRA while offering a traditional health plan to other employees, permitted classifications for distinguishing among employees include:

• Full-time or part-time employees.
• Salaried or hourly employees.
• Seasonal employees.
• Temporary employees of staffing firms.
• Unionized employees, including those covered by a particular bargaining unit.
• Employees working in the same insurance rating area as defined by the ACA.
• Employees who have not met the employer's waiting period for medical coverage.
• Nonresident aliens with no U.S.-source income.
  
• Any group of employees formed by combining two or more of the above classes.

"An employer may offer current employees in a classification traditional coverage, and newly hired employees in the classification an ICHRA," wrote Edward Fensholt, director of compliance service at Lockton, a national insurance brokerage. "In defining 'full-time,' 'part-time' and 'seasonal' employees, the employer may adopt the definitions applied under the ACA, or may use slightly more liberal definitions under section 105(h) of the tax code," he added.

The class of employees offered the ICHRA generally must satisfy minimum size requirements:

• For employers with fewer than 100 employees, the class must be at least 10 employees.
  

• For employers with 100 to 200 employees, the class must be at least 10 percent of the employees.
  

• For employers with more than 200 employees, the class must be at least 20 employees.
  

"The class size is determined based on the expected number of employees on the first day of the plan year of the ICHRA," noted an alert from HUB International, a global insurance brokerage. "Among other exceptions, the size limits also do not apply if the employer is not offering a traditional group health plan."

Notice and Disclosure

Under the final rule, notice must be given to all employees at least 90 days before the beginning of the plan year, letting employees know that the ICHRA offer may make them ineligible for a premium tax credit or subsidy when buying an ACA exchange-based plan, even if they opt-out of the ICHRA, if the ICHRA their employer offers would allow them to purchase on an available ACA marketplace exchange coverage that meets the ACA's affordability threshold.

If the ICHRA won't cover the cost of an "affordable" plan, employees must opt out of the ICHRA to qualify for the premium tax credit if they are otherwise eligible.

The rule also includes a disclosure provision to help ensure that employees understand the type of HRA being offered by their employer.

To satisfy the notice and disclosure requirements, the DOL issued an Individual Coverage HRA Model Notice. 

The DOL also issued Individual Coverage HRA Model Attestations that employees can sign to confirm they will have individual health insurance coverage, Medicare Part A and B, or Medicare Part C while they are covered by the ICHRA.

QSEHRAs and ICHRAs

Currently, qualified small-employer HRAs (QSEHRAs)—pronounced "q-sarahs"— created by Congress in December 2016, allow small businesses with fewer than 50 full-time employees to use pretax dollars to reimburse employees who buy nongroup health coverage. The new rule goes farther and:

• Allows all employers, regardless of size, to pay premiums for individual policies through a premium-reimbursement ICHRA.
  

• Clarifies that when employers fund an ICHRA or a QSEHRA paired with individual-market insurance, this will not cause the individual-market coverage to become part of an Employee Retirement Income Security Act (ERISA) plan if certain requirements are met (for instance, employers may not select or endorse a particular individual-market plan).
  

• Creates a special enrollment period in the ACA's individual market for those who gain access to an ICHRA or a QSEHRA to purchase individual-market health insurance coverage.

The legislation creating QSEHRAs set a maximum annual contribution limit with inflation-based adjustments. In 2019, annual employer contributions to QSEHRAs are capped at $5,150 for a single employee and $10,450 for an employee with a family.

The new rule, however, doesn't cap contributions for ICHRAs.

As a result, employers with fewer than 50 full-time employees will have two choices—QSEHRAs or ICHRAs—with some regulatory differences between the two. For example:

• QSEHRA participants who obtain health insurance from an ACA exchange and who are eligible for a tax credit/subsidy must report to the exchange that they are participants in a QSEHRA. The amount of the tax credit/subsidy is reduced by the available QSEHRA benefit.
  

• ICHRA participants, however, will not be able to receive any premium tax credit/subsidy for exchange-based coverage if the ICHRA their employer offers would allow them to purchase on an available ACA marketplace exchange coverage that meets the ACA's affordability threshold.
  

"QSEHRAs have a special rule that allows employees to qualify for both their employer’s subsidy and the difference between that amount and any premium tax credit for which they're eligible," said John Barkett, director of policy affairs at consultancy Willis Towers Watson.

While the ability of employees to couple QSEHRAs with a premium tax credit is appealing, the downside is QSEHRA’s annual contribution limits, Barkett said. "QSEHRA’s are limited in their ability to fully subsidize coverage for older employees and employees with families, because employers could run through those caps fairly quickly,” he noted.

For older employees, the least expensive plan available on the individual market could easily cost $700 a month or $8,400 a year, Barkett pointed out, and "with a QSEHRA, an employer could only put in around $429 per month to stay under the $5,150 annual limit for self-only coverage.”

Similarly, for employees with many dependents, premiums could easily exceed the QSEHRA's family coverage maximum of $10,450, whereas “all those dollars could be contributed pretax through an ICHRA," Barkett said.

[SHRM members-only toolkit: Managing Health Care Costs]

An Excepted-Benefit HRA

In addition to allowing ICHRAs, the final rule creates a new excepted-benefit HRA that lets employers that offer traditional group health plans provide an additional pretax $1,800 per year (indexed to inflation after 2020) to reimburse employees for certain qualified medical expenses, including premiums for vision and dental insurance, COBRA continuation coverage, and in some circumstances short-term, limited-duration insurance.

The new excepted-benefit HRAs can be used by employees whether or not they enroll in their employer's group health plan.

The existing limited-scope HRA will continue to be available to employers along with the new excepted-benefit HRA, said Chicago-based benefits attorney Andy Anderson, who leads the health and welfare task force at law firm Morgan Lewis. "The limited-scope HRA can reimburse a smaller subset of expenses, but has no annual dollar cap on employer contributions," he noted.

Safe Harbors Coming

With ICHRAs, applicable large employers with at least 50 full-time or equivalent employees still must satisfy the ACA's affordability and minimum value requirements, just as they must do when offering a group health plan. However, "the IRS has signaled it will come out with a safe harbor that should make it straightforward for employers to determine whether their ICHRA offering would comply with ACA coverage requirements," Barkett said.

Last year, the IRS issued Notice 2018-88, which outlined proposed safe harbor methods for determining whether individual coverage HRAs meet the ACA's affordability threshold for employees, and which stated that ICHRAs that meet the affordability standard will be deemed to offer at least minimum value. The safe harbors are based on the lowest cost ACA exchange silver plan offered locally for self-only coverage.

The IRS indicated that further rulemaking on these safe harbor methods is on its agenda for later this year. [Update: On Sept. 30, 2019, the IRS released a proposed rule that clarifies and expands how to apply the ACA's affordability safe harbors to ICHRAs.]

Related SHRM Articles:

Health Care Consumerism: HSAs and HRAs, SHRM Online, updated May 22, 2020

Will ICHRAs Become the 401(k)s of Employee Health Benefits?, SHRM Online, October 2019

QSEHRAs Help Small Employers Solve the Health Care Coverage Puzzle, SHRM Online, May 2019

Small Employers Cut Health Care Costs Using Stand-Alone HRAs, SHRM Online, April 2018

Visit SHRM's resource page for the Affordable Care Act.