Will Allowing HRAs for Plan Premiums Be a Game Changer?

New regulations could transform employee health care—or maybe not

Stephen Miller, CEBS By Stephen Miller, CEBS June 20, 2019
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Might a final rule on health reimbursement arrangements (HRAs), which would let employers subsidize employee premiums in the individual health insurance market, transform how organizations provide their workers with health care? Yes, no and maybe, say employee benefit experts.

As SHRM Online reported, on June 13 the U.S. departments of Health and Human Services (HHS), Labor and the Treasury issued a final rule: Starting next year, employers without a group coverage plan will be allowed to fund a new individual-coverage HRA (ICHRA) for employees to use to buy—tax-free—individual-market insurance, including policies purchased on the public exchanges formed under the Affordable Care Act (ACA).

According to preliminary estimates from the Treasury Department, once employers and employees have fully adjusted to the new rule, roughly 800,000 employers are expected to provide HRAs to pay for individual health insurance coverage for more than 10 million employees. "The proposed regulations hold the potential of transformative impact on the health insurance landscape in the coming years," HHS stated.

Giving credence to this claim, a March 2017 survey by HR consultancy Mercer asked about 750 benefits professionals if their organizations would consider using an HRA to help employees buy nongroup coverage if employer contributions for premium payments were tax-free. Of the respondents:

  • 16 percent said their employers would consider shifting to this approach for all eligible employees.
  • 8 percent said their organizations would consider doing so for part-time or another subset of employees.

Smaller employers were the most likely to consider this option for all employees: 23 percent of those with fewer than 500 employees, compared to 10 percent of those with 5,000 or more.

But, according to the survey, a majority of employers of all sizes would consider replacing their group plan with an individual-coverage HRA if they were allowed to contribute enough so that employees could obtain coverage of comparable value (there is no limit on employer contributions to ICHRAs in the new regulations) and if the individual market offered coverage that employees would want at prices they could afford.

"The biggest obstacle is the attractiveness of the underlying individual market," said John Barkett, director of policy affairs at consultancy Willis Towers Watson. "If employees don't value the coverage they can buy on the individual market, employers are not going to adopt the ICHRA model."

Expanding Employers' Options

"HRA expansion is the spark that could ignite a 401(k)-like defined contribution model for employer-based health coverage in the U.S.," said Shandon Fowler, founder and principal of benefits consultancy Four8 Insights in Mount Pleasant, S.C.

The regulations "could certainly have an upside for employees—and especially for smaller employers that have struggled to offer health coverage," noted Arthur Tacchino, chief innovation officer at SyncStream Solutions, a Metairie, La.-based software firm that helps employers comply with complex regulations.

Shifting Responsibility to Employees

Since ICHRAs are allowed only if employers don't offer a group health plan, "it would essentially be a full replacement for group coverage," said benefits attorney Andy Anderson, who leads the health and welfare task force at law firm Morgan Lewis in Chicago. That's a "big leap that employers might not be comfortable taking."

Kim Buckey, vice president of client services at DirectPath, a benefits education, enrollment and health care transparency firm, also doubts that the regulations would upend employer health care benefits.

"I don't think we'll see much interest from large employers, whose group plans provide them with a competitive advantage," Buckey said. "Small to midsize employers seeking to provide some level of support for their employees and to avoid the employer mandate penalty may be interested if they are not put off by the compliance and administrative aspects of setting up an HRA."

She added that there was much talk a few years ago about how private exchanges were going to replace health care as we knew it. "That sweeping change never materialized, at least not to the extent predicted. This is a similar scenario, and I don't think the outcome will be very different. I don't see this triggering a seismic shift," she said.

"Although regulators think the recently final regulations will cause nearly a million employers to use HRAs in lieu of group medical programs, that viewpoint overlooks several important factors," wrote Edward Fensholt, director of compliance service at Lockton, a national insurance brokerage based in Kansas City, Mo. He noted that:

  • Inflation in the individual health insurance markets tends to exceed inflation in the group market, eroding the purchasing power of employers' health care dollars faster than group insurance.
  • Employers using HRAs to fund individual market policies would lose control over health plan design and lose access to health plan-related information on their employees, which could make it harder for them to drive healthier lifestyles through wellness programs targeting latent or chronic conditions.

Education Needed

If employers are considering funding ICHRAs so employees can buy health care in the individual market, "they'd better be willing to commit to a lengthy and robust communications campaign to ensure that their employees understand what it is they are buying and how to shop effectively," Buckey said.

The combination of employer adoption and employee education "will determine if the expanded availability of HRAs is a success in the long term," Tacchino noted. "It's great to make these benefits available to employees. However, if they are not educated on how to take advantage of the opportunity, it's ultimately squandered or missed."

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

Compliance Burdens Remain

For employers with 50 or more full-time or equivalent employees, ICHRAs must be sufficiently funded to purchase individual coverage that meets the ACA's affordability and minimum-value requirements. "Ensuring the HRA benefit is adequate to render individual market coverage 'affordable' to an employee is a complex, employee-by-employee calculation necessitating information about coverage costs in specific areas," noted Fensholt. "Many employers, even those willing to consider an HRA to defray individual market premium costs, may find the rules too difficult to embrace," he said.

To address this challenge, last year the IRS issued Notice 2018-88, which outlined proposed safe harbor methods for determining whether ICHRAs meet the ACA's affordability threshold for employees, and indicated that further rulemaking on these safe harbor methods is on the agency's agenda for later this year.

"Unfortunately, the regulators chose not to undo the application of ACA rules to HRAs," Anderson said. Rather than easing regulatory burdens, he added, "the safe harbors that the IRS has begun to outline could add a whole new layer of complexity" to HRA administration.

ICHRAs will not be adopted by large employers, he predicted, unless the employer shared responsibility provision to meet the ACA's affordability and minimum-value requirements is eliminated.

Nevertheless, the final HRA rule "does provide a road map to the future for employers who want to move solely into a defined contribution environment," Anderson said.

Despite his reservations, Fensholt noted that "for some employers with certain categories of employees, the rules might be attractive." He added, "employers with large populations of part-time, seasonal or temporary employees, for example, can use an HRA to help these employees buy individual policies on a tax-favored basis."

Concluded Fowler, "There are thousands of employers with hourly workforces that would gladly exchange administering an HRA for all of the work that goes into administering a health plan for their employees."

Related Article:

New Final Rule Lets Employees Use HRAs to Buy Health Insurance, SHRM Online, June 2019


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