Regulations Aim to Let Employees Use HRAs to Buy Health Insurance

Workers could use pretax dollars to purchase coverage on Affordable Care Act exchanges

Stephen Miller, CEBS By Stephen Miller, CEBS October 26, 2018
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updated November 20, 2018

President Donald Trump's administration issued proposed regulations that would let employers fund a new kind of health reimbursement arrangement (HRA) that employees could use to buy individual-market insurance, including insurance purchased on the public exchanges formed under the Affordable Care Act (ACA). Some predict that this change could transform the employer-provided health care landscape.

The proposed regulations were issued on Oct. 23 and published in the Federal Register on Oct. 29. Three weeks later, on Nov. 19, the IRS followed up with Notice 2018-88, which outlines several proposed safe harbors that would help large employers ensure that their HRA designs satisfy the “employer mandate” provisions of the ACA.

Similar to health savings accounts (HSAs), HRA contributions are made with pretax dollars, and employees use these funds to pay for qualified medical expenses without paying taxes on the distributions. Unlike HSAs, which are employee-owned and can be funded by employers and employees, HRAs are exclusively employer-funded, and when employees leave the organization, their HRA funds go back to the employer.

The rules now in place prevent large employers from funding HRAs that workers could use to pay nongroup health insurance premiums—a prohibition that would end on finalization of the proposed regulations, which were published Oct. 29 in the Federal Register by the departments of Labor, Health and Human Services (HHS) and the Treasury.

"Many employers simply cannot afford to offer traditional, employer-sponsored coverage to their employees as a result of the significant costs, including the administrative burdens, associated with identifying and managing such health plans," said the HHS announcement.

"This proposal offers relief for workers who may have previously faced a choice between an unaffordable on-exchange plan or no coverage at all, and it accomplishes this while upholding a commitment to workers with pre-existing conditions," said Joel White, president of the Council for Affordable Health Coverage, which promotes policies that lower health costs through increased competition.

The proposed regulations are in response to Trump's October 2017 executive order on health care choice and competition. Health and Human Services Secretary Alex Azar stated, "More access to association health plans, short-term insurance, and flexible HRAs complement the work we are doing at HHS" to lower the cost of health care services.

Comments on the proposed regulations are requested by Dec. 28, 2018. During the comment period, employers are expected to request changes and clarifications to the proposals.

If finalized, the regulations would be effective for plan years beginning Jan. 1, 2020.


Consumer-Directed Health Accounts

Among Society for Human Resource Management members polled earlier this year, 19 percent said their organizations offer employees health reimbursement arrangements (HRAs) to pay for medical expenses.


Source: Society for Human Resource Management, 2018 Employee Benefits report.


New Types of HRAs

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

  • An individual-market premium-reimbursement HRA. Employers would be allowed to fund premium-reimbursement HRAs only for employees not offered a group health plan. The proposed regulations describe how the ACA's premium tax credit would interact with the new HRAs.
  • An excepted-benefit HRA. These would be limited to paying premiums for vision and dental coverage or similar benefits exempt from ACA and other legal requirements. Under the proposal, excepted-benefit HRAs also may reimburse COBRA continuation coverage premiums and short-term insurance coverage. Contributions would be capped at $1,800 per year. These HRAs would only be permitted if employees are offered coverage under a group health plan sponsored by the employer.

QSEHRAs and HRAs

Currently, qualified small-employer HRAs (QSEHRAs), 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 proposal would:

  • Allow all employers, regardless of size, to pay premiums for individual policies through a premium-reimbursement HRA.
  • Clarify that when employers fund a premium-reimbursement HRA 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).
  • Create a special enrollment period in the ACA's individual market for those who gain access to a premium-reimbursement HRA or a QSEHRA to purchase individual-market health insurance coverage.

The legislation creating QSEHRAs set a maximum annual contribution limit for them, with inflation-based adjustments. In 2018, for instance, annual employer contributions to QSEHRAs are capped at $5,050 for a single employee and $10,250 for an employee with a family.

The new regulations, however, don't cap contributions for premium-reimbursement HRAs and make these available to employers of all sizes, noted Andy Anderson, a Chicago-based partner at Morgan Lewis and leader of firm's health and welfare task force.

As a result, "employers with fewer than 50 full-time employees will have two choices"—QSEHRAs or premium-reimbursement HRAs—if the proposed regulations are finalized, "with some regulatory differences between the two that may become clearer in the final guidance," Anderson said.

One significant difference between QSEHRAs and premium-reimbursement HRAs involves the availability of a premium-assistance tax credit/subsidy for coverage bought on an ACA marketplace exchange:

  • 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.
  • Premium-reimbursement HRA participants, it seems, would not be able to receive a premium tax credit/subsidy for individual coverage obtained through an ACA exchange if they take the HRA, and may still not be able to get the subsidy if they are offered and opt-out of the HRA.
[SHRM members-only toolkit: Managing Health Care Costs]

A Transformative Potential?

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.

"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 Charleston, S.C. "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."

"The proposed regulations could certainly have an upside for employees—and especially for smaller employers that have struggled to offer health coverage but want to provide some benefits to their employees," said Arthur Tacchino, J.D., principal and chief innovation officer at New Orleans-based Sync Stream, a software firm that helps employers comply with complex regulations.

However, "the amount of tax-advantaged funds [that many employers would contribute] is likely to be much less than the actual cost of an individual health plan," Tacchino pointed out.

Since premium-reimbursement HRAs are only allowed if employers don't offer a group health plan, "it would essentially be a full-replacement for group coverage," Anderson said. That's a "big leap that employers might not be comfortable taking."

Kim Buckey, vice president of client services at Birmingham, Ala.-based 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, as the plans they already offer 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 well be interested if they are not put off by the compliance and administrative aspects of setting up an HRA."

Under the proposed regulations, she noted, "employers would have to determine whether their [premiun-reimbursement] HRA met affordability requirements"—once that guidance is finalized.

Safe Harbors Proposed

Because employers with 50 or more full-time employees (or part-time equivalents) are subject to the ACA’s employer mandate, those that might offer a premium-reimbursement HRA instead of ACA-compliant group coverage "will be looking for a safe harbor for the ACA’s shared-responsibility requirements" for affordability and minimum essential coverage, Anderson said.

Without safe harbor guidance, "they'll be few large employers interested in exiting the group plan market" and putting themselves at risk for ACA penalties, he noted, as long as the ACA's employer mandate remains in place.

IRS Notice 2018-88 explains that a "stand-alone" premium-reimbursement HRA "will be considered an 'offer of coverage' sufficient to avoid the potentially catastrophic penalties," noted Ajay Gogna and Finn Pressly, attorneys at law firm Littler. The notice also outlines proposed safe harbor methods of determining whether a premium-reimbursement HRA meets the ACA’s affordability threshold for employees, and states that an HRA that meets the affordability standard will be deemed to offer at least "minimum value."

Responsibility Shifts to Employees

"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," Tacchino said. The combination of employer adoption and employee education "will determine if the expanded availability of HRAs is a success in the long term."

"We should be cautiously optimistic that employees aren't just dumped into the individual market," Fowler noted. "But if they can shop on public marketplaces they could end up saving money from their employer-based coverage, while their employer also saves money."

Under the proposed rule, however, the offer of an "affordable" premium-reimbursement HRA could make some employees ineligible to receive a premium tax credit/subsidy for coverage bought on an ACA exchange. "As a result, some employees could pay more for coverage under [a premium-reimbursement HRA] option than they were paying" previously for insurance bought through the ACA marketplace, according to the journal Health Affairs.

"By moving to a 'defined contribution' model, employers would be able to cap their annual health care spending and shift the risk to insurance companies," noted Gogna and Pressly. However, "unless employers provide substantial HRA contributions, employees would bear the brunt of cost increases imposed by insurers in the individual market. Further, without the combined risk pool that comes with a group health plan, employees may find it difficult to replicate their current coverage without increasing their out-of-pocket expenditures. "

"Everyone should resist the temptation to make sweeping assumptions—good or bad—about the impact of the proposed rule," said James A. Klein, president of the American Benefits Council, an employers group. "It still is proposed and there are many questions to be answered. Overall, though, we believe it is a positive step forward."



HRA-Based Coverage for Specific Employee Classes

The proposed regulations would allow employers to offer premium-reimbursement HRAs only to specific classes of employees, but employers would have to offer the HRA to all employees in that class. The specified classes are:

  • Full-time.
  • Part-time.
  • Seasonal.
  • Unionized employee.
  • Employees who have not satisfied the group health plan's waiting period.
  • Employees who have not reached age 25 before the beginning of the plan year.
  • Nonresident aliens with no U.S.-source income.
  • Employees whose primary employment sites are all in the same insurance rating area (as defined by the ACA).

"Notably absent from the list is salaried versus hourly," noted an analysis by Hub International, an employee benefits insurance brokerage. "The departments were concerned that those categories were too easily manipulated to allow employers to move unhealthy employees into one or the other so they could receive an HRA instead of a traditional group health plan."



Related SHRM Articles:

Health Care Consumerism: HSAs and HRAs, SHRM Online, May 2016 (updated September 2018)

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

New Law Lets Small Employers Use Stand-Alone Health Reimbursement Arrangements, SHRM Online, December 2016

Related SHRM Resource:

Visit SHRM's Health Care Reform Resources for Employers.


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