Beginning in 2020, employers will have a new tax-preferred option for providing individual health insurance coverage to employees—the health reimbursement arrangement (HRA).

Under prior law, employers could not reimburse employees for individual health insurance premiums via the tax-preferred HRA structure because HRAs were deemed to fail certain prohibitions imposed by the ACA. However, upon direction from the Trump administration, the DOL, Department of Health and Human Services (HHS) and Treasury developed a new set of rules to expand employer options for providing coverage via HRAs.

While the option will be welcome to most employers seeking options for providing health coverage, the final rules, like the proposed rules, are detailed and complex—and must be carefully followed in order to avoid loss of the HRA tax benefits.

Qualifying for the expanded HRA option

The new rules would allow employers to reimburse premiums for individual health insurance coverage through HRAs if the several specific conditions are satisfied. First, all individuals enrolled in the HRA are also enrolled in individual coverage. If an individual ceases to be enrolled in individual coverage, the HRA must stop reimbursing their medical expenses (applied prospectively only). Individuals who are still within the grace period with respect to paying their premiums for individual coverage are considered enrolled in individual coverage.

The employer cannot offer integrated HRA-individual coverage to one class of employees if it offers group health coverage to others in the same class of employees. Finally, the HRA must be offered on the same terms to members of employees within a given class of employees where consistent definitions are used to determine employee classifications. Exceptions to this rule include an exception for age and for family size, although differing contributions based upon age cannot vary by more than 3:1.

Permissible classes of employees include part-time employees, full-time employees, seasonal workers, hourly workers, salaried workers, new hires and workers employed or not employed through a temporary staffing agency. In response to concerns that the expanded HRA option could allow employers to push sicker workers into the individual markets by manipulating the “class of employees” requirement, the agencies imposed strict limits on the class sizes in certain situations.

Under the final rule, HRA coverage offers that are based upon part-time status, geography or status of the worker as salary versus hourly are only permitted when the group is of a sufficient size. For employers with between 100 and 200 employees, the class size must be the smaller of 20 employees or 10 percent of the workforce. For employers with fewer than 100 employees, the class size must be at least 10 employees, and for employers with more than 200 employees, the class size must be at least 20 employees. The minimum size requirement does not apply to the “new hire” class of employees.

The final rules also make clear that employers are permitted to confirm that an employee has actually purchased health insurance coverage with the HRA dollars by relying upon the employee's attestation—and, while the employer must receive an attestation for every HRA reimbursement requested, the employer is not required to conduct an independent investigation to determine whether the employee was truthful.

Interaction with Affordable Care Act rules

Employees who receive integrated individual coverage via an HRA are not eligible for the premium tax credit, but they are eligible for a special enrollment period in the individual market. When the individual accepts the HRA coverage, he or she will have 60 days to enroll in coverage or change their health insurance plan via the health insurance marketplace.

Employers who are required to provide coverage under the ACA can satisfy the employer mandate requirements through offering an individual coverage HRA, assuming the HRA is affordable and meets applicable minimum value standards, and is offered to at least 95 percent of full-time employees and dependents. Guidance for determining affordability that was released late in 2018 continues to apply under the new rules, although the agencies have noted that they plan to release additional rules.

Under that guidance, affordability is determined based upon the employee's income, their required contribution to the HRA and the lowest-cost silver marketplace plan that is available to the employee.

The newly expanded HRA rules can provide a powerful tool for employers looking to provide a health insurance benefit to employees—whether required to do so under the ACA or not. However, the guidance regarding these HRAs is extremely specific and must be carefully followed to risk disqualification and a loss of tax benefits.

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Unpacking the new HRA option for employee health insurance

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