An Individual Coverage HRA is affordable if the “employee's required HRA contribution” for the month does not exceed 1/12 of the product of the employee's household income for the taxable year. (Photo: Shutterstock)

New regulations issued by the Departments of Labor, Treasury, and Health and Human Services have expanded the use of health reimbursement accounts (HRAs) by allowing reimbursements for individual market insurance premiums.

These new “Individual Market HRAs” may prove to be game-changers in the employer-sponsored health plan arena, especially with respect to small and mid-sized employers. Before employers adopt a benefit offering that includes Individual HRAs, they should consider the implications on the Affordable Care Act's (ACA) employer shared-responsibility mandate and on the ability of their employees to obtain a premium tax credit (PTC) on the ACA marketplace.

ACA employer mandate impact

The ACA's employer shared responsibility mandate applies to “applicable large employers” (ALEs). ALEs are generally employees who averaged at least 50 full-time employees and equivalents in each month of the prior year. ALEs must offer an eligible employer-sponsored health coverage (i.e., “minimum essential coverage”) to at least 95 percent of its full-time employees and their dependent children or pay a potentially significant penalty. The coverage that ALEs offer must also be affordable and have minimum value, and the failure to meet those requirements could result in a smaller, individualized penalty. In order for either penalty to be triggered, at least one employee would need to opt out of available employer-sponsored coverage and receive a PTC.

The new HRA regulations contain very little substantive guidance regarding the impact that Individual Coverage HRAs will have on employer mandate compliance, referring instead on on prior guidance as laying the groundwork for later regulations. Here is what we do know:

• Individual Coverage HRAs are minimum essential coverage. Therefore, if these HRAs or other forms of minimum essential coverage are made available to 95 percent or more of the full-time workforce, the large ACA penalty can be avoided.
• Individual Coverage HRAs must be “affordable.” Although prior guidance explains that the same affordability methodology described below for PTC purposes can be applied for purposes of the employer shared responsibility mandate, that methodology may not be the best option for employers. First, affordability in this context is determined based on a formula that includes household income. Employers usually do not have access to the household income of their employees. Second, affordability would be based on the “silver-level” plan cost on the marketplace, and that cost is based off of individualized factors such as place of residence and age

Given the complexities involved in determining HRA affordability, additional guidance containing safe harbor methodologies would be welcomed.

ACA marketplace impact

To help defray the high cost of health coverage available in the marketplace, the ACA makes available, depending on an individual's household income, an advance PTC. The new regulations clarify that to be eligible for the PTC, an individual generally cannot have access to an affordable Individual Coverage HRA. Importantly, if an employee actually enrolls in an Individual Coverage HRAS, he or she will not have access to a PTC on the ACA marketplace, even if the HRA is unaffordable.

An Individual Coverage HRA is affordable if the “employee's required HRA contribution” for the month does not exceed 1/12 of the product of the employee's household income for the taxable year and the “required contribution percentage.” An employee's required HRA contribution amount is determined by subtracting the monthly contribution for self-only coverage by the lowest cost silver-level plan available on the ACA marketplace. The required contribution percentage is adjusted annually and is set at 9.86 percent for plan years beginning in 2019. If the ACA marketplace determines the Individual Coverage HRA is not affordable, the HRA will be deemed not affordable for the entire year.

Employers and plan sponsors must provide employees with written notice when an Individual Coverage HRA adopted and made available. The content of the notice must include a statement about the availability of the PTC, a statement that the participant may opt out of the HRA and potentially receive a PTC for any month the HRA is considered “unaffordable,” and a statement that opting out of an affordable HRA would prohibit the participant from receiving a PTC. The Department of Labor has provided model notices for this purpose.

Although the new Individual Coverage HRAs have the potential of disrupting the individual coverage market, employers may find them to be an attractive option that could stem the increasing cost of providing health benefits to employees. Nevertheless, the new HRAs are subject to many requirements, so employers should consult with experienced tax and benefits professionals before adopting these plans.

Damian A. Myers is a senior counsel in the Employee Benefits & Executive Compensation Group at Proskauer Rose.

Read more: 

• Unpacking the new HRA option for employee health insurance
• New HRA rules could allow businesses to circumvent ACA's employer mandate
• Experts warn HRA expansion could hurt workers, drive up premiums