Final Rule on HRA’s and Individual Insurance
President Trump issued an Executive Order in October 2017 intended to promote choice and competition in health coverage. The three (3) areas of improvement identified in the Executive Order were: association health plans, short-term limited duration insurance (STLDI) and health reimbursement arrangements (HRAs).
In October 2018, the administration published a proposed rule to address HRAs. After reviewing hundreds of comments, the administration published the final rule in June 2019. This issue of Legislative Review provides some highlights of the final HRA rule.
The HRA rule will expand availability of HRAs particularly since it will allow employers to offer HRAs that can fund individual health insurance. This new HRA availability may represent a long-desired Republican goal of decoupling health insurance from work. The new rule gives an employer an opportunity to provide a defined contribution toward health insurance instead of the traditional defined benefit model.
Notably, the rule will allow employers of any size to offer this option as long as they follow the HRA guidance. The final rule makes few changes from the proposed rule.
The rule has a tight timeframe, the HRA can be offered beginning on or after January 1, 2020. Of note, employers may want to determine their course of action in time to coincide with the individual open enrollment period which begins November 1, 2019 for January 1, 2020 effective date.
Quick List of What the Rule Allows
A quick list of what the rule allows includes:
• Employers define a contribution amount for a tax-preferred “individual coverage HRA” or ICHRA
• HRA monies can be used to fund individual health insurance premiums
• Employers can define which expenses are eligible for reimbursement
• Employees can’t be eligible for traditional group health plan and ICHRA
• Employer may establish different classes of employees as defined in the rule
• ICHRA may cause an individual to lose eligibility for the ACA’s Premium Tax Credit
• ICHRA may be used to reimburse premiums for plans on and off the exchange/marketplace
• Establishes an “excepted benefit HRA” which can reimburse premiums for short-term limited duration insurance (STLDI).
Integration with Individual Coverage Allowed
The HRA must be “integrated” with individual health insurance coverage. This means that the HRA must require participants and any dependents covered by the HRA to be enrolled in individual health insurance coverage. Substantiation of the coverage is also required.
For purposes of the ICHRA, “individual coverage” includes individual health insurance including grandmothered and grandfathered plans. It also includes student health insurance coverage and Medicare Parts A and B or Medicare Part C. The ICHRA may also be used to reimburse premiums for Medigap coverage. An employer should carefully review the rules regarding integration with Medicare.
The rule prohibits a plan sponsor from offering both a traditional group plan and an integrated HRA to the same class of employees.
There are several conditions that must be met to have a compliant integrated HRA. These are:
• All individuals covered by the HRA must be enrolled in individual coverage
• A prohibition against offering both an integrated HRA and a traditional group health plan to the same class of employees
• A requirement that the HRA must be offered on the same terms to all employees within the class
• An opt-out provision must be allowed to waive future reimbursements from the HRA at least annually
• The HRA must establish procedures to substantiate and verify enrollment in individual health insurance coverage upon enrollment and each time reimbursement is provided
• The HRA plan must provide notice to eligible participants to explain relevant HRA provisions.
Classes of Employees
An employer may offer a traditional group health plan to certain classes of employees and an ICHRA to other classes. The rule defines the classes as:
• Full-time employees as defined by section 105(h) or 4980H of the IRS Code
• Part-time employees using these same code sections or as determined by the plan sponsor
• Employees working in the same geographic location
• Seasonal employees using these same code sections or as determined by the plan sponsor
• Employees covered by a collective bargaining unit
• Employees who have not satisfied a waiting period for coverage
• Salaried workers (new)
• Non-salaried workers such as hourly employees (new)
• Non-resident aliens with no U.S.-based income
• Temporary employees of staffing firms (new).
New additions to the eligible classes are shown in bold. The final rule eliminated the proposed class of employees who have not attained age 25 prior to the beginning of the plan year.
Employers may not create other classes not enumerated in the rule. However, employers can combine two or more of the enumerated classes to define a class. An example given in the rule is part-time employees covered by a collective bargaining agreement.
If the HRA is offered to former employees, the former employees are considered to be in the same class that they were in immediately prior to separation from service.
Classes must be clearly defined without overlap. They must be defined in the HRA plan document.
In an attempt to prevent adverse selection in the individual market a minimum class size provision applies if an employer offers a traditional group health plan to some employees and an ICHRA to other employees based on the following classes:
• Full-time versus part-time status
• Salaried versus non-salaried status
• Geographic location if the location is smaller than a state.
The minimum class size is:
• Ten employees, for an employer with fewer than 100employees
• Ten percent of the total number of employees, for an employer with 100 to 200 employees
• Twenty employees, for an employer with more than 200 employees.
There is also a “new hire rule” which allows an employer to offer new employees an ICHRA while grandfathering existing employees in the traditional group plan.
Salary Reduction Allowed
Employers will have the option to allow employees to pay a portion of the individual premium by using a salary reduction arrangement under a cafeteria plan. The portion of the premium would be the amount that is not covered by the HRA.
Due to existing law, salary reduction contributions cannot be offered if the individual health plan is purchased through the exchange
Same Terms Requirement
The HRA must be offered on the same terms to all participants in the class. This means that the same amount and same terms and conditions must apply to all employees in the class.
Due to the age-rating of the individual market, the maximum dollar amount available under the HRA may increase as the age of the participant increases and still meet the “same terms” requirement. Varying the dollar amount based on the number of dependents is also considered under the “same terms” provision. In these
circumstances, the HRA amount for a class of employees may vary for both age and family size as long as this variation applies to all members of the class.
The final rule limits the amount that HRA funds can vary based on age to a 3:1 ratio if HRA amounts are based on age.
Coverage through an HRA may result in an individual losing eligibility for the ACA’s premium tax credit. Because an employee may find that the tax credit is more beneficial, the HRA must allow someone to opt-out of the HRA and waive future reimbursements.
Substantiation of Individual Health Coverage
An HRA must verify that the individual and all dependents are covered by individual health coverage to be eligible for reimbursement under the HRA. The rule provides that reasonable procedures to verify coverage include:
• A document from the insurance plan showing who is enrolled
• An attestation by the participant that the participant and any dependents are or will be enrolled in individual health insurance coverage, when it will begin and the provider of coverage.
The Department of Labor has developed models for initial and ongoing attestation of coverage statements which are available on their website. The HRA may rely on the documentation or attestation unless the HRA has “actual knowledge” that the person(s) will not be enrolled.
Because an individual may sacrifice premium tax credits as a result of ICHRA coverage, the rule requires that the HRA provide a notice to ensure that the participants understand the implications. The written notice must include:
• A description of the terms of the HRA, including the maximum dollar amount available
• A statement of the right to opt-out
• A description of the potential availability of the ACA’s premium tax credit and the possible consequences of accepting the HRA
• A statement that the participant must inform the exchange about the HRA if the person is seeking a premium tax credit
• A statement that the HRA may not reimburse medical expenses unless the substantiation requirements are met
• A statement that the participant must inform the HRA if the individual or dependents are no longer enrolled in individual health insurance coverage.
The Department of Labor has developed a comprehensive model notice regarding the ICHRA which is available on their website. The notice addresses:
• Basic discussion of the ICHRA and the ability to opt-out
• How to obtain individual health insurance coverage
• Information about Special Enrollment Periods
• Discussion of the Premium Tax Credit.
The rule contemplates that larger employers may also find the integrated HRA to be a viable option for some classes of employees. As such, the rule addresses how an employer who is an “applicable large employer” (ALE) for ACA purposes determines whether they have any employer shared responsibility liability when offering the HRA.
The final rule identifies the conditions employers must take to ensure that the individual insurance policies purchased by employees do not become ERISA plans. These are:
1. Employee participation must be voluntary
2. The employer cannot select or endorse any particular insurer or plan
3. No premiums other than individual health insurance premiums can be reimbursed from the HRA
4. The employer cannot receive any consideration in connection with the employee selecting or renewing a policy
5. Participants must be notified annually that the individual policies are not subject to ERISA.