Before we get into how rules for HRAs may be changing, we should discuss what an HRA is and how it works. A Health Reimbursement Account (sometimes referred to a Health Reimbursement Arrangement) is an employer-funded group health plan that reimburses employees, tax-free, for qualified medical expenses up to a certain amount per year. This type of policy does not replace Medical Insurance and is usually coupled with a High-Deductible policy. Unlike an Health Savings Account (HSA), the Employee can not help to fund the account. Like HSAs though, there are maximum allowed contributions. In 2018, an Employer can fund an HRA up to $5,050 for a Single Employee and $10,250 for aFamily. Any unused amounts for the year may be rolled over to be used the following year.
The Employer, alone, funds and owns the account. Funds are refunded to the Employer at the end of the year for any employee who terminates employment and does not choose continuation of the HRA, in accordance with COBRA provisions. With an HRA, an Employee must submit proof of a covered medical expense in order to be reimbursed by the Employer. Because the Employee is being reimbursed for the medical expense by the HRA, the Employee can not claim the expense on their personal tax forms; however any funds reimbursed by the HRA are exempt from employer’s payroll taxes and Social Security taxes. These types of Arrangements were only allowed for Employers with more than 50 Employees. However, in 2016, a new law was enacted which allowed Employers with less than 50 Employees to open up a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) which works very similar to an HRA.
Monday (October 29, 2018), the White House offered a broad overview of how they would like to allow HRA funds to pay for an Employee’s Individual Health Coverage Premium. An official Announcement is expected soon. Current regulations prohibit employers from using HRAs to reimburse employees for the cost of individual health insurance coverage. The proposed regulation would undo that prohibition and would permit HRAs to reimburse employees, of all companies, regardless of size, for the cost, subject to certain conditions.
Those conditions are as follows: All individuals covered by the HRA verified that they are, or will be, enrolled in individual health insurance coverage. No class of employees is offered a choice between a traditional group health plan and the HRA. The HRA is offered on the same terms to all employees within a class. Participants can opt out of the HRA annually. And lastly, the Employers provide eligible participants with a written notice describing certain features of the HRA.
Because medical expense reimbursements from HRAs are tax-preferred, workers and their families can use the HRA to purchase coverage of their choosing while still having the same tax advantage as those given by traditional employer-sponsored coverage. While the employer would fund the cost of individual health insurance coverage, the employee would own the coverage.
As with all new legislation, there are Pros and Cons. The Pro is simply that under this new regulation, Employees are free to choose policies in the Individual Market that may fit their needs better then the offered Employer sponsored coverage, while still receiving the benefit of having an Employer cost share of the premium. It also helps streamline someone’s benefits, as they can continue with their current Individual Coverage instead of switching to an Employer Plan or allows the Employee to continue coverage, with no gaps or paperwork, after that Employee leaves the Company. The Coverage is the Owner of the Policy and can keep it as long as they wish. Lastly, if there is an increase in the Individual Market, especially of younger, healthier people, it helps to spread out the costs, and over time lower premium amounts in the Individual Market.
The proponents of this regulation have some concerns. One of the concerns is that this regulation would allow employers to devise strategies for shifting workers with high health care costs off their corporate plans and into the market for individual policies. Another argument is that some Employees would miss out on benefiting more from claiming premium tax credits than opting into an HRA. Another concern is that a move like this could start a trend that ends traditional Employer Coverage. This is because the regulation allows an HRA that is affordable (under the “affordability test”) and meets minimum value requirements to at least 95 percent of its full-time employees and dependents will be considered “credible coverage” and meet the current Employer Mandates under the ACA. At a later date, the White House intends to issue additional guidance on a safe harbor for determining whether an employer that offers an HRA has made an offer of affordable coverage that provides minimum value.
Despite these concerns, the Trump administration says that there are protections in place to prevent any discriminatory practices, helps smaller businesses who can not afford to help fund Employees’ benefits the traditional way, offer assistance with medical costs, and gives Employees all the knowledge necessary on how the HRA works, ensuring the Employee can make an informed decision. The full, proposed regulation can be found here.