Departments Propose Rule Allowing HRAs to Be Integrated with Individual Health Coverage

On Oct. 29, 2018, the IRS, DOL and HHS (the Departments) published a proposed rule which will allow employees to use their employers’ HRA to pay for individual health coverage. This rule comes after Pres. Trump issued an executive order directing the agencies to promulgate rules that would allow for the expanded use of HRAs.

Specifically, the proposed rule allows an employer to offer an HRA that can be integrated with individual health insurance coverage. As background, the ACA required that HRAs be integrated with group health coverage; this is the only way the HRA could be deemed to meet many of the ACA’s market reforms, such as the prohibition on annual and lifetime limits. As such, employers could not reimburse employees for individual coverage.

This rule would change that requirement by allowing employees to be reimbursed for the cost of individual coverage as long as the employee and any dependent for which the HRA would reimburse are actually enrolled in individual coverage. That individual coverage can be offered on or off the exchange and can include student health insurance coverage.

In order to deter adverse selection, the rule prohibits an employer from offering the HRA and a traditional health plan to the same class of employees. Additionally, the HRA must be offered on the same terms to each participant in the class (with limited exceptions). The rule allows the following classes of employees:

  • Full-time
  • Part-time
  • Seasonal
  • Employees covered under a collective bargaining agreement
  • Employees who have not yet satisfied an ACA-compliant waiting period
  • Employees under 25 prior to the beginning of the plan year
  • Non-resident aliens with no US-based income
  • Employees whose primary site of employment is in the same rating area

So, as an example, an employer could choose to offer a traditional group health plan to its full-time employees and an HRA integrated with individual coverage for its part-time employees. But that employer could not offer both a traditional group health plan and an HRA integrated with individual coverage for its full-time employees. This should make it more difficult for employers to shift high-cost individuals to the individual market.

In order to reimburse the individual coverage, employers must substantiate the employee’s coverage at the beginning of the HRA plan year and either prior to or in conjunction with any reimbursement. This can be done through third-party documentation of the coverage or an attestation from the employee. However, the attestation can only be relied upon as long as the employer doesn’t have specific knowledge that the individual is not enrolled in individual health coverage.

The proposed rule also would allow for employers to offer an excepted benefit HRA that isn’t integrated with any health coverage, as long as certain conditions are met. Specifically, to be considered a limited excepted benefit HRA, the employer must ensure that they offer other traditional coverage, limit the benefit to $1,800 per plan year (indexed for inflation), only reimburse for premiums of excepted benefit plans and make the HRA uniformly available.

The proposed rule also requires employers to distribute a notice to eligible employees 90 days before the start of the HRA plan year (or by the date of eligibility if someone becomes eligible for the HRA after the start of the plan year). The notice must describe the terms of the HRA, discuss the HRA’s interaction with premium tax credits, describe the substantiation requirements and notify the person that the individual health coverage integrated with the HRA isn’t subject to ERISA.

The rule also discusses the interaction of these HRAs with the Section 125 cafeteria plan regulations, the ACA and ERISA. As it pertains to the cafeteria plan regulations, the rule would allow an employee to take a pre-tax salary reduction to pay for the remainder of their individual policy as long as the individual coverage is offered outside of the exchange.

As it pertains to the ACA, the rule makes it clear that individuals who are covered by an HRA that’s integrated with affordable, minimum value individual health insurance coverage are ineligible for a premium tax credit. However, employees can waive the HRA so that they can retain their premium tax credit eligibility. The rule also states that an applicable large employer that offers a minimum value, affordable HRA or other employer-sponsored plan to at least 95 percent of its full-time employees and their dependents wouldn’t be liable for an employer mandate penalty.

As it pertains to ERISA, the rule makes it clear that individual coverage paid for through the HRA would not be subject to ERISA as long as the employer doesn’t take an active role in endorsing or choosing the individual coverage. In this way, the rules for having individual coverage avoid being subject to ERISA are similar to the rules for voluntary plans. However, the HRA itself would be subject to ERISA.

This rule would become effective on the first of the plan year beginning on or after Jan. 1, 2020. The Departments are requesting comments on the rule; those are due on or before Dec. 28, 2018.

While these rules could present additional options for smaller employers to offer coverage to their employees, the fact that there is no size limitation means that employers of all sizes could consider offering an HRA to certain classes of employees. Employers that want to do so will need to work with their service providers to implement the plan.

Proposed Rule »