In October 2018, regulations were issued by the departments of Treasury, Labor, and Health and Human Services — at the direction of an Executive Order by President Trump — to expand the use of stand-alone Health Reimbursement Arrangements (HRAs) by employers of all sizes.
This is another twist in the complicated history of HRAs.
HRAs first became available around 2001, when a handful of employers paired such arrangements with high-deductible health plans. These employers offered HRAs under then-existing law — which was unclear at the time. In 2002, the Internal Revenue Service (IRS) released Revenue Ruling 2002-41 and Notice 2002-45 (published in Internal Revenue Bulletin 2002-28, dated July 15, 2002) to provide guidance clarifying the conditions under which HRAs could be provided to workers on a tax free basis, and addressed questions related to the benefits offered under an HRA, the interaction between HRAs and cafeteria plans, FSAs, COBRA coverage, and other matters. One of the provisions in Notice 2002-45 allowed HRAs to be used on a stand-alone basis to reimburse workers for eligible health insurance premiums, which included premiums for health insurance purchased by workers directly from insurance companies in the individual or non-group market.
Employers never made this provision widely available and, in 2013, the Obama Administration banned the practice in the Department of Labor Technical Release No. 2013-03.
Then in December 2016, the 21st Century Cures Act included a provision known as the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), which allows certain small employers to use HRAs on a tax-preferred basis to reimburse workers for health insurance purchased on the individual market, as well as deductibles, and cost-sharing more generally. A year later, President Trump issued his executive order.
Under the newly-proposed regulations, two types of HRAs would be allowed.
- A stand-alone HRA that could be used to purchase coverage in the non-group market, with no contribution limit. The HRA must be used to purchase ACA-compliant plans and must meet ACA affordability requirements in order for the employer to meet the shared responsibility requirement. The HRA will not be subject to ERISA if certain conditions are met.
- An “excepted benefit HRA,” where employers would be able to contribute up to $1,800 that workers could use to pay their out-of-pocket cost sharing and/or certain premiums, such as those for short-term health insurance, COBRA, disability insurance, and dental and vision insurance. When offering an excepted benefit HRA, employers must also offer a group health plan, but workers could decline it and get coverage in the non-group market. Employers are not allowed to offer both the stand-alone HRA and excepted benefit HRA to the same class of workers.
The administration expects around 800,000 employers will offer stand-alone HRAs by 2024 and beyond. As a result, some 10.7 million individuals would be covered by such an HRA by 2027 and 6.8 million fewer workers (and their dependents) would have traditional employment-based health coverage. It is no surprise that there would be fewer people with employment-based health coverage. Employers have been interested in the concept of “defined contribution (DC) health” coverage and giving workers an HRA that they can use to purchase coverage in the non-group market may be an attractive means of moving to DC health. Employers never moved in the direction of giving workers a fixed contribution to purchase health insurance for a number of reasons. Historically, they were hesitant to drop group coverage in favor of offering individual policies because the non-group market was not considered a viable alternative to the employment-based system. And, more recently, even with the advent of private health insurance exchanges, employers did not embrace them as the initial hype would have expected us to believe.
There is no question that the HRA provision gives employers the means to drop traditional health coverage and go to a “DC health”-type plan. One of the concerns is that employers will try to structure their plans in such a way to send high-risk employees to the individual market. The regulations include a number of provisions to prohibit such a discriminatory practice. However, what if only employers facing the highest premiums in the group market adopted HRAs? If such a phenomenon occurred, the non-group market would not become more stable, and may see average premiums increase, which the group market would see a reduction in average premiums as higher risk groups left.
Employers may require that there be a viable non-group market for their employees to go to before moving to HRAs. Stability in premiums may be one requirement, which may make it less likely that multi-state employers move to HRAs given the variation in premium growth across states. The quality of the benefits offered is another consideration. For instance, the prevalence of narrow network plans in the non-group market may be something that continues to hold employers back from HRAs. And of course there is always the uncertainty of future changes in the non-group market, as employers have no control over that marketplace and would have no control over how workers spent HRAs in the non-group market.
There are a number of unanswered questions. Which employers would go in this direction, under what circumstances, and for which employees? Would it vary by firm size? Do the strength of the economy and labor market conditions factor in? The next recession will be the first recession in history since the insurance market reforms were put into place by the ACA. It will be the first time in history that a recession was paired with the inability of insurance companies to deny people coverage for pre-existing conditions or to charge them more for such conditions. It will also be the first time that health insurance premiums for people under 400 percent of the federal poverty level would be subsidized by the federal government during a recession in a meaningful way. Employers may decide that they no longer need to offer health benefits to be competitive in the labor market during the next recession, and the combination of the insurance market reforms and the ability to give workers tax-free money to purchase health insurance on their own may finally put the future of employment-based health coverage to the test.
The new regulations are expected to be finalized early next year and take effect for plan years beginning on or after Jan. 1, 2020.