In an effort to reverse another aspect of the Affordable Care Act (“ACA”), the Trump Administration published a proposed rule in late October that would allow employers to reimburse employees for medical expenses through a stand-alone health reimbursement account (“HRA”). Health care reform imposes a large excise tax on arrangements that reimburse employees for health care expenses without also providing a group health plan to employees. The penalty was intended to drive employers to purchase group insurance plans for their employees but posed a huge challenge for small employers who saw such reimbursements as a natural alternative to offering employee health care coverage. In the wake of rising health care costs, the Internal Revenue Service (“IRS”) recognized the burden such prohibition posed on small employers. As a result, in 2017, the IRS chipped away at the prohibition by allowing employers with less than 50 full-time employees to offer special stand-alone HRAs, known as “Qualified Small Employer Health Reimbursement Accounts” or “QSEHRAs.” The government now takes one step further by proposing to allow both small and mid-size employers to offer HRAs to their employees, even if they do not offer traditional group coverage. The Proposed Rule intends to accomplish two major goals: (1) permit HRAs to be integrated with individual health insurance coverage; and (2) expand the definition of benefits in order to allow reimbursement for stand-alone dental, limited scope vision, and other plans.
i. The Proposed Integration Rules
HRAs are tax-free, employer-funded accounts used to pay for out-of-pocket, qualified medical expenses. HRAs have been part of the health care market for years, but the ACA tried to discourage the use of HRAs to prevent employers from pushing employees with health risks into the individual market. Currently, employers can only offer an HRA to their employees if it is “integrated” with a major group medical plan sponsored by the employer. Under the new Proposed Rule, employers would be able to offer HRAs to employees with individual health insurance coverage if certain conditions are met. For example, under the Proposed Rule, an employer cannot offer a stand-alone HRA and a traditional group health plan to the same group or class of employees. Additionally, while HRA reimbursement amounts can vary to reflect age-based health coverage pricing, reimbursement amounts cannot vary based on the health-risk posed by the employee. In other words, the general rule requires that the HRA integrated with individual health insurance coverage be offered on the same terms to all employees of the same class (e.g., full-time, part-time, seasonal, etc.).
ii. Limited Excepted Benefits under the Proposed Rule
The Proposed Rule also offers employers the opportunity to offer an HRA to its employees, even if its employees do not have any major medical coverage at all. Under the Proposed Rule, an HRA will be considered a “limited excepted benefit” exempt from the integration rules if: (1) the HRA is not an integral part of the plan; (2) the HRA does not provide reimbursements in excess of $1,800 per year; (3) the HRA does not reimburse premiums for certain health insurance coverage; and (4) the HRA is made available under the same terms to all similarly situated individuals. The HRA is not an “integral part of the plan” if the participant is offered the opportunity to enroll in an employer-sponsored group health plan. Additionally, the HRA cannot reimburse the participant for premiums for individual health insurance coverage, coverage under a group health plan, or Medicare parts B or D. Rather, the HRA could reimburse employees for premiums for dental plans, limited scope vision plans, or other “excepted benefits.”
iii. The Proposed Rule and QSEHRAs
HRAs under the Proposed Rule are different from QSEHRAs. QSEHRAs have specific, stringent requirements and only apply to employers with less than 50 full-time employees. However, QSEHRAs have a higher statutory dollar limit on reimbursements. While an employer-sponsored QSEHRA can reimburse employees up to $5,050 for individuals and $10,250 for families, a stand-alone HRA under the new Proposed Rule can only reimburse employees for up to $1,800 worth of medical expenses. In other words, some small employers hoping to reimburse employees up to the highest dollar amount available might find that QSEHRAs are a more attractive option. Another difference between QSEHRAs and the stand-alone HRAs under the Proposed Rule is the ACA consequences applicable to employers. Under the Proposed Rule, if group health plan coverage is unaffordable for an employee enrolled in the stand-alone HRA, the employer will be subject to ACA penalties if the employee opts out of coverage and qualifies for a premium tax credit subsidy. In contrast, QSEHRAs do not impose penalties on employers if the reimbursements do not make health coverage “affordable,” because small employers eligible to establish QSEHRAs are not subject to the pay-or-play mandate.
If you have any questions about the HRAs, QSEHRAs, or the new Proposed Rule, please contact one of our employee benefits attorneys.