Tax Law Insights

On June 13, the Departments of Labor, Treasury and Health and Human Services jointly released final regulations dealing with health reimbursement accounts (“HRAs”).  These regulations fulfill the Trump administration’s directive to “increase the usability of HRAs, to expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup coverage.”

Background.

HRAs are employer-funded account-based plans from which employees may be reimbursed for qualifying medical expenses.  HRAs, like other account-based plans, have seen a dramatic increase in usage due to the perception that these type of arrangements help control health care spending.

HRAs are considered health plans for purposes of the Affordable Care Act (“ACA”).  By their nature, HRAs cannot independently comply with the ACA’s prohibition on annual dollar limits or requirement to provide first-dollar coverage for certain preventive care services. Prior to the issuance of these final regulations, HRAs generally were required to be integrated with an ACA compliant group health plan to satisfy these requirements.  Integration with individual health coverage was prohibited. The final regulations repeal this prohibition, thereby clearing one of the biggest obstacles from the path of employers interested in using HRAs to address their employees’ health care needs.

The final regulations create two new types of HRAs:

• Individual coverage health reimbursement arrangements ("ICHRAs")
• Excepted benefit health reimbursement arrangements ("EBHRAs")

Individual Coverage Health Reimbursement Arrangements.

An ICHRA is an HRA that may be integrated with an individual health insurance product, even if such insurance was purchased from a non-ACA marketplace.  The final regulations contain extensive guidance regarding the integration of ICHRAs with nongroup health coverage.  To be considered “integrated,” an ICHRA must:

• Ensure each ICHRA participant is covered by individual health insurance or Medicare;
• Adopt reasonable verification procedures to verify such coverage;
• Not offer both the ICHRA and a traditional group health plan to the same class of employees;
• Offer the ICHRA to all current employees of each designated class on the same terms (exceptions allow increases in the ICHRA dollar limit based on increased age and number of dependents);
• Allow an annual opt-out period; and
• Provide written notice at least 90 days before the beginning of the plan year.

To state (or restate) the obvious, allowing HRA integration with individual insurance products is a significant step forward in allowing flexibility in designing health care solutions tailored to the needs of particular employers and their workforce.  However, as with most things ACA/IRS related, employers must proceed with some degree of caution.  For example, the final regulations do not offer clear guidance on the interaction between the ACA’s employer mandate and ICHRAs.

Excepted Benefit Health Reimbursement Arrangements.

The term “excepted benefits” is used in the benefit's world to refer to insurance programs that are not primary health plans.  Stand-alone dental and vision policies are the most common examples.  Excepted benefits are generally exempt from the market reform provisions of the ACA.

An EBHRA is an HRA designed (at least primarily) to pay for “excepted benefits.”  Unlike the ICHRA, it does not require integration with other health coverage and may be offered to employees that are not enrolled in health care coverage (employer-sponsored or otherwise). To qualify as a EBHRA, the employer must:

• Offer other non-account based coverage to EBHRA-eligible employees;
• Make the EBHRA available under the same terms and conditions to all similarly situated employees (distinctions based on reasonably defined classifications are allowed);
• Prohibit reimbursement of premiums for individual or non-COBRA health insurance (premiums for COBRA, dental and vision coverage may be reimbursed);
• Limit annual employer contributions (excluding amounts carried over from prior years) to $1,800 (indexed for inflation); and
• Provide proper notice to the eligible employees.

The final regulations and the provisions related to ICHRAs and EBHRAs are effective for plan years beginning on or after January 1, 2020.