The Departments of the Treasury, Labor, and Health and Human Services (collectively, the “Departments”) recently released a proposed rule to expand the use of health reimbursement arrangements (HRAs)¹ and other account-based group health plans.  If finalized in its current form, the rule would allow employers to terminate their existing medical plans and shift their employees to the individual insurance market.

The proposed rule was developed in response to President Trump’s Executive Order 13813, which directed the Departments to consider proposing regulations that would (1) increase the usability of HRAs; (2) expand employers’ ability to offer HRAs to their employees; and (3) allow HRAs to be used with nongroup or individual health insurance coverage.

The Department of Treasury also issued follow-up guidance on November 19, 2018, to provide further details about how stand-alone HRAs integrated with individual health insurance coverage will comply with the employer mandate provisions of the Affordable Care Act (ACA).

Background

The ACA requires all group health plans to comply with certain “market reforms,” including the annual and lifetime dollar limit prohibition on essential health benefits and the preventive services mandate. According to existing guidance established by the Departments, a stand-alone HRA for active employees does not satisfy these market reform requirements unless the HRA is integrated with other group health plan coverage that complies with the ACA’s market reforms.  This prior guidance also stated that an HRA may not be integrated with individual health insurance coverage for purposes of the ACA market reforms.   

Proposed Stand-Alone HRA Design

The proposed rule will now allow the integration of an HRA with individual health insurance policies purchased by employees, provided certain conditions are met.  The rule also proposes certain requirements that an HRA must satisfy in order to be integrated with individual health insurance coverage:

• Enrollment in Individual Health Insurance Coverage.  The HRA must require that the participant and any dependents are enrolled in individual health insurance coverage (other than coverage that consists solely of excepted benefits) for each month the individuals are covered by the HRA.

• Uniformity Across a Class of Employees.  If a plan sponsor (typically an employer) offers any class of employees an HRA, then the plan sponsor may not also offer a traditional group health plan² to the same class of employees. Examples of a “class of employees” include full-time employees, part-time employees, and seasonal employees.  This means that executives must be pushed off the traditional group health plan if the HRA model is rolled out to other full-time employees.   

• Same-Terms Requirement.  The proposed rule generally requires that a plan sponsor that offers an HRA to a class of employees must offer the HRA on the same terms (that is, both in the same amount and on the same terms and conditions) to all employees within the class. 

• Opt-out.  The proposed rule requires that a participant must be permitted to opt out of and waive future reimbursements from the HRA at least annually, and, upon termination of employment, either the remaining amounts in the HRA are forfeited or the participant is allowed to permanently opt out of and waive all future reimbursements from the HRA.

• Reasonable Procedures for Substantiation and Verification of Individual Health Insurance Coverage. The HRA must implement, and comply with, reasonable procedures to verify that participants and their dependents are, or will be, enrolled in individual health insurance coverage for the plan year (e.g., requiring participants to provide an insurance card).

• Notice Requirements.  The HRA must provide a written notice (that satisfies certain content requirements) to each participant at least 90 days before the beginning of each plan year.

ERISA³ Plan Status

Under the proposed rule, the Department of Labor (DOL) clarified that the individual health insurance coverage purchased by the employee in the individual market would not be treated as part of the employer’s group health plan, or as health insurance coverage offered in connection with a group health plan, or as a part of any employee welfare benefit plan for purposes of ERISA, provided all of the following conditions are satisfied:

• The purchase of any individual health insurance coverage is completely voluntary for employees;

• The employer or other plan sponsor does not select or endorse any particular issuer or insurance coverage. However, providing general contact information regarding the availability of health insurance in a state or providing general health insurance educational information is permitted;

• Reimbursement for nongroup health insurance premiums is limited solely to individual health insurance coverage;

• The employer or other plan sponsor receives no consideration in the form of cash or otherwise in connection with the employee’s selection or renewal of any individual health insurance coverage; and

• Each plan participant is notified annually that the individual health insurance coverage is not subject to ERISA.

Employer Mandate Compliance

In separate guidance (Notice 2018-88), the IRS outlined several proposed safe harbors that would help large employers ensure that their HRA designs satisfy the “employer mandate” provisions of the ACA. 

Notably, the guidance explains that a stand-alone HRA will be considered an “offer of coverage” sufficient to avoid the potentially catastrophic penalties set forth under Code⁴ Section 4980H(a) – the so-called “A" Penalty.

With respect to the smaller penalty assessed under Code Section 4980H(b) (the “B" Penalty), the IRS offers some proposed safe harbor methods of determining whether a stand-alone HRA is considered “affordable” to employees.  Further, the IRS states that an HRA that meets the Code’s affordability standard will be deemed to offer “minimum value.”

Impact on Employers

If adopted as final, the proposed HRA rule could significantly alter the way employers offer medical coverage in the United States. By moving to a “defined contribution” model, employers would be able to cap their annual health care spending and shift the risk to insurance companies.  However, unless employers provide substantial HRA contributions, employees would bear the brunt of cost increases imposed by insurers in the individual market.  Further, without the combined risk pool that comes with a group health plan, employees may find it difficult to replicate their current coverage without increasing their out-of-pocket expenditures. 

Employers would also lose the ability to control plan design features, because the terms of the underlying medical coverage would be dictated by whatever individual insurance policy has been purchased by the employee.  This would leave employees’ coverage options at the mercy of state-level insurance laws, which may or may not offer coverage for all services.  For example, since most states do not recognize domestic partners, many employees could lose the ability to cover domestic partners as their dependents.  Additionally, access to certain care – such as applied behavioral analysis therapy (or “ABA therapy”) for autism spectrum disorders – may not be available on the same terms as under traditional employer-sponsored plans.  States such as Florida and New York permit insurers to impose annual dollar limits on autism spectrum treatment.

Comment Deadline for the Proposed Rule

The proposed rule on HRAs and excepted benefit HRAs would be effective for plan years beginning on or after January 1, 2020. Comments on the proposed rule are due  on or before December 28, 2018.