On June 13, 2019, the Department of Health and Human Services (HHS), the Department of Labor (DOL), the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) (collectively, the "Departments") issued a coordinated set of final regulations ("final rules"). Entitled, "Health Reimbursement Arrangements and Other Account-Based Group Health Plans," the final rules expand employers' ability to offer health reimbursement arrangements (HRAs) to their employees to be used in conjunction with individual market coverage and recognize a new type of excepted benefit HRA that allows employees to pay for HIPAA excepted benefits and short-term coverage. This post summarizes the final rules.
HRAs are account-based group health plans funded solely by employer contributions that are generally used to reimburse certain medical expenses incurred by eligible employees and their dependents. If the HRA so provides, amounts not expended in one year may be carried over to subsequent years. HRAs are, and are regulated as, group health plans. HRA contributions are therefore deductible by sponsoring employers, and benefits paid to eligible employees and their dependents are excluded from employees' income.
Prior law generally barred employers from making HRAs available to enable employees to purchase health insurance of their choice in the individual health insurance market. The Departments referred to these arrangements as "stand-alone" HRAs. The Departments were of the view that stand-alone HRAs failed to satisfy the following Affordable Care Act (ACA) requirements:
- Public Health Service Act ("PHS Act") section 2711, which generally bars group health plans from imposing annual or lifetime limits on the dollar amount of benefits (the "annual dollar limit prohibition"); and
- PHS Act section 2713, which requires non-grandfathered group health plans to provide preventive services without imposing any cost-sharing requirements (the "preventive services requirement").
In the Department's view, only "integrated" HRAs (i.e., only HRAs paired with employer-sponsored group health coverage) could pass muster under the ACA. This issue was first raised in the preamble to a 2010 interim final regulation, fleshed out in a series of subsequent guidance items, and adopted as law in a 2015 regulation. Along the way, the Departments also addressed integration of HRAs with Medicare and TRICARE.
The 2015 regulation establishes two methods for integration of HRAs with other group health plan coverage. The first method applies to HRAs integrated with other group health plan coverage that provides minimum value; the second method applies to HRAs integrated with other group health plan coverage that does not provide minimum value. Both methods require that:
- The HRA plan sponsor offers the employee a group health plan other than the HRA (non-HRA group coverage);
- The employee receiving the HRA be enrolled in non-HRA group coverage, even if the non-HRA group coverage is not offered by the HRA plan sponsor, such as a group health plan maintained by an employer of the employee's spouse; and
- The HRA be made available only to employees who are enrolled in non-HRA group coverage, regardless of whether such coverage is provided by the HRA plan sponsor.
For both integration methods, the non-HRA group coverage cannot consist solely of excepted benefits, and employees (or former employees) must be permitted to permanently opt out of and waive future reimbursements at least annually from the HRA. The two integration methods differ with respect to the expenses that the HRA may reimburse. Under the minimum value integration method, the HRA may reimburse any medical care expenses, but under the non-minimum value integration method, the HRA may reimburse only co-payments, co-insurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care that does not constitute essential health benefits.
(For a comprehensive discussion of prior law on the subject of stand-alone HRAs, please see Intricacies of Health Premium Reimbursements by the author.)
In 2016, Congress approved a narrow exception allowing qualifying small employers to offer stand-alone HRAs under a "Qualified Small Employer Health Reimbursement Arrangement (or "QSEHRA") to their eligible employees. QSEHRAs may be maintained only by employers that are not "applicable large employers," i.e., employers with 50 or fewer full-time and full-time equivalent employees during the previous year. Qualifying small employers can fund a QSEHRA to pay or reimburse premiums for health coverage purchased in the individual health insurance market, but they must make a company-wide choice between offering a QSEHRA and offering a traditional employer-sponsored group health plan. They cannot do both. Additional rules and restrictions apply, including a cap on annual amounts and a notice requirement.
Summary of the 2020 Final Rules
Beginning January 1, 2020, the final rules modify previous agency guidance interpreting the ACA's insurance market reforms by making available to employers two new HRA options:
- Individual Coverage HRA: Employers can integrate HRAs and other account-based group health plans with individual health market insurance coverage or Medicare, if certain conditions are satisfied. This new type of HRA is referred to as an "Individual Coverage HRA."
- Excepted Benefit HRA: Employers may offer an HRA for the purpose of obtaining non- ACA regulated coverage including "excepted benefits" (sometimes interchangeably referred to as "HIPAA excepted benefits") such as stand-alone dental or vision coverage, hospital/fixed indemnity benefits and certain other coverage including short-term, limited duration insurance (STLDI) under an "Excepted Benefit HRA."
The final rules modify prior law governing the integration of HRAs with individual market health insurance coverage such that the combination complies with particular ACA insurance market reforms, i.e., the annual dollar limit prohibition and the preventive services requirements, the rules governing premium tax credits, and the health care non-discrimination standard first adopted in HIPAA and expanded on in the ACA. Each of the Departments adopted the final rules in substantially similar form, but with some differences:
- The Treasury Department and the IRS issued rules regarding the eligibility for premium tax credits under Internal Revenue Code Section 36B on the part of individuals covered by Individual Coverage HRAs;
- The DOL provided assurances to plan sponsors that insurance coverage for which premiums are reimbursed by an HRA or under a QSEHRA do not become part of a plan subject to the Employee Retirement Income Security Act (ERISA); and
- HHS issued rules expanding the special enrollment period in the individual market for individuals who gain access to an HRA integrated with individual health insurance coverage, or who are provided with a QSEHRA.
The final rules broadly regulate "account-based group health plans," which term refers to employer-provided group health plans that provide for reimbursement of expenses for medical care, subject to a maximum fixed-dollar amount of reimbursements. QSEHRAs, Medical Savings Accounts, Health Savings Accounts, and premium-only cafeteria plans are not account-based group health plans for this purpose. While there are other types of account-based plans (e.g., health flexible spending arrangements), the final rules deal principally with HRAs, and they use HRA interchangeably with the term account-based group health plan. This post follows that convention.
Individual Coverage HRAs
The final rules establish the following conditions that an Individual Coverage HRA must satisfy in order to be integrated with individual health insurance coverage:
1. Covered individuals must be enrolled in individual health insurance coverage that complies with Public Health Service Act sections 2711 and 2713.
All individual health insurance coverage (other than STLDI and individual health insurance coverage that consists solely of excepted benefits) is treated as complying with PHS Act sections 2711 and 2713. ACA-grandfathered plans, grand mothered individual policies (i.e., small group and individual market health plans that are not fully ACA-compliant and that took effect from March 23, 2010 through the end of 2013), and student plans are deemed to satisfy these requirements despite that they may not comply technically in all cases.
An Individual Coverage HRA may but is not required to pay for premiums. It may, for example, pay only deductibles, co-pays and other out-of-pocket charges. In this latter case, the cost-sharing features do affect the minimum value of the combined arrangement, but do not help determine whether the combined arrangement is affordable. Where an Individual Coverage HRA pays or reimburses premiums, the affordability of the combined coverage is affected. Where the combined coverage is affordable, the employee is unable to qualify for premium tax credits where coverage is purchased from an ACA exchange or marketplace. (Minimum value and affordability are discussed below.)
Once an individual covered under an Individual Coverage HRA ceases to be covered under the accompanying individual health insurance coverage, the HRA may no longer reimburse medical care expenses that are incurred by that individual. And once the employee and all dependents covered by the HRA cease to be covered by individual health insurance coverage, the participant must forfeit the HRA. The HRA must, however, continue to reimburse covered medical care expenses incurred by the individual prior to the cessation of individual health insurance coverage. If a participant or dependent loses coverage under the HRA for a reason other than cessation of individual health insurance coverage, COBRA may apply.
2. No traditional group health plan may be offered to same class of participants.
To the extent a plan sponsor offers any class of employees (discussed below) an Individual Coverage HRA, the plan sponsor may generally not also offer a traditional group health plan to the same class of employees. A traditional group health plan is any group health plan other than either an account-based group health plan or a group health plan that consists solely of excepted benefits.
3. Coverage must be offered on the same terms to all participants in the same class.
An Individual Coverage HRA must be offered on the same terms to all participants within a class of employees. The "same terms" requirement prohibits discrimination that could occur either by offering less generous benefits to only certain employees in a class of employees or by offering more generous benefits to only certain employees in a class of employees. An employer is not free to offer more generous coverage based on the presence of a chronic illness or disease.
An employee's right to pay the portion of the premium for individual health insurance coverage that is not covered by the HRA, if any, by using a salary reduction under a cafeteria plan is considered to be a term of the HRA, which if made available to any participant in a class of employees must be made available on the same terms to all participants (other than former employees) in the class of employees. Because pre-tax amounts under a cafeteria plan cannot be used to purchase coverage through an ACA exchange, pre-tax premiums can only be used to purchase off-exchange individual health insurance coverage.
An HRA does not fail to be provided on the same terms where there are variations based on the number of dependents. Thus, the maximum dollar amount made available to participants to reimburse medical care expenses for any plan year may increase as the number of the participant's dependents who are covered under the HRA increases, so long as the same maximum dollar amount attributable to the increase in family size is made available to all participants in that class of employees with the same number of dependents. Similarly, variations on the maximum dollar amount may vary by age, provided that that amount made available to the oldest participant(s) is not more than three times the maximum dollar amount made available to the youngest participant(s).
A more liberal rule applies to former employees, under which an HRA does not fail to be treated as provided on the same terms if the plan sponsor offers the HRA to some, but not all, former employees within a class of employees. The HRA must, however, be offered to the former employees on the same terms as to all other employees within the class.
Health Savings Account (HSA)-compatible HRAs are permitted. A class of employees may be offered a choice between an HSA-compatible individual coverage HRA and an individual coverage HRA that is not HSA-compatible, so long as both types of HRAs are offered to all participants in the class of employees on the same terms. HSA-compatible coverage would include post-deductible and retiree HRA coverage.
4. Opt-out requirement.
At least once each year (presumably at open enrollment), a participant who is otherwise eligible for coverage under an Individual Coverage HRA must be permitted to opt-out of and waive future reimbursements on behalf of the participant and his or her dependents. Employers may establish timeframes for enrollment in and opting-out of the HRA but, in general, the opportunity to opt-out must be provided in advance of the first day of the plan year. For participants who become eligible to participate in the HRA on a date other than the first day of the plan year, or for a new dependent, the opportunity to opt-out must be provided during the applicable HRA enrollment period(s) established for these individuals.
Upon termination of employment of the covered participant, the remaining amounts in the HRA must be forfeited or the participant must be permitted to permanently opt-out of and waive future reimbursements from the HRA on behalf of the participant and all dependents covered by the HRA.
5. Reasonable procedures for coverage substantiation.
An Individual Coverage HRA must adopt and comply with reasonable procedures to substantiate that participants and each dependent covered by the HRA are, or will be, enrolled in individual health insurance coverage. Reasonable procedures include a requirement that a participant substantiate enrollment by providing either a third-party document (e.g., a communication from an ACA insurance exchange showing that an individual has completed the application and plan selection), or an attestation by the participant. An employer may rely on the participant's documentation or attestation absent actual knowledge to the contrary.
6. Notice requirements.
In general, an Individual Coverage HRA must provide 90 days' advance written notice to each participant, or for new participants by a date that is no later than the date on which the HRA first takes effect. The written notice must include:
- A description of the terms of the HRA, including the maximum dollar amount available for each participant (including the self-only HRA amount) available for the plan year;
- A statement of the right of the participant to opt out of and waive future reimbursements from the HRA;
- A description of the potential availability of the premium tax credit if the participant opts out of and waives future reimbursements from the HRA and the HRA is not affordable;
- A statement that if the participant accepts the HRA, the participant may not claim a premium tax credit for the participant's ACA exchange coverage for any month the HRA may be used to reimburse medical care expenses of the participant;
- A statement that the participant should retain the written notice because it may be needed to determine whether the participant is allowed a premium tax credit on the participant's individual income tax return;
- A statement that the HRA may not reimburse any medical care expense unless the reimbursement is properly substantiated;
- A statement that if the individual health insurance coverage of a participant or dependent ceases, the HRA will not reimburse any medical care expenses that are incurred by the participant or dependent, as applicable, after the coverage ceases, and a statement that the participant must inform the HRA if the participant's or dependent's individual health insurance coverage is cancelled or terminated;
- The contact information (including a phone number) for an individual or a group of individuals whom participants may contact in order to receive additional information regarding the HRA; and
- A statement of availability of a special enrollment period to enroll in or change individual health insurance coverage, through or outside of an ACA exchange, for the participant and any dependents who newly gain access to the HRA and are not already covered by the HRA.
The Departments have helpfully provided a model notice that is appended to a set of Frequently Asked Questions available here.
Classes of employees
The Departments were concerned that permitting HRAs to purchase individual market coverage could invite discrimination based on health status. Without some limitations, the employers might seek to discriminate against individual participants and beneficiaries in eligibility, benefits, or premiums based on a health factor. To discourage discrimination based on health status with respect to offering HRAs to "high-cost" employees, the final rules permit HRA offers by employee class.
An employer may offer an Individual Coverage HRA to a class of employees only if the employer does not also offer a traditional group health plan to the same class of employees. If the individual coverage HRA is offered to former employees, former employees are assigned to the same class in which they were included immediately before separation from service. Before each plan year, a plan sponsor must determine for the plan year which classes of employees it intends to treat separately. Once the classes are established for a plan year, a plan sponsor may not make changes with respect to that plan year.
The classes established under the final rules include:
- full-time employees;
- part-time employees;
- employees who are paid on a salary basis;
- non-salaried employees (such as, for example, hourly employees);
- employees whose primary site of employment is in the same rating area;
- seasonal employees;
- employees included in a unit of employees covered by a particular collective bargaining agreement (or an appropriate related participation agreement) in which the plan sponsor participates;
- employees who have not satisfied a waiting period for coverage;
- non-resident aliens with no U.S.-based income;
- Employees hired by staffing firms for temporary placement at entities unrelated to the staffing firm; or
- A group of participants described as a combination of two or more of the above classes.
If a plan sponsor offers a traditional group health plan to one or more classes of employees and offers an individual coverage HRA to one or more other classes of employees, certain classes are subject to a minimum class size requirement. The minimum class size requirement applies to full-time employees, part-time employees, salaried employees, non-salaried employees, or employees whose primary site of employment is in the same rating area (other than by state). In the case of full-time and part-time employees, the minimum class size requirement applies only to the class offered an individual coverage HRA.
The applicable class size minimum is determined prior to the beginning of the plan year for each plan year of the individual coverage HRA and is: 10, for an employer with fewer than 100 employees; a number, rounded down to a whole number, equal to 10 percent of the total number of employees, for an employer with 100 to 200 employees; and 20, for an employer with more than 200 employees.
Additional classes can consist of combinations of two or more of the enumerated classes. Thus, for example, part-time employees included in a unit of employees covered by a collective bargaining agreement might be one class of employees, and full-time employees included in the same unit of employees covered by a collective bargaining agreement might be another class of employees.
Classes of employees are identified based on whether covered individuals are employees of the common law employer, or for whom they provide services, and not on the basis of the controlled group of employers. The Departments express the view in the preamble to the final rules that "applying the minimum class size requirement [ ] at the common law employer level, is a more straightforward way of addressing the adverse selection concerns [ ]" (p. 28,913). This means that the designation of classes by one employer under common control with other employers does not bind the choices made another employer in the group.
Minimum Value and Affordability
The ACA made available premium tax credits for certain low- and moderate-income taxpayers to help with the cost of purchasing individual health insurance coverage through an ACA exchange. The amount of the premium tax credit varies based on household income. No premium tax credit is available, however, in any month in which:
- The individual is eligible for coverage under an eligible employer-sponsored plan and the coverage is affordable and provides minimum value; or
- The individual is enrolled in an eligible employer-sponsored plan, even if the coverage is not affordable or does not provide minimum value.
An "eligible employer-sponsored plan" for this purpose is synonymous with an employer-sponsored group health plan. An eligible employer-sponsored plan provides minimum value if the percentage of the total allowed costs of benefits provided under the plan is greater than or equal to 60 percent, and if the benefits under the plan include substantial coverage of inpatient hospital services and physician services. An Individual Coverage HRA is presumed to provide minimum value, since the individual market plans to which the HRA must be tethered will always provide minimum value.
An eligible employer-sponsored plan is affordable if the amount the employee must pay for self-only coverage does not exceed a specified percentage (9.856 in 2019) of the employee's household income. In the case of an employer-sponsored group health plan, affordability is based on the employee premium, and the employer can use one of three safe harbor definitions to approximate household income. A group health plan is therefore affordable if the monthly employee-provided premium is less than 1/12 of the employee's household income multiplied by the specified percentage.
While the employer knows the amount of its contribution to an Individual Coverage HRA on behalf of an employee, it is not likely to know the amount that the employee is paying for individual market coverage. The final rules allow the employer to assume that this amount is the premium amount for the lowest cost silver plan for self-only coverage available through the ACA exchange in the rating area in which the employee resides.
In a notice issued last year, the IRS described some possible additional affordability safe harbors, which included a "worksite" safe harbor, under which the employer uses the premium for the lowest cost silver-level individual plan (minus the HRA amount) for the employee's worksite location, rather than the employee's residence; and a "prior calendar year" safe harbor that would allow employers to use the amount the employee paid for his or her coverage in the prior calendar year, minus the current year HRA amount. The notice also provided proposals to accommodate non-calendar year plans as well as rules that would allow for employers to determine affordability based on employee groupings. While not included in the final rule, these changes may be adopted subsequently.
Status of Individual HRAs as ERISA-Covered Plans
The final rules provide assurances that individual health insurance coverage will not be treated as part of an HRA or QSEHRA for purposes of ERISA if certain conditions are satisfied. These assurances take the form of an amendment to the ERISA definition of "employee welfare benefit plan." ERISA section 3(1) broadly defines ERISA-covered welfare plans to include "any plan, fund, or program" that is "established or maintained by an employer or employee organization" for the provision of health benefits "through the purchase of insurance or otherwise." The PHS Act generally treats individual health insurance and group health insurance as mutually exclusive categories. If individual health insurance coverage were considered to be a group health plan or part of a group health plan, the individual health insurance coverage would violate certain of the ACA group market requirements (e.g., the single risk pool requirement for the small group market, the rating rules for the small group market, or the separate medical loss ratio requirements for large group insurance coverage).
According to the final rules, individual health insurance coverage paid for by the HRA is not covered by or otherwise subject to ERISA if the following conditions are satisfied:
- The purchase of any individual health insurance coverage is completely voluntary for participants and beneficiaries. (That the plan sponsor requires such coverage to be purchased as a condition for participation in an HRA or supplemental salary reduction arrangement does not make the purchase involuntary.)
- The employer, employee organization, or other plan sponsor does not select or endorse any particular issuer or insurance coverage. Plan sponsors may, however, provide general contact information regarding availability of health insurance.
- Reimbursement is limited solely to individual health insurance coverage.
- The employer, employee organization, 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.
- Each plan participant is notified annually that the individual health insurance coverage is not subject to ERISA.
These requirements rule out attempts to steer employees to a particular individual market product or coverage. While the preamble to the final rules refers to private exchanges, it would not be possible to limit options only to particular private exchange coverage and still satisfy these requirements.
Special Enrollment Periods
Individuals seeking coverage in individual health insurance coverage, whether through an ACA exchange/marketplace or otherwise, are generally permitted to enroll in or change such coverage only during a specified annual open enrollment period. Individuals can, however, qualify for a special enrollment period in order to enroll in or change such coverage outside of the annual open enrollment period under circumstances enumerated in the ACA. Group health plans and group health insurance issuers are obligated to provide special enrollment periods under certain circumstances. The final rules add a new special enrollment period triggering event for individuals and their dependents who newly gain access to an Individual Coverage HRA or who are newly provided a coverage under a QSEHRA. The triggering event occurs on the first day on which coverage can take effect. This new special enrollment period is available only to individuals and dependents who are not currently enrolled in an Individual Coverage HRA or covered by a QSEHRA on the day immediately prior to the triggering event.
Excepted Benefit HRAs
HIPAA established health insurance portability rules that applied to group health plans and health insurance issuers. However, these rules did not (and do not) apply to excepted benefits. HIPAA prescribed four statutory categories of excepted benefits, one of which is "limited excepted benefits." Limited excepted benefits include limited scope vision or dental benefits, benefits for long-term care, nursing home care, home health care, community-based care, or any combination thereof, and "such other similar, limited benefits as are specified in regulations". To be excepted benefits under this category, the benefits must either be insured and provided under a separate policy, certificate, or contract of insurance, or otherwise not be an integral part of a non-excepted benefit group health plan. While the ACA insurance market reforms broadly apply to group health plans and health insurance issuers offering group health insurance coverage, excepted benefits are exempt from the ACA's market reforms, including the ACA's prohibition on annual limits and preventive care coverage requirement discussed above.
Coverage that consists exclusively of excepted benefits is not minimum essential coverage for ACA purposes. An individual who otherwise qualifies for a premium tax credit is not rendered ineligible for premium tax credits if he or she purchases or is provided with coverage under a plan or arrangement that consists of solely of excepted benefits. The final rules enlarge the definition of limited excepted benefits to create an "excepted benefit" HRA that is limited in the annual amounts made available and the types of coverage for which premiums may be reimbursed. This newly established Excepted Benefit HRA can be used to reimburse certain medical care expenses incurred with respect to coverage that is not limited to other types of excepted benefits. An HRA that only provides reimbursement for excepted benefits (e.g., limited-scope vision and limited-scope dental benefits) already complies with prior law and need not satisfy the criteria of the final rule Excepted Benefit HRA, which is a new type of HRA.
In order to qualify as an excepted benefit HRA, an arrangement must satisfy the following four requirements:
1. Contemporaneous offer of group health plan coverage.
While an excepted benefit HRA must meet the statutory requirement that it not be "an integral part of the plan," it must also be offered alongside an employer group health plan (other than an account-based group health plan or coverage consisting solely of excepted benefits). Only individuals who are eligible for participation in the employer's group health plan are eligible for participation in the excepted benefit HRA. There is no requirement that they actually enroll in the employer's group health plan.
2. Limitation on amount.
The amounts newly made available for each plan year under the HRA or other account-based group health plan must not exceed $1,800, indexed for increases in the cost-of-living for plan years after December 31, 2020. Carry-over of unused amounts from year-to-year are disregarded for purposes of determining whether benefits are limited in amount. Multiple HRAs offered by the same plan sponsor are aggregated for this purpose, except that HRAs or other account-based group health plans that reimburse only excepted benefits are not included in determining whether the benefits are limited in amount.
3. Prohibition on reimbursement of premiums for certain types of coverage.
To qualify as an Excepted Benefit HRA, the HRA must not reimburse premiums for individual health insurance coverage, group health plan coverage (other than COBRA continuation coverage or other continuation coverage), or Medicare Part A, B, C, or D.
4. Uniform Availability.
An Excepted Benefit HRA must be made available under the same terms to all similarly situated individuals. Individuals are similarly situated for this purpose if the distinctions are based on bona fide employment-based classifications consistent with the employer's usual business practice, e.g. part-time and full-time employees, employees working in different geographic locations, and employees with different dates of hire or lengths of service. A plan generally may treat participants and beneficiaries as two separate groups of similarly situated individuals. The plan also may distinguish between beneficiaries based on their relationship to the plan participant (such as spouse or dependent child) or based on the age or student status of dependent children. But in no case may a plan create or modify a classification directed at individual participants or beneficiaries based on one or more HIPAA-designated health factors.
Premium reimbursements for STLDI.
Excepted Benefit HRAs may be used to pay premiums for STLDI, with some limitations aimed at ensuring that the purchase of such coverage does not unduly burden or harm state small group markets. STLDI premiums may not be paid by an Excepted Benefit HRA offered by a small employer in instances in which the Department of Health and Human Services, in consultation with the Secretaries of Labor and the Treasury, determines that "the reimbursement of premiums for short-term, limited-duration insurance by the excepted benefit HRAs has caused significant harm to the small group market in the state that is the principal place of business of the small employer." The final rules establish rules for the making of this determination.
From the perspective of employers and their advisors, the final rules are a big, ambitious regulatory undertaking. These rules are long, complicated and fraught with compliance risks. The effective date is also perilously near. Employers that want to make Individual Coverage HRAs or Excepted Benefit HRAs available to their employees (or selected classes of employees) commencing January 1, 2020 will need to be ready for open enrollment as soon as October or November this year. This leaves little time to digest and assess the various options and to implement the agreed upon plan design changes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.