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Advocates claim a newly issued regulation could transform how employers pay for employee health care coverage.
On June 13, the U.S. Departments of Health and Human Services, Labor and the Treasury issued a final rule allowing employers of all sizes that do not offer a group coverage plan to fund a new kind of health reimbursement arrangement (HRA), known as an individual coverage HRA (ICHRA). The departments also posted FAQs on the new rule.
Starting Jan. 1, 2020, employees will be able to use employer-funded ICHRAs to buy individual-market insurance, including insurance purchased on the public exchanges formed under the Affordable Care Act (ACA).
Under IRS guidance from the Obama administration (IRS Notice 2013-54), employers were effectively prevented from offering stand-alone HRAs that allow employees to purchase coverage on the individual market.
“Using an individual coverage HRA, employers will be able to provide their workers and their workers’ families with tax-preferred funds to pay all or a portion of the cost of coverage that workers purchase in the individual market,” said Joe Grogan, director of the White House Domestic Policy Council. “The departments estimate that once employers fully adjust to the new rules, roughly 800,000 employers will offer individual coverage HRAs to pay for insurance for more than 11 million employees and their family members, providing them with more options for selecting health insurance coverage that better meets their needs.”
The new rule “is primarily about increasing employer flexibility and worker choice of coverage,” said Brian Blase, special assistant to the president for health care policy. “We expect this rule to particularly benefit small employers and make it easier for them to compete with larger businesses by creating another option for financing worker health insurance coverage.”
The final rule is in response to the Trump administration’s October 2017 executive order on health care choice and competition, which resulted in an earlier final rule on association health plans that is now being challenged in the courts, and a final rule allowing low-cost short-term insurance that provides less coverage than a standard ACA plan.
New Types of HRAs
Existing HRAs are employer-funded accounts that employees can use to pay out-of-pocket health care expenses but may not use to pay insurance premiums. Unlike health savings accounts (HSAs), all HRAs, including the new ICHRA, are exclusively employer-funded, and, when employees leave the organization, their HRA funds go back to the employer. This differs from HSAs, which are employee-owned and portable when employees leave.
The proposed regulations keep the kinds of HRAs currently permitted (such as HRAs integrated with group health plans and retiree-only HRAs) and would recognize two new types of HRAs:
What ICHRAs Can Do
Under the new HRA rule:
The rule also includes a disclosure provision to help ensure that employees understand the type of HRA being offered by their employer and how the ICHRA offer may make them ineligible for a premium tax credit or subsidy when buying an ACA exchange-based plan. To help satisfy the notice requirements, the IRS issued an Individual Coverage HRA Model Notice.
QSEHRAs and ICHRAs
Currently, qualified small-employer HRAs (QSEHRAs), created by Congress in December 2016, allow small businesses with fewer than 50 full-time employees to use pretax dollars to reimburse employees who buy nongroup health coverage. The new rule goes farther and:
The legislation creating QSEHRAs set a maximum annual contribution limit with inflation-based adjustments. In 2019, annual employer contributions to QSEHRAs are capped at $5,150 for a single employee and $10,450 for an employee with a family.
The new rule, however, doesn’t cap contributions for ICHRAs.
As a result, employers with fewer than 50 full-time employees will have two choices—QSEHRAs or ICHRAs—with some regulatory differences between the two. For example:
“QSEHRAs have a special rule that allows employees to qualify for both their employer’s subsidy and the difference between that amount and any premium tax credit for which they’re eligible,” said John Barkett, director of policy affairs at consultancy Willis Towers Watson.
While the ability of employees to couple QSEHRAs with a premium tax credit is appealing, the downside is QSEHRA’s annual contribution limits, Barkett said. “QSEHRA’s are limited in their ability to fully subsidize coverage for older employees and employees with families, because employers could run through those caps fairly quickly,” he noted.
For older employees, the least expensive plan available on the individual market could easily cost $700 a month or $8,400 a year, Barkett pointed out, and “with a QSEHRA, an employer could only put in around $429 per month to stay under the $5,150 annual limit for self-only coverage.”
Similarly, for employees with many dependents, premiums could easily exceed the QSEHRA’s family coverage maximum of $10,450, whereas “all those dollars could be contributed pretax through an ICHRA,” Barkett said.
An Excepted-Benefit HRA
In addition to allowing ICHRAs, the final rule creates a new excepted-benefit HRA that lets employers that offer traditional group health plans provide an additional pretax $1,800 per year (indexed to inflation after 2020) to reimburse employees for certain qualified medical expenses, including premiums for vision, dental, and short-term, limited-duration insurance.
The new excepted-benefit HRAs can be used by employees whether or not they enroll in a traditional group health plan, and can be used to reimburse employees’ COBRA continuation coverage premiums and short-term insurance coverage plan premiums.
Safe Harbor Coming
With ICHRAs, employers still must satisfy the ACA’s affordability and minimum value requirements, just as they must do when offering a group health plan. However, “the IRS has signaled it will come out with a safe harbor that should make it straightforward for employers to determine whether their ICHRA offering would comply with ACA coverage requirements,” Barkett said.
Last year, the IRS issued Notice 2018-88, which outlined proposed safe harbor methods for determining whether individual coverage HRAs meet the ACA’s affordability threshold for employees, and which stated that ICHRAs that meet the affordability standard will be deemed to offer at least minimum value.
The IRS indicated that further rulemaking on these safe harbor methods is on its agenda for later this year.
The Department of Labor has just published a series of FAQs regarding premium reimbursement arrangements. Specifically, the FAQs address the following arrangements:
Situation #1: An arrangement in which an employer offers an employee cash to reimburse the purchase of an individual market policy.
When an employer provides cash reimbursement to the employee to purchase an individual medical policy, the DOL takes the position that the employer’s payment arrangement is part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, regardless of whether the employer treats the money as pre or post tax to the employee. Therefore, the arrangement is considered a group health plan that is subject to the market reform provisions of the Affordable Care Act applicable to group health plans and because it does not comply (and cannot comply) with such provisions, it may be subject to penalties.
Situation #2: An arrangement in which an employer offers employees with high cost claims a choice between enrollment in its group health plan or cash.
The DOL takes the position that offering a choice between enrolling in the group health plan or cash only to employees with a high claims risk would be discriminatory based on one or more health factors. The DOL states that such arrangements will violate such nondiscrimination provisions regardless of whether (1) the cash payment is treated by the employer as pre-tax or post-tax to the employee, (2) the employer is involved in the selection or purchase of any individual medical policy, or (3) the employee obtains any individual health insurance. The DOL also notes that such an arrangement, depending on facts and circumstances, could result in discrimination under an employer’s cafeteria plan.
Situation #3: An arrangement where an employer cancels its group policy, sets up a reimbursement plan (like an HRA) that works with health insurance brokers or agents to help employees select individual insurance policies, and allows eligible employees to access the premium tax credits for Marketplace coverage.
The DOL takes the position that such an arrangement is a considered a group health plan and, therefore, employees participating in such arrangement are ineligible for premium tax credits (or cost-sharing reductions) for Marketplace coverage. The DOL also takes the position that such arrangements are subject to the market reform provisions of the ACA and cannot be integrated with individual market policies to satisfy the market reforms. Thus, such arrangements can trigger penalties.
Key Takeaway
There has been quite a bit of banter regarding whether any of the foregoing arrangements could be an effective way for employers to avoid complying with the market reforms and other provisions of the Affordable Care Act applicable to group health plans. These FAQs are a strong indication that the DOL will be forceful in its interpretation and enforcement of these provisions.
Many employers originally thought they could shift health costs to the government by sending their employees to a health insurance Exchange/Marketplace with a tax-free contribution of cash to help pay premiums, but the Obama administration has squashed this idea in a new ruling. Such arrangements do not satisfy requirements under the Affordable Care Act (ACA), the Obama administration said, and employers could now be subject to a tax penalty of $100 a day — or $36,500 a year — for each employee who goes into the individual Marketplace/Exchange for health coverage.
The ruling this month, by the Internal Revenue Service, prevents any “dumping” of employees into the exchanges by employers.
Under a main provision in the health care law, employers with 50 or more employees are required to offer health coverage to full-time workers, or else the employer may be subject to penalties.
Many employers had concluded that it would be cheaper to provide each employee with a lump sum of money to buy insurance on an exchange, instead of providing employer-sponsored health coverage directly to employees as they had in the past.
But the Obama administration has now raised objections in an authoritative Q&A document recently released by the IRS, in consultation with other agencies.
The health law, known as the Affordable Care Act (ACA), was intended to build on the current system of employer-based health insurance. The administration wants employers to continue to provide coverage to workers and their families and do not see the introduction of ACA as an eventual erosion of employer provided coverage.
Employer contributions to sponsored health coverage, which averages more than $5,000 a year per employee, are not counted as taxable income to workers. But the IRS has said employers could not meet their obligations under ACA by simply reimbursing employees for some or all of their premium costs from the marketplace/exchange.
Christopher E. Condeluci, a former tax and benefits counsel to the Senate Finance Committee, said the recent IRS ruling was significant because it made clear that “an employee cannot use tax-free contributions from an employer to purchase an insurance policy sold in the individual health insurance market, inside or outside an exchange.”
If an employer wants to help employees buy insurance on their own, Condeluci said, they can give the employee higher pay, in the form of taxable wages. But in such cases, he said, the employer and the employee would owe payroll taxes on those wages, and the change could be viewed by workers as reducing a valuable benefit.
A tax partner from a large accounting firm has also said the ruling could disrupt reimbursement arrangements used in many industries.
For decades, many employers have been assisting employees by reimbursing them for health insurance premiums and out-of-pocket costs associated with their health coverage. The new federal ruling eliminates many of those arrangements, commonly known as Health Reimbursement Arrangements (HRAs) or employer payment plans, by imposing an unusually punitive penalty. The IRS has said that these employer payment plans are considered to be group health plans, but they do not satisfy requirements of the Affordable Care Act for health coverage.
Under the law, insurers may not impose annual limits on the dollar amount of benefits for any individual, and they must provide certain preventive services, like mammograms and colon cancer screenings, without co-payments or other charges.
But the administration has said that employer payment plans or HRAs do not meet these requirements.
This ruling was released as the Obama administration rushed to provide guidance to employers and insurers who are beginning to review coverage options for 2015.
The Department of Health and Human Services said it would provide financial assistance to certain insurers that experience unexpected financial losses this year. Administration officials hope the payments will stabilize medical premiums and prevent rate increases that are associated with the required policy changes as a result of ACA.
Republicans want to block these payments, however, as they see them as a bailout for insurance companies who originally supported the president’s health care law.
Stay tuned for more updates on ACA as they are released. Should you have any questions, please do not hesitate to contact our office.
If you currently have an individual health insurance plan, you will be in for a big change when you sign up for your coverage in 2014.
Approximately 50% of the individual health plans that are currently being sold in the marketplace do not meet the standards of Obamacare to be sold in 2014. The reason for this is because the Affordable Care Act (ACA) sets new minimums for the basic coverage every individual health care plan must provide effective on renewals on or after January 1, 2014.
About 15 million Americans (or about 6% of non-elderly adults) currently have coverage in the individual health market. Beginning in the fall of 2013, they will be able to shop for and enroll in health insurance through state-based exchanges (aka SHOP or The Exchange) with coverage taking effect in January. By 2016, it is projected that around 24 million people will get their insurance through the exchanges, while another 12 million will continue to obtain individual coverage outside of the exchange.
Beginning in 2014, nearly all plans, both group and individual, will be required to cover an array of “essential” services regardless of if they are purchased within the exchange or not. These “essential” services will include medication, maternity, and mental health care. Many individual plans do not currently offer these benefits.
What will happen to the plans that do not meet the new minimum standards? They will more than likely disappear and you will not be allowed to renew your existing coverage on the plan you currently have. A handful of existing plans will be grandfathered in, but the qualifying criteria for a grandfathered plan is hard to meet. In order for your existing individual plan to be considered “grandfathered”, (1) you have to have been enrolled on this plan before the ACA was passed in 2010 and (2) the plan has to have maintained fairly steady co-pay, deductible and coverage rates until now.
Many insurers in the individual marketplace have already acknowledged that the majority of their existing individual plans do not meet Obamacare standards for 2014 and they are currently working to ready new product lineups for 2014.
In the future, consumers buying individual plans will be able to choose between four levels of coverage: platinum, gold, silver, and bronze.
Platinum plans will carry the highest premiums but will offer the lowest out of pocket expenses, with enrollees paying no more than 10%, on average. At the other end of the spectrum are the bronze plans, which will have the lowest monthly premiums but will have higher deductibles and copayments totaling up to 40% of the out of pocket costs on average.
Starting also in 2014, all Americans will be required to carry health care coverage or face fines. Those penalties will start at $95 per adult or 1% of the adjusted family income, whichever is greater, and will escalate in later years.
Individuals will annual incomes of up to 400% of the poverty line (or roughly $45,000 for an individual and about $92,000 for a family of four) will get federal subsidies to help defray the premium costs.
Most individual plans sold next year, even the lowest level bronze plans, are likely to charge higher premiums than today’s most “bare-bones” individual insurance plans. Many consumers feel the costs will be offset by having lower out of pocket costs and more comprehensive coverage than their current “bare-bones” plan offers.
In today’s marketplace, with deductibles of $10,000, an individual can buy a policy and then when they get sick, they may go broke because the policy leaves them with such a high level of out of pocket expenses to pay. Many insurance industry experts feel, however, that consumers may now wind up with more coverage–and higher monthly costs– than they want. As a result, some individuals may just choose to simply pay the fine instead of obtaining health insurance coverage they will not use or can not afford.