If employers could give employees tax free money to buy health insurance on their own, how many would do so?
We’re about to find out.
Late last month, the Trump Administration proposed regulations expanding health reimbursement arrangements (HRAs). The new rule will allow employers to set up HRAs that can reimburse employees for premiums on health insurance they purchase in the individual market.
These regulations are likely to raise questions about employers’ choices of how to provide access to health insurance, and elicit reactions about the fate of the Affordable Care Act (ACA) and whether employers will stop offering employees health care coverage altogether.
While the latter is unlikely, here’s a little background on the lead up to the proposed rule, what’s in it and what it could mean for the role of employer plan sponsorship, the stability of insurance markets and employee access to affordable health insurance.
Where we started: Legislative and regulatory background
Prior to passage of the ACA, employers could reimburse employees who bought individual coverage, but few did. They worried their employees with pre-existing conditions would be denied coverage, or that coverage could be unaffordable, making any program that relied on the individual market a nonstarter.
The ACA brought consumer protections guaranteeing that people with pre-existing conditions could buy insurance, but the Obama Administration prevented employees from being reimbursed for individual market coverage.
In 2013, the IRS ruled HRAs for active employees, on their own, would not satisfy two of the ACA’s group health plan requirements: the prohibition on annual coverage limits on Essential Health Benefits (EHB); and the requirement that group health plans cover certain preventive services at no cost-sharing. Moreover, they ruled the HRA could not be “integrated” with underlying individual coverage that complied with those requirements. Any employer that offered this model could be penalized $100 per employee per day in violation of the rule.
The first sign that Washington began to re-think its position on HRAs came in 2016, when President Obama signed the 21st Century Cures Act into law. The Act created Qualified Small Employer Health Reimbursement Arrangements (QSEHRA). QSEHRAs are a specific type of HRA that small employers can provide to employees who purchase individual coverage. QSEHRAs cannot be offered alongside traditional group coverage and can only reimburse employees on a limited basis: up to $5,050 for individuals and $10,250 for families in 2018. Restrictions on employer size and maximum contributions have impeded uptake of this approach.
President Trump announced his intention to expand HRAs in an executive order published October 12, 2017. He called on the departments of Treasury, Labor, and Health and Human Services to undertake rulemaking to “allow HRAs to be used in conjunction with nongroup coverage” within 120 days after publication of the executive order. While it took more than a year, the departments finally published the HRA proposed rule in late October 2018.
What the proposed rule says
The proposed rule creates two new type of HRAs: (1) an HRA integrated with individual health insurance coverage (an “individual coverage HRA,” or ICHRA); and (2) a stand-alone HRA that would qualify as an excepted benefit (an “excepted benefit HRA,” or EBHRA).1 The rest of this post will be devoted to ICHRAs.
Under the proposed rule, employers can set up an ICHRA to reimburse employees who purchase individual health insurance coverage starting in 2020. If these rules are finalized, this could create the true, but elusive, “defined contribution” model under which the employer subsidy is divorced from the offering of a group health plan.
ICHRAs must meet certain criteria:
- Employees covered by an ICHRA must purchase individual market coverage, such as plans offered through a public exchange or ACA-compliant coverage bought directly from a carrier to receive reimbursement from the ICHRA. Short term coverage may not be purchased, though the departments are seeking comment on whether this should be allowed.
- Employers may not offer an ICHRA and traditional group coverage to the same class of employees; either one or the other may be offered.
- The rule lists the following as different classes of employees: Full time, part time, seasonal, collectively bargained, employees who have not satisfied a waiting period, employees who have not attained age 25, non-resident aliens and employees whose primary site of employment is in the same rating area.
- Employers must offer the ICHRA on the same terms to all employees within a class.
- One exception: Employers may increase their contribution to older employees and employees with dependents who would face higher premiums in the individual market.
- Employers must allow employees to opt-out of an ICHRA once a year and upon termination of employment, verify their employees are paying their premiums and provide a notice explaining how the ICHRA affects eligibility for premium tax credits available through a public exchange.
Employers subject to the ACA’s employer mandate that offer an ICHRA must still comply with the mandate. The IRS has issued preliminary guidance providing for a safe harbor employers can use when determining whether an ICHRA will be deemed to offer “affordable” coverage.2
Like regular HRAs, ICHRAs have no statutory cap on employer contributions, thus allowing substantial flexibility for employers to determine their ICHRA credits based on employee class, business needs and competitive considerations. Unused amounts in an ICHRA may roll over to the following year, and ICHRAs may reimburse any 213(d)-eligible expense, though it’s worth noting that the premiums employees pay for individual coverage are in most cases likely to consume most of their ICHRA credits.
Note that we assume ICHRA contributions will be includible in the calculation of costs subject to the ACA 40% excise tax on high-cost group plans, (known as “the Cadillac Tax”) should it go into effect in 2022 (and this would likely result in a de facto “cap” on the contribution).
The proposed rule allows interested parties 60 days to provide comment. Comments are due by December 28, 2018. The departments will consider each comment, resolve open questions, and draft a final rule for release likely sometime next year.
The departments estimate that 1 million employees will enroll in individual coverage with access to an ICHRA in 2020, with that number growing to 10.3 million by 2024. About two thirds of that group are estimated to come from traditional employer-sponsored group health coverage. The departments predict 800,000 employers will offer ICHRAs in 2024, while suggesting the vast majority of adopters will be small to midsize employers.
The accuracy of these estimates will depend in large part on the attractiveness of the individual market. If the market offers employees reasonable coverage at affordable prices, employers may come to view it as a viable alternative to the group market. If, instead, employees experience double-digit rate increases or are forced to switch plans each year due to carrier exits, employers will likely stay away. Adoption will also depend on how employers and employees view the provider networks offered through individual plans, which are narrower than typical group plan networks.
How employers think of their role in sponsoring group health care benefits will likely influence their uptake of ICHRAs. Employers that invest heavily in health care benefits may find sticking with the group plan model is the best way to reinforce their overall employee value proposition. Employers with certain workforce characteristics, such as low employee tenure, high turnover, or low benefit uptake, may find the ICHRA model proves attractive to employees in terms of flexibility, value and choice while enabling the employer to adopt a true defined contribution approach.
Should the departments’ estimates prove correct, the addition of millions of new customers to the individual market could attract new carriers, lower per person administrative costs and lead to a more stable premium environment. But as noted above, we may only see employer adoption if they find the individual market to be attractive today. This chicken-and-egg dynamic could lead to rapid adoption in more stable markets and limited adoption in others.
With the U.S. government making it clear that the proposed rules cannot be relied upon and key decisions left to be made, employers should take care not to jump to conclusions. We’ll be watching developments closely. If you have questions about how the proposed rule could affect your own company, please contact John Barkett to talk through the implications.
1. EBHRAs would not be subject to the ACA market reforms and would allow out-of-pocket medical expenses to be reimbursed. However, it would not permit reimbursements of premiums for the purchase of individual health insurance coverage or group health coverage. Excepted benefit HRAs must meet certain criteria including: (1) must not be integral part of the plan (but traditional group health plan must also be offered), (2) annual contribution limit of $1,800 (indexed), (3) cannot reimburse premiums for individual health insurance coverage, (4) must be offered to all similarly situated individuals (uses HIPAA definition which is not the same as class of employees for ICHRAs).
2. See, IRS Notice 2018-88, Section III.