A new opportunity for employers to shift their health care strategies several steps closer to a pure "defined contribution" model may be coming closer to reality. Whether it's worth seizing or not is an entirely different question and depends on your philosophy and circumstances.
Late last fall, several federal agencies — including the IRS and U.S. Department of Labor (DOL) — published a lengthy "notice of proposed rulemaking" describing two reimagined versions of the Health Reimbursement Arrangement (HRA). Various experts have since weighed in with detailed comments, which were generally favorable though replete with recommended technical changes and requests for clarification on multiple provisions.
As proposed — and no doubt there will be changes — the regulations would allow employers to deploy the new HRA types in 2020. In simplest terms, the idea is to let employers that want their workers to enjoy health care benefits, but don't want to offer the plans directly to employees, funnel financial support for individual employee coverage via an HRA. As described by the DOL, the goal is to "give working Americans and their families more control over their health care by providing an additional way for employers to finance quality, affordable health insurance."
The first of the two new HRA categories that would be created by these regulations — individual insurance coverage HRAs (ICHRAs) — would integrate with individual health policies. Currently, HRAs must be integrated with employer-provided health care plans. These arrangements would be the conduit for paying a fixed portion of each employee's policy premium, whether those policies were bought via a Health Insurance Marketplace (commonly known as an "exchange") or otherwise. Under the proposed regulations, there would be no ceiling on employer contributions to an ICHRA.
The ICHRA builds on the more restricted qualified small employer health reimbursement arrangement (QSEHRA). For example, the QSEHRA can be offered only in the same form to different categories of employees, whereas employers would be allowed to offer different versions of an ICHRA to different employee groups. Employers couldn't, however, offer both an ICHRA and a traditional employer-sponsored health care plan to the same category of employees.
As the ICHRA name suggests, employees can't have an "individual insurance coverage" HRA if they aren't covered by an individual health care insurance policy. That is, if they drop their individual coverage, their HRA must be shut down. Also, the regulations ban any form of discrimination in which certain employees are offered ICHRAs, to avoid a scenario in which high-cost unhealthy employees dominate these plans — otherwise known as "adverse selection."
However, employers would have considerable flexibility to segment their employee populations and offer an ICHRA to some segments and not others. Permissible categories include:
One health plan sponsor lobby group, the Employers Council on Flexible Compensation, recommended adding exempt and nonexempt employees to the list of permissible employee segmentation categories.
If your organization is an applicable large employer (ALE) under the Affordable Care Act (ACA), you could still use an ICHRA to satisfy the employer mandate. The fine print on precisely how to do so has yet to be written. But in a subsequent notice, the IRS said it would explain how the ACA's "minimum value" and "affordability" tests will apply. The American Benefits Council is asking the federal government to use the cost of a single silver plan "as a national baseline for an employer's employee population" for these tests.
Suffice it to say that potential savings for your ALE switching from a traditional health plan to an ICHRA would stem not so much from the dollars you contribute for actual employee and dependent individual health insurance premiums. Rather, the savings would come from extracting yourself from the business of designing and administering a traditional health care plan. In addition, as noted, your contributions to employee HRAs could be a fixed amount, allowing you greater predictability for financial planning purposes.
The other new HRA category described in the proposed regulations is a standalone excepted-benefit HRA. This mouthful refers to an HRA that wouldn't be integrated with any other health care plan and could be used to reimburse employees for purchases of so-called "excepted benefits." These include health-related services that aren't core benefits required under the ACA, such as dental, vision and long-term care coverage. Today's standard HRAs, integrated with employer plans, can be used only to pay for basic medical expenses. This new kind of HRA would be limited to $1,800 (to be inflation-adjusted) in annual employer contributions.
As noted, standalone excepted-benefit HRAs can finance a broader range of health-related services than today's HRAs. But they would be subject to three general restrictions. The plan must:
One important question left unclear in the proposed regulations is whether standalone excepted-benefit HRAs could simply be used by employees to pay for certain health care services even if they didn't have any kind of health plan (individual or group).
Despite the many as-yet unanswered questions about these two new kinds of HRAs, the prospect of them coming online soon should give employers much to think about. Clarification and possible changes when the regulations are finalized, however, might come too late in the year for you to jump on board with a new HRA for 2020. Nevertheless, if you're interested in keeping your options open regarding how you might handle the delivery of future health care benefits, keep an eye on these plans.
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