The New HRA: Great Options Mean Great Complexity

In October 2017, the Trump Administration issued an Executive Order instructing Federal agencies to propose rulemaking on several key areas focused on promoting health care choice and competition. The three main aspects of the order included:

  1. Expanded access to Association Health Plans (AHPs)
  2. Expanded availability to Short-Term Limited Duration Insurance (STLDI)
  3. Expanded used of Health Reimbursement Arrangements (HRAs) including the ability to use them to pay for individual insurance coverage

The Rulings

Association Health Plans (AHPs): In June of 2018, The Department of Labor (DOL) released a final rule expanding access to AHPs, although a court found the final rule to be unlawful in March of 2019. The DOL has appealed this ruling leaving the changes to AHPs uncertain for the time being.

Short-Term Limited Duration Insurance (STLDI): In August of 2018, a final rule was released regarding STLDI. This rule was also challenged in court but with a different result. In July of 2019, a federal district court upheld the rule allowing these plans to be sold up to 12 months with renewals extending to a maximum of 36 months. While Federal blocks to STLDI may have been lifted, many states have banned or heavily restricted the use of STLDI, leaving them in limbo in many jurisdictions.

Health Reimbursement Arrangements (HRAs): The final rule focused on HRAs was released in June of 2019 with it going into effect on January 1, 2020. First, what is an HRA? An HRA is a type of group health care plan that allows employers to fund qualified employee medical expenses. Reimbursement of qualified claims are tax-deductible for the employer and tax free to the employee. Unused funds carry over into future years. Qualified expenses are things not covered by the core insurance plan, such as out of pocket costs, before meeting a deductible, or even the coinsurance paid after a deductible has been met. In addition, dental, vision and many over the counter health items are considered qualified expenses as well.

The final rule expands the scope of HRAs in a couple key ways. Let’s examine the opportunity and complexity offered by this expansion.

Individual Coverage HRA

These new plans allow employers to contribute pre-tax dollars for employees to buy an individual health policy. The policy could be an Affordable Care Act marketplace or “exchange” plan (bought on or off the official marketplace). Under the regulations, however, the employee using the HRA funds would not be eligible for premium tax credits (or subsidies). The employee could be eligible for subsidies only if they opt out of the HRA plan and the HRA is deemed unaffordable. Individual Medicare plans may also be covered by those pre-tax dollars, but Short-Term Limited Duration Insurance plans may not.

Out of concern for adverse selection and the gaming of risk pools, the final rule requires that Individual Coverage HRAs must be offered based on class of employee rather than on an individual basis. For example, an employer can decide to have all full-time workers under a traditional group plan and all part-time employees offered the Individual Coverage HRA option; but they cannot selectively offer it on a case by case basis. There is no limit to how much an employer can contribute to the plan and employers do have the option to offer higher amounts for older employees or those with more dependents. In addition, if individual insurance premiums are higher than the HRA contribution amount, it is possible to set up a cafeteria plan where an employee could pay for the balance of the premium on a pre-tax basis.

Excepted Benefit HRA

The Excepted Benefit HRA is a new plan that allows employers that offer a traditional group health plan to provide an additional pre-tax amount of $1,800 for certain qualified expenses. These expenses could include vision and dental premiums, cost for COBRA, long term care, and in some cases, the cost for STLDI. Employees do not need to be part of the group health plan to be eligible for these HRAs. However, Excepted Benefit HRA dollars cannot reimburse premiums for individual coverage, group coverage or Medicare plans.

Where do we go from here?

Overall, the new HRA rules provide employers with more flexibility to how they offer and pay for health coverage for their workforce. Along with the flexibility comes complexity as well. The discussion above is designed to provide a taste of the effects of the regulations; the detail creates challenges to implementation. We have simplified here as the final HRA rule is 140 pages long! It’s critical that employers consult with their health plan, TPA, broker, consultant, legal counsel, compliance department, etc. when establishing these plans to ensure proper compliance. It is vital that enrollment and downstream systems implement the changes correctly and follow the new complex rule to a ‘T.’ As we know, health care is continually changing. Systems need to be nimble to accommodate these rule changes without complicated and costly overhauls. We will continue to keep ahead of these changes and ensure that our product rules accommodate changes and that we consult with our clients on downstream impacts.