By: HUB’s EB Compliance Team
Recently, the Trump Administration has sought to relax restrictions on employers paying for individual health insurance policies. As part of those proposed regulations governing individual coverage HRAs, federal agencies enforcing the Affordable Care Act (ACA) jointly proposed a new type of “excepted” benefit health reimbursement arrangement (HRA). (Note: As further detailed below, “excepted” benefit refers to a specific type of employee benefit program that is except from a slew of federal compliance obligations – including ACA.)
Although the proposed regulations have been described as a further expansion of HRAs, a closer look reveals that they are more limited. Most employers are likely to find the new option lacking practical uses.
What The Proposal Requires
These excepted benefit HRAs are designed to cover limited, so called “excepted” benefits. These are the types of benefits that generally are not subject to ACA, such as vision, dental, long-term care, fixed indemnity, etc. An excepted benefit HRA must meet all of the following:
- Mandatory offer of “regular” coverage: The employer must offer a major group medical group plan in addition to the excepted benefit HRA to those same employees. The employees don’t have to enroll in that plan, but coverage must be offered. Notably, an individual coverage HRA is not a major group medical plan for this purpose, so this excepted benefit HRA is only available to employers that separately maintain a group health plan.
- Applicable funding cap: The amount of reimbursement is limited to $1,800 per year. This amount will be adjusted for inflation starting after 2020. If an employer allows unused amounts to carry over to the following year, those unused amounts do not count against the cap. For example, if an employee has $200 left at the end of a year, he or she could be reimbursed up to $2,000 the following year ($1,800 limit + the $200 from the prior year).
- Restricted spending: The excepted benefit HRA cannot reimburse for individual or group health plan premiums (other than COBRA) or Medicare parts B or D premiums. However, it can be used to pay for COBRA or short-term limited duration insurance. It also, of course, could be used for premiums for excepted benefits, like vision, dental, long-term care, or fixed indemnity insurance.
- Uniform availability: The excepted benefit HRA must be available on the same terms to similarly situated employees. In particular, the employer cannot take an employee’s health status into account. “Similarly situated” employees are those who are in the same job classification, such as full-time, part-time, different geographic locations, union, non-union, and different occupations or even dates of hire or length of service. In other words, the maximum reimbursement, benefits eligible for reimbursement, etc. must be the same for all employees who are similarly situated, but may vary among groups of employees. This “same terms” requirement is supposed to prevent employers from encouraging less healthy workers to drop the employer’s major medical plan in favor of this excepted benefit HRA.
Finally, although not directly addressed in the proposed regulations, HRAs are a form of self-funded plan. Consequently, these HRAs must satisfy the self-funded tax code nondiscrimination testing standards. These HRA rules have been around for over 30 years. They generally prohibit providing better benefits to highly compensated employees.
What to Think About
While this proposed excepted benefit HRA is a potential additional benefit option, it overlaps significantly with existing excepted benefits. For example, under current HRA rules, an employer could offer an HRA that covers dental, vision, and long-term care (including reimbursement of premiums) without the $1,800 cap, without the requirement to offer a separate group health plan, and without the “same terms” requirement. Therefore, for those types of coverage, this excepted benefit HRA is actually more restrictive. Presumably, an employer could offer a separate HRA covering vision, dental, and long-term care and then offer an excepted benefit HRA for the remaining available benefits.
But what are the remaining available benefits? Essentially they are reimbursement of COBRA and short-term limited duration insurance. Neither appears to offer plan sponsors meaningful utility. For example, what if an employee is hired but has not met the employer’s waiting period requirement for its plan? It appears the employer could not use the excepted benefit HRA to pay for all or part of their COBRA coverage from a prior employer. Why? The employee does not satisfy the first requirement above: being offered the employer’s group health plan coverage.
What about using the excepted benefit HRA to subsidize health insurance when employees terminate employment? Well, as we have written previously, there are numerous (and significant) perils to subsidizing COBRA. Plus, the combination of the “same terms” requirement (#4 above) and the existing tax code nondiscrimination rules might require the excepted benefit HRA to be offered more broadly than the employer would like. Finally, $1,800 isn’t much of a subsidy for most COBRA premiums.
As a final note, remember that these are merely proposed HRA rules. We expect that some of these concerns, or additional clarifications, may be addressed as part of the final rule. Moreover, while it does not seem likely that employers will rush to set these up, they should not yet anyway since the final regulations may be different. (Even if finalized, these HRA rules would not likely go in to place until 2020 at the earliest.) Therefore, employers who might be interested in establishing an excepted benefit HRA should wait until additional clarifications are provided.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.