Final Regulations Provide Health Reimbursement Arrangement Options

Final Regulations Provide Health Reimbursement Arrangement Options

The Internal Revenue Service (IRS), in conjunction with the Department of Labor (DOL), and Department of Health and Human Services (HHS), have recently issued final rules and regulations that allow the integration of health reimbursement arrangements (HRAs), and other account-based health plans with individual health insurance or Medicare if certain conditions are met. 

The new regulations create two new types of HRA accounts: 1.) individual coverage HRA, which can be used by employers of any size, and 2.) excepted benefit HRA, which allows an employer to provide up to $1,800 in cash per year to help employees pay for supplemental coverage and cover out of pocket health care costs such as health plan deductibles.

HRAs in General
HRA accounts are a type of account-based group health plan funded solely by employer contributions that reimburse an employee solely for medical care expenses incurred by the employee up to a maximum dollar amount for a coverage period.  Reimbursements also apply to the employee’s spouse, dependents, and children under the age of 27.  Reimbursements under these types of arrangements are excludable from an employee’s income and wages for Federal income and employment taxes.   Amounts remaining in an HRA account at the end of the year may be used to reimburse medical expenses incurred in later years, depending on the terms of the HRA.

Individual Coverage HRAs
The individual coverage HRA account can be used to reimburse premiums for individual health insurance chosen by the employee, promoting employee and employer flexibility while maintaining the tax-favored status for employer contributions towards a traditional group health plan.  Individual HRA accounts may be beneficial to businesses of any size and help them focus on serving their customers instead of managing complex health benefit designs.  Individual HRA accounts will likely increase worker options for health insurance coverage, allowing them to shop for plans in the individual marketplace that best suit their needs.

The employer can allow unused amounts in any year to rollover from year to year, as long as employees enroll in individual health insurance (or Medicare) for each month the employee or family member is covered by the individual HRA. Rollovers do not apply to short term, limited duration insurance, or coverage consisting solely of dental, vision, or similar expected benefits.

Employers must offer individual HRA accounts on the same terms to all individuals within a class of employees, with the exception that the amounts may be increased for older workers and workers with more dependents.  An employer that does not provide group health insurance to its employees may offer an individual HRA that will satisfy the requirements of minimum essential coverage if certain conditions are met.

An offer of an individual coverage HRA counts as an offer of coverage under the terms on the employer mandate.   Generally, whether a large employer that offers an individual HRA to its full-time employees will owe a payment under the employer mandate, will depend on whether the HRA is affordable.  

Excepted Benefit HRAs
Employers may offer excepted benefit HRA accounts in addition to a traditional group health plan to help cover the costs of copays, deductibles, or non-covered expenses.  Excepted benefit HRA accounts generally allow for higher levels of employer contributions than health flexible spending arrangements (FSAs), and can permit rollover of unused amounts from year to year.

Beginning in 2020, excepted benefit HRAs can be used by employees, even if they do not enroll in the traditional group health plan. These excepted benefit HRAs are exempt from many federal health care requirements that do not work well for account-based plans.

There are several requirements to qualify as an excepted benefit HRA:

  1. Contribution is limited to $1,800 per year, beginning with the 2020 tax year (indexed for inflation annually for subsequent years beginning in 2021).
  2. Must be offered in conjunction with a traditional group health plan, although the employee is not required to enroll in the group health plan.
  3. Cannot be used to reimburse individual health insurance premiums, group health plan premiums (other than COBRA), or Medicare premiums. It can be used to reimburse premiums for items such as dental, vision, and short-term limited duration insurance.
  4. Must be uniformly available to all similarly situated individuals.

Effective Date
The effective date of the new regulations is August 19, 2019, and generally applies for plan years beginning on or after January 1, 2020.

Consider Your Options
In addition to these two new HRA options, the traditional Group Health Plan HRA and the Qualified Small Employer HRA (see our blog still remain viable HRA alternatives.

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Article prepared by Matt Flamisch.