Health reimbursement arrangements are arrangements in which an employer reimburses employees for medical costs incurred by the employee or individual health insurance premiums for health insurance procured by the employee. When the Patient Protection and Affordable Care Act, or ACA, was enacted in 2010, HRAs were viewed as violating the ACA by putting impermissible limits on health care coverage. To help preserve HRAs, the 21st Century Cures Act, enacted on Dec. 13, 2016, created new qualified small employer health reimbursement arrangements to permit small employers to continue to offer HRAs if certain conditions were met. Now, based on regulations finalized on June 20, 2019, by the Internal Revenue Service, the Department of Labor, and the Department of Health and Human Services, starting in 2020 two new forms of HRAs may be offered to employees: individual coverage HRAs and excepted benefit HRAs.
Qualified small employer health reimbursement arrangements are available only to employers that are not applicable large employers under the ACA, i.e., it applies to employers having fewer than an average of 50 full-time or full-time equivalent employees for the prior year. The employer must not otherwise offer a group health plan. The QSEHRA must be funded exclusively with employer contributions, with none from the employee.
The QSEHRA must be offered to all full-time employees who have completed at least 90 days of service and are at least 25 years of age, with certain exclusions. There are annual limits on QSEHRA contributions, adjusted for inflation. For 2019, the limits were $5,150 for single employees, and $10,450 for families; for 2020, the limits are $5,250 for single employees, and $10,600 for families. For the reimbursements not to be taxable to the employee, the employee must provide proof that the employee and any included family members have obtained minimum essential coverage (as defined in the ACA) from a health insurance exchange or other third-party provider. The employer must provide a notice to employees that includes the amount of the employee’s benefit, a statement that the benefit must be disclosed to any health insurance exchange if the employee is claiming advance premium tax credits, and a warning of possible tax penalties if the employee and any applicable family members do not have minimum essential coverage.
Individual coverage HRAs
An individual coverage HRA reimburses employees for their medical care expenses, and in some cases family member expenses, up to a maximum dollar amount that the employer makes available each year. There is no minimum or maximum amount. It is available to employers of any size, and employers may offer a group health plan or ICHRAs to different classes of employees. The employer may allow unused amounts to roll over to the next year. Employees must enroll in individual health insurance (or Medicare) for each month covered by the ICHRA. The coverage can be through an exchange or offered outside the exchange.
Employers who offer an ICHRA must offer it on the same terms to all individuals within a class of employees, except that the amounts offered may be increased for older workers and for workers with more dependents. Classes of employees may include, among other categories, full-time employees, part-time employees, employees working in the same geographic location, seasonal employees, employees covered by a particular collective bargaining unit, salaried employees, hourly workers, and temporary employees of staffing firms. A minimum class size rule applies if the employer offers a traditional group health plan to some employees and an ICHRA to other employees.
The employer must provide a notice to eligible participants regarding the ICHRA and its interaction with the premium tax credit. The employer must also have reasonable procedures in place to substantiate that participating employees and their families are enrolled in individual health insurance or Medicare.
Excepted benefit HRAs
Excepted benefit HRAs work something like flexible spending accounts without the same dollar limits or rollover restrictions. Employers would offer them in addition to a traditional group health plan to help employees pay the cost of co-pays, deductibles or non-covered expenses. They must be uniformly available to all similarly situated individuals. However, employees could use an EBHRA even if they choose not to enroll in the group plan, e.g., if the employee is part of a spouse’s group plan instead or if the employee’s share of the group plan expenses is not affordable.
The annual EBHRA contribution limit for 2020 is $1,800, adjusted for inflation in future years. The EBHRA cannot be used to reimburse individual health insurance premiums, group health plan premiums (other than COBRA), or Medicare premiums. They can be used for dental and vision coverage and for short-term, limited-duration insurance.
Employers were able to start offering ICHRAs and EBHRAs on Jan. 1, 2020. If employers did not take the necessary steps prior to Jan. 1, 2020, they can focus on getting them in place for 2021. Employer contributions to ICHRAs and EBHRAs are deductible to the employer and not taxable to the employee.
ICHRAs and EBHRAs are part of the Trump administration’s plan to try to offer additional insurance options outside of the ACA. Although there are some procedures in place to try to reduce concerns about adverse selection with the use of these plans, some commentators remain concerned that such plans will still tend to leave more of the most health-at-risk individuals in the exchange plans. Health care remains in a state of flux with the constitutionality of the ACA before the Supreme Court once again, the individual mandate under the ACA repealed starting in 2019, and the 2020 fall elections.