New Federal Health Reimbursement Proposal Adds New Variables to State Health Insurance Markets

In response to President Trump’s Executive Order promoting health care choice and competition, the departments of the Treasury, Labor, and Health and Human Services have proposed a new regulation that provides more flexibility over employer-funded health reimbursement accounts (HRAs).


A health reimbursement account (HRA) is an IRS-approved, employer-funded personal health benefit that reimburses employees for out-of-pocket medical expenses and individual health insurance premiums.


The new rule opens two new avenues for employers to provide benefits to their employees:

  • An integrated HRA allows employers to give employees reimbursements that can be used to purchase coverage through individual insurance markets.
  • A limited benefit HRA specifically permits employees to purchase limited benefit plans, such as vision, dental, long-term care, or short-term plans.

The federal agencies predict the rule’s changes will have significant impact on insurance markets, adding 10.7 million people to the individual market and shifting 6.8 million out of group markets. Comments on the proposal are due Dec. 23, 2018, and can be submitted here.

HRAs allow both large and small employers to provide pre-tax dollars to their employees specifically to cover health expenses. Historically, employers were not limited in the amount they could make toward the HRA, and employees could use the funds to pay for qualifying health expenses, including health insurance premiums. In some cases, employers could provide HRAs in lieu of health insurance, giving employees discretion to either use the money to purchase insurance or to pay directly for health care benefits or services.

When passed in 2010, the Affordable Care Act (ACA) guaranteed coverage of certain benefits and provided spending protections to many consumers by establishing requirements for insurance policies sold in individual and group insurance markets. These requirements included a prohibition on annual and lifetime limits on coverage and no cost-sharing on preventive services. Acknowledging that HRAs were operating as a de facto health insurance plan for some, the ACA and the Internal Revenue Service designated HRAs as a form of group coverage, which subjected HRAs to the ACA’s requirements . In effect, this negated the ability of employers to offer an HRA without also offering a fully ACA-compliant insurance policy.

CURES Act Opens HRA Opportunities

A little known provision of the 21st Century Cures Act added some flexibility to HRA policies by creating a new type of pre-tax contribution that employees could use to purchase health insurance, called Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). Through QSEHRAs, employers with fewer than 50 employees that do not offer group coverage can deposit up to $4,950 for an individual and $10,000 for a family (adjusted by inflation) annually into eligible employee’s accounts.[1] Employees can use the funds to purchase health coverage and must prove they have enrolled in a plan with minimum essential coverage (MEC)[2]. Under the law, QSEHRAs are explicitly not defined as group coverage, so they are exempt from ACA requirements. By mandating that employees have MEC, the law guarantees that QSEHRA recipients have ACA-compliant coverage.


Determining affordability under QSEHRA

The law includes strict parameters so employees do not inadvertently receive double benefits (double-dipping) in the form of receiving both the tax-benefitted QSEHRA dollars and tax credits available through the health insurance exchanges. If the amount given through the QSEHRA would make coverage “affordable” for an employee, then the employee would not be eligible for any premium tax credit (PTC).

However, if the QSEHRA is not sufficient to make coverage affordable, the employee would receive APTC minus the amount of the QSEHRA. Coverage is deemed affordable if the premium for a standard plan available to the employee is less than 9.5 percent of the employee’s income. Standard plans are identified as the second-lowest cost, silver-level health plan available to the individual through an insurance exchange.

In practice, this affordability threshold has significant shortcomings. First, PTCs are indexed so that eligible individuals (those earning from 100 to 400 percent of the federal poverty level) only pay as little as 2 percent of their income for premiums (up to 9.5 percent as their income increases). Therefore, a universal 9.5 percent threshold puts lower-income individuals at risk of significant more expense for coverage than they would have paid with a PTC. Second, the affordability calculation does not adjust for family size and related changes in premium costs or QSEHRA contributions, potentially setting families up for significant benefit losses if premium costs for the family are much larger than the premiums for individual coverage.


The program also includes a complicated affordability calculation designed to prevent employees from receiving a double tax incentive in the case of employees who would be eligible for premium tax credits (PTC) to purchase coverage through a health insurance exchange and a QSEHRA. Complex requirements and concerns over the affordability calculation have led to minimal uptake of this option across employers.

Proposed Rule Adds New Flexibility to Use Traditional HRAs to Purchase Coverage

The proposed rule creates a new designation of HRAs so HRAs can be exempt from qualifying as group health coverage — called the “integrated HRA.” Similar to QSEHRAs, employers may deposit funds in an integrated HRA that employees can use to purchase health insurance and participating employees must enroll in individual insurance coverage — meaning non-group coverage sold on the individual market,[3] which excludes short-term, limited duration insurance. Different from QSEHRAs, this program is open to both large and small employers and there is no requirement about the level of employer contribution [4]

The rule also includes several requirements employers must meet to offer this program. Specifically, employers:

  • Must offer the same arrangement to all employees of the same class;
  • May not offer both a group insurance plan and the integrated HRA to members of the same class (but could offer different benefits to difference classes); and
  • Must provide a notice to employees that the HRA could affect their eligibility for PTCs.

These requirements are designed to limit discrimination by ensuring that employers offer similar benefits to similar types of employees. However, employers may vary the amount of HRA given to employees based on age and household size, recognizing the increased costs employees may face in purchasing coverage for a household or due to the age of recipients. The rule also allows employers to use these funds to set up Section 125 cafeteria plans, which enable employees to contribute their own pre-tax funds toward premiums on top of the employer contribution.

The new option could prove to be attractive to employers to save administrative expenses in terms of the human resource costs of selecting and administering coverage for employees. Additionally, employers are facing escalating costs of group coverage—the average annual premium for employer-sponsored coverage was $6,368 in 2017. In contrast, the annual premium for a benchmark plan purchased on the individual market was $4,308.

Integrated HRAs, APTCs, and Health Insurance Exchanges

Employees receiving an integrated HRA may shop for individual coverage either on or off a health insurance exchange. Exchanges provide these employees useful shopping tools like cost calculators, provider directories, in-person assistance networks, and other services that aid consumers in making coverage selections. Such tools may be especially important for employees who are purchasing coverage on their own for the first time, such as those who were previously accustomed to having a group plan selected and managed by their employer. However, if an employer opts to offer a Section 125 plan, federal law prohibits the use of those funds to purchase coverage for exchange coverage. Anyone who chooses to increase his or her buying power by supplementing an employer’s HRA contribution with a personal, pre-tax contribution could only purchase an off-exchange product.

Importantly, employees who receive an integrated HRA would not qualify for premium tax credits (PTC). Generally, any employed individual is not eligible for PTC if his or her employer offers coverage that is considered “affordable” and provides “minimum value.”[5] The rule applies a similar standard in the case of employees offered integrated HRAs. The affordability and minimum value standard raise questions about the value of these new plans for some employees, especially those who would have been eligible for PTC, (e.g., individuals who earn between 100 to 400 percent FPL or $12,140 to $48,560). The integrated HRA and PTC programs use different standards in considering how income, household size, and scope of benefits (actuarial value) affect eligibility. The net effect is that in almost every circumstance, a PTC-eligible individual would have been better off receiving PTC versus the integrated HRA.


Affordability of Integrated HRAs vs. Premium Tax Credits

Scenario 1: Income between 100 to 400 percent of FPL. The rule deems that the integrated HRA would be considered affordable if it provides sufficient funds so an employee would pay no more than 9.56 percent of income for a benchmark plan (this rate applies to 2019 and is adjusted annually for inflation). For an individual earning up to 200 percent of FPL, or $24,280 per year, this means the individual would have to pay at most $2,321 per year, or $193 per month for coverage for it to be considered affordable. However, that person would only be required to pay 6.54 percent of income to purchase a benchmark plan at $132 per month.

Scenario 2: Different definitions of benchmark. Individual market plans are rated as Bronze, Silver, Gold, or Platinum depending on how “rich” their benefits are (how much coverage a plan provides and at what level of cost-sharing). Typically, the second-lowest cost Silver (SLCS) is considered the benchmark for affordability determinations including PTC calculations and the QSEHRA program. However, the rule proposes basing affordability of the integrated HRA on the lowest-cost Silver (LCS) level insurance plan available to an employee on an exchange. Operationally, this could cause challenges for exchanges, employees, and employers in trying to assess eligibility based on different benchmarks. In addition, the difference between LCS and SLCS can vary greatly based on where a plan is sold — from $0 in Polk County, Florida, to $490 in Bryan County, Oklahoma (based on premiums for a 40 year-old non smoker). As a result, the threshold for the value of coverage received under the integrated HRA could be significantly lower for employees in counties with wide variation between Silver plans than what they could have purchased if given their PTC.

Scenario 3: Consideration of household size. Under current law, affordability of employer coverage is calculated based on how much an employee would pay for coverage as an individual, but does not allow for adjustments based on household size. Known as the “family glitch,” the calculation disqualifies many households from receiving PTCs even though the group health coverage offered to the employee would not be affordable based on the premium’s cost to the entire family. The proposed rule applies this same standard in the case of integrated HRAs. In the case of individuals earning 200 percent of FPL, they could find coverage at the $132 rate, but they would not be allowed to exempt themselves from the integrated HRA, even if the cost to purchase coverage for their family exceeds $132.


 

Employees offered an HRA would want to determine if they qualify for PTC or if the HRA was an affordable option. The rule gives the exchanges primary responsibility for verifying this eligibility. Acknowledging that the exchanges use an estimated projection to determine income, which could be different from the real-time income reported by the employer, the rule includes a safe harbor provision to protect employees determined eligible for PTCs by the exchange, but whose actual income at the end of the year would have disqualified them from receiving PTCs. The rule also identifies a new special enrollment period that would be triggered by an employee who newly receives this HRA, such as a new employee who starts coverage mid-year or an employer that schedules a coverage year that is different than the calendar year, which is the typical standard for coverage purchased on the individual market. Collectively, these requirements could mean significant changes for the exchanges, which will need to update eligibility and systems and invest in other resources, such as consumer outreach, to ensure they can appropriately educate and serve consumers under this new program.

Limited Excepted Benefit HRAs

The rule also creates a second HRA option that would allow employers to offer an HRA that can be used to purchase limited excepted benefits, such as dental, vision, or long-term care benefits. Under this option, employers may place up to $1,800 per year in the HRA (indexed to inflation). Employers can only provide this option if:

  • The employer offers group health coverage (though employees are not required to enroll in this coverage);
  • The benefits covered by the HRA are limited in scope (e.g. dental, nursing, etc.), including short–term, limited-duration plans
  • The HRA does not reimburse premiums for individual coverage, a group health plan, or Medicare B or D; and
  • The option is made available to all similarly-situated employees.

Unlike the integrated HRA that requires coverage through an ACA-compliant plan, limited benefit HRAs allow for the purchase of short-term plans that are not subject to the ACA’s consumer protection requirements. A recent rule issued by the Trump Administration has opened new avenues for short-term plans to be sold as a coverage alternative for consumers. The rule estimated that the average short-term plan cost only $124 per month in 2016. In comparison, the average monthly premium for an employer-based plan was $508 per month. This cost difference might prove attractive particularly to employees with limited coverage needs. There is potential that this option could draw these individuals out of the group’s insurance pool, worsening the risk mix and escalating costs of the employer sponsored plan.

Considerations for Markets

In offering new options for employers and employees, this rule may significantly affect the composition of the individual and group markets in states, raising a series of questions for state regulators as they consider potential implications of this rule. Questions include:

  • Will this rule spur changes to states’ individual and group markets? What will this mean for the risk mix of each? How could this affect costs and premiums in each market?
  • What support will be needed if a greater number of consumers are driven to the individual market? Should states leverage current resources (exchanges, brokers, navigators) to ensure consumers who are new to the individual market have access to resources to make informed coverage choices?
  • Should a state consider regulation of short-term plans accessible under the limited benefit HRA to ensure that consumers are guaranteed certain protections in the case of catastrophic events?
  • How will multiple new programs (e.g., QSEHRA, integrated HRA, Section 125, limited benefit HRA) impact employers, consumers, and health plans, exchanges and insurance regulators?

NASHP will continue to monitor this issue as states debate these and other questions and track comments made on the proposed rule through Dec. 28, 2018.


[1] Employers are allowed to exclude certain individuals from these arrangements including: (i) employees who have not completed three years of service; (ii) employees who have not attained age 25; (iii) part-time or seasonal employees; (iv) employees covered through a collective bargaining agreement; and (v) employees who are nonresident aliens and who receive no earned income from the employer.

[2] Minimum Essential coverage includes government- sponsored coverage (e.g., Medicare, Medicaid, TRICARE, etc.), an employer-sponsored plan, and plans sold on the individual insurance market (including through the health insurance exchanges),

[3] All plans sold on the individual market are in compliance with ACA requirements with the exception of grandfathered plans, or plans in existence prior to the ACA that are not required to meet those requirements. Grandfathered policies are only be accessible to employees that had maintained continuous enrollment in that policy since March 2010—meaning only a limited number of individuals would be affected by these exceptions.

[4] The only exception includes grandfathered plans, or plans in existence prior to the ACA that are not required to meet ACA requirements. Grandfathered policies are only be accessible to employees that had maintained continuous enrollment in that policy since March 2010—meaning only a limited number of individuals would be affected by these exceptions.

[5] Policies prohibiting PTC were intended to encourage and maintain employee participation in group markets and to ensure that individuals did not receive “double” benefits by both receiving coverage purchased through pre-tax dollars and an additional federal tax credit to purchase coverage.