Health Reimbursement Arrangements (HRA) have been around for years and are an outstanding benefit to help employees enrolled in an employer’s group health plan pay for their insurance premiums. What happens though when an employee chooses not to enroll in the group plan or when an employer decides they cannot afford to sponsor a health plan? Until recently, employees were left to foot the bill using their own post-tax wages and there was nothing an employer could do to help.

HRA Basics

HRA’s are established by an employer to reimburse its employees for qualified medical expenses (e.g., insurance premiums, long-term care coverage, prescriptions, insulin) resulting from enrollment in their employer-sponsored health plan. An employee’s wages do not include the reimbursed amounts and there are no personal income tax reporting requirements for the employee. Generally, there is no limit to the amount the employer may contribute to an HRA on behalf of employees (with a few exceptions).  The employer determines the amount it will contribute and conveys it to the employees annually. The rules allow employees to carry forward to the next year amounts that remain at the end of a plan year. Employees are often-times issued a debit card for convenience in accessing funds from their HRA.

Agency Action

In 2018 the Department of Labor (DOL), Department of Health and Human Services (HHS), and Department of Treasury (IRS) (collectively “the Agencies”) decided hundreds of thousands of employees needed more choices when it came to their healthcare.  The Agencies worked together to develop additional HRA options that would benefit the masses as opposed to a select few. The Agencies developed proposed regulations and after time for public comments and revisions, finalized the regulations which apply for plan years beginning on or after January 1, 2020. Here is the link to HHS information release.

The Individual Coverage HRA (ICHRA) was created for employees to pay through an employer-sponsored plan for qualified medical expenses resulting from their individual health coverage, whether purchased on or off the Exchange, or for Medicare coverage. Unlike a traditional HRA, if certain requirements are met (such as the voluntary purchase of insurance by the employee, no employer endorsement of any insurance or coverage, and an annual statement that the plan is not covered by ERISA) the ICHRA is not subject to ERISA.  Reimbursements through an ICHRA are not considered taxable income. Employees may even use cafeteria plan reductions to pay any portion of their individual insurance premiums not covered by an ICHRA if the insurance is outside the Exchange.

Also, recently established is the Excepted Benefit HRA (EBHRA). An employer may offer an EBHRA along with a traditional group health plan to employees not also offered an ICHRA, to reimburse medical expenses such as co-pays, deductibles, and other non-covered expenses. While an EBHRA cannot be used to pay group or individual health insurance premiums, it can be used for excepted benefit premiums such as dental or vision coverage. The EBHRA is limited to $1,800 a year.

Employer Considerations

If an employer decides to offer an ICHRA there is some flexibility in its design:

• Classes – employers may differentiate employees by certain classes based on:
  • Full-time or Part-time
  • Same geographic location
  • Seasonal
  • Collective bargaining agreement units
  • Satisfaction of certain waiting periods
  • Non-resident aliens
  • Salaried or Non-salaried
  • Temporary
  • Any one or more combinations of these classes

• Size – The regulations lay out a minimum number of employees that may be in a group if the class is based on full or part-time status, salaried or non-salaried, or geographic location:
  • 10 employees, if fewer than 100 employees
  • 10% of the total number of employees, if 100 to 200 employees, and
  • 20 employees, if more than 200 employees

• Amount – Classes may distinguish between older employees or employees with more dependents by offering increased amounts. Yet the same terms must apply to all employees within each class.

• Notice – The employer must provide a notice to eligible participants about the terms of the ICHRA and how it affects the premium tax credit for the federal income tax return. The notice must include among other things, who is eligible for the HRA, the maximum dollar amount available, who may be covered (family members, etc.), and the plan year. A model notice is available here from the DOL.

• Substantiation Procedures – For the employer to ensure that its employees are actually enrolled in individual coverage or Medicare Part A and B or C and eligible for the ICHRA, the regulations require confirmation of certain information initially and then on an on-going basis. The DOL has created a model “Attestation” for employers to use which is available here.

Getting Started

For an ICHRA implementation date in 2020, the process must begin in 2019. The open enrollment for individual health insurance runs between November 1, 2019, and December 15, 2019. This means that the employer must distribute the notice referenced above to employees eligible for the ICHRA well before November 1 to provide enough time for them to decide whether they wish to participate.