On June 13, 2019 the Department of Health and Human Services, Department of Labor and Department of the Treasury released final regulations that create new healthcare coverage options for employers and employees. https://www.federalregister.gov/documents/2019/06/20/2019-12571/health-reimbursement-arrangements-and-other-account-based-group-health-plans

The new coverage options come in the form of two new types of health reimbursement arrangements (“HRAs”), one which allows employers to reimburse employees for medical expenses including expenses for health insurance purchased on the individual market (an “Individual Coverage HRA”) and another that allows employers offering a traditional group health plan to reimburse employees for medical expenses even if the employee does not enroll in the traditional group health plan offered by the employer (an “Excepted Benefit HRA”). These types of HRAs were previously unavailable because they were deemed to violate the “market reform” provisions of the Affordable Care Act (“ACA”) including the prohibition on annual and lifetime dollar limits on essential health benefits and the first dollar coverage requirements for preventive care services.

Individual Coverage HRAs

Individual Coverage HRAs provide an additional option to employers seeking an alternative to offering traditional group health coverage to employees: coverage under an Individual Coverage HRA which employees can use to purchase (and receive reimbursement for) health coverage on an individual market. If certain conditions are met, payments to employees from the HRA will receive the same tax-favored treatment as contributions to a traditional group health plan.

Individual Coverage HRAs are available to employers of all sizes, including Applicable Large Employers, who can avoid penalties under the employer mandate provisions of the ACA so long as they contribute a sufficient amount to the HRA for the offer of the HRA to be considered “Affordable” under ACA rules[1].

In the event the amount contributed to the Individual Coverage HRA by the employer is insufficient to cover 100% of the cost of an employee’s health insurance coverage purchased on the individual market, the employee can use pre-tax dollars to cover the difference so long as: (1) the employer offers a salary reduction arrangement under a cafeteria plan to cover the difference; and (2) the individual health insurance coverage is not purchased on an Exchange.

Individual Coverage HRAs must satisfy all of the following conditions:

• The Individual Coverage HRA must require that the employee and any covered dependents enroll in individual health insurance coverage and must substantiate their enrollment in such coverage.
• If the employer offers an Individual Coverage HRA to a particular class of employees, the employer may not also offer a traditional group health plan to the same class of employees (subject to an exception for new hires).
• If the employer offers an Individual Coverage HRA to a particular class of employees, the HRA must be offered on the same terms to all participants within the class (subject to certain exceptions related to carryovers, family size, employee age, former employees and new hires).
• The Individual Coverage HRA must allow an employee to opt out of coverage at least once with respect to each plan year; and
• The employer must provide a written notice to each employee that includes a description of the HRA, notice of the right of the employee to opt out of coverage and a description of the availability of the premium tax credit if the participant opts out and the HRA is not considered affordable under the ACA rules.

[1] The Internal Revenue Service has stated that it will provide more information about how the employer mandate applies to Individual Coverage HRAs in the near future.

Excepted Benefit HRAs

Excepted Benefit HRAs allow employers to supplement an existing traditional group health plan with an HRA to help cover the cost of copays, deductibles and other non-covered expenses. Unlike other HRAs, an Excepted Benefit HRA may be used to reimburse an employee’s medical expenses even if the employee declines to enroll in the traditional group health plan offered by the employer (or in any other coverage). In addition, an employer may also use an Excepted Benefit HRA to reimburse an employee for certain qualified medical expenses, including premiums for vision, dental and short term limited duration insurance. An Excepted Benefit HRA must satisfy certain conditions, including the following:

• The annual HRA contribution is limited to $1,800 per year (indexed for inflation beginning in 2021);
• The HRA must be offered in conjunction with a traditional group health plan (although the employee is not required to enroll in the traditional plan);
• The HRA cannot be used to reimburse individual health insurance premiums, group health insurance premiums (other than COBRA), or Medicare Premiums; and
• The HRA must be uniformly available to all similarly situated individuals (as defined under the Health Insurance Portability and Accountability Act, which generally permits bona fide employment-based distinctions unrelated to health status).

Employers can begin offering Individual Coverage HRAs and Excepted Benefit HRAs beginning January 1, 2020. Employers interested in offering an Individual Coverage HRA or an Excepted Benefit HRA should ensure that the HRAs comply with the applicable conditions set forth in the regulations.