Employer-provided healthcare continues to be the largest source of coverage in the United States. It’s also one of the most appreciated employee benefits offered. The Trump Administration has issued proposed regulations for the use of Individual Coverage HRAs that some say has the potential to change the world of large-employer healthcare.
Will HRAs replace the traditional employer plan? Will employees view these favorably? Will Individual Coverage HRAs provide a better plan management option for employers? The answers to these questions are critical to the future of HRA plans and employer healthcare as we know it.
In October 2017, President Trump issued an Executive Order directing the Secretaries of the Treasury, Labor, and Health and Human Services to consider how to expand the flexibility and use of HRAs.
In response, on October 29, 2018, these departments announced a proposed regulation that allows employers (in place of their traditional employer plan) to offer an HRA that reimburses premiums for individual market healthcare plans on a pre-tax basis.
HRAs are provided by employers and can be used pre-tax by employees to pay for qualified medical expenses. Under current law, large employers are prohibited from using HRAs to reimburse the cost of premiums for insurance purchased on the individual market. The proposed regulation reverses these rules. The new regulation raised key questions as to how large employers can offer Individual Coverage HRAs in place of their traditional employer plan while satisfying ACA requirements and avoiding penalties.
Since the regulation was released, the IRS has shared additional guidance on how an employer could offer HRAs in place of their traditional plan, while still meeting ACA affordability and offer of coverage requirements.
Individual coverage premiums are commonly based on age bands, resident zip codes and coverage levels purchased. To address these variables, in addition to the three original ACA affordability safe harbors, the IRS is proposing additional safe harbor options to determine affordability and minimum value for these HRAs including safe harbors for calendar and non-calendar year, as well as by work location (versus each employee’s residence).
Employers will need to evaluate the risk of moving employees to the Individual Marketplace or keeping them in a traditional plan. Here are a few important things employers should consider before deciding if the switch is right for them:
How will transitioning to an HRA impact my competitiveness?
Large employers use healthcare benefits as an attraction and retention tool. And, in fact, a Health e(fx) study found that 87 percent of employers offer a more generous plan for their employees than required by the ACA. Many employers may not be willing to eliminate their traditional plan or require employees to go out to the individual market for their insurance, as this change could be viewed as a reduction in benefits by employees.
Plans may be more or less expensive for an employee depending on where employees live, their age, and the number of and unique aspects of insurance options offered locally. For example, a key factor not reflected in the affordability calculation or minimum value, is that a lowest-cost individual marketplace plan may have a narrower network of providers than the traditional employer plan offers.
Will Individual Coverage HRAs be a better value for employers than a traditional employer plan?
At the employer-level, or for a class of employees (such as full-time, part-time and seasonal classes), the Individual Coverage HRA may be a better value than the employer’s group plan. An employer analysis would need to be conducted.
Will Individual Coverage HRAs be easier to administer?
It’s not likely an Individual Coverage HRA would be easier to administer, as ACA requirements create restraints. While large employers would no longer need to oversee their own group plan, to comply with the ACA, they will need to:
- Establish a formula for HRA amounts
- Create (or buy) a system to help verify employee (and dependent) enrollment and reimbursement from the HRA, and
- Monitor affordability of individual market plans in the states where employees work/reside.
With a traditional group plan, the employer has influence with its Insurer or Third-Party Administrator. If service is poor, they can choose to go elsewhere. This leverage would diminish with an Individual Coverage HRA.
In addition, the employer health plan is often a cornerstone of an employer wellness program. Employers would lose this connection with an Individual Coverage HRA plan.
In summary, while Individual Coverage HRAs may be an option for small employers looking to offer some level of coverage, for many employers the administrative aspects of setting up an HRA and adhering to ACA employer requirements may be too big of a burden.
For now, the proposed regulations are not a game changer for employers but certainly worth keeping an eye on in the coming years.
Given the complex nature of the proposed regulations, the subsequent IRS guidance, and the significant number of comments, there likely will be changes to the rules in any final regulations.
These changes are proposed to be implemented January 1, 2020, and have no immediate impact to ACA compliance or reporting requirements, or to what employers can do for 2019. Health e(fx) continues to analyze the regulations as they are released and keep our clients well-informed.
February 27, 2019