New Regulations Make Drastic Changes to HRA Rules!
On October 23, 2018 the tri agencies (DOL, Treasury, and HHS) published much anticipated proposed regulations regarding HRAs.
The proposed regulations would make drastic changes to the rules currently applicable to HRAs offered to active employees. Under the proposed regulations, employers will be once again able to establish HRAs for active employees that reimburse the employee’s premiums for major medical insurance purchased in the individual market, subject to certain conditions. In addition, employers will be able to set up non-integrated HRAs, that reimburse an employee’s general medical expenses subject to certain conditions. The following is a brief summary of the new proposed rules. More details will follow after we have digested the rules. NOTE: The regulations address the impact of certain Health Insurance Reforms of the ACA on HRAs. Those reforms did not have an impact on HRAs that only provide excepted benefits (dental, vision) and HRAs covering only former employees (e.g. retiree HRA). Consequently, this guidance does not apply to excepted benefit and retiree only HRAs.
The proposed regulations are not effective for plan years that begin before January 1, 2020.
Premium Reimbursement HRA: An employer of any size may establish an HRA that reimburses the employee’s premiums for major medical insurance purchased in the individual market (including the Exchange) provided that the following requirements are satisfied:
- The employer does not offer any other traditional coverage (i.e. major medical coverage) to the employee
- The employee and all covered dependents are enrolled in major medical coverage purchased in the individual market and the plan requires substantiation of that fact both initially and when expenses are submitted for reimbursement (employee attestation appears to be sufficient)
- The HRA must be offered to all employees within classes prescribed in the regulations and the HRA must be offered on the same terms to everyone in that class. Benefits may vary among a class only by age and family size. The classes identified in the regulations are:
- Full-time (as defined in accordance with Code Section 105 or 4980H)
- Part-time (as defined in accordance with Code Section 105 or 4980H)
- Seasonal (as defined in accordance with Code Section 105 or 4980H)
- Employees subject to a collective bargaining agreements
- Employees subject to a waiting period
- Non-resident aliens with no US source income
- Employees under age 25
- Employees whose principal place of employment is in the same rating area
- A “QSEHRA”-like Notice must be provided 90 days prior to the start of the plan year or prior to the effective date of coverage if the employee becomes eligible after the start of the plan year.
- Employees must be allowed to opt out and waive benefits at least annually.
Employers may offer traditional health coverage to one class and a Premium Reimbursement HRA to another class without running afoul of the new guidance. Also, premium reimbursement HRAs offered to different classes may vary as long as the requirements are satisfied within each class.
In a rather surprising twist, the employer may also allow participants in the Premium Reimbursement HRA to pay the premium difference for non-Exchange coverage with pre-tax salary reductions so long as the “supplemental” cafeteria plan is offered to all employees in the class on the same terms. NOTE: the guidance does not go so far as to permit cafeteria plans to allow employees to pay the premiums for major medical insurance outside of this Premium Reimbursement HRA but they do request comments as to whether they should permit that.
The Premium Reimbursement Arrangement does qualify as MEC and will allow applicable large employers to avoid the 4980H(a) tax (aka the “sledgehammer”) and will also be treated as minimum value for purposes of the 4980H(b) tax (aka, the tackhammer) if the coverage is affordable under Code Section 36B. The coverage is affordable if the difference between 1/12 of the annual HRA contribution and 1/12 of the premium for the lowest cost silver plan is less than the applicable percentage (e.g. 9.66%) of the employee’s household income.
The DOL is also issuing guidance clarifying that even though the Premium Reimbursement HRA may be subject to ERISA, the individual market policies paid for by the HRA will not be if requirements similar to the current voluntary plan safe harbor are satisfied. For example, the employer cannot participate in the selection of the policies offered through the plan.
The current guidance regarding reimbursement of Medicare B and D premiums appears to be largely unaffected by these proposed regulations; however, it is worth noting that the agencies did not take the opportunity to codify the Medicare premium reimbursement guidance in Notice 2015-17—leaving open the possibility that the 2015-17 guidance will go away.
Non-integrated HRA: An employer may also offer to employees who are not offered a premium reimbursement HRA a non-integrated HRA that reimburses general medical expenses, COBRA or other continuation coverage premiums, and excepted benefits (including excepted benefit premiums). Such an HRA is permissible, and will qualify as an excepted benefit, subject to the following conditions:
- The maximum annual contribution is $1800 adjusted for inflation (does not include carry over amounts which may be unlimited);
- The employee must also be offered traditional health coverage from the same employer but the employee does not have to enroll in that coverage (this is similar to the rule for excepted benefit Health FSAs);
- The employee cannot also be offered a Premium Reimbursement HRA
- The terms and conditions must be the same for all “similarly situated” classes of employees.
So, if this guidance is finalized, we will have 6 different types of HRAs:
- The “2013-54 HRA”s that are integrated with other group health plan coverage;
- The Premium Reimbursement HRA described above
- The non-integrated HRA described above
- QSEHRAs (although it remains to be seen what value the QSEHRAs would offer in light of the flexibility provided by the proposed regulations).
- Dental/Vision HRAs
- Retiree Only HRAs.