Agencies Expand HRA Availability to Provide Coverage

In response to an Executive Order from President Trump, the DOL, HHS, and the IRS proposed new regulations to expand the use of HRAs to pay for certain medical expenses.  They now have released final regulations that will be published in the Federal Register on June 20, 2019.  The final regulations, which will become effective January 1, 2020, provide for two new types of HRAs.

Excepted Benefit HRAs

The first, and simplest of the new HRA types, can be referred to as an “excepted benefit HRA.”  There are four requirements that must be satisfied under the  regulations for an HRA to qualify as an excepted benefit HRA:

• First, the HRA must not be an integral part of the employer’s group health plan.  However, other group health plan coverage that is not limited to excepted benefits, and not an HRA or other account based group health plan, must be made available by the same plan sponsor for the plan year to the participant.  Note that the employee would not be required to participate in the group health plan, but it must be offered.

• Second, the benefits must be limited in amount.  The  regulations limit the annual benefit to $1,800, to be indexed for inflation after December 31, 2020.  Unused amounts can be carried forward to the following plan year, and such carryover amounts will not count against the dollar limit for that year.  If the plan sponsor provides more than one excepted benefit HRA to the participant for the same time period, the amounts available under all such plans are aggregated to determine whether the benefits are limited in amount, except that HRAs or other account-based group health plans that existed under prior rules, and which reimburse only excepted benefits, are not included in determining whether the benefits are limited in amount.

• Third, only certain medical expenses can be paid from the excepted benefit HRA.  The excepted benefit HRA cannot reimburse premiums for individual health insurance coverage, group health plan coverage (other than COBRA continuation coverage or other continuation coverage), or Medicare Parts A, B, C, or D.  However, the excepted benefit HRA can reimburse premiums for excepted benefits, such as dental or vision coverage or short-term limited duration insurance (“STLDI”).  However, there is a special rule with respect to the reimbursement of STLDI offered to small employers.  Premiums for such policies cannot be reimbursed if the IRS, the DOL and the HHS determine that reimbursement by excepted benefit HRAs has caused significant harm to the small group market in the state that is the principal place of business of the small employer.

• Fourth, the excepted benefit HRA must be made available on the same terms to all similarly situated individuals, regardless of any health factor.  A separate group of participants may be viewed as similarly situated individuals and treated differently from other groups if the difference is based on a bona-fide classification.  While it is a facts and circumstances test, examples could include full time versus part time, different geographic location, membership in a collective bargaining unit, date of hire, length of service, current employee versus former employee, and different occupations.

There are no special notice requirements for excepted benefit HRAs, although they will be subject to ERISA’s disclosure requirements.

Individually Integrated HRAs

Current regulatory guidance prohibits employers from offering HRAs that reimburse employees for the cost of individual health coverage, a practice that was permissible prior to the Affordable Care Act.  The  regulations with respect to this new second type of HRA, which may be referred to as an “individually integrated HRA,” removes that prohibition if the requirements discussed below are satisfied.  At the same time, the regulations are designed to prevent an employer from intentionally or unintentionally discriminating against those with adverse health factors, and to prevent risk shifting by the employer.

• First, the individually integrated HRA must require that the participant and any dependents be enrolled in individual health insurance coverage (other than coverage that consists solely of excepted benefits, but which can include student health insurance) that complies with Sections 2711 and  2713 of the Public Health Services Act (“PHSA”) (annual and lifetime limits and coverage of preventive services, respectively), including grandfathered and grandmothered plans (certain arrangements not compliant with Sections PHSA Sections 2711 and 2713, which HHS has allowed to continue in effect).

• Second, subject to COBRA, if an individual covered by the individually integrated HRA ceases to be covered by such individual health insurance coverage, the individual may not seek reimbursement under the HRA for claims that are incurred after the individual health insurance coverage ceases.  Additionally, again subject to COBRA requirements, if the participant and all dependents covered by the participant’s HRA cease to be covered by such individual health insurance coverage, the participant must forfeit the HRA.  The final regulations clarify that if an individual loses coverage under an HRA because of cessation of individual health insurance coverage, COBRA will not be available with respect to the individual coverage.  However, if coverage is lost under the HRA because of a circumstance that would constitute a COBRA qualifying event, such as termination of employment, COBRA continuation coverage will be available with respect to the HRA itself.

• Third, a plan sponsor may not offer a choice between the Individually Integrated HRA and a traditional group health plan to any participant or dependent.  For this purpose, a traditional group health plan is any group health plan that is not an account-based group health plan, such as a health flexible spending account, or a group health plan that consists solely of excepted benefits.

• Fourth, the participant would need to substantiate compliance with the coverage requirement.  The regulations do not specify any particular procedures; rather they only require that the procedures be reasonable.  The HRA may establish the date by which the substantiation must be provided, although in general, the date must be no later than the first day of the plan year.  For participants not eligible to participate in the HRA on the first day of the plan year, the substantiation must be provided no later than the date that HRA coverage begins.  Substantiation of coverage may be by either a document from a third party showing that the participant and any dependents covered by the HRA are or will be enrolled in individual insurance coverage, or an attestation by the individuals that they are or will be enrolled in individual health insurance coverage, the date coverage began or will begin, and the name of the provider of the coverage.  The HRA can rely on an individual’s attestation unless the HRA, the plan sponsor, or an individual acting in an official capacity on behalf of the HRA, has actual notice to the contrary.  The substantiation requirement also applies to any request for reimbursement during the plan year.  Note, the agencies have developed “model forms” for both substantiating coverage and requesting a reimbursement for medical expenses.

• Fifth, the individually integrated HRA must generally be offered on the same terms to all members of the class.

• • The final regulations provide for 11 different classes (the proposed regulations provided only 9 categories, but the final regulations added salaried/hourly and temporary employees):

• • • full-time employees that can be defined in the same manner as under Code Sections 4980H or 105(h);
    • part-time employees that can also be defined in the same manner;
      employees covered by a collective bargaining agreement;
    • employees who have not satisfied a waiting period for coverage;
    • nonresident aliens with no U.S. source income;
    • salaried employees;
    • non-salaried employees;
    • employees whose primary site of employment is in the same rating area;
    • temporary employees; or
    • a combination of these 10 categories (for example, part-time employees covered under a collective bargaining agreement and full-time employees covered under a collective bargaining agreement).

• • If an individually integrated HRA is offered to former employees, then the former employees are treated as being in the class they were in immediately before separation from service.

• • Employees under age 25 cannot be treated as a separate class, even though that was considered.

• • In addition, unlike the proposed regulations, minimum class size requirements apply in certain circumstances if a plan sponsor offers a traditional group health plan to one class of employees, and offers an individually integrated HRA to another class of employees.  The minimum class size (10 employees if the employer has fewer than 100 employees, 10% of the employer’s employees if between 100 and 200, and 20 employees if the employer has more than 200 employees) applies to full-time employees, part-time employees, salaried employees, non-salaried employees, and employees whose primary site of employment is in the same ratings area.

• • An employer can, however, provide that individuals in a class can be in two different classes if a plan establishes a new hire date after January 1, 2020, and employees hired before the new hire date participate in the traditional group health plan while individuals hired on or after the new hire date participate in the individually integrated HRA.

• • There are some permitted exceptions to the same terms requirement:

• • • It is permissible to offer a higher dollar amount under an individually integrated HRA on the basis of age or family size, so long as the increase in maximum dollar amount is because of an increase in age or family size is made available to all participants in the class of employees who are of the same age or have the same number of dependents covered by the HRA, although the premium for the oldest person cannot exceed three times the premium for the youngest person.
    • An individually integrated HRA can be made available to some former employees, but not to all.
    • Participants could pay the difference on a pre-tax basis under a cafeteria plan, so long as this option is provided to all members of the class.
    • If the HRA provides that the unused amounts could be carried forward to later plan years, the amounts carried forward are disregarded in determining whether benefits are offered on the same terms.
    • Amounts transferred from a prior HRA can be disregarded, so long as the transferred amount rules apply to all participants in the class.
    • There can be adjustments in the maximum dollar amount for newly hired employees and new dependents.
    • Employees can be offered a choice between an HSA-compatible individually integrated HRA and an individually integrated HRA that is not HSA compatible.

• Sixth, the participant must be permitted to opt out and waive future reimbursements on behalf of the participant and all dependents eligible for the individually integrated HRA.  This must be offered once, and only once, with respect to each plan year.  Further, under the terms of the individually integrated HRA, upon termination of employment, the remaining amounts in the individually integrated HRA must be forfeited or the participant must be permitted to permanently opt out of and waive future reimbursements from the HRA.

• The notice requirement is a seventh condition to qualify as an individually integrated HRA.  The notice must include, among other items:

• • a description of the terms of the HRA;

• • the maximum dollar amount for each participant, and any rules regarding the proration of the maximum dollar amount applicable to any participant who is not eligible to participate for the entire plan year;

• • whether the participant’s family members are eligible;

• • that there are different kinds of HRAs, including a qualified small employer health enrollment arrangement;

• • that the individually integrated HRA requires the participant and dependents to be enrolled in individual health insurance coverage and substantiate such enrollment;

• • a statement that the individually integrated HRA may not reimburse any medical care expense unless the substantiation requirements are satisfied;

• • a statement that the individually integrated HRA is not subject to ERISA if certain conditions are satisfied;

• • a statement that it is the responsibility of the participant to inform the HRA if the participant or any dependent whose medical care expenses are reimbursable by the individually integrated HRA is no longer enrolled in individual health insurance coverage.  The regulations require a statement of the participant’s right to opt out, and an explanation of the eligibility consequences regarding the premium tax credit if the participant accepts the HRA – namely, that HRA-eligible participants are not eligible for a premium tax credit on the Exchange;

• • a contact person for additional information about the HRA; and

• • the availability of a special enrollment period for participants and any dependents; who newly gain access to the HRA and were not already covered by it.