Responding to an October 2017 executive order directing federal agencies to consider steps to expand consumer health care choices, the Trump administration on Oct. 23 proposed regulations to substantially expand the use of tax-advantaged health reimbursement accounts (HRAs) by allowing employers to pay for their workers' health plans in the individual market. HRAs are employer-sponsored accounts used to pay for employee premiums and other qualified medical expenses on a tax-free basis.
Employers have considered various strategies for health benefits design in recent years, including a “defined contribution” approach that would permit employees to buy individual policies on public or private exchanges. Guidance issued under the previous administration, however, prevents the use of HRAs, cafeteria plans or other employer arrangements to buy such coverage, reflecting concern that some employers might encourage only their sicker employees to buy individual market coverage.
The proposed rule includes safeguards meant to ease those concerns. Employers could, for example, offer different types of employee coverage through either an HRA or a traditional group health plan, but all employees within the same class (e.g., full-time, part-time, collectively bargained employees, and employees working at the same site) would have to be offered the same type of plan and generally receive the same amount of money.
HRAs integrated with individual policies. Under the proposal, all employers could use an HRA to help employees buy individual plans sold either on or off the federal and state exchanges created by the Affordable Care Act (ACA). Under a special rule, employees could pay the portion of the premiums not covered by the HRA for off-exchange policies with pretax cafeteria plan salary reductions. Employers could provide an HRA contribution as significant as they would have made for the premiums of the employer-sponsored plan. Regulators say they’ll provide more guidance on whether and how coverage provided through these integrated HRAs counts toward an employer’s ACA shared responsibility obligations.
This will likely spur some – especially smaller employers -- to consider moving to a pure defined contribution health benefit approach. Whether these employers, and ultimately larger firms as well, adopt this approach will depend on the terms of the final rule and whether good, affordable coverage is available in the individual market. We’ve seen substantial volatility in rate increases in the individual market over the past several years relative to the general stability of group plan costs. But if the coverage is competitively priced, these potential reforms could offer opportunities to employers with large number of part-time workers.
As noted above, the HRA generally would have to make available the same benefit amount on the same conditions to all employees within the same employee class. But the maximum dollar amount could increase as the participant ages and if he or she adds covered dependents. Any of the HRA's carryover amounts from prior years would be disregarded, assuming the same carryover conditions of the HRA apply equally within the class.
Excepted benefit HRAs. Another option under the proposal would permit an employer that offers a group health plan to offer, as an additional benefit, up to $1,800 per year (indexed for inflation) to cover out-of-pocket costs and premiums for excepted benefit coverage such as dental or vision coverage, COBRA, or short term limited duration insurance.
An employer could only offer an excepted-benefit HRA if traditional group health plan coverage is also made available to employees eligible to participate in the excepted-benefit HRA. So an employer couldn't offer both an HRA integrated with individual health insurance coverage and an excepted-benefit HRA to the same employees.
Opportunity seen for small firms, initially. Administration officials say they expect the proposed rule would offer more choices to employees, particularly those who work at small businesses who may only have one insurance plan option or who don't currently receive insurance through their employer. They also note that it could strengthen the individual market by encouraging more choice and competition.
Initial estimates by the Treasury Department suggest that roughly 800,000 employers could ultimately provide HRAs to pay for individual health insurance coverage to more than 10 million employees.
Employer input needed. Although the proposed rule broadly tracks policy recommendations from plan sponsor groups, it is complex and wide-ranging and will need suggestions from employers on how to ensure that the final rule meets the needs of employers and workers. Like many employers, we at Mercer will be working with our trade group partners to provide comments and welcome your suggestions. Comments on the proposed regulation should be submitted by December 28.
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