A Limited Future for HRAs after 2014?

June 26, 2013

This is part of our series of alerts intended to help guide employers and plan sponsors through their new obligations under the health care reform laws and related guidance. This alert focuses on the potential impact of the new laws on employer-sponsored health reimbursement arrangements (“HRAs”). 

BackgroundAn HRA is an account-based group health plan that is funded solely by the employer to reimburse employees for medical care expenses that qualify under Section 213(d) of the Internal Revenue Code of 1986, as amended (“Code”). Although a prohibition on annual dollar limits for benefits that are in the ten categories of essential health benefits ("EHBs") in group health  plans has been phasing in since 2010, the Department of Health and Human Services had previously waived the application of the annual dollar limit prohibition to HRAs that were in existence on September 23, 2010 until the end of the last plan year beginning before January 1, 2014. 

The expiration of this waiver has generated concern about the future of employer-sponsored HRA programs. The Departments of Health and Human Services, Labor, and Treasury (the “Departments”) attempted earlier this year to provide insight into which HRA designs will no longer be permitted and how employer HRA programs will work after the new rules take effect. You may view the FAQ here

Will Annual Dollar Limits Apply to HRAs in 2014?

It depends. 

The prohibition does not apply to HRAs that are integrated with other medical coverage under a group health plan arrangement. Integrated HRAs are deemed to comply with the prohibition on annual dollar limits as long as the other medical coverage has no annual dollar limit on EHBs. In other words, the HRA and underlying coverage are considered to be one plan for purposes of satisfying the annual dollar limit prohibition. In Q&A-3 of the FAQ, the Departments state their intention to issue guidance providing that an employer-sponsored HRA may be treated as integrated with other medical coverage only if the employee receiving the HRA is actually enrolled in that other medical coverage. Any HRA that credits additional amounts to an individual when the individual is not enrolled in the employer-provided primary medical coverage meeting the annual dollar limit prohibition will be subject to the annual dollar limit prohibition (and, as a result, will violate that prohibition). 

The prohibition does apply to “stand-alone” HRAs, which are those HRAs that are not linked to other medical coverage under a group health plan. This would include HRAs that allow employees to participate in the HRA even if they do not enroll in the employer's group medical plan coverage. This would also include HRAs that provide employees with premium reimbursement for their purchase of individual insurance policies (as described in more detail below).

Can HRAs Be Used to Fund Individual Insurance Premiums? 

No. 

As an alternative to offering group health plan coverage, some employers have structured their HRAs as premium reimbursement arrangements that allow employees to purchase individual insurance policies with pre-tax dollars. Over the past year or so, some promoters of private exchanges have also been marketing “quasi-group” coverage in which an employer uses this premium reimbursement structure to fund an HRA that employees can use to shop for individual insurance policies in their private exchange. These promoters argue that, since the underlying coverage is made up of individual policies, the only “group” health plan required to comply with ERISA and other federal laws applying to group health plans is the HRA component. HHS has historically frowned upon this general concept out of concerns this practice avoided the guaranteed issue protections of group market coverage under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) (view here). 

The FAQs issued earlier this year make clear that HRAs that can be used to pay individual insurance premiums will no longer be permitted beginning in 2014. The FAQs indicate that future guidance will be issued providing that an employer-sponsored HRA can not be integrated with individual market coverage or with an employer plan that provides coverage through individual policies on the basis it causes the arrangement to violate the annual dollar limit prohibition. 

Note that some experts have challenged whether the annual dollar limit prohibition even applies to an HRA used to fund individual premiums, since the law only prohibits annual dollar limits on EHBs. EHBs are the 10 categories of coverage that must be offered by qualified health plans in the government-run exchanges and non-grandfathered coverage in the small group and individual markets (employers with less than 50 or 100 employees, depending on the state). Examples of EHB categories include hospitalization, prescription drugs and maternity/newborn care, but notably do not include medical premiums. Other experts argue that the HRA premium reimbursement arrangements for individual market coverage should be exempt from the annual dollar limit prohibition as health flexible spending accounts meeting the definition of Code Section 106(c)(2) (i.e. the maximum amount available for reimbursement under the plan may not exceed 500% of the value of the coverage). However, the Departments apparently take a different view given the clear statement in the FAQ that HRAs reimbursing employees for individual market insurance premiums will violate the annual dollar limit prohibition. 

Are Stand-alone HRAs A Thing of the Past?   

If you currently sponsor a stand-alone HRA that allows reimbursement of individual insurance policy premiums, you should plan on terminating your HRA before the 2014 expiration of the waiver. You should also pay close attention for future guidance on this subject.

If you sponsor a stand-alone HRA that does not reimburse individual policy premiums, you will need to conduct a separate analysis to determine whether you can continue to sponsor your stand-alone HRA. The Departments did not actually prohibit use of all stand-alone HRAs, as many employers have heard. HRA programs only covering retirees are not subject to the annual limit on EHBs, and most stand-alone HRAs that do not impose dollar limits and reimburse only a specified number of services or treatments will continue to be a viable option.    

One often-overlooked option for employers who wish to continue to offer stand-alone HRAs is to reimburse only excepted benefits under HIPAA, which are also excepted from the annual dollar limit prohibition. Excepted benefits include:

The FAQs indicate that future guidance will be issued providing that unused amounts credited before January 1, 2014 to prohibited HRAs may still be used to reimburse medical expenses after 2014 without causing the HRA to violate the annual dollar limit prohibition. However, only contributions made pursuant to the terms of the HRA as in effect on January 1, 2013 are expected to be eligible for this transition relief.  If the terms of your HRA as in effect on January 1, 2013 did not prescribe a set amount or amounts to be credited during 2013 or the timing for crediting such amounts, then your HRA may be subject to special rules that limit the 2013 amounts to those credited for 2012.

Do Any Special Rules Apply to Retiree Only HRAs?

The annual dollar limit prohibition does not apply to retiree-only HRAs, which are generally exempted from the annual dollar limit prohibition (and many other provisions of the new health care reform laws). However, whether retiree-only HRAs will be able to continue to reimburse individual insurance coverage, including Medi-gap policies or coverage on a government-run exchange, will likely be the subject of future discussion.

What Are Next Steps for Employers? 

Although there is still a lot of uncertainty regarding what the Departments' ultimate guidance for HRAs will look like, the recent FAQ does provide enough insight to allow you to begin planning for 2014. 

To ensure your HRA is “integrated” in 2014, you should ensure that HRA eligibility is linked to enrollment in the group health plan. 

If you are offering stand-alone HRAs, you will want to ensure they fall within one of the exceptions or comply with the prohibition on annual dollar limits, or terminate the HRA before the 2014 effective date. 

Sponsors of HRAs used to fund individual health insurance premiums should consider other options, such as a limited health FSA or simply providing across-the-board pay increases to employees to offset their health insurance expenses. You should not buy into a private exchange structure that proposes to use HRAs to pay individual insurance policy premiums on the private exchange, without obtaining your own legal advice approving the structure.

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