Proposed Rules Would Permit HRAs to Be Integrated with Individual Health Insurance Coverage

Practical Law Legal Update w-017-2832 (Approx. 11 pages)

Proposed Rules Would Permit HRAs to Be Integrated with Individual Health Insurance Coverage

by Practical Law Employee Benefits & Executive Compensation

Trump Administration Executive Order 13813

The Departments developed and issued the proposed rules in response to a Trump Administration executive order from October 2017 that instructed the Departments, among other things, to "increase the usability of HRAs, to expand employers' ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup coverage" (Executive Order 13813, 82 Fed. Reg. 48385 (Oct. 17, 2017)). Executive Order 13813 also included health care-related initiatives involving:

Association health plans (see Practice Note, Association Health Plans).
Short-term, limited duration insurance (see Practice Note, Short-Term, Limited-Duration Insurance (STLDI)).

Integrating HRAs and Individual Health Insurance Coverage

The proposed regulations would remove a prohibition (under 2013 ACA implementing guidance) against integrating HRAs with individual health insurance coverage (IRS Notice 2013-54; see Legal Update, Guidance Addresses the ACA's Impact on EAPs, HRAs and Health FSAs). An HRA is a group health plan which, on its own, generally fails to satisfy an Affordable Care Act (ACA) requirement that prohibits group health plans from establishing lifetime or annual limits on the dollar value of essential health benefits (EHBs) (see Group Health Plans Toolkit). This is because HRAs impose an annual limit on the amount of reimbursable expenses (Public Health Service Act (PHSA) § 2711 (42 U.S.C. § 300gg-11); see Practice Notes, Lifetime Limits, Annual Limits, and Essential Health Benefits Under the ACA and Health Reimbursement Arrangements (HRAs): Integration, Nondiscrimination, and Group Health Plan Compliance: Integrated HRAs May Satisfy the ACA Annual Limit Requirement).

HRAs that are not grandfathered under the ACA also fail to satisfy an ACA rule requiring first-dollar coverage of preventive services (PHSA § 2713 (42 U.S.C. § 300gg-13); see Practice Notes, Preventive Health Services Under the ACA, Other Than Contraceptives, Contraceptives Coverage Under the ACA, and Grandfathered Health Plans Under the ACA). This is because although HRAs may be used to reimburse the costs of preventive services, HRAs stop doing so after they have reimbursed the maximum dollar amount for a coverage period. As a result, HRAs do not provide the required coverage and violate the prohibition on imposing cost-sharing for preventive services.

Under the 2013 guidance, an HRA that is "integrated" with other group health plan coverage that satisfies PHSA Sections 2711 and 2713 is considered compliant (that is, because the combined arrangement satisfies Sections 2711 and 2713). However, this prior guidance expressly prohibited HRAs from being integrated with individual health insurance coverage. The proposed regulations would remove the prohibition and instead permit HRAs to be integrated with individual health insurance coverage (if several conditions are satisfied).

Preventing Discrimination

The Departments acknowledged the possibility that expanded access to HRAs could result in employers offering employees coverage options in a way that discriminates against the employees based on their health status – in violation of nondiscrimination rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). For example, an employer could encourage higher risk employees (such as those with high expected medical claims) to obtain coverage in the individual market and outside of the employer's traditional group health plan. Doing so could reduce the cost of coverage provided under the employer's plan to lower risk employees.

To avoid this outcome, the proposed regulations include rules to prevent plan sponsors from steering participants with adverse health factors – be it intentionally or unintentionally, directly or indirectly – to choose individual market coverage rather than coverage under the employer's traditional health plan. For example, the proposed regulations would prevent employers from offering the same class of employees both:

A traditional group health plan.
An HRA that is integrated with individual health insurance coverage.

(See Second Condition: Restriction Involving the Same Class of Employees.)

These rules are intended to draw individuals from all risk profiles to the individual market, thereby avoiding market segmentation and destabilization.

Six Conditions for HRA Integration with Individual Health Insurance Coverage

The proposed regulations would permit HRAs to be integrated with individual health insurance coverage if the following six conditions are met.

First Condition: All Individuals Covered By an HRA Must Be Enrolled in Individual Coverage

An HRA may be integrated with individual health insurance coverage, and is deemed to comply with PHSA Sections 2711 and 2713, if the HRA requires participants and any dependents to be enrolled in individual health insurance coverage for each month that the individuals are covered by the HRA. This approach would allow for integration with both grandfathered and nongrandfathered individual health insurance coverage.

The following rules also apply regarding the first condition:

The individual health insurance coverage cannot consist only of excepted benefits (see Practice Note, Excepted Benefits).
An individual must actually obtain the individual health insurance coverage, as opposed to merely being able to do so.
This first condition applies to all individuals whose health care expenses are reimbursable under the HRA, not merely the participant.
If an individual covered by the HRA ceases to also be covered by individual health insurance coverage, the individual must forfeit the HRA.

Second Condition: Restriction Involving the Same Class of Employees

An employer cannot offer an HRA that is integrated with individual health coverage to a class of employees if it offers a traditional group health plan to the same class of employees. As a result, an employee in a particular class cannot be given a choice between either:

A traditional group health plan.
An HRA integrated with individual health insurance coverage.

A traditional group health plan generally refers to any group health plan other than:

An account-based group health plan.
A group health plan consisting solely of excepted benefits (see Practice Note, Excepted Benefits).

Different Benefits May Be Provided to Specified Classes of Employees

An employer that offers an HRA that is integrated with individual health coverage to a class of employees generally must offer the HRA on the same terms to each participant within the class. For classes of employees specified under the proposed regulations, the employer may only offer either an HRA integrated with individual health insurance coverage or a traditional group health plan.

The specified classes are:

Full-time employees, using the definition of this term under Code Sections 105(h) or 4980H, as determined by the employer (26 U.S.C. §§ 105(h) and 4980H; see Practice Note, Employer Mandate Under the ACA: Determining Full-Time Employees for Employer Penalties).
Part-time employees, also using the definition of this term under Code Sections 105(h) or 4980H, as determined by the employer.
Seasonal employees, using the definition of this term under Code Sections 105(h) or 4980H, as determined by the employer (see Practice Note, Employer Mandate Under the ACA: Overview: Seasonal Worker Exception).
Employees included in a unit of employees covered by a collective bargaining agreement (CBA) in which the employer participates, as described in 26 C.F.R. § 1.105-11(c)(2)(iii)(D).
Employees who have not met a waiting period for coverage, if the waiting period satisfies the ACA's statutory and regulatory requirements for waiting periods (PHSA § 2708 (42 U.S.C. § 300gg-7); 29 C.F.R. § 2590.715-2708; see Practice Note, Ninety-Day Limit on Waiting Periods Under the ACA).
Employees who are not yet age 25 at the start of the plan year (as described in 26 C.F.R. § 1.105-11(c)(2)(iii)(B)).
Non-resident aliens with no US-based income (as described in 26 C.F.R. § 1.105-11(c)(2)(iii)(E) (that is, foreign employees who work abroad).
Employees whose primary site of employment is in the same "rating area," as that term is defined in 45 C.F.R. § 147.102(b).

Groups of employees that are a combination of two or more of the above classes may also comprise a class. For example, a single class could consist of:

Part-time employees who are included in a unit of employees covered by a CBA.
Full-time employees included in the same unit of employees covered by a CBA.

For HRAs offered to former employees (for example, retirees), the former employees would be placed in the class they were in immediately before separating from service.

According to the Departments, employers have commonly provided different benefit packages to employees in the classes described above. For example, benefit packages offered to employees often vary by location, owing to the availability of health care providers or health insurers in a given geographic area.

However, the proposed regulations would not allow employers to treat hourly and salaried employees as different classes of employees, because these classes could be more easily manipulated.

Consistent Definitions Must Be Used for Employee Classifications

In defining who are full-time, seasonal, and part-time employees for purposes of the classes described above, an employer would need to consistently use the definitions under Code Section 105(h) or 4980H across the three categories of employees. An employer could not mix-and-match the definitions – for example, using the Section 4980H definition of full-time employee and the definition of part-time employee under the 26 C.F.R. § 1.105-11 regulations.

However, an employer could change the definitions it uses for a later plan year if:

Each class is defined consistent with the same provision for the plan year.
The HRA plan document is updated to reflect the governing definitions before the start of the plan year in which they apply.

The Departments included definitions under Code Section 105(h) as an option because HRAs generally are subject to the Code Section 105(h) nondiscrimination rules, as self-insured medical reimbursement plans. Alternatively, some employers have already analyzed how the definitions of Code Section 4980H apply to their workforces in implementing the ACA's employer mandate rules (see Employer Mandate Toolkit).

Use of Cafeteria Plan Salary Reductions

The proposed regulations address the extent to which employees may pay the portion of premiums for individual health insurance coverage that is not covered by an integrated HRA through salary reductions under a cafeteria plan (see Practice Note, Cafeteria Plans). Specifically, employers may not allow employees to make salary reduction contributions to a cafeteria plan to purchase a qualified health plan, including individual health insurance coverage, that is offered through an ACA health insurance exchange (26 U.S.C. § 125(f)(3); see Article, Health Insurance Exchange and Related Requirements Under the ACA). However, employees who purchase individual health insurance coverage outside an ACA exchange may pay the balance of the premiums for the coverage through a cafeteria plan.

Third Condition: Same-Terms Requirement

Employers that offer an HRA that is integrated with individual health insurance coverage to a class of employees must offer the HRA on the same terms to all employees within the same class. This means that the HRA must be offered in both the same amount and otherwise on the same terms and conditions to all employees. Offering an HRA that is more generous for some individuals based on an adverse health factor is not allowed.

Variation for Age and Family Size Is Allowed in Amounts Made Available Under an HRA

The Departments have acknowledged that premiums for individual health insurance coverage obtained by HRA participants and dependents may vary in some cases. As a result, some variation in amounts made available under an HRA is permitted, even within a class of employees.

For example, the maximum dollar amount made available under an HRA for participants within a class of employees may increase as a participant's age increases, if the same maximum dollar amount related to the age increase is made available to all participants of the same age within the same class of employees. As another example, the maximum dollar amount made available under an HRA within a class of employees may increase as the number of a participant's dependents who are covered under the HRA increases. However, the same maximum dollar amount attributable to the increased family size must be available to all participants in the class of employees with the same number of dependents covered by the HRA.

Some Variation Permitted Regarding Post-Employment Health Coverage

The proposed regulations would permit an employer to increase the HRA amount for a class of employees for both age and family size. As a result, an employer could offer two employees in a class of employees of the same age different HRA amounts that are attributable to differences in family size.

The Departments also recognized that post-employment health coverage may vary significantly and be subject to age, service, or other conditions. Regarding post-employment health coverage, an HRA may be treated as provided on the same terms even if the employer:

Offers the HRA to some former employees (for example, to all former employees who were employed by the employer for a certain minimum amount of time).
Does not offer the HRA to the other former employees within a class of employees.

However, if an employer offers an HRA to former employees in a class of employees (see Second Condition: Restriction Involving the Same Class of Employees), the HRA must be offered to the former employees on the same terms as to all other employees in the class.

HRA Carryovers Disregarded for Purposes of Same-Terms Requirement

A special rule under the same-terms requirement applies if:

A participant or dependent in an HRA that is integrated with individual health insurance coverage does not use the full amount made available under the HRA to reimburse medical expenses for a plan year.
The HRA allows the remaining amount to be made available to participants and dependents in later plan years.

In determining whether the same-terms requirement is met, the proposed regulations would disregard these carryover amounts if two conditions are met. First, the method for determining whether participants have access to unused amounts in future years must be the same for all participants in a class of employees. Second, the methodology and formula for determining the amounts of unused funds that participants may access in future years must be the same for all participants in a class of employees.

Amounts Paid Through Salary Reduction

A participant's ability to pay the part of premiums for individual health insurance coverage that are not covered by the HRA through a cafeteria plan salary reduction arrangement is considered a term of the HRA for purposes of the same-terms requirement (see Practice Note, Cafeteria Plans). As a result, an HRA is not treated as provided on the same terms unless the salary reduction arrangement, if made available to any participant in a class of employees, is made available on the same terms to all participants in a class of employees (excluding former employees).

Fourth Condition: Opt-Out Provision

An individual who is covered by an HRA that is integrated with individual health insurance coverage for a month is ineligible for a PTC under the ACA health exchanges for that month. Under the proposed regulations, however, current employees may claim the PTC (assuming they are otherwise eligible) if:

They opt out of and waive future reimbursements from an HRA integrated with individual health insurance coverage.
The HRA is either unaffordable or does not provide minimum value.

Also, when a participant terminates employment, either the remaining amounts in the HRA must be forfeited or the participant must be allowed to permanently opt out of and waive future reimbursements from the HRA. This ensures that the participant may choose whether to:

Claim the PTC (if the participant is otherwise eligible to do so).
Continue to participate in the HRA after separating from service.

Fifth Condition: Substantiating Individual Health Insurance Coverage

Individuals whose medical expenses may be reimbursed under an integrated HRA must be enrolled in individual health insurance coverage. Under the proposed regulations, an HRA must adopt and comply with reasonable procedures to verify that individuals whose medical expenses are reimbursable by the HRA are (or will be) enrolled in individual health insurance coverage during the plan year. This excludes coverage consisting only of excepted benefits.

An HRA's procedures can require participants to substantiate their enrollment in individual health insurance coverage using either of two methods. This substantiation could consist of:

A document from a third party (for example, a health insurer) demonstrating that the participant and any dependents covered by the HRA are, or will be, enrolled in individual health insurance coverage during the plan year. Specifically, this documentation could include an insurance card or an explanation of benefits (EOB) pertaining to the applicable time period.
A participant's attestation that the participant and any dependents who are, or will be, enrolled in individual health insurance coverage, including:
- the date that coverage began or will begin; and
- the name of the provider of the coverage.

An HRA may rely on a participant's documentation or attestation unless it has actual knowledge that any individual covered by the HRA is not, or will not be, enrolled in individual health insurance coverage for the plan year.

Ongoing Evidence of Enrollment Required

After the initial substantiation of coverage requirement is satisfied, an ongoing substantiation requirement applies with each new request for reimbursement of an incurred medical expense for the same plan year. An HRA may not reimburse a participant for a medical expense unless, before each reimbursement, the participant provides substantiation that the participant and any dependents whose medical care expenses are requested to be reimbursed continue to be enrolled in individual health insurance coverage for the month during which the medical care expenses were incurred. (This excludes coverage consisting only of excepted benefits.)

The substantiation can consist of an attestation, which may be part of the form used for requesting reimbursement. An HRA may rely on a participant's documentation or attestation unless the HRA has actual knowledge that the participant (and any individual seeking reimbursement for the month) was not enrolled in individual health insurance coverage for the month.

Sixth Condition: Notice Requirement

The proposed regulations include a written notice requirement intended to inform participants who are eligible to participate in an HRA integrated with individual health insurance coverage of the arrangement's potential impact on their ability to claim the PTC. The HRA would need to provide the written notice to eligible participants at least 90 days before the start of each plan year. The proposed regulations include extensive content requirements for these notices.

Applicability Date; Reliance Not Permitted

The proposed regulations' HRA integration and HRA excepted benefit provisions, and certain other aspects of the regulations, would apply to group health plans and health insurers for plan years beginning on or after January 1, 2020.

However, taxpayers and others may not rely on the proposed regulations.

Proposed Rules Would Permit HRAs to Be Integrated with Individual Health Insurance Coverage | Practical Law