Final Rules Permit HRAs to Be Integrated with Individual Health Insurance Coverage

Practical Law Legal Update w-020-8232 (Approx. 12 pages)

Final Rules Permit HRAs to Be Integrated with Individual Health Insurance Coverage

by Practical Law Employee Benefits & Executive Compensation

Final Regulations Address Individual Coverage HRAs and Other Topics

In addition to the final regulations' rules for individual coverage HRAs, the regulations also:

Permit HRAs that meet certain conditions to be recognized as limited excepted benefits.
Address the implications for premium tax credit (PTC) eligibility for individuals who are offered coverage under an HRA that is integrated with IHIC.
Clarify the status under the Employee Retirement Income Security Act of 1974 (ERISA) of IHIC for which premiums are reimbursed under an HRA.
Add a special enrollment period (SEP) in the individual market for individuals who gain access to an HRA that is integrated with IHIC.

Trump Administration Executive Order 13813

The Departments developed and issued the final regulations in response to a Trump Administration executive order from October 2017 that instructed the Departments "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. 12, 2017)). Executive Order 13813 also addressed related Trump Administration initiatives involving:

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

Integrating HRAs and Individual Health Insurance Coverage

By removing a prohibition under 2013 Affordable Care Act (ACA) guidance, the final regulations permit HRAs to be integrated with IHIC if several conditions are satisfied (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 that, on its own, generally fails to satisfy an ACA requirement prohibiting 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).

Non-grandfathered HRAs 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 ACA 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 IHIC. In a reversal, the Departments' final regulations remove this prohibition and instead permit HRAs to be integrated with IHIC if several conditions are satisfied.

Preventing Discrimination

The final 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 final regulations prohibit employers from offering the same class of employees both:

A traditional group health plan.
An HRA that is integrated with IHIC.

(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 final regulations include six conditions under which an HRA is considered integrated with IHIC and, as a result, compliant with PHSA Sections 2711 and 2713. The final regulations include numerous clarifications regarding these conditions.

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

An HRA may be integrated with IHIC (and deemed compliant with PHSA Sections 2711 and 2713) if the HRA requires participants and dependents to be enrolled in IHIC for each month that the individuals are covered by the HRA. This approach would allow for integration with both grandfathered and non-grandfathered IHIC (even though grandfathered IHIC might not be compliant with Sections 2711 and 2713).

The final regulations clarify the specific types of individual health insurance that can be integrated. For example, the final regulations permit an HRA to be integrated with:

IHIC obtained in a state that has obtained an ACA Section 1332 waiver, because IHIC obtained in the state is subject to Sections 2711 and 2713 (see Practice Note, Short-Term, Limited-Duration Insurance (STLDI): ACA State Innovation Waivers and STLDI).
Catastrophic plans (see Practice Note, Information Reporting for Employers That Self-Insure and Insurers (Section 6055): Catastrophic Health Plans).
Grandmothered IHIC (see Practice Note, Grandfathered Health Plans Under the ACA: Grandmothered Health Plans).
IHIC (within the meaning of the PHSA) sold through a private health insurance exchange (see Article, Private Health Insurance Exchanges).

The Departments also clarified how COBRA's health plan continuation coverage rules apply when an individual loses access to an individual coverage HRA because of failure to maintain IHIC (see COBRA Toolkit). For example, the Departments indicated that an individual's failure to satisfy the integration requirement of maintaining IHIC is not a COBRA qualifying event (see Practice Note, COBRA Overview: Qualifying Events). As a result, losing eligibility to participate in an individual coverage HRA in this situation does not result in COBRA rights regarding the individual coverage HRA. However, other situations involving individual coverage HRAs may be COBRA qualifying events (for example, employment terminations).

In other clarifications, the Departments addressed whether a failure to maintain IHIC causes retroactive forfeiture of an individual coverage HRA. The final regulations' required forfeiture rules apply only prospectively. As a result, an individual coverage HRA must permit an employee who loses coverage under the HRA for not maintaining IHIC to seek reimbursement for substantiated medical care expenses incurred during the coverage period but before the failure to maintain IHIC.

Second Condition: Restriction Involving the Same Class of Employees

Under the final regulations, 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 IHIC.

(For more information, see Practice Note, HRAs and Individual Market Health Coverage: Proposed Integration Rules and Notice 2018-88: Second Condition: Restriction Involving Same Class of Employees.)

The final regulations make several changes regarding this rule, including:

Revisions to the list of permitted classes of employees.
Addition of a minimum class size requirement that applies in some situations (see Minimum Class Size Requirement).

For example, unlike the proposed regulations, the final regulations do not include a class for employees who are not yet age 25 at the start of the plan year.

Regarding the collective bargaining agreement (CBA) class of employees, the Departments' clarifications include permitting employers to establish separate classes of employees for employees covered by separate CBAs. An employer may also combine a CBA classification with other permitted employee classes. For example, an employer could combine the CBA class with full-time and part-time employee classes, resulting in full-time and part-time CBA subclasses.

Unlike the proposed regulations, the final regulations include salaried and non-salaried employees as permitted classes of employees. Another permitted class consists of individuals who are the employees of an entity that hired the individuals for temporary placement at an unrelated entity (see Practice Note, Temporary Staffing Firms and Interns Under the ACA's Employer Mandate).

In addition, the final regulations clarify that classes of employees are:

Determined based on the employees of a common law employer.
Not based on employees of a controlled group of employers (see Practice Note, Controlled Group and Affiliated Service Group Rules).

Special Rule for New Hires

Despite the rule that plan sponsors may only offer a class of employees either a traditional group health plan or an individual coverage HRA, a special rule for new hires is intended to ease the transition to individual coverage HRAs. Under the special rule, a plan sponsor that offers a traditional group health plan to a class of employees may:

Prospectively offer employees in that class who are hired on or after a certain date in the future (the new hire date) an individual coverage HRA (the new hire subclass).
Continue to offer employees in the class hired before the new hire date a traditional group health plan.

The new hire date for a class of employees can be any date that is on or after January 1, 2020. A plan sponsor may also set different new hire dates prospectively for separate employee classes.

Minimum Class Size Requirement

The final regulations add a minimum class size requirement that applies in certain circumstances. The minimum class size requirement:

Varies depending on employer size.
Applies only to some classes of employees in situations where the risk of adverse selection is the greatest.

Classes subject to the requirement must include a minimum number of employees for the individual coverage HRA to be offered to that class. The final regulations address:

When and how the minimum class size requirement applies.
How the applicable class size minimum is determined.
How an individual coverage HRA determines whether a given class of employees complies with the applicable class size minimum.

For example, the requirement generally applies only to certain employee classes that are offered an individual coverage HRA (such as salaried or non-salaried employees).

The applicable minimum class sizes are:

10 employees, for an employer with fewer than 100 employees.
10% of the total number of employees, for an employer with 100 to 200 employees.
20 employees, for an employer with more than 200 employees.

Third Condition: Same-Terms Requirement

Employers that offer an individual coverage HRA 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. The HRA cannot be more generous for some individuals based on an adverse health factor.

The Departments addressed an exception to the same terms requirement under which individual coverage HRAs may satisfy the same-terms requirement regarding a class of employees even if the maximum dollar amount available under the HRA to reimburse expenses for a year varies by age (see Practice Note, HRAs and Individual Market Health Coverage: Proposed Integration Rules and Notice 2018-88: Third Condition: Same-Terms Requirement). The Departments clarified that plan sponsors may determine a participant's age for this purpose using any reasonable method for a plan year if:

The plan sponsor uses the same method to determine age for all participants in the class of employees for the plan year.
The method is determined before the year.

Under the final regulations, an individual coverage HRA does not violate the same-terms requirement solely because the maximum dollar amount made available under the HRA's terms increases as the participant's age increases. However, the maximum dollar amount made available under the HRA's terms to the oldest participant cannot be more than three times the maximum dollar amount made available to the youngest participant.

The final regulations also include clarifications regarding the same terms requirement in the context of new employees and dependents.

Fourth Condition: Opt-Out Provision

An individual who is covered by an individual coverage HRA for a month is ineligible for a PTC under the ACA health exchanges for that month. Under the final 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 IHIC.
The HRA is either unaffordable or does not provide minimum value.

(See Practice Note, HRAs and Individual Market Health Coverage: Proposed Integration Rules and Notice 2018-88: Fourth Condition: Opt-Out Provision.)

The proposed regulations' opt-out provision was finalized with clarifications. For example, the final regulations clarify that:

An HRA may set timeframes for enrolling in (and opting out of) the HRA.
Participants generally must be permitted to opt out of the individual coverage HRA once for each plan year, and this opt-out opportunity must be provided before the plan year.

The Departments also clarified that the annual opt-out condition applies for all participants who are eligible to enroll in an individual coverage HRA, including former employees.

Fifth Condition: Substantiating Individual Health Insurance Coverage

Individuals whose medical expenses may be reimbursed under an individual coverage HRA must be enrolled in IHIC. Under the final 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 IHIC during the plan year (see Practice Note, HRAs and Individual Market Health Coverage: Proposed Integration Rules and Notice 2018-88: Fifth Condition: Substantiating Individual Market Health Coverage). The HRA (as opposed to its participants) is responsible for implementing reasonable procedures to ensure that coverage is integrated.

The final regulations adopted this requirement from the proposed regulations, with minor clarifications. For example, the final regulations clarify that although an HRA may set the date by which the annual coverage substantiation requirement must be satisfied, this date generally cannot be later than the first date of the HRA's plan year.

Under another clarification, if a new dependent's coverage is effective retroactively, the HRA:

May establish any reasonable timeframe for the annual coverage substantiation.
Must require that substantiation be provided before the HRA reimburses medical care expenses for the newly added dependent.

Ongoing Substantiation and Attestations

The final regulations also retained an ongoing substantiation requirement under which each reimbursement for medical expenses by an HRA may only be paid after the expense is substantiated as being for medical care. A participant attestation is one method of substantiation, and the Departments provided model attestation language in a document issued along with the final regulations.

Under the final regulations, an individual coverage HRA may rely on a participant's attestation unless the HRA has actual knowledge that a covered participant or dependent is not (or will not be) enrolled in IHIC for the plan year or month. An HRA that learns of an attestation's inaccuracy may not provide further reimbursements on the individual's behalf for expenses incurred during the period to which the inaccurate attestation relates.

Sixth Condition: Notice Requirement and Model Language

The final regulations include a written notice requirement intended to inform participants who are eligible to participate in an individual coverage HRA of the arrangement's potential impact on their ability to claim the PTC (see Practice Note, HRAs and Individual Market Health Coverage: Proposed Integration Rules and Notice 2018-88: Sixth Condition: Notice Requirement). An HRA must provide the written notice to eligible participants at least 90 days before the start of each plan year. The final regulations include extensive content requirements for these notices, and numerous revisions relative to the proposed regulations.

The Departments declined to adopt suggestions to add certain additional content to the notice as proposed (for example, a comparison of traditional group health plans and individual coverage HRAs). The Departments reasoned that individual coverage HRAs must provide summaries of benefits and coverage (SBCs) that describe coverage, including cost-sharing (see Practice Note, Summaries of Benefits and Coverage Under the ACA).

The Departments did add certain information requirements to the notice, for example:

Contact information for one or more individuals who participants may contact with questions about their individual coverage HRA.
The dates on which:
- coverage under the HRA may first become effective; and
- the HRA plan year begins and ends.
Information on when amounts will be made available (for example, monthly or annually).
A statement of availability of an SEP for employees and dependents who newly gain access to the HRA.

Relatedly, the Departments issued model language for use by employees in purchasing coverage through or outside an ACA health insurance exchange, which HRAs may use to satisfy the notice requirement.

In another addition, the notice must include a statement about how participants may find assistance for determining their individual coverage HRA affordability under the ACA's PTC rules (see Practice Note, Employer Mandate Under the ACA: Overview: Affordability Requirement and Safe Harbors).

In conjunction with the final regulations, the Departments provided model language for certain aspects of the notice that are not employer-specific, for example, provisions explaining the PTC consequences of being offered and accepting an individual coverage HRA.

Excepted Benefit HRAs

The final regulations also provide for "excepted benefit HRAs" (EB-HRAs) that permit employers to offer an HRA that is not integrated with IHIC, non-HRA group coverage, Medicare or TRICARE, if certain conditions are satisfied (see Practice Note, HRAs and Individual Market Health Coverage: Proposed Integration Rules and Notice 2018-88: Excepted Benefit HRAs). An employer might offer an EB- HRA in situations where an employee does not have other coverage at all. An EB-HRA can be used to reimburse certain medical care expenses incurred regarding coverage that is not limited to other types of excepted benefits (see Practice Note, Excepted Benefits).

To be an excepted benefit, the HRA:

Must not be an integral part of the plan.
Must provide benefits that are limited in amount ($1,800 (to be indexed for inflation)).
Cannot reimburse premiums for certain health insurance coverage.
Must be made available under the same terms to all similarly situated individuals.

The IRS will publish the inflation-adjusted amount for plan years beginning in a given calendar year by June 1 of the preceding calendar year.

ERISA Plan Status of Individual Health Insurance Coverage (DOL Safe Harbor)

The final regulations reflect a DOL proposal under which individual market health coverage, the premiums of which are reimbursed by an HRA or qualified small employer health reimbursement arrangement (QSEHRA), do not become part of an ERISA plan if certain requirements are met (see Practice Note, HRAs and Individual Market Health Coverage: Proposed Integration Rules and Notice 2018-88: Individual Market Health Coverage and ERISA Plan Status). Under the final regulations, IHIC selected by an employee in the individual market and reimbursed by an HRA or QSEHRA is not treated as part of a group health plan or ERISA employee welfare benefit plan if conditions resembling the DOL's existing safe harbor for voluntary benefits are satisfied (see Practice Note, Voluntary Benefits).

As finalized, the DOL's safe harbor regarding IHIC includes minor clarifications to the proposed version. For example, one clarification involves the condition under the safe harbor that reimbursements for non-group health insurance premiums must be limited solely to IHIC. This clarification provides that the DOL safe harbor was not intended to apply to excepted benefit policies sold in the individual market (see Practice Note, Excepted Benefits).

Practical Impact

The final regulations include a great deal of detail and complexity concerning how individual coverage HRAs and EB-HRAs must be implemented, including significant clarifications from the proposed version of the Departments' regulations (many of which are discussed above). From a big picture perspective, however, the basic structure of the arrangements permitted under the Departments' revised regulatory interpretation is similar to the proposals from last fall. The final regulations could – as the Trump Administration hopes – change the landscape of how health coverage is provided, but it remains to be seen whether employers will embrace individual coverage HRAs, particularly regarding benefit choices to be offered to employees for 2020.

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