On June 13, 2019, the Departments of Labor, Health and Human Services, and the Treasury released an advance copy of a Final Rule on Health Reimbursement Arrangements (HRAs). It will be published in the Federal Register on June 20, 2019. The rule expands the types of HRAs that can be offered starting in 2020.
An HRA is a tax-preferred health plan account for employees. Employers that choose to offer HRAs pay all the costs. The HRA is funded with employer contributions that employees can use for specific health care-related expenses. HRAs offer significant tax advantages. Contributions are tax deductible to the employer and HRA benefits are excluded from the employee’s compensation for income tax and payroll tax (e.g., FICA) purposes. HRAs are not simple, however, and must be designed and administered in accordance with complex rules under the Internal Revenue Code.
Several types of HRAs are allowed under current tax rules and those rules are not changing. The new rule adds two new types of HRAs starting in 2020: Individual Coverage HRA and Excepted Benefit HRA.
The ICHRA is designed for employers that either do not have a group medical plan or do not offer group coverage to some classes of employees. The key rules include:
The second type of new HRA that will be allowed in 2020 is the EBHRA. It is very different from the ICHRA summarized above, and different from traditional HRAs. Employers will be able to offer EBHRAs only to employees who also are eligible for traditional group coverage, although actual enrollment in the group plan will not be required. Examples include all ACA-compliant group medical plans, such as major medical plans, PPOs and HMOs.
The employer may fund up to $1,800 per year for the employee’s health expenses and/or premiums for excepted benefits (e.g., dental, vision, short-term limited-duration insurance). The $1,800 limit will be adjusted for inflation after 2020. Medical insurance premiums for individual insurance, group coverage (other than COBRA), or Medicare will not be eligible under the EBHRA.
Lastly, the same employee cannot be offered both an ICHRA and an EBHRA. The ICHRA requires integration with individual ACA-compliant medical insurance and is limited to employees not eligible for the employer’s traditional group plan. The EBHRA, on the other hand, can only be offered to employees who are eligible for traditional group coverage, regardless of whether they choose to enroll.
In announcing the new rule, Labor Secretary Acosta stated “The HRA final rule offers millions of American workers more health coverage choices and portability.” The Secretary neglected to mention that the rule may offer more options, but only if the worker’s employer chooses to provide HRAs and the type of HRA.
As with any tax-preferred benefit, the rules are quite complex. Many questions remain and additional clarification and rules are expected from the federal regulators. In the coming months, employers and their advisors will want to consider their current health plan offerings, or their decision not to offer a group plan, and the pros and cons of traditional HRAs or the new ICHRA and EBHRA options.
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