Can HRAs Survive Healthcare Reform?

Health Reimbursement Arrangements (HRAs) are used to help employees pay for medical expenses incurred by the employee, his or her spouse, dependents, and any children who, at the end of the taxable year, have not attained age 27.  An HRA must be funded solely by the employer; employees cannot contribute to an HRA account.  HRA reimbursements are not included in the employee’s taxable income. Unused amounts can be rolled over for use in other plan years if the plan so provides. HRAs can also be offered only to those employees who enroll in group medical coverage sponsored by another employer.

HRAs are group health plans that are subject to Health Care Reform under the Affordable Care Act (ACA). Under the ACA, group health plans are barred from establishing an annual limit on the dollar amount of benefits for any individual (the Annual Dollar Limit Prohibition). In order to comply with this requirement, an HRA must be integrated with other group health coverage that itself complies with the Annual Dollar Limit Prohibition.  In other words, an HRA can be offered only if employer offers compliant primary group health coverage and the employee is actually covered under a group health plan that does not have an annual limit on the dollar amount of benefits.  Two important points to keep in mind:

• the employer-sponsored HRA cannot be integrated with individual market coverage or with individual policies, even if the employer pays the premium; and
  
• the primary group coverage in which the employee is actually enrolled does not have to be provided by the same employer that offers the HRA; for example, the linked coverage could be sponsored by the employer of the employee’s spouse. 

The ACA also requires that non-grandfathered group health plans must provide certain preventative services without imposing any cost sharing requirements for the service (the Preventive Services Requirements).  An HRA can satisfy this part of the ACA if the group health plan coverage with which it is integrated complies with the Preventive Service Requirements.

If the primary group health coverage that is linked to the HRA does not provide minimum value to the employee (that is, if the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of the costs), the HRA can only be used to reimburse co-payments, co-insurance, deductibles, and premiums under the non-HRA group coverage, as well as for medical care expenses that do not constitute essential health benefits.

Finally, the ACA requires that at least annually, an HRA must permit participating employees (or former employees if they are allowed to participate in the HRA) to permanently opt out of and waive future reimbursements from the HRA. Upon termination of employment, either the remaining amounts in the HRA must be forfeited or the employee must be permitted to permanently opt out of and waive future reimbursements from the HRA.

These new HRA rules take effect for plan years that begin on or after January 1, 2014.  However, they do not apply to funds credited to the HRA before January 1, 2013, or to amounts credited in 2013 under the terms of an HRA in effect on January 1, 2013. These funds can be used after December 31, 2013, to reimburse medical expenses pursuant to the terms of that HRA.

New Employer Rules Soften Start of Healthcare Reform

It is a work in progress.  There are so many moving parts to Healthcare Reform that implementing the Affordance Care Act (ACA) requires adjustments as theory meets reality.  In July 2013, the deadline for large employers to provide Minimum Essential Coverage (MEC) at affordable rates was pushed forward one year to 2015.  In February 2014, new rules gave mid-sized employers another year ― to 2016 ― to do so.  Recent guidance explains some of the ways these two types of employer can transition into compliance.

Large Employers

Large employers with at least 100 full-time employees (including full-time equivalents) still must offer affordable MEC in 2015.  However, plan years that begin in 2014 (with start dates that haven’t recently been changed) won’t have to comply until the plan year beginning in 2015. Thus, if a plan year begins in October, compliance is not required until the October 2015 plan year.  Also, the requirement that large employers offer minimum affordable coverage to all but 5%, or if greater 5, of their full-time employees (those who work at least 30 hours per week or the equivalent) has been changed. Now, for each calendar month in 2015 and any calendar month during the 2015 plan year that falls in 2016, the minimum participation rate has been reduced to 70%.  The transition rules even give additional time to employers to ensure that their plans provide dependent coverage provided they take steps to satisfy this coverage requirement during the 2015 plan year.

Mid-Sized Employers

Mid-sized employers ― that is, those with 50-99 full-time employees (including full-time equivalents) ― are still large employers who must provide affordable MEC to their full time employees. However, because mid-sized employers may find it more difficult to comply with the ACA, the new rules delay until 2016 the date on which they must offer minimum essential affordable coverage to their full-time employees.  Not so coincidentally, beginning in 2016 mid-sized employers will be eligible to obtain the coverage through the federal government’s online SHOP healthcare exchange, which was originally established to help small employers (fewer than 50 full time employees) find coverage.  The SHOP exchange is currently online at https://www.healthcare.gov/what-is-the-shop-marketplace/.

In order to qualify for this deferred start date, an employer must certify that (a) it employed on average between 50 and fewer than 100 full time employees (including full time equivalents) during 2014, (b) there were no reductions in the size of its workforce or the overall hours of service of its employees during the period February 9, 2014, to December 31, 2014 (except for bona fide business reasons),  and (c) the health coverage  it offered as of February 9, 2014, was not eliminated or materially reduced (certain limited exceptions also apply). If these conditions are met, compliance is not required until the 2016 plan year.

While these and other changes will allow them to ease into compliance, both large and mid-size employers should not become complacent. These relaxations of the ACA’s implementation schedule do not change the underlying requirements that could subject them to significant penalties for failure to comply.