Companies that meet certain criteria dictated by the Internal Revenue Service now can offer two new types of tax-free HRAs: the individual coverage HRA (ICHRA) and the excepted benefit HRA (EBHRA).
The new rules will transform the health insurance arena as we know it. Expanded HRAs are part of the healthcare shift from defined benefit to defined contribution health plans. A White House spokesman said that once employers fully adjust to the new rules, an estimated 800,000 employers will provide ICHRAs to more than 11 million employees and their families.
These rules present plan design opportunities for employers effective January 1, 2020. The differences between the various types of account-based group health plans are subtle; the type of plan best suited to meet each employer’s goals may be difficult to evaluate. The planning process must include whether the HRA can be offered as an added feature or replacement.
The main features of the ICHRA are:
- Employers have control over eligibility requirements and benefits budgets with no minimum or maximum contribution limits;
- Employers make monthly allowance contributions to varying employee classes;
- Employers must decide whether to offer traditional group coverage or ICHRAs to employees within a given class (it is not permissible to offer both);
- Employees can access funds to pay premiums for individually purchased health coverage and out-of-pocket expenses through submission of proof of purchase and attestation of having coverage, and;
- Employees who use it are ineligible for premium tax credits for exchange-based coverage.
Employers subject to the Affordable Care Act’s (ACA) shared-responsibility rules may find it difficult to avoid penalties. If an employee declines coverage in an ICHRA and subsequently qualifies for the ACA Exchange premium tax credit, the employer could face penalties. Employees will need to determine if they want to participate in the ICHRA, forego access to employer money or purchase coverage on the exchange, using eligibility for a premium tax credit.
The EBHRA allows employers who offer traditional health plans to provide up to $1,800 per year, even if employees do not enroll in the traditional group health plan. This HRA is ideal for employers to establish and alter their costs year-by-year. The other key features are:
- HRA dollars can be used to reimburse employees for certain qualified medical expenses, including premiums for vision, dental and short-term limited-duration insurance;
- Employees will have some protections against having no coverage, and;
- Employees are not deemed enrolled in minimum essential coverage, meaning they aren’t exempt from receiving a premium tax credit for coverage purchased on an exchange.
Effect on employers
These new rulings will be advantageous for small employers competing with large companies for employees — without the high cost and complexity of providing health coverage. Also, employees will have increased portability of coverage and options to meet their individual needs through the market or exchange.
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That said, employers may feel pressured to increase cap amounts. There also may be administrative challenges regarding required documentation of proper enrollment and reimbursement.
Steps to take now
A top priority should be to examine total compensation strategies through an analysis of salary, benefits, ancillary benefits, retirement and PTO to meet the needs of the workforce. It’s also essential to develop a strategic plan to work across benefit programs and get off the merry-go-round approach.
A perspective of “in with the new out with the old” will be valuable. Employers with various types of employees (i.e., hourly, salary, part-time, bargaining) in different or similar locations, with mixed business lines, could benefit from a viewpoint to help them achieve their goals. Identification of all planning and design opportunities will produce the framework of the discussion to move forward.
Now is the time to strategically reassess the role an organization plays in promoting a happy, healthy and high-performing workforce. Engaging a total compensation approach can serve employees well while meeting corporate objectives.