Trump Administration Rules Expand the Use of Health Reimbursement Arrangements
On June 13, 2019, the Trump Administration finalized regulations to expand Health Reimbursement Arrangements (“HRAs”), providing employers with more options for offering health insurance coverage to employees. The final regulations now authorize employers to provide employees with tax-preferred funds to pay for the cost of health insurance coverage purchased in the individual market. The regulations are aimed at benefitting employers who do not currently offer employee health care coverage and small employers who face significant costs in offering traditional group health plan coverage to employees.
As background, an HRA is an employer-funded arrangement that reimburses employees for certain medical care expenses incurred by employees and their spouses, children, and dependents. Generally, employees are not taxed on the value of their HRA coverage or on reimbursements from the HRA, and any unused amounts in the HRA may be carried forward into future years. Moreover, employers may be entitled to deductions for reimbursements made to an HRA.
The final regulations give employers more flexibility to steer tax-exempt dollars to employees for health care. Prior to the enactment of the final regulations, HRAs could only be used in combination with a group health plan sponsored by the employer. But beginning January 1, 2020, employers are no longer required to sponsor a group health plan and may instead use Individual Coverage HRAs (“ICHRAs”) to subsidize employees buying Medicare or health plans on the individual market.
A number of conditions apply to ICHRAs, including the following:
- Employees and dependents covered by ICHRAs must be enrolled in individual health insurance coverage or Medicare;
- Employers may not offer “traditional” group health plans to employees covered by ICHRAs;
- Only employer contributions may be made to ICHRAs – employee contributions are not permitted;
- Reimbursements made under an ICHRA must be properly substantiated by the employee;
- ICHRAs offered to any particular class of employees must be offered on the same terms and conditions for all participants within such class (however, the benefit amount may increase based on the individual’s age or family size); and
- Employees may use pre-tax cafeteria plan salary reductions to pay any portion of their individual premiums which are not covered by the ICHRA, so long as the coverage is purchased outside of the Exchange.
The primary goal of the final regulations is to expand the flexibility and use of HRAs and other account-based group health plans to provide more Americans with additional options to obtain quality, affordable healthcare. We’ll be following the application of these final regulations closely to see how this goal is achieved.