Starting in January 2020, a new type of HRA will be available called an "Excepted Benefit HRA". While the rules are not yet settled, here's what we know so far about how these new HRAs will work.
For background, a Health Reimbursement Arrangement (HRA) is a vehicle that allows employers to help employees pay for medical expenses with tax-advantaged dollars. The most common types of HRAs are called Section 105 HRAs, named after the Internal Revenue Code Section 105, which created and regulates most types of HRAs today.
The Excepted Benefit HRA is a new flavor of Section 105 HRA with some unique benefits and applications. We'll keep this blog up-to-date as we continue to learn more about it.
Where did the "Excepted Benefit HRA" come from?
In October 2018, the U.S. Departments of the Treasury, Health and Human Services, and Labor proposed new regulations to expand the usability of health reimbursement arrangements (HRAs). This is the 3rd and final part of President Trump's Executive Order from October 2017 (E.O. 13813) to reform the health system through regulatory changes. You can see the press release, accompanying fact sheet, and proposed rule itself here.
A second-type of HRA was also announced in these regulations that allows an HRA to integrate with individual health insurance coverage. We're tentatively calling this HRA an "Individual Integrated HRA".
Why was is created?
Traditionally, HRAs have always been required to integrate with a group health plan unless they fit the narrow criteria to be considered a stand-alone HRA (like a QSEHRA). However, regulators have recognized that some employers may wish to offer tax-free reimbursement without regard to whether or not employees have qualified insurance coverage. The Excepted Benefit HRA offers reimbursement opportunities to employees that do not participate in the group health plan.
What are the requirements for an Excepted Benefit HRA?
There are four requirements for an HRA to qualify as an Excepted Benefit HRA:
- The HRA must not be an integral part of the plan;
- The HRA must provide benefits that are limited in amount;
- The HRA cannot provide reimbursement for premiums for certain health insurance coverage;
- The HRA must be made available under the same terms to all similarly situated individuals.
Do employers have to offer a group health plan to use an Excepted Benefit HRA?
Technically, yes, an employer must offer group health insurance in order to also offer an Excepted Benefit HRA. However, unlike traditional HRAs, employees do not have to participate in the group plan in order to receive reimbursements. This is really what separates this new HRA from traditional HRAs which required employees participate to receive reimbursements.
What can it pay for? What are "excepted benefits" anyway?
"Excepted Benefits" is insurance jargon to refer to insurance plans that are not primary health plans. Examples of excepted benefits include vision insurance, dental insurance, long-term care insurance, nursing home care, etc.
Individual major medical premiums, coverage under a group health plan, and Medicare Parts B and D are not excepted benefits and would not be eligible. The proposed rules make exceptions that would allow for payment of COBRA premiums, short-term plans (STLDI), and individual or group plans that consist solely of excepted benefits.
What are the limits?
Employers can offer $1800 a year starting in 2020 to employees. While this does not sound like much, this works out to $150 a month which can go pretty far for non-major medical health insurance plans. The $1800 amount is tied to inflation, so it'll go up a little bit every year.
Can unused funds carry-over to the next year?
Yes, if an employee does not use all of his or her allowance in a given year, the unused balance can carry-forward to the next year. Presumably, the employer will be able to choose whether to allow this or not, but we'll see. According to the proposed rules, any carry-over amount will not count towards the annual maximum the following year.
Can an Excepted Benefits HRA work with other types of HRAs?
Because an Excepted Benefits HRA requires a group health plan be offered, it will not work with the newly proposed Individual Integrated HRAs or existing QSEHRAs. It is not clear if Excepted Benefit HRAs can also be offered alongside a traditional 105 HRA.
However, the proposed rules do allow employers to offer different benefit solutions to different classes of employees (assuming the classes are defined in a fair manner). An employer could offer an Excepted Benefits HRA to one class (say, part-time employees) and a QSEHRA to full-time employees.
When will we learn more about the final rules?
Now that the proposed rules have been published, there is a 60 day public comment period. There are likely to be some minor tweaks and clarifications made the rules. The IRS is expected to provide further guidance during 2019, although no time-frame has been provided.
When can I setup an Excepted Benefit HRA?
The proposed rules recommend that these new HRAs become effective January 1st, 2020. We'll have to wait until then!