The Trump Administration recently announced big changes for Health Reimbursement Arrangements (HRAs). We share our initial thoughts and ideas on what lies ahead for the small businesses health insurance market.
Today, 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 209 pages of the proposed rule itself here.
In summary, we think this has potential to dramatically reshape the small group insurance market in coming years. The stated goal of the rules are "to increase the usability of HRAs to more Americans, especially employees who work at small businesses". There will be plenty of partisan critics of the new rules, but it's important to remember that this was essentially where President Obama's Administration was heading when he signed the 21st Century Cures Act into law and created the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). The Trump Administration's proposed regulations seem to build on the QSEHRA concept.
While big changes may be on the horizon, we should point out the timing is not immediate. The proposed rule suggests changes go into effect January 1st, 2020 so there will be some time to see how things shake out. There is also a very important comment period and we'll be waiting on guidance from the IRS during 2019. So while there's nothing immediate small employers or small business insurance brokers should do, this is definitely something to watch during 2019.
Let's jump into what is in the proposed rules.
Two New Types of HRAs
The proposed rules essentially create two new flavors of HRAs:
These are not official names, but just what we're going to call these HRAs until a better name emerges in the market. These are both spin-offs of the traditional Section 105 HRAs (referring to Section 105 of the Internal Revenue Code (IRC) that governs most HRAs today). Currently, traditional HRAs are required to integrate with a traditional group health plan. Although many small employers tried to integrate HRAs with individual health plans in the past, the IRS strictly prohibited this practice in the last few years. The work-around or exception to this have been stand-alone HRAs (like the QSEHRA) which do not require a group health plan. While QSEHRA has gained ground in niche markets, it's limitations prevent it from serving the broader market. However, the rules describing the new types of HRAs seemed aimed at making HRAs a more attractive option to a larger group of employers, which will almost certainly drive higher HRA penetration at least to some degree.
Individual Integrated HRA
The proposed rules would lift the prohibition on offering a traditional HRA to reimburse individual health plans, creating what we'll call "Individual Integrated HRAs". This closely resembles the QSEHRA created by the Obama Administration albeit with some more flexibility. The proposed rules would require that several conditions be met for the Individual Integrated HRA to qualify:
- Individual employees (and their dependents) must be covered by a health insurance plan or elect to "opt out" of the HRA
- The design of the HRA does not intentionally or unintentionally discriminated against (to prevent risk shifting)
- Employees in the same "employee class" are offered an HRA on the "same terms". Allowable employee classifications include:
- Full-Time Employees
- Part-Time Employees
- Seasonal Employees
- Employees covered by a collective bargaining agreement
- Employees who have not satisfied a waiting period for coverage
- Employees under age 25
- Non-Resident aliens with no US-based income
- Employees whose primary site of employment is in the same rating area
As long as employees are divided using the classifications above, the proposed rules specify that employers could offer an HRA to one and a traditional group plan to another. This is a big upgrade over QSEHRA, which allows employers to choose whether to include or exclude classes of employees similar to the list above but not to offer different offerings. Under the proposed rules, employers could offer full-time employees a traditional group plan and part-time employees an HRA. Or employers could offer an HRA certain reimbursement rates to an office in one geography and a different HRA with different reimbursement amounts to an office in another location (based on the rating area criteria above).
The new HRA rules maintains very similar "same terms" requirement as found in QSEHRA guidance, namely that HRA amounts can vary as long as it's done in a fair manner and based on employee criteria such as age or family size.
Excepted Benefit HRA
"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.
The Excepted Benefit HRA makes changes to what traditional HRAs integrated with group health plans can pay for. Currently these traditional HRAs can only pay for medical expenses. In the new rules, HRAs paired with a group plan would be able to pay for up to $1800/yr for "excepted benefits" like dental plan premiums, vision premiums, short-term insurance, etc.
For the Excepted Benefit HRA to be compliant, the proposed regulations suggest four rules:
- 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
The first requirement that the HRA "must not be an integral part of the plan" is confusing. The stated goals of the Excepted Benefits HRA are to enable scenarios where "employers wish to offer an HRA without regard to whether its employees have other coverage at all". However, the language around the first rule above suggests employees must be offered a traditional group health plan. This is likely a case of regulatory gymnastics to reach the administration's stated goal, as the language in the rule further describes that employees would not have to actually enroll in a group plan to be eligible for the Excepted Benefit HRA.
Does this mean employers could offer tax-free money for health benefits completely separate of a qualified individual or group plan? That appears to be the case, or at least the intention. We'll need more clarity from the IRS here, but this would be a big deal. Employers could offer tax-free money to employees to pay for everything except qualified health plans: presumably medical expenses, short-term plans, sharing ministries, dental plans, etc.
The limitation comes with rule 2 above: the limited amount proposed is only $1800 a year ($150 a month). Although this amount is tied to inflation, it's not enough to be a serious option for insurance among professional firms. However, this could be wildly popular for working class companies whose employees often go without insurance anyway. In that case, $150 can actually go pretty far if employees are eligible for short-term plans or sharing ministries. This could be a huge opportunity for Direct Primary Care clinics, telemedicine providers, and other work-site provider options.
Under the proposed rules, an Individual Integrated HRA and an Excepted Benefit HRA could not be offered to the same class of employee, although employers may be able to use the permitted employee class descriptions listed above to devise structures where both types of HRAs are offered (i.e. full-time employees get an Individual Integrated HRA and part-time employees get an Excepted Benefit HRA).
Additional Updates Aimed to Expand Overall HRA Usage
In addition to creating to new flavors of HRAs described above, the proposed rules suggest changes that could give HRAs more flexibility and greater market penetration:
HRAs can Trigger Special Enrollment for Employees
One of the limitations of QSEHRA has been that although employers can start QSEHRAs at anytime, employees needing to purchase an individual health plan can only purchase insurance during Open Enrollment (unless they happen to personally qualify for a Special Enrollment). Under the proposed rules, an employer offering a new QSEHRA or an Individual Integrated HRA would enable eligible employees to enroll in a major medical health plan year-round through a new Special Enrollment criteria.
Improved Interaction with Premium Tax Credits (PTC)
One of the biggest limitations we see with QSEHRA is that employers merely offering a QSEHRA to employees means that their allowed amount will offset any available tax credits if the individual employee were to qualify based on his or her family size. This functionally limited QSEHRA implementations to the "professional-only" or "high-income only" market as employers would end up throwing money away if their employees qualified for premium tax credits.
The proposed rules take a positive step towards bringing the QSEHRA concept to blue-collar and middle class companies. While employees still won't be able to stack HRA reimbursements and tax credits, employees can "opt out" of the HRA and still receive tax credits. This will make the HRA much more efficient for employers--especially ones that have a mix of employees that qualify for credits and some that do not.
Individual Integrated HRAs and the Corporate Mandate
While QSEHRA and these new types of HRAs will be popular with small employers (under 50 employees), proposed changes would allow Individual Integrated HRAs to satisfy the corporate mandate. It's possible we'll see larger companies subject to mandates (over 50 employees) opt for an HRA approach versus the traditional group market. The IRS is tasked to provide "safe harbors" for how employers can calculate if their HRA contributions are sufficient enough to meet the corporate mandate.
There has been some angst among employers to embrace the HRA approach because ERISA regulations. The proposed rules seem to clear a pathway around ERISA.
Initial thoughts: How will this impact the market?
As noted above, the stated goal of these new rules are to increase the penetration of HRAs in the market. This will almost certainly happen, however, figuring out the extent that will happen is will depend on a few things:
- How the finalized rules shape up (the comment period will last 60 days)
- What the IRS guidance says
- How small group insurers and brokers respond--do they embrace the HRA approach or stick to the group plan model?
The broader context for these proposed rules is important to understand too. Expanded HRAs are a tool in the broader shift going on in the healthcare industry from "defined benefit" to "defined contribution" health plans. This is analogous to the move from employers providing pension retirement benefits to the 401k model. The result should provide employers and employees more choice, but it will shift a greater burden of responsibility onto the employee. This could be a good thing if employees can be effective consumers but it could also provide several traps along the way.
A few clear winners come to mind based on what we know already:
- Small employers new to benefits - The new HRAs will provide a more flexible and affordable option for employers looking to offer benefits for the first time, similar to what QSEHRA has done in niche markets. There are no minimum contributions or participation rates specified which should provide an attractive entry point to benefits for some employers.
- Small employers wanting to offer a high-degree of benefits - Right now, there are no stated limits for the "Individual Integrated HRAs". As long as reimbursements meet the "same terms" requirements, a firm could provide a much richer level of benefits beyond the current QSEHRA limits ($~5k for single employees and ~$10k for employees with dependents)
- Small employers with low wage employees - We've seen many employers interested in QSEHRA only to be forced to back-off because of how QSEHRA contributions offset premium tax credits available to employees. Both the Individual Integrated HRA or Excepted Benefit HRA would provide a better solution.
- Large employers wary of group premium increases - Large employers subject to the corporate mandate to provide insurance could turn to the proposed Individual Integrated HRAs to meet mandate requirements with capped expenses. Furthermore, it's likely amounts claimed by employees participating in the plans will be significantly less than the group plan premiums or MEC-plan premiums they are covering now.
- "Excepted Benefit" Providers - The Excepted Benefit HRA could potentially open the door for innovative delivery models like Direct Primary Care to get tax-advantaged treatment. Excepted Benefit HRAs could be popular for professional businesses as well as blue-collar businesses.
- Individual Payers - Individual insurance companies that have figured out how to thrive in the individual market (Oscar, Ambetter, Molina, etc) will now be able to pitch their individual plans to the group market using a variety of HRA options.
- The Individual Insurance Market - Despite the Trump Administration's political rhetoric to undermine the ACA markets, these HRA policies should result in a greater portion of healthy individuals purchasing individual market plans.
We will be eagerly watching to see how the rules and regulations play out.
About Take Command Health
Take Command Health launched three years ago with the goal of bringing awareness, advocacy, and transparency to the confusing world of health insurance for small businesses and individuals. Take Command Health is at the forefront of this issue, a recognized leader in QSEHRA administrationand small business tax strategy, with customers in every state. It operates in Arizona, California, Florida, Georgia, Indiana, Michigan, North Carolina, Pennsylvania, Texas, Tennessee, and Wisconsin for individual insurance and offers small business HRA administration nationwide.