In October, the Departments of Treasury, Labor, and Health and Human Services (the “Departments”) issued a proposed rule that aims to expand the “flexibility and use” of health reimbursement arrangements (HRAs). Public comments on the proposal were due December 28, 2018, and the Departments could publish the final rule at any time.
HRAs are accounts in which employers set aside a fixed amount of money every year to help employees pay for medical expenses that are not covered by their health insurance plan (see e.g., HRA eligible expenses). Employees can then use the funds to reimburse their medical expenses, and in some cases their premiums, up to a maximum dollar amount per coverage period, and any unused funds may be carried into the next year.
In 2017, the Trump Administration issued an Executive Order that sought to expand employers’ ability to offer HRAs. This proposed rule makes good on that promise by allowing employers to offer two new HRA options:
- Integrated HRAs: Instead of offering a traditional group health plan, employers could offer employees HRAs to purchase ACA-compliant individual policies; and
- Excepted Benefit HRAs: In addition to offering a traditional group health plan, employers could also offer employees HRAs (with contributions capped at $1,800 annually) to purchase an “excepted benefit” (e.g. vision, dental, long-term care coverage) or short-term plan; however, the employee could choose to enroll in only the HRA.
Currently, employers can only offer HRAs if employees are enrolled in a traditional group health plan that meets the ACA’s standards, with a few exceptions. To understand reactions to the proposal, CHIR reviewed a sample of comments from state officials, insurers, consumer advocates, and employer and benefit advisor groups. In this blog, we highlight a selection of comments from the following employer, broker, and employee benefit advisor organizations:
- U.S. Chamber of Commerce
- International Association of Firefighters
- Small Business Majority
- National Association of Self-Employed (NASE)
- National Federation of Independent Businesses (NFIB)
- National Association of Health Underwriters (NAHU)
- Health Sherpa
- American Benefits Council
- Willis Towers Watson
For a complete summary of the proposed rule, you can find more information here.
In general, employer, broker, and benefit advisor commenters support the proposed rule, applauding its goal of “increased flexibility” with respect to employee benefits. Employers should have “as many tools as possible” to deal with rising health care costs, commented NASE. The web broker Health Sherpa noted additional benefits of the proposed rule, such as expanded coverage among low-wage workers and stabilization of the individual market risk pool. The Chamber of Commerce observed that HRAs could be particularly useful in helping part-time employees obtain coverage, many of whom are not currently eligible for their employer group health plan. The proposal would allow businesses to provide “some financial assistance” to these employees, who might otherwise “have been left bare and fallen through the cracks.”
However, several commenters struck cautionary notes about the proposed rule. NAHU expressed concerns that, based on the reactions of many of their members’ clients, certain employers will drop their group plans and make “de minimis contributions” to HRAs in order to meet the Affordable Care Act’s (ACA) “employer mandate” requirements. NAHU projects that if such a practice is permitted, it “could lead to a downgrade in the scope of employer-sponsored coverage” and “an increase in the number of uninsured individuals and dependents.”
Others observed that employers’ take-up of HRAs is dependent on a “stable and functional” individual market (American Benefits Council and Chamber of Commerce), and some argued the rule could actually undermine that market. For example, Health Sherpa asserted the “need for vigilance” to ensure that the expansion of HRAs does not in practice lead to greater enrollment in low-quality coverage or a decline in insurance coverage. Small Business Majority argued the rule goes too far in expanding HRAs, potentially leading to disruption of the Affordable Care Act’s individual marketplaces.
Mitigating Adverse Selection in the Individual Market
In its proposed rule, the administration acknowledges that the expanded use of HRAs comes with the risk of adverse selection if employers use HRAs to push employees with higher cost health care needs to the individual market. At the same time, the administration recognizes that employers’ interest in offering their employees the new HRA option will depend on the stability and attractiveness of the individual market. Or, as phrased by Willis Towers Watson, you could have a “chicken versus egg situation in which employer reluctance to adopt [HRAs] based on concerns about ACA market instability could impede improvements in both the predictability and spread of risk that could otherwise encourage more employers to consider [HRAs].”
The proposed rule includes some safeguards against adverse selection risks, including a requirement that employers choose between offering a group plan and HRAs. The proposal further requires employers to offer the HRA option on the same terms to all within a given class of employees (such as full-time vs. part-time).
Commenters had differing views on the benefits and burdens of these safeguards. Several (Willis Towers Watson, Health Sherpa, NAHU, and the Chamber) supported the requirement that employers choose between offering a group plan or an HRA as a critical mechanism to mitigate selection risks. Conversely, NFIB, arguing that small employers want more flexibility, asked that their members be allowed to offer employees both an HRA and a group health plan.
The American Benefits Council and Willis Towers Watson encouraged the administration to expand the permissible classes of employees to include, in particular, salaried and hourly employees. Both comment letters argued that this would encourage more employers to take up HRAs, because categorizing employees based on whether they are salaried or paid hourly is an “important and often used” practice.
On the other hand, NAHU argued against giving employers the flexibility to create new categories of employee classes and suggested the Departments provide a “concrete list” of employee classes that employers would have to use in determining whether and on what terms to offer an HRA option. Not doing so, NAHU predicted, could “increase the potential of class manipulation.” Similarly, Health Sherpa warned that if the requirement to offer HRAs on the same terms within an employee class was not “followed vigilantly,” there would be a risk that companies would reclassify workers in ways that would “’dump their medically high-risk employees off of group-based coverage.” The company was particularly concerned about classifications that would allow employers to keep higher-income individuals on the group plan while “offloading lower-income individuals” onto the individual market, noting that lower-income individuals have been found to have higher health care costs.
What Kind of Insurance Can Employees Buy with an HRA?
The proposed rule would allow employees to use funds from an HRA to purchase individual market health insurance. Employees would not be allowed to integrate their HRA with a short-term health plan or other non-ACA-compliant insurance products.* While commenters were generally supportive of this approach, several urged the administration to allow HRAs to be integrated with other forms of coverage. NFIB, for example, urged the Departments to allow employees to “choose from among the broadest possible range of choices in the marketplace,” while the American Benefits Council asked for more flexibility in states that have pursued state innovation waivers under ACA’s section 1332. The International Association of Firefighters asked that employees be allowed to integrate their HRAs with coverage offered through a multi-employer trust, even though such plans are not subject to all the requirements of the ACA.
On the other hand, two commenters (Willis Towers Watson, NAHU) urged the administration to continue to limit the integration of HRAs to only those forms of health insurance that meet ACA standards. NAHU noted that expanding the forms of coverage available could expose employers to compliance risks, because “there is no simple way for an employer to verify” whether the coverage meets the ACA’s essential health benefit and other group plan requirements.
Substantiation of Coverage
The proposed rule requires employers to establish “reasonable verification procedures” to ensure that participants enroll in qualified individual coverage; these can include relying on an employee’s self-attestation of coverage. Commenters generally supported allowing employers to rely on employees’ attestations, but noted that the requirement to substantiate coverage still raises compliance burdens for employers. NAHU urged the Departments to “simplify the verification process, develop more guidance for employers, and create more specific rules and safe harbors.” Similarly, the American Benefits Council asked for greater clarification of substantiation rules, while Willis Towers Watson requested that the Departments develop a model attestation form.
Employers sponsoring an HRA would be required to provide written notice to employees at least 90 days before the beginning of each plan year. Commenters were unanimous in asking the Departments to develop a model notice for employers to use in order to “ease administrative burden.” NAHU further pointed out that the 90-day time frame may be unrealistic, given that many employers may not have accurate rate quotes for fully insured group coverage until 60 days before the start of the plan year.
Not surprisingly, compliance and administrative issues dominated many of the commenters’ feedback for the administration. The proposed rule lays out criteria by which employers may escape ERISA liability when employees purchase individual insurance using HRA funds. These include:
- The purchase of insurance is completely voluntary for employees;
- Not selecting or endorsing any particular insurer or coverage type;
- Reimbursement for premiums is limited to qualifying individual coverage;
- The plan sponsor receives no cash or other compensation in connection with an employee’s selection or renewal in a health insurance policy;
- Plan participants are notified annually that the individual market coverage is not subject to ERISA.
Commenters raised concerns about the above criteria. Both the American Benefits Council and NAHU argued that the prohibition on endorsement of a particular insurer or product, in particular, raised risks for employers who wish to provide enrollment assistance to employees. Commenters also noted that employers often work with private exchanges or broker organizations, many of which do not display or recommend all of the available insurers and products in the market. They asked the administration to clarify that working with such third parties would not run afoul of the non-endorsement rule. NFIB, noting that “unlike larger businesses, small businesses cannot afford the services of lawyers, accountants, and health care experts to wade through complex regulations,” asked the Departments to release a “plain English” guide for small business on how to establish and maintain an HRA benefit.
Employee Opt-out Rights
Under the proposed rule, employers must allow employees to opt out of the HRA options on an annual basis. NAHU noted that the opt-out opportunity and the open enrollment period for ACA individual market coverage would need to be timed to avoid consumer confusion (as well as potential missed coverage opportunities). The Chamber of Commerce recommended that employees be allowed to opt-out of an HRA in order to receive a marketplace premium tax credit, even when an employee is offered an HRA that is considered “affordable” under federal rules.
The proposed rule provides that an HRA would be considered “affordable” if the employee’s “required HRA contribution” does not exceed 9.5 percent of the employee’s household income. The benchmark premium would be based on the self-only premium for the lowest cost silver plan available to the employee. Employer and broker respondents requested at least two safe harbors for employers with respect to the affordability determination. First, the American Benefits Council asked that employers not be required to know the geographic rating area in which the employee resides in order to identify the silver plan premium; instead, the Council requested a safe harbor for employers that use a single silver plan premium as a national baseline for all of their employees. Second, NAHU sought a safe harbor for age rating variations, arguing that it will be “problematic and a significant barrier” to employers who may face challenges making level contributions to employee HRA accounts. NAHU also pointed out that the ACA’s marketplaces are not currently equipped to verify the accuracy of affordability determinations, given that there is currently no mechanism for verifying marketplace applicants’ employer coverage.
Excepted Benefit HRAs
Employer, broker and benefit advisor groups were mixed in their views about the value of excepted benefit HRAs. Some, such as the American Benefits Council, supported the additional “flexibility” for employers, while others, such as Small Business Majority, strongly opposed allowing employees to use an HRA to purchase plans not required to meet minimum ACA standards.
Stay tuned for the fourth and final post in our blog series, summarizing comments on the HRA proposal from consumer and patient organizations.
*The rule would allow for HRAs to be integrated with grandfathered individual market products that are not required to meet all of the ACA’s standards, but most analyses suggest that few grandfathered policies remain in the market, and issuers of such policies cannot sell them to new enrollees.
A Note on Our Methodology
This blog is intended to provide a summary of comments submitted by specific stakeholder groups: employers, brokers, and employee benefit advisors. This is not intended to be a comprehensive report of all comments on every element in the Health Reimbursement Arrangement proposed rule, nor does it capture every component of the reviewed comments. Additionally, a portion of submitted comments were not available for our review at the time of publication. For more stakeholder comments, visit http://regulations.gov.