Final HRA Regulations 3-4
Final HRA Regulations
by Christoper E. Condeluci, Principal and sole shareholder of CC Law & Policy PLLC in Washington, D.C.
Final HRA Regulations Released – The “New Hire Sub-Class”?
- On Friday, I ran through all of the “classes” of employees that an employer can designate for purposes of offering a “group health plan” to one “class,” while ALSO offering an “individual market HRA arrangement” to another “class” or “classes” of employees. But remember, an employer can ONLY offer a “group health plan” to a “class” of employees, while also ONLY offering an “individual market HRA arrangement” to another “class” or “classes” of employees (i.e., the “all-of-nothing-proposition”). HOWEVER, there is an interesting caveat to the “all-of-nothing-proposition” + the “classes” rules that were NOT originally proposed, but were added to the final regulations based on public comments the Administration received. What is this interesting caveat? It’s called the “new hire sub-class.” What is the “new hire sub-class”? In short, an employer that is offering a “group health plan” to a specific “class” of employees is permitted to continue offering that “group health plan” to the employees in this “class,” while also choosing to offer an “individual market HRA arrangement” to newly hired employees in the same “class.” Here, the employer would NOT be offering the “group health plan” to the newly hired employees in this “class,” rather, the “all-of-nothing-proposition” continues to apply, meaning, if an employer chooses to offer an “individual market HRA arrangement” to its newly hired employees, this employer can ONLY offer an “individual market HRA arrangement” to its newly hired employees. All the while, the employer can continue offering ONLY a “group health plan” to its existing employees in this “class.” Offering an “individual market HRA arrangement” to this “new hire sub-class” can only be made available on a prospective basis to new employees hired on or after a specific date. And, the “individual market HRA arrangement” must be offered to ALL newly hired employees on the same terms and conditions (i.e., the same contribution amounts and the same variations to the contribution amounts if the employer varies contributions by “age” and/or “family size”). An employer may also discontinue the “new hire sub-class” at any time and treat – on a prospective basis only – all of the employees in the particular “class” the same (by, for example, offering all of these employees in this “class” an “individual market HRA arrangement” OR a “group health plan”). Note, the minimum “class” size rule that I discussed on Friday does NOT apply to this “new hire sub-class” (which makes sense because employers don’t hire employees in bulk all at once, and some employers only hire a few employees a year).
Why Is This “New Hire Sub-Class” Interesting?
- Well for one, this is a common practice in the area of pension plans. What I mean is this: As many of you may know, “defined benefit pension plans” – which provide an employee a specified benefit over the course of their retired life based on a specified formula – have been in decline for the past 3 to 4 decades. Today, very few employees are covered by a defined benefit plan. Instead, most employees are covered by a “defined contribution pension plan,” like a 401(k) plan. The primary way employers have been making the shift from “defined benefit” to “defined contribution” pension plans is to “freeze” participation in the defined benefit plan, and only offer participation in a 401(k) plan to newly hired employees hired on or after a specific date. Another reason why this “new hire sub-class” is interesting is this: Many analysts – including me – have been characterizing the ability to purchase an “individual” market plan with tax-free employer contributions as a “defined contribution”-type arrangement, where the employer sets a “budget” and determines the amount of money that it wants to spend on health coverage for a specified number of years (say 5 years). The employer then develops an amount it wants to contribute in the 1st year, and also a rate at which the contribution amount will increase each year (e.g., a rate pegged to the historic increase in premiums each year, or to the increase in medical inflation, or even to increases to the Consumer Price Index (CPI)). Then, once this employer determines its “budget,” the employer gives its employees a “chunk of change” and instructs its employees to purchase a health plan on their own. The employer can also set up a Section 125 Cafeteria Plan so the employee can pay for any premiums not covered by the employer contributions on a pre-tax basis. Again, this is not too dissimilar from a 401(k) plan, where an employer will offer tax-free dollars as a “match” or a “profit sharing” contribution, and an employee will make their own 401(k) contributions through salary reduction on a pre-tax basis. The employee will then determine – on their own – how he or she wants to invest these contributions. Note, however, when I say “on their own” I mean that the employer in NOT involved in any of the investment decisions. Rather, the employee hires a financial advisor to help them with their investments, or more typically, the employer will refer its employees to a financial institution (like a Fidelity or Vanguard) where the financial institution will help the employee invest their 401(k) contributions, subject to a fee. Under this new “individual market HRA arrangement” (i.e., a “defined contribution”-type arrangement), an employer can refer its employees to a third-party service provider (i.e., an insurance agent/broker or a “private” exchange) where the agent/broker or “private” exchange will help the employee find an “individual” market plan that best fits their needs, often times for FREE, as the agent/broker or “private” exchange will typically receive a commission for the purchase of the “individual” market plan. We’ll talk more about this when I talk about the application of ERISA to an “individual market HRA arrangement.” It is this shift to this new “defined contribution”-type arrangement that is making some analysts suggest that the days of the employer-sponsored health system are numbered (note that the current employer-sponsored system is itself a “defined benefit”-type system, where the employer not only “defines” the contribution for the health coverage, but the employer “defines” the benefits and services offered through a specified type of health plan (or array of up to 5 health plans) underwritten by a specified insurance carrier or offered by the employer on a self-insured basis).
Will This Shift to a “Defined Contribution”-Type Health Care Arrangement Mean the End to the Employer-Sponsored System?
- I am NOT buying the argument that this movement toward a “defined contribution”-type health care arrangement means that the employer-sponsored system is going away. After all, even though defined benefit pension plans are all but extinct, employers STILL play a vital role in their employees’ retirement planning by offering a defined contribution plan like a 401(k). Same would be true if more and more employers start offering an “individual market HRA arrangement.” That is, the employer would STILL play a vital role in helping their employees access health care coverage. You have heard me say it before: Under an “individual market HRA arrangement,” the employer remains the “financier” of their employees’ health coverage, which helps them actually afford coverage (remember when I told you last week that health coverage needs to be financed by someone – either the government or the employer through an employee’s compensation). In addition, I believe the employer will also play a vital role in directing their employees to a competent, trusted resource that can help the employees enroll in an “individual” market plan. In this case, the “competent, trusted resource” would be an agent/broker like a Web-Based Entity (WBE) or a “private” exchange. Again, this is not too dissimilar from what an employer does in the area of retirement when the employer directs its employees to Fidelity or Vanguard. I also believe this: A lot of employers – especially large employers – are going to WANT to CONTINUE to offer a “group health plan” (for all of the reasons I described last week). But, other employers – like small- and mid-sized employers – need to somehow relieve the financial pressure associated with sponsoring a health plan and contributing dollars for the health coverage. PriceWaterhouseCoopers recently released a study indicating that employers have reached a tipping point when it comes to continually shifting costs on to their employees. In other words, the era of growing high deductibles and co-pays appears to be coming to an end. What are the options available to employers? Well, adopting value-based insurance designs is one option. Interestingly, shifting to an “individual market HRA arrangement” is another option. I suppose there is even another option, which is shifting to a Medicare-for-All-type system. BUT, I do NOT believe that employers want to go there. Soooo – at least in my opinion – one of the best ways to steer away from a possible, inevitable shift to a Medicare-for-All-type system is supporting a shift to a “defined contribution”-type health care arrangement where employees can still purchase “private” insurance (in this case, a private “individual” market plan).
An “Individual Market HRA Arrangement” Can Only Purchase An “Individual” Market Plan That Complies With PHSA Sections 2711 and 2713
- For the HRA contribution to be tax-free, an employee MUST enroll in an “individual” market plan that complies with Public Health Service Act (PHSA) section 2711 (which prohibits annual and lifetime limits on the “essential health benefits” (EHBs) covered under the plan) and 2713 (which requires free coverage for certain preventive services). This means that an “individual market HRA arrangement” CANNOT be used to purchase a “short-term health plan” or, for example, an indemnity, disability, or specified disease policy. Soooo, any claims that the final HRA regulations allow employers to push their employees into “junk” plans like short-term health plans are just plain FALSE (I will add to this point when I talk about “excepted benefit HRAs” which CAN be used to purchase a short-term health plan). The final HRA regs DO allow an employee to use their “individual market HRA arrangement” to purchase the ACA’s “catastrophic plan.” As you may know, an ACA “catastrophic plan” is an “individual” market plan that MUST cover ALL of the “essential health benefits” (EHBs), and the plan MUST comply with ALL of the ACA’s requirements, including PHSA sections 2711 and 2713. However an ACA “catastrophic plan” can have a higher deductible than even the ACA’s out-of-pocket maximums. Importantly, an employee must be under the age of 30 to purchase the ACA’s “catastrophic plan,” which means enrollment in “catastrophic plans” will be limited. The final HRA regs also allow employees to purchase a “grandmothered” plan (or what I always call a “transitional policy”). As you have heard me explain before, at the end of 2013, the previous Administration decided to allow States to allow their insurance carriers to continue to offer non-ACA-compliant plans in the “individual” and “small group” markets. These “transitional policies” were extended 2 additional times by the previous Administration, and the current Administration has also chosen to extend these “transitional policies” through Oct. 1, 2021. To date, about 30 to 40 States still allow these “transitional policies” (i.e., “grandmothered” plans). Importantly, while these plans are technically NOT ACA-compliant plans (because they are NOT required to cover all of the EHBs and they are not required to follow the ACA’s adjusted community rating rules), these plans are STILL required to comply with PHSA sections 2711 and 2713. And because these “transitional policies” (i.e., “grandmothered” plans) MUST comply with PHSA sections 2711 and 2713, the HRA regs say an employee CAN use their “individual market HRA arrangement” to purchase these types of plans.
The “Individual” Market Plan Coverage Must Be Substantiated (1) Before Coverage Begins and Also (2) Upon a Request for Reimbursement
- The final HRA regulations require that an employee must substantiate whether they are covered by an “individual” market plan that complies with PHSA sections 2711 and 2713. The regs do NOT require specific verification of compliance with PHSA sections 2711 and 2713. Rather, the final regs provide that if the plan is “sold in the individual market,” this alone is enough to assume compliance with PHSA sections 2711 and 2713. As part of this substantiation requirement, however, the final HRA regulations require an employer to establish “reasonable procedures” to verify that an employee is actually covered under a plan “sold in the individual market.” This substantiation must be conducted every year, no later than the first day of the start of the HRA arrangement’s plan year. Substantiation could be required during or at the end of “open enrollment,” but again, substantiation must occur no later than the first day the HRA arrangement coverage begins. In addition to substantiating that the employee is indeed covered by a plan “sold in the individual market” (and thus compliant with PHSA sections 2711 and 2713), the final HRA regs require an employee to substantiate that they remain covered each time the employee requests a reimbursement from the HRA. This is consistent with the existing the HRA rules, which requires substantiating that the medical expense that is being reimbursed is a Code section 213(d) “medical expense” (which are the only types of medical expenses that may be reimbursed tax-free). In both cases (i.e., substantiating “individual” market coverage and also substantiation before expenses may be reimbursed), an employee is permitted to “attest” that they indeed have coverage. An employer can rely on the attestation unless the employer has actual knowledge that the attestation is inaccurate. For ease is making such an attestations/substantiation, the Administration developed “model forms” that an employer can provide to its employees. Note, insurance carriers are NOT required to provide an employer with a “list” of employees covered under an “individual” market plan, nor is an employer required to contact an insurance carrier to substantiate coverage. Also note, for substantiation that must occur prior to an expense being reimbursed, such substantiation can occur through the use of an HRA debit card. Nothing in the final HRA regs changed the current procedures for substantiating 213(d) “medical expenses” through electronic means. The final HRA regs also clarify that “individual market HRA arrangement” is NOT limited to only reimbursing premiums for the “individual” market plan. In other words, pursuant to the current rules that apply to HRAs, an employer has the discretion over the “types” of medical expenses that may be reimbursed through an HRA, so long as those expenses are 213(d) “medical expenses.” This means that an “individual market HRA arrangement” can reimburse the premiums for the underlying plan, and also be used to reimburse out-of-pocket spending on co-pays and payments before the deductible is met, again, so long as the expense is a 213(d) “medical expense.” In the event an employer limits the “individual market HRA arrangement” to reimburse premiums ONLY, the employee may remain eligible to contribute to an HSA, provided the “individual” market plan is an HDHP and the employee does NOT have other disqualifying coverage. If, however, the “individual market HRA arrangement” can reimburse BOTH premiums and out-of-pocket expenses before the deductible is met, the employee will NOT be eligible to contribute to an HSA even if the “individual” market plan is an HDHP.
Employees Can Opt-Out of the HRA Arrangement and Remain Eligible for the ACA’s Premium Subsidy
- Even with this “defined contribution”-type of arrangement, employees whose income is low enough so that the ACA’s premium subsidy is more valuable than the employer’s tax-free HRA contribution CAN decline the employer’s HRA contribution, and remain eligible to receive a premium subsidy if they purchase an “individual” market ACA Exchange plan – BUT ONLY IF – the employer’s HRA contribution does NOT make the “individual” market plan “affordable.” For this purpose, the “affordability” test is pegged to the lowest-cost “silver” plan in the rating area of the employee’s worksite, and the maximum HRA contribution for self-only coverage. For purposes of opting-out of the “individual market HRA arrangement,” an employee ONLY has 1 chance each plan year to opt-out. Specifically, an employer MUST offer an employee the opportunity to opt-out each year, and an employee’s opt-out MUST occur in advance of the plan year. If an employee fails to opt-out prior to the beginning of the plan year, and later realizes that they were better off receiving a premium subsidy, the employee CANNOT opt-out mid-year. In other words, employees MUST have 1 advance opportunity to opt-out. The employer CANNOT allow employees to opt-out and opt-in during the course of the plan year. The Administration received a number of comments raising concerns that an employee who is offered an “individual market HRA arrangement” may NOT understand (1) whether the arrangement is “UNaffordable” and (2) whether the ACA’s premium subsidy is more valuable than the HRA contribution offered by the employer. In response, the Administration developed a specific “notice” that MUST be provided to employees prior to the date on which the “individual market HRA arrangement” is being made available.
The Notice Is Pretty Long and Involved (good thing there is a “model notice”), and There are Specific Requirements on Delivery Timing and Methods
- The notice must include information about the HRA coverage and must list the maximum contribution amount made available for self-only coverage. The notice must also explain that the employee has a right to opt-out of the HRA arrangement, and the notice must inform the employee of the potential availability to the premium subsidy if the HRA is (1) “UNaffordable” and (2) the employee opts-out of the HRA arrangement, along with the consequences for failing to opt-out and taking the HRA contribution (in this case, no premium subsidy is available). The notice must inform the employee that they must inform the Exchange of the offer of the HRA arrangement, and the notice must state that the “individual market HRA arrangement” is not a QSEHRA. The employer must include contact information (including a phone number) of any person(s) responsible for fielding questions about the HRA arrangement, the notice must include a statement of availability of a “special enrollment period” right for employees who gain access to the HRA arrangement for the first time, and the notice must specify the date on which the HRA arrangement first becomes available and date on which the HRA contributions will be made available (e.g., monthly or annually). To ease administrative burden (because there is a TON of information that needs to be included in this notice, as described above), HHS is making available a “model notice” for employers. The notice MUST be provided to employees at least 90 days prior to the beginning of the HRA arrangement’s plan year. For newly hired employees, the notice MUST be provided no later than the date on which the employee is first eligible to participate in the HRA arrangement. And, to accommodate employers that may choose to establish an HRA arrangement within a short period of time prior to the start of the arrangement’s plan year, the final regs provide that in cases where the HRA arrangement is established less than 120 days prior to the beginning of the arrangement’s plan year, the notice may be provided no later than the date on which the HRA may first take effect (but this rule only applies for the first plan year). Employers may deliver the notice through snail-mail or the employer may deliver the notice through electronic means, so long as the employer satisfies ERISA’s electronic disclosure requirements. Employers may also deliver the notice with other plan materials such an annual enrollment materials or new hire benefit packages, so long as the employer satisfies the timing requirements discussed above. Note, the employer is NOT required to determine whether the HRA arrangement is “affordable.” Instead, HHS will provide resources to assist employees using the Federal Exchange to best understand their premium subsidy eligibility, including understanding whether their HRA arrangement is “affordable,” and understanding the premium subsidy amount they may be eligible to receive. HHS will also work with State-based Exchanges to make sure they incorporate similar resources into their web platform to help employees make the best financial decisions for themselves and their families. HHS will also add information relating to an offer of an HRA arrangement on the Healthcare.gov application to further help employees understand their eligibility (or non-eligibility), and HHS will provide technical assistance materials to agents/brokers registered with the Federal Exchange and Web-Base Entities (WBEs).