HRA Regulations Expected to Have Significant Small Business Impact

During a recent webinar, Caitlin Bronson, content marketing manager for PeopleKeep, which specializes in providing employee benefits to small businesses, offered an extensive analysis of recently finalized federal regulations impacting the way employers can utilize health reimbursement accounts (HRAs).

Under new rules adopted by the U.S. departments of Health and Human Services, Labor and the Treasury, starting in January 2020, employers will be able to use what are referred to as “individual coverage health reimbursement accounts,” or “ICHRAs,” to provide their workers with tax-preferred funds to pay for the cost of health insurance coverage that workers purchase in the individual market, subject to certain conditions.

The HRA rule also creates an “excepted benefit HRA.” In general, this aspect of the rule lets employers that offer traditional group health plans provide an excepted benefit HRA of up to $1,800 per year—indexed to inflation after 2020—even if the worker doesn’t enroll in the traditional group plan. Through these accounts, employers may reimburse an employee for certain qualified medical expenses, including premiums for vision, dental, and short-term, limited-duration insurance.

As finalized, the regulations contain some key differences compared with the proposed version. Notably, the proposed regulation did not offer a distinction between the treatment of salaried and hourly employees.

Stepping back before interpreting the potential impact of the newly final HRA regulations, Bronson recalled that the businesses have been offering health reimbursement accounts for many years. She said there was originally very little regulatory oversight of the HRA marketplace, but that changed with passage of the Affordable Care Act (ACA). Acting under the direction of Congress, the IRS in 2013 determined that standalone HRAs, with some limited exceptions, did not meet the requirements of the ACA.

“This change caused a lot of anguish in the small business community, where HRAs had been more popular,” Bronson said. “Under President Trump, the government wants to promote greater use of HRAs, which is why we have seen the proposed rule and now the final rule. At PeopleKeep, we actually participated in the process, and so we’ve been waiting for the final rule for some time now.”

According to Bronson, the 500-plus page final rule includes a lot of detail and subtlety, but it boils down to a few main points.  

“First, this is a formal revision of the 2013 notice from IRS, which really put the brakes on small businesses offering HRAs,” Bronson said. “The final rule says clearly that you can use HRAs as the main health benefit in a way that complies with the ACA. The various rules and guidelines in the final rule give us the individual coverage HRA, or ICHRA. It’s a brand new approach to HRAs that will be made available to businesses of all sizes starting January 1, 2020. The excepted benefit HRA is also a newly expanded option that we expect to be popular.”

Bronson said that it is important to note the special enrollment period programmed into the final rule.

“The final rule creates a special enrollment period for employees that become eligible for these new accounts at some point during the year,” Bronson explained. “Instead of waiting for open enrollment, if a business decides to offer one of these new HRA types next June, the employees can open an account immediately. New employees can also have their HRAs established immediately. They don’t have to wait for open enrollment.”

Bronson explained how the final rule allows employers to define HRA eligibility according to 11 different employee classes, which she said is an appropriately flexible system.

“You could offer salaried employees $800 per month and hourly employees $600, as a simple example,” Bronson said. “It can be quite flexible, in our estimation. You can also offer different amounts to employees with the same class, based on employee age and number of dependents. The oldest employees can get up to three-times what youngest employees can get.”

According to Bronson, in general the HRA reforms as proposed were embraced by all stakeholders, but one sticking point was discussion about whether HRAs should be allowed to be used to pay for individual short-term insurance.

“The fear that people voiced with allowing short-term insurance premiums being reimbursed via an HRA is that younger and healthier employees may opt out of the group plan,” Bronson said. “Ultimately,  the departments decided to go ahead with this approach, but they did acknowledge this risk through some stipulations. First, this aspect of the rule does not supersede state law. So if a state like New York banned short-term insurance plans, an employer couldn’t hide behind this rule. Second, the department has reserved the right to come back and readdress this issue if the need arises.”

Bronson concluded that this package of HRA reforms “is a really good thing for small businesses and the employees of small businesses.”

“It’s great to have these different approaches that serve different use cases,” she said. “We expect small businesses to lead the interest here, but over time these reforms will influence businesses of all sizes. A little less clear is what will be the ultimate impact on the individual market. Presumably, more people will be shepherded into the individual market through the new types of HRAs, so that will be something to watch. I personally think the arguments about adverse effects on individual market risk pools are overblown. My sense is that this will actually improve the risk pool in the individual market. It will drive more full time workers into the individual market, and research shows that full time workers tend to be healthier.”

PeopleKeep has published an overview of the regulatory changes here.