New Individual Coverage HRAs—Don’t Forget About ERISA

New regulations issued by the Departments of Labor, Treasury, and Health and Human Services have expanded the use of health reimbursement accounts (HRAs) by allowing reimbursements for individual market insurance premiums.

These new “individual coverage HRAs” are likely a welcome development for many employers, as they present a new opportunity to manage escalating health care benefit costs. Nevertheless, individual coverage HRAs are still subject to many legal requirements, such as the Employee Retirement Income Security Act (ERISA). Because ERISA applies to these HRAs, employers must be cognizant of the fiduciary duties, disclosure requirements—i.e., plan documents, summary plan descriptions (SPDs) and other communications—claims and appeals procedures and annual reporting that the act requires. Being subject to ERISA also means the HRAs must comply with the Consolidated Omnibus Budget Reconciliation Act (COBRA) and Health Insurance Portability and Accountability Act (HIPAA) requirements.

But what about the individual market insurance policies that employees use HRA funds to purchase—could those be subject to ERISA? At a quick glance, one would think not. After all, individual market coverage can already be purchased without the use of an HRA and that coverage is not subject to ERISA. However, employers can inadvertently subject individual market insurance policies to ERISA if they have too much involvement in selecting which policies are purchased through an individual coverage HRA. ERISA’s application to these policies could be a nightmare—plan documents and SPDs would become unwieldy, annual reporting would become complex, and COBRA and HIPAA compliance would be a severe headache.

For that reason, the new regulations create a safe harbor for employers that establish individual coverage HRAs. The safe harbor generally tracks criteria recognized under similar safe harbor rules for voluntary employee benefit plans—i.e., common employee-paid voluntary insurance for things such as critical illness or accidents. To qualify for the safe harbor so that ERISA does not apply to the individual market insurance, all of the following conditions must be satisfied:

• The purchase of any individual health insurance coverage must be voluntary. This essentially means that an employee must be able to opt out of the individual coverage HRA. To enroll in an individual coverage HRA, employees must purchase individual market coverage. However, the regulations provide that this requirement does not make the purchase “involuntary” for the purpose of the safe harbor.
• The employer may not endorse an issuer or type of coverage. Employers may generally help employees navigate the marketplace but should take care not to steer them toward a particular health insurer or type of coverage. If access is provided to insurance brokers, the brokers must be made available on a uniform basis and without preference for any particular ones. Additionally, employers may not apply reimbursement procedures in a way that limits or endorses one insurer over another.
• Reimbursement is limited solely to individual health insurance coverage. To comply with the safe harbor, only individual health coverage premiums may be reimbursed; coverage that consists solely of excepted benefits does not satisfy the safe harbor. That said, the HRA may reimburse Medicare premiums for Medicare beneficiaries without falling outside the safe harbor.
• Employers may not get kickbacks. The preamble to the final regulations emphasizes that employers may not receive consideration or kickbacks from any insurance issuer or affiliated person in connection with an employee’s purchase or renewal of individual insurance coverage that is reimbursed by the HRA. Accordingly, compensation from third parties, such as individual insurers or brokers, to cover the cost of operating the HRA would not be permissible under the safe harbor. Plan assets would be available to pay plan expenses as in the normal case, provided that ERISA requirements are satisfied.
• Each participant must be notified annually that the individual health insurance coverage is not subject to ERISA. This information is contained in the model notices provided along with the regulations.

Individual coverage HRAs may be an attractive benefit option for employees, but employers must be cognizant of legal requirements. Employers might want to limited the scope of insurance coverage available for purchase—e.g., through a private exchange—but such a limitation could expose the individual insurance to ERISA. When designing the scope of individual coverage HRAs and any private insurance exchange, employers should consult with counsel.

Damian Meyers is a senior counsel in the employee benefits and executive compensation group at Proskauer Rose LLP.