Regulators Finalize New HRA Rule

The U.S. departments of Health and Human Services, Labor and the Treasury issued a final regulation that will expand the use of health reimbursement arrangements (HRAs).

Under the rule, starting in January 2020, employers will be able to use what are referred to as individual coverage HRAs 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 departments say these conditions strike the right balance between employer flexibility and guardrails meant to protect the individual market against adverse selection, and include a notice requirement to ensure employees understand the benefit.

Besides allowing individual coverage HRAs, the HRA rule 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. Employers may also reimburse an employee for certain qualified medical expenses, including premiums for vision, dental, and short-term, limited-duration insurance. According to the departments, this provision will also benefit employees who have been opting out of their employer’s group health plan because the employee share of premiums is too expensive.

When the rule was first proposed, John Barkett, senior director of policy affairs at Willis Towers Watson, in Washington, D.C., called it the first legal framework for employers that want to contribute to employees’ purchase of health insurance but not to pick the plan. He added that this model could lower costs for employers if they find and adopt plans from the individual marketplace that would be attractive to employees and cost less than the group plan they have today.

A press release from the departments says the HRA rule makes it easier for small businesses to compete with larger businesses by creating another option for financing worker health insurance coverage. The rule enables businesses to better focus on serving their customers and growing their businesses, vs. navigating and managing complex health benefit designs.

Additionally, the HRA rule increases workers’ choice of coverage, increases the portability of coverage, and should generally improve workers’ economic well-being. The rule will also allow workers to shop for plans in the individual market and select coverage that best meets their needs. Because HRAs are tax-preferred, workers who buy an individual market plan with an HRA receive the same tax advantages as workers with traditional employer-sponsored coverage. Further, by increasing employee options and empowering more people to shop for health plans in the individual market, the final rule should spur a more competitive individual market that drives health insurers to deliver better coverage options to consumers, the departments say.

The departments estimate that, when employers have fully adjusted to the rule, the expansion of HRAs will benefit approximately 800,000 employers, including small businesses and more than 11 million employees and family members, including an estimated 800,000 Americans who were previously uninsured.

An unpublished version of the final rule is available for download here. A Q&A about the final rule is here. And a model notice can be viewed here.