By Pension and Benefits Editorial Staff
Starting in January 2020, employers will be able to integrate health reimbursement arrangements (HRA) with individual health insurance coverage under final regulations issued in June 2019. The final rules also set forth conditions under which certain HRAs and other account-based group health plans will be recognized as limited excepted benefits. To learn about the ins and outs of the regulations, Wolters Kluwer reached out to Jack Hooper, CEO of Take Command Health.
WK: What is an individual coverage HRA and how does it differ from a standard HRA?
Hooper: An individual coverage HRA (let’s call it ICHRA or “ick-rah” for short) is a new model of employer-sponsored health insurance. Instead of sponsoring a traditional group plan, employers can now reimburse employees tax-free for individual health insurance and medical expenses.
There are two primary differences between an ICHRA and a traditional HRA:
- An ICHRA can reimburse individual insurance premiums, while a traditional HRA cannot.
- A traditional HRA must be “integrated” with a group health plan, whereas an ICHRA works with (i.e., “integrates with”) individual insurance plans.
WK: What medical expenses are eligible for ICHRA reimbursement?
Hooper: The list of eligible medical expenses is pretty wide-ranging, everything from doctor visits, prescriptions, medical equipment, etc. If you’re familiar with health savings accounts (HSAs), it’s the same list! If you want to get into the details, the IRS maintains a list and guidance in Publication 502.
WK: Is an individual covered by an ICHRA eligible for premium tax credits through the ACA exchange? Why or why not?
Hooper: It depends. ICHRA has a concept of “affordability” baked in. Large employers can satisfy the employer mandate by offering an “affordable” HRA. Employees that receive an “affordable” HRA offer are not eligible for tax credits, whereas employees that receive an “unaffordable” HRA can pick either a premium tax credit (PTC) or the HRA.
The next big question is what makes an HRA offer affordable or not? The IRS has provided several “safe harbors” and methods to calculate affordability for ICHRA. We’ve provided some examples of how it works here (https://www.takecommandhealth.com/ ichra-guide#afford) and are working on an affordability calculator.
As a side note, smaller employers (under 50 employees) that are not subject to the mandate, may want to intentionally design an unaffordable HRA so that their employees can choose the PTC option.
WK: How do the regulations attempt to address the issue of employers engaging in adverse selection?
Hooper: This was very important to the regulators and the subject of many of the public comments provided. I think the new regulations strike a pretty good balance between providing design flexibility for employers (important for adoption) and creating some boundaries to prevent abusive practices or risk shifting.
The major design components employers can use are the “employee classes”. This allows employers to group similar employees into groups and to vary their offer of health coverage (whether it’s an ICHRA or traditional group plan) by each class. Classes include: full-time employees, part-time employees, employees who work at a certain location (rating area), employees that haven’t satisfied a waiting period, etc. You can see a full list of the ICHRA classes here.
While there are numerous design options and ways to assemble classes (you can even combine them to create new, sub-classes!), all of them would not be trivial to manipulate if you were trying to manipulate your risk pool or discriminate unfairly in your offering. For example, you can’t use “job title” or things that would be easy to change to create classes.
Furthermore, if you are offering a traditional group plan to any class (and therefore might be tempted to shift risk off of the group plan), the regulations require that classes have a minimum number of participants. This starts at 10 employees for employers under 100 employees and scales up. If there’s no group plan being offered, then class size minimums do not apply.
WK: What are the requirements regarding avoiding ERISA plan status?
Hooper: ICHRA is considered a group plan and is subject to ERISA and COBRA requirements. The ERISA components that come into play are around providing plan documents and employee notices.
For COBRA, ICHRA is subject to COBRA unless an employer has an exemption reason. Those reasons are:
- fewer than 20 employees,
- a “church” plan, or
- a “government” plan.
We strongly recommend using a third party to setup and administer ICHRA (Full disclosure: That’s what we do at Take Command Health).
WK: What are the notice and substantiation requirements?
Hooper: It’s not too bad! Most of the regulations around notification are to allow employees sufficient time to shop for and enroll in an individual health insurance plan. If you’re offering a new ICHRA, notice must be given as soon as employees are eligible. If you’re renewing your ICHRA, then there’s a 90-day requirement to let employees shop.
For substantiation, employees must attest that they are maintaining coverage in a qualified individual health plan when they onboard and each time they submit an expense for reimbursement. We highly recommend employers utilize a 3rd party service that helps employees enroll (as well as verify enrollment) and check periodically through out the year. It’s much easier to fix things throughout the year than figure out at the end you’ve been reimbursing employees for insurance they never had, or insurance that was improper.
WK: What is an excepted benefit HRA and why would an employer offer one?
Hooper: An excepted benefit HRA (or EBHRA) is very similar to a traditional HRA. It works by integrating with a traditional group plan and does not work for individual insurance like an ICHRA does. The major difference though between an EBRA and traditional HRA is that employees can still utilize the EBHRA even if they don’t enroll in the group health plan it’s paired with. EBHRA can also pay for short-term insurance premiums, which is very unique but is limited to $1,800/yr which is pretty restrictive.
EBHRA was designed primarily for employers to help employees that cannot afford or don’t want to enroll in the traditional group plan. We’re eager to see how employers and benefit advisors deploy EBHRA. I think one challenge that will arise has to deal with adverse risk selection and whether or not insurance companies providing the underlying group plan will want to work with an EBHRA. I could see a scenario where group carriers won’t want to work with clients offering EBHRA because healthy employees will skip the expensive group coverage and pick up short-term, leaving older and sicker employees on the group plan.
WK: What type of employers and how many employers do you expect to implement an individual coverage HRA?
Hooper: Federal regulators (primarily Health and Human Services (HHS)) predict that 800,000 employers and their 11 million employees will adopt an ICHRA over the next five to 10 years as the market settles out. What’s fascinating is the individual Obamacare market is roughly at 10 million right now, so this is essentially doubling the individual market. Although employers of any size can use ICHRA (it can meet the employer mandate for large employers!), most expect it to be popular with smaller employers under 50 lives.
While we think the above projections are pretty good based on what we know now, there are some market changes that could occur that could drive that number much higher—possibly returning up to 50 million employees to the individual market. The major barriers to growth now likely have to do with weaknesses in the individual market in many geographies—plans are more expensive on the individual market and have a narrower network that may not be appealing to employers utilizing traditional group plans now. However, if some return to market, does that draw some of the major carriers back to the individual market? What if they design plans that do compete or are on par with small group plans? In that scenario or in those geographies, you’d have to think ICHRA adoption could pick up quickly—If employers could jettison the responsibility of managing a group plan and their employees could buy comparable plans themselves, I think that’s a recipe where we’ll see higher than expected adoption. Until we see those conditions appear though, we’ll stick with the HHS projections.
WK: Is there anything else you’d like to add?
Hooper: As a benefits professional, it’s been a long, long time since we’ve really seen something fundamentally new in our industry. I know we’ve seen promises of private exchanges taking over and stuff like that in the past that never materialized, but ICHRA feels different. While it’s easy to dismiss it because “the individual market stinks here”, there are some key advantages employers and their benefit consultants should keep in mind:
- ICHRA actually transfers risk off of an employer and onto the individual market.
- ICHRA allows for predictable costs.
- Some employees don’t care about PPO networks and would value choice and portability that ICHRA can provide.
All that to say, there will be areas where ICHRA can and will win against a traditional group offering. Benefit professionals need to be prepared to identify opportunities where ICHRA could help their clients (if you don’t, one of your competitors will try!).
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