Final Rule On Health Reimbursement Arrangements Could Shake Up Markets

Ruling will fundamentally change the way employers provide employee health care benefits……..

By Katie Keith

JUNE 14, 2019

On June 13, 2019, the Departments of Health and Human Services, Labor, and Treasury issued a new final rule to expand the use of health reimbursement arrangements (HRAs) by employers to fund premiums for their employees in the individual health insurance market. The final rule reverses prior federal guidance by allowing HRAs to be used to fund both premiums and out-of-pocket costs associated with individual health insurance coverage. The Departments also released new frequently asked questionsmodel attestations, and model notices.

The final rule is largely similar to the proposed rule, which received more than 500 comments from a stakeholders that include state regulatorsinsurers, and employers, brokers, and benefit advisors. The final rule’s major significant changes focus primarily on new “integration requirements” for HRAs. The rule also allows a new “excepted benefit HRA” option that employees can use to pay premiums for excepted benefits and short-term coverage. Individuals who gain access to an HRA or qualified small employer health reimbursement arrangement are eligible for a special enrollment period in the individual market.

The HRA rule completes the regulatory trifecta from President Trump’s executive order in October 2017. Rules on short-term coverage and association health plans have already been finalized; the final rule on HRAs fulfills the executive order’s directive to the Departments to “increase the usability of HRAs, to expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup coverage.”

The impact of the HRA rule—both on employees and individual market consumers—will depend significantly on what employers do next. The Trump administration is trying to make this an attractive option to employers, especially small businesses. They expect employers to take them up on this offer, resulting in a significant increase in the size of the individual market. The administration is also moving quickly: despite requests for a delay, the rule will go into effect beginning on January 1, 2020.

On the one hand, the rule could be a welcome step in de-coupling health insurance from the workplace, an idea that has had bipartisan support in the past. On the other, it will be interesting to see how the rule plays out since disruption to employer-sponsored coverage has long been a third rail of health policy. With nearly 7 million people expected to lose their job-based coverage by 2029, it’s worth watching to see whether critics of other proposals that would disrupt job-based coverage (such as, say, Medicare for All) will level the same criticisms at the administration’s rule.

This post offers background information on HRAs; summarizes the final rule; and briefly discusses the rule’s potential implications for employers, employees, and the individual insurance market.

Background On Health Reimbursement Arrangements

An HRA is a type of account-based group health plan that allows employers to fund medical care expenses for their employees on a pre-tax basis. An HRA must be funded solely by employer contributions and can only be used to reimburse an employee for the medical care expenses (as defined by the IRS) of the employee, dependents, or children up to age 27 up to a maximum dollar amount. Any unused portion of the HRA in one year may be carried forward to subsequent years. If certain rules are followed, neither employer contributions nor employee reimbursements from an HRA are subject to income or employment taxes under federal law.

HRAs are not explicitly mentioned in the ACA and were not formally recognized in the tax code prior to 2016. Rather, these arrangements were created by IRS guidance. HRAs qualify for pre-tax treatment because they are considered group health plans. As group health plans, HRAs have historically not been able to be used to pay premiums for coverage in the individual market.

In addition, HRAs must comply with certain group health plan requirements—namely, Sections 2711 and 2713 of the Public Health Service Act, which ban the use of annual dollar limits on essential health benefits (EHBs) and require the coverage of preventive services without cost-sharing, respectively. However, HRAs on their own do not comply with Sections 2711 or 2713. Historically, to satisfy these requirements, an HRA had to be integrated with other group health plan coverage that meets these requirements.

Put another way, HRA contributions could only be sheltered from taxation if they are coupled with an ACA-compliant group health plan (not an individual policy). This was the position that the Departments took as early as regulations in 2010 followed by Labor guidanceCMS guidance and regulations in 2013, plus additional guidance in 2014 and 2015. In a 2015 rule, the Departments incorporated this prior subregulatory guidance and again confirmed the interpretation that HRAs cannot be integrated with individual coverage for the purposes of complying with Sections 2711 and 2713. The IRS and CMS issued additional guidancethroughout 2015, 2016, and 2017.

Under this prior interpretation, HRAs were treated as integrated with group health plan coverage under certain circumstances. First, the employer had to offer a group health plan other than the HRA. Second, an employee receiving the HRA had to be enrolled in a non-HRA group health plan. Third, access to the HRA had to be limited to employees enrolled in a non-HRA group health plan. This “non-HRA group health plan” could not consist only of excepted benefits.


The 21st Century Cures Act (Cures Act), adopted in 2016, included a limited exception to this rule that only applies for small employers. In 2016, Congress authorized a new arrangement known as the qualified small employer HRA (QSEHRA). QSEHRAs are an option for employers with fewer than 50 full-time equivalent employees that are not subject to the employer mandate and that do not offer a group health plan to any employees. Qualifying small employers can opt to fund a QSEHRA to pay or reimburse employees for premiums for minimum essential coverage. This can include minimum essential coverage in the individual market. Similar to the treatment of other group-based coverage, if an employee is provided with a QSEHRA that is considered “affordable,” neither the employee nor their dependents are eligible for premium tax credits through the marketplace.

Concerns About Discrimination And Employee Dumping

One potential concern about the expanded use of HRAs is that employers could try to incentivize employees with health conditions to accept the HRA and move away from a group health plan and into the individual market. Without restrictions, there is concern that employers could, say, offer an HRA only to employees with health issues or offer a group health plan that does not adequately cover high-cost conditions, thus driving an employee with that condition into the HRA and individual market.

In guidance from 2014, the tri-agencies interpreted nondiscrimination protections under the Health Insurance Portability and Accountability Act (HIPAA) to limit this type of activity. Under this guidance, employers cannot offer only employees with health conditions a choice between a 1) group health plan or 2) cash. Offering cash as an alternative to traditional coverage for those with high-risk health care needs was deemed as an eligibility rule that violates HIPAA nondiscrimination requirements by discouraging enrollment in an employer’s group health plan.

If employers were able to “dump” their high-risk employees into the individual market through an HRA (with the goal of reducing their own group health plan costs), it could have significant consequences for the individual market risk pool. This could result in worse overall risk profiles and lead to higher premiums, higher federal outlays for premium tax credits, and a higher uninsured rate.

The Final Rule

The final rule makes two major changes to the regulation of HRAs and other account-based group health plans, such as health flexible spending arrangements and employer payment plans. (Although the rule focuses on HRAs, it applies equally to most other account-based group health plans and is thus not limited solely to HRAs. The reference to HRAs does not include QSEHRAs, medical savings accounts, health savings accounts, or cafeteria plan premium arrangements.)

First, the final rule will allow employers to provide an HRA that is integrated with individual health insurance coverage (HRA-IIHIC). (The final rule refers to this as an “individual coverage HRA.”) An HRA-IIHIC could be offered to current and former employees and their dependents. For purposes of this rule, “individual health insurance coverage” refers to coverage offered in the individual market as well as fully insured student health insurance. It does not include short-term, limited-duration insurance, coverage that consists solely of excepted benefits, health care sharing ministries, or TRICARE (with some special rules for TRICARE enrollees that are not discussed in this post).

Employers can offer an HRA-IIHIC so long as they follow the new integration rules. The HRA-IIHIC can, but is not required to, pay premiums for individual coverage. Employers can specify which medical care expenses are eligible for HRA-IIHIC reimbursement; reimbursement may be allowed only for premiums, non-premiums (such as cost-sharing), or particular medical expenses. The rule prohibits an employee who is offered or receives an “affordable” HRA-IIHIC from being eligible for premium tax credits and authorizes a special enrollment period in the individual market for those who gain access to an HRA-IIHIC or a QSEHRA.

Second, the rule allows employers to offer new “excepted benefits HRAs.” These could be funded up to $1,800 and used to pay premiums for excepted benefits, short-term plans, and COBRA premiums.

In response to comments, the Departments discuss, at length, their legal authority to adopt the rule. Some commenters asked whether the Departments have the authority to allow HRA-IIHICs; others noted that the creation of QSEHRAs is evidence that Congress wanted only this limited exception for HRA-IIHICs. Still others asserted that the HRA rule is contrary to the ACA’s intent to create a stable individual market. Similar comments were raised with respect to the new excepted benefits HRA. The Departments generally responded to these points, asserting that it is on solid legal ground. Unlike in other recent rules, the Departments did not add a severability provision to the regulations.

Integration Rules For An HRA With Individual Health Insurance Coverage

As discussed above, an HRA must work in conjunction with a plan that complies with Sections 2711 and 2713 of the Public Health Service Act (on annual dollar limits and preventive services without cost-sharing, respectively). Individual health insurance coverage is generally assumed to satisfy these provisions. To qualify as an HRA-IIHIC that does not discriminate based on health status, the HRA or plan sponsor has to satisfy three general rules and six integration requirements.

General Rules

First, a participant must actually enroll in individual health insurance coverage that complies with Sections 2711 and 2713. Thus, an HRA for individuals who are eligible for, but do not enroll in, individual coverage would be noncompliant. HRA sponsors must design their terms to account for the effective dates of individual coverage, which can vary based on enrollment.

Second, if an enrollee stops being covered under the individual policy, they forfeit the HRA, and the HRA would stop reimbursing their medical expenses. This forfeiture applies prospectively, not retroactively, meaning expenses would be reimbursed until the individual lost their coverage. Individuals that lose coverage under the HRA for reasons other than failing to maintain individual coverage may qualify for continuation rights under the Consolidated Omnibus Budget Reconciliation Act (COBRA).

Finally, individuals who are within the “grace period” to pay their premiums are still considered enrolled in individual coverage. If the grace period passes (or a policy is cancelled or terminated retroactively for a different reason), the individual should notify the HRA that their coverage has been cancelled or terminated. The HRA cannot reimburse for expenses on or after the cancellation or termination date.

Coverage Satisfies Sections 2711 and 2713

Any type of coverage that complies with Sections 2711 and 2713 qualifies for HRA integration. This includes fully insured student health insurance coverage, catastrophic coverage, “grandmothered” individual health insurance, and individual coverage sold through a private exchange.

Citing the burden on employers, the Departments will not require HRAs to confirm that their participants are enrolled in individual coverage that truly complies with Sections 2711 and 2713. Instead, the rule finalizes a “proxy” approach where all individual health insurance coverage is deemed subject to and compliant with Sections 2711 and 2713 and thus available for integration with an HRA. (As noted above, “individual health insurance coverage” does not include short-term, limited-duration insurance, coverage that consists solely of excepted benefits, or health care sharing ministries.)

The agencies acknowledge that the proxy approach could allow HRA integration with a grandfathered policy in the individual market (even though grandfathered policies do not have to comply with Sections 2711 and 2713). The Departments do not seem concerned about this issue. Noting that few people have maintained their individual grandfathered coverage since 2010, they expect “extremely limited instances” when one of these individuals would be offered and accept an HRA-IIHIC.

An HRA-IIHIC could be sold in a state with a Section 1332 waiver. The Departments reason that Sections 2711 and 2713 are not waivable under Section 1332 and thus would continue to apply to individual coverage even in states with a state innovation waiver.

Only One Option Per Class Of Employees

Employers cannot offer both an HRA-IIHIC and a traditional group health plan to the same class of employees. Preventing employees from choosing between the two options helps dampen concerns about market segmentation. Employers can, however, offer a traditional group health plan to a specific class of employees (i.e., full-time employees) while offering an HRA-IIHIC to a separate class of employees (i.e., part-time employees) so long as no employee is offered both options.

The final rule makes some of its most significant changes to the classes of employees. In the proposed rule, the agencies had enumerated eight employee classes and proposed to allow HRAs to identify additional classes based on a combination of the enumerated classes. The final rule includes 10 enumerated classes and allows HRAs to identify additional classes based on a combination of two or more of the enumerated classes. Many of the classes remain the same (or similar) from the proposed rule. However, the agencies did not finalize the under-age-25 class of employees, citing concerns about risk segmentation and administrative complexity. They also added new employee classes (salaried employees, non-salaried employees, and employees of a temporary hiring agency), a minimum class size requirement, and examples to illustrate these changes.

The Departments acknowledge that the risk of adverse selection and discrimination increases as the number of classes increases. In light of this, they declined to adopt additional separate classes, despite comments urging them to do so. The Departments rejected separate classes for former employees; employees who are eligible for Medicare and those who are enrolled in Medicare; and classes based on roles or job title, employee tenure, religion, and a host of other factors. They also did not include independent contractors or self-employed individuals as a class because, as non-employees, these individuals cannot be provided a tax-favored HRA.

Consistent with the proposed rule, HRAs must define “full-time employee,” “part-time employee,” and “seasonal employee” consistent with existing federal law. Because plan sponsors could choose among multiple sets of definitions, they are required to adopt and maintain the same set of definitions throughout a given plan year. Classes of employees are determined based on the employees of a common law employer, rather than a controlled group of employers.

In a new addition from the proposed rule, the Departments adopt a minimum size requirement for certain classes and circumstances where there is the greatest potential for employer manipulation and adverse selection. This minimum size requirement varies based on employer size and applies only if an employer offers a traditional group health plan to one employee class and an HRA-IIHIC to another. Further, this restriction only applies when certain classes are offered an HRA-IIHIC. These classes are salaried employees, non-salaried employees, full-time employees, part-time employees, employees whose worksite is in the same rating area (with some exceptions), and the combination class (with some exceptions). For full- and part-time employees, the minimum class size requirement only applies to the class that is offered the HRA-IIHIC.

If the minimum class size requirement applies, the class must include a minimum number of employees for the HRA-IIHIC to be offered to that class. The minimum class size is 10 employees for an employer with 100 or fewer employees and 20 employees for an employer with more than 200 employees. For a mid-sized employer—with 100 to 200 employees—the minimum class size is at least 10 percent of the total number of employees. The number of employees is determined before the HRA plan year begins and is based on the number of employees expected to be employed on the first day of the plan year. Whether a class satisfies the minimum size requirement is determined on the first day of the plan year; it will not vary based on changes in the number of employees in the class during the plan year.

The final rule includes clarifications regarding what happens when an employee moves from one class to another. And, although an employer cannot generally allow employees to make salary reduction contributions to a cafeteria plan to purchase a qualified health plan through the exchange, they can do so for individual coverage offered outside the exchange. Thus, an employee covered by an HRA-IIHIC who purchases individual coverage outside of the exchange could, if the employer allows it, pay their premiums through a cafeteria plan. The Departments are otherwise largely silent on issues related to the intersection of HRAs and cafeteria plans but may issue future guidance as needed.

The Departments declined to adopt a “facts and circumstances” test which would have provided them with discretion to determine whether an HRA-IIHIC is being offered in a discriminatory manner, even if complies with the rule. However, other federal nondiscrimination rules continue to apply, including HIPAA nondiscrimination protections (as noted above) and rules under ERISA, the Americans with Disabilities Act, and the Social Security Act.

Same Terms

To the extent that an employer offers an HRA-IIHIC to a class of employees, it must do so on the same terms for all participants within the class. This means that an employer cannot make employee-specific offers regarding an HRA—such as offering a more generous HRA to an employee based on his or her health status. There are two exceptions to this general rule. A plan sponsor could offer higher HRA contributions based on an employee’s 1) age (capped at up to three times as much as the contribution to the HRA’s youngest participant) or 2) family size. In both cases, all participants in the same class must receive the same increase based on age or family size.

The proposed rule had not capped contributions for older employees using a 3:1 ratio. The Departments adopted this restriction in response to concerns that unlimited HRA-IIHIC contributions based on age could be used to incentivize older, less healthy workers to the individual market. The agencies agreed that an outer limit on age-based contributions would help limit adverse selection and adopted the 3:1 limit to mimic the ACA’s age rating rules (although, as discussed here, they’re not perfectly analogous). The agencies considered, but did not adopt, limits on HRA-IIHIC contributions based on family size.

In another change from the proposed rule, the final rule includes a variation of the “same terms” rule when it comes to new hires. An employer that offers a traditional group health plan to a class of employees may prospectively offer an HRA-IIHIC only to new employees in the same class. The Departments refer to this as the “new hire subclass.” Employers would need to select a prospective “new hire date” on or after January 1, 2020 and could set different dates for different classes of employees. Employers could discontinue the new hire subclass rule at any time, and the preamble lays out a number of restrictions on employers’ ability to reinstate this rule. Finally, the minimum class size requirement described above does not apply to a new hire subclass (unless the employer subdivides the new hire subclass into other classes where the minimum class size requirement applies).

For new hires or dependents covered by an HRA-IIHIC after the first day of the plan year, the HRA-IIHIC can make a full annual contribution or adopt a “reasonable” methodology to prorate the amount. The final rule also addresses cases when an employer varies contributions based on family size and an employee’s family size increases or decreases during the plan year. In that case, the HRA-IIHIC can make a contribution in the same amount as other participants in the class with the same family size—or adopt an appropriate proration methodology. Employers must determine the method they will use before the beginning of the plan year and use the same method for all participants within the class.

The final rule also includes an exception for former employees. An employer is not required to offer an HRA-IIHIC to all former employees (or to all former employees in the same class). Thus, an employer can offer an HRA to some, but not all, former employees within a class. If the employer does offer an HRA-IIHIC to former employees, it  must be on the same terms as for the other employees in that class. Former employees are considered to be in the class they were in immediately prior to separation from service. An employer could not provide some employees in a class with larger or smaller HRA amounts based on how many years they have been employed or their status as former employees.

Opt Out

All participants, including former employees, must be able to opt out of an HRA-IIHIC and waive future HRA reimbursements on at least an annual basis and in advance of the start of the plan year. This would allow some eligible individuals to potentially claim a premium tax credit for coverage through the marketplace.

If an individual is covered by an HRA-IIHIC, the individual is not eligible for premium tax credits regardless of the amount of reimbursement available under the HRA. But, recognizing that some individuals may be better off claiming a premium tax credit than receiving reimbursement under an HRA, the final rule allows would-be HRA participants to opt out of and waive future reimbursements from the HRA. Thus, employees could claim a premium tax credit if they opt out of the HRA and the HRA is unaffordable or does not provide minimum value. If an employee is terminated, remaining funds in the HRA are forfeited or the participant can permanently opt out of and waive future HRA reimbursements.

Verification Procedures

HRAs are required to adopt reasonable procedures to confirm that HRA participants are, or will be, enrolled in qualifying individual health insurance coverage for the portion of the plan year when they will be covered. The final rule does not dictate what these verification procedures must be. However, the rule suggests that employers could require participants to 1) submit a document from a third-party, such as an insurance card or explanation of benefits, to show the participant has enrolled or will enroll in coverage; or 2) submit an attestation that the participant has enrolled or will enroll in coverage, the date of coverage, and the insurer’s name.

The annual coverage substantiation requirement is intended to serve as verification for the entire HRA plan year. Although HRAs can establish their own deadline for annual verification, it should be no later than the first day of the HRA plan year (or no later than the date that HRA coverage begins for those who become eligible during the plan year). A document from an exchange showing that an individual has completed the plan selection process would satisfy the annual substantiation requirement.

The final rule also requires ongoing enrollment verification with each new request for reimbursement under the HRA. An HRA cannot reimburse a medical expense until the participant substantiates (again) that they are enrolled in individual coverage. This requirement could be satisfied with a written attestation from the participant or a third-party document (from, say, an insurer) and could be included as part of the form used to request reimbursement. The Departments also released optional model attestation language for HRAs. HRAs can use electronic means to satisfy these requirements so long as those methods reasonably verify enrollment.

One commenter suggested that this requirement could be satisfied if the employer advised employees to contact their employer if they were no longer enrolled in individual health insurance coverage. The Departments rejected this proposed safe harbor, noting that it would be insufficient to ensure that a participant was continuously enrolled in coverage.

An HRA can rely on a participant’s documentation or attestation unless it has actual knowledge that the employee or dependents is not enrolled, or will not enroll, in individual coverage. An inaccurate attestation or document will not cause the HRA-IIHIC to lose its integrated status unless the HRA has actual knowledge of the inaccuracy. If the HRA knows of an inaccuracy, it cannot reimburse for expenses. While the Departments will require ongoing verification, this requirement could be satisfied through attestations. But, beyond the attestation, the HRA would not have to confirm that an individual is enrolled in qualifying coverage in the individual market. This raises the concern that individuals could unknowingly attest that they are enrolled in qualifying coverage (such as an ACA plan) even if they are enrolled in, say, a short-term plan (which does not qualify as individual health insurance coverage for purposes of an HRA-IIHIC). Relying on a consumer attestation alone in this case could be especially concerning given misleading advertisement practices for non-ACA products.

Written Notices

HRAs must provide detailed written notices to each participant at least 90 days before the beginning of each plan year. For those who enroll after the beginning of the plan year or who miss the initial notice, the HRA must provide the notice no later than the individual’s effective date. Brand new HRAs may have additional flexibility on the timeliness of the notices. Although commenters asked for clarity on the delivery methods for notices, the Departments provided little guidance beyond citing current rules under ERISA and confirming that the notice may be delivered with other plan materials and notices under the Fair Labor Standards Act.

The notice can include additional information but, at a minimum, must include ten specific pieces of information. Notices must, for instance, state the maximum dollar amount for each participant, note that participants must enroll in individual coverage (and that this coverage cannot be short-term, limited-duration insurance or excepted benefits), and explain the implications of the HRA on eligibility (or not) for premium tax credits through the marketplace. Because the HRA-IIHIC is a group health plan, the HRA must also provide enrollees with a summary of benefits and coverage. The Departments released optional model notices alongside the rule.

Relative to the proposed rule, the final rule additionally requires the notice to include 1) specific contact information for someone who can answer HRA-related questions, 2) a statement on the availability of a special enrollment period (SEP) for those who newly gain access to an HRA, 3) coverage effective dates to help with timely enrollment in coverage, 4) a statement that Medicare beneficiaries are ineligible for premium tax credits; and 5) a statement about finding assistance for determining HRA-IIHIC affordability. It also amends some of the notice language on QSEHRAs. The Departments expect these notices to be six pages long.

The written notice does not need to include information specific to a given employee or participant, such as whether the HRA is considered “affordable” for the participant or not. Participants will need to determine that information on their own or through the exchange based on their household income and the premium for the lowest-cost silver plan in their area. The Departments do not newly require these notices to be translated into other languages but note that other existing language access protections may apply.

Acknowledging that the HRA-IIHIC option will be confusing to consumers, the federal government is volunteering to do some of the explaining itself. Before the 2020 open enrollment period, HHS will “provide resources to assist individuals offered an individual coverage HRA” who are using HHS will help these individuals determine whether their HRA-IIHIC is deemed “affordable” and whether they qualify for a SEP. The agency will also work with state exchanges to develop resources for their platforms. Additional guidance will be released on a safe harbor or other method to give employers more predictability about application of the employer mandate.

Other Issues: Medical Expenses, HSAs, and Medicare

The HRA-IIHIC can only be used to reimburse medical expenses consistent with existing HRA rules. Under these rules, medical expenses include amounts paid for diagnosis, treatment, or prevention, for medical-related transportation, for certain long-term care services, and for medical insurance. Commenters asked the Departments to confirm that various types of excepted benefits (such as hospital indemnity or other fixed indemnity coverage) and expenses related to health care sharing ministries and direct primary care arrangements qualify as medical expenses under the rule (and are thus reimbursable by an HRA-IIHIC). The Departments referred to existing rules defining medical expenses and may address some of these issues in the future.

Commenters also asked the Departments to clarify whether an individual covered by an HRA-IIHIC can contribute to a health savings account (HSA). The answer: it depends on the HRA-IIHIC. An HRA-IIHIC that reimburses solely for individual coverage premiums would not disqualify contributions to an HSA if the individual otherwise meets the requirements (of being enrolled in a high-deductible health plan with no other disqualifying coverage). But if the HRA-IIHIC reimbursed for first-dollar cost-sharing, it would not be compatible with an HSA. Under the final rule, an employer can still satisfy the “same terms” requirement if it offers employees within the same class a choice between an HSA-compatible HRA-IIHIC and a non-compatible HRA-IIHIC so long as both types of HRA-IIHIC are offered to all employees in the class on the same terms.

Under some circumstances, HRA-IIHICs can be integrated with Medicare Parts A and B or C and used to reimburse premiums for Medicare and Medicare supplemental health insurance (known as Medigap) as well as other medical expenses. The preamble includes an extended discussion of these special integration rules for an HRA-IIHIC with Medicare. The rule also includes a new provision on student premium reduction arrangements.

Premium Tax Credits

As noted above, an individual covered by an HRA-IIHIC would be ineligible for premium tax credits through the marketplace. This is because an HRA-IIHIC qualifies as minimum essential coverage under an employer plan during any month when the HRA is considered “affordable.” Similar to other types of employer coverage, an employee could be eligible for premium tax credits if they declined the offer of an HRA-IIHIC and that HRA was considered unaffordable or not providing minimum value.

Under the final rule, an HRA or other account-based group health plan is “affordable” if the employee’s monthly required HRA contribution does not exceed one-twelveth of the product of the employee’s household income and the required contribution percentage. The employee’s required HRA contribution is calculated by subtracting 1) the monthly self-only HRA plan amount from 2) the monthly premium for the lowest-cost silver plan for self-only coverage offered through the marketplace. This required HRA contribution can be no greater than 9.86 percent of the employee’s household income. If it is, it will be considered unaffordable and the employee will be eligible for premium tax credits through the marketplace. The employee’s monthly self-only HRA plan amount is based solely on the amount that is made newly available in a given year—it would not include carryover funds from a prior year or different HRA.

If the “affordability” test is met, then the HRA also meets the minimum value standard. Affordability is based on the lowest-cost silver marketplace plan: the rule uses this plan because it is certain to cover at least 66 percent of costs and thus meet the minimum value requirement of 60 percent. The final rule otherwise generally aligns with current eligibility rules for premium tax credits for non-HRA employer-sponsored coverage. For example, individuals who use tobacco (and would face higher premiums in most states due to the tobacco surcharge) will have the affordability of their HRA-IIHIC determined based on lower premiums that do not reflect the tobacco surcharge.

Commenters had raised concerns about consumer confusion with respect to premium tax credit eligibility. Some urged the Departments to allow employees to be eligible for both the HRA-IIHIC and premium tax credits or to be able to choose between the two options. Others urged the Departments to determine the HRA’s affordability based on family, rather than self-only, coverage. The Departments rejected these proposals.

These changes will require additional resources for the federal and state exchanges to verify premium tax credit eligibility for those offered an HRA-IIHIC. The Departments estimate total one-time costs of about $3.9 million for the federal exchange and $46.8 million for the 12 state exchanges. Commenters requested additional funding for state exchanges to develop a way to electronically verify information about HRA-IIHIC. The Departments note only that Congress appropriates funding and they do not have the authority to provide that additional funding to state exchanges. (Additional ongoing costs for the federal marketplace as a result of the rule range from $56 million in 2020 to $243 million by 2022. In the 12 state exchanges, ongoing costs range from about $20 million in 2020 to $85 million by 2022.)

The rule also incorporates an employee safe harbor such that an employee could rely on a marketplace’s determination of unaffordability even if their HRA offer ultimately proved to be affordable based on actual household income. This means an employee who received premium tax credits after the marketplace deemed them eligible would not be required to repay those premium tax credits later. Employees could rely on this safe harbor so long as they do not intentionally or recklessly provide incorrect information and affirmatively provide information to the marketplace as needed during an eligibility redetermination process.

Employer Mandate

The Departments believe that the employers most likely to offer an HRA-IIHIC will be small employers—i.e., those with 50 or fewer full-time equivalent employees who are not subject to the ACA’s employer mandate. However, employers subject to the employer mandate could meet this standard by offering an HRA-IIHIC. An HRA is an eligible employer-sponsored plan, meaning a large employer could satisfy the employer mandate by offering an HRA-IIHIC that is affordable and meets minimum value requirements to at least 95 percent of its full-time employees and dependents.

The Departments issued separate guidance on this issue in November 2018, laying out how the employer mandate would apply to those that offer an HRA-IIHIC and potential safe harbors and examples. They also solicited comment on the proposed approach. The Departments will propose additional rules on the issues addressed and comments received on the November guidance.

Special Enrollment Periods

As noted above, employees and dependents must enroll in individual health insurance coverage to take advantage of the new HRA-IIHIC option. To accommodate employees who might need access to individual market coverage or want to change to a different plan to take advantage of the HRA-IIHIC, the rule creates an SEP for employees who newly gain access to or are newly provided an HRA-IIHIC or QSEHRA. The SEP is available for coverage offered both on and off the marketplace.

When a qualified individual, enrollee, or dependent gains access to an HRA-IIHIC or QSEHRA, they can enroll in coverage or change their plan for up to 60 days. The rule includes clarifications regarding coverage effective dates to better ensure that individuals are enrolled in individual coverage before their HRA-IIHIC effective date. The rule also includes an option for advance availability (meaning qualifying employees have 60 days before or after the triggering event to select a qualified health plan). Individuals will be subject to the existing SEP verification process in states that use, and additional guidance from HHS is expected. To the extent that a current marketplace enrollee qualifies for this new SEP, HHS eliminated its current plan category limitations.

HHS declined to extend this SEP on an annual basis but notes that individuals still have access to other SEPs and can change their individual coverage during the annual open enrollment period.

New Excepted Benefit HRA

The rule recognizes an additional limited excepted benefit HRA for purposes of federal law. This new HRA can be used to reimburse for excepted benefits (such as limited-scope vision or dental benefits) as well as other types of medical expenses that do not qualify as excepted benefits. The new HRA seems primarily designed to reimburse premiums for, and thus incentivize enrollment in, short-term plans (although the final rule includes a new limitation). The Departments were not swayed by commenters who argued that the new HRA will incentivize short-term coverage, cause adverse selection, and increase consumer confusion.

To qualify as an excepted benefit HRA, an HRA must 1) not be an integral part of a group health plan; 2) provide benefits that are limited in amount; 3) not reimburse for premiums for certain health insurance coverage; and 4) be made available under the same terms to all similarly situated individuals. An employer cannot offer both an HRA-IIHIC and an excepted benefit HRA to any employee.

First, to ensure that the HRA is not an integral part of a plan, the employer must provide some other group health plan (that satisfies the requirements under Sections 2711 and 2713) in addition to an excepted benefit HRA to the same HRA participants for the same plan year. Despite comments urging them to do so, the Departments did not limit excepted benefit HRAs to only those who actually enroll in their employer’s traditional group health plan. The agencies do not believe that employees will rely on the excepted benefit HRA as their primary form of coverage, so they are not requiring dual enrollment.

Second, the excepted benefit HRA must be sufficiently limited to qualify as a limited excepted benefit. Here, the Departments cap the newly available amount for an excepted benefit HRA at $1,800 per plan year, indexed for inflation. The Departments will publish the adjusted inflation amount no later than June 1. Carryover amounts from one plan year to the next will be disregarded for purposes of the $1,800 limit. If an employer provides more than one HRA over the same time period, the amounts across all the HRAs (with the exception of an HRA that reimburses for only excepted benefits) will be aggregated to determine whether the benefits are limited to $1,800.

Third, excepted benefit HRAs cannot be used to reimburse premiums for individual health insurance coverage, group health plan coverage (other than continuation coverage), or Medicare Parts A, B, C, or D. (This new HRA may be used to reimburse for qualified cost-sharing associated with these types of coverage, but not premiums.) The HRA may, however, be used to reimburse premiums for short-term plans and COBRA coverage, or for cost-sharing under an excepted benefit HRA.

The final rule includes a new way to restrict some excepted benefit HRAs from reimbursing short-term plan premiums. The Departments adopted this exception to help address concerns about the potential for adverse selection in the small group market. An HRA cannot reimburse for short-term plan premiums if 1) the HRA is offered by a fully insured or partially insured small employer, and 2) the Departments find that reimbursement for short-term plan premiums has significantly harmed the small group market in the employer’s state. This finding from the Secretary of HHS, in conjunction with the Secretaries of Labor and Treasury, would be made in response to a written recommendation from state officials. The Secretary must formally publish this finding in the Federal Register and give entities enough time to adjust their plan offerings.

The rule does not preempt state regulation of short-term plans, and states can fully prohibit the sale of short-term plans if they want to. Individuals who lose their short-term plan coverage because of a rescission would qualify for a SEP to enroll in a group health plan (but not for a SEP in the individual market).

Finally, the excepted benefit HRA must be made available under the same terms to all similarly situated individuals in an employee class regardless of any health factor. The Departments define “similarly situated individuals” based on the definition under HIPAA nondiscrimination rules. Thus, the excepted benefits HRA cannot be offered only to employees who have cancer or only those who pass a physical examination. Employers also cannot offer a higher amount in the HRA based on health status or limit enrollment in the HRA to those who declined traditional group health plan coverage.

Despite the urging of commenters, the Departments did not adopt new notice requirements for excepted benefit HRAs. They believe that existing notice requirements under ERISA are sufficient and cross-reference these existing provisions. HHS will propose additional notice requirements for non-federal governmental plan excepted benefit HRAs in the future.

Individual Health Insurance Coverage And ERISA Plan Status

The rule includes a Department of Labor-only clarification to confirm that the definition of “group health plan” will not include premiums for individual health insurance coverage that are reimbursed by an HRA or other arrangement—so long as the employer complies with a variety of requirements.

Among these requirements, individual coverage must be completely voluntary for employees and the employer cannot select or endorse the individual coverage. To avoid running afoul of the “endorsement” prohibition, employers should provide unbiased, neutral, uniformly available assistance to employees shopping for individual coverage. Use of a private exchange could satisfy the “endorsement” prohibition, but it will depend on how the exchange is designed. The Departments suggest that such a tool or web-based platform should display information about all coverage options in a state and present these options in a neutral way (without, for instance, recommended or starred listings). The Department opted not to finalize an annual notice requirement that the HRA-IIHIC coverage is not subject to ERISA. Each of the criteria is discussed in more detail in the preamble.

The clarification assures stakeholders that individual market policies are not part of an HRA for purposes of ERISA. The same change applies to other arrangements, such as QSEHRAs and salary reduction arrangements under a cafeteria plan, where employees are reimbursed for the purchase of individual market coverage or allowed to pay a portion of their premiums not covered by the HRA or QSEHRA.

Clarification is needed because the involvement of an employer in the HRA-IIHIC could result in a situation where individual health insurance coverage is treated as an employee welfare benefit plan or group health plan under ERISA. If individual market coverage became subject to both individual and group market requirements, it could result in conflicting requirements, uncertainty, and violation of some of the market rules (such as the single risk pool requirement). In light of those concerns, the Department further confirmed that this change is a safe harbor. The Department confirmed that its criteria account for some, but not all, circumstances where a workplace arrangement falls outside the scope of an ERISA plan.

Despite concerns that individual coverage could be treated as an ERISA plan, the Department then adopts a more expansive definition of “reimbursement” that seems to blur the lines of the employer’s role in paying for the HRA-IIHIC. Under this definition, “reimbursement” includes direct payments made to the employee’s insurer by the employer, employee organization, or plan sponsor. Employers could thus directly pay premiums to an insurer for individual coverage for its employees (rather than having the employee use the funds in the HRA to pay the insurer on their own behalf). The Department includes a few cautionary notes about ensuring that employers do not violate the “endorsement” criteria (by, say, excluding certain insurers or placing additional burdens on employees if they choose a different insurer). Employers must also affirmatively request that the employer make the payment.

All three Departments propose to amend their definition of “group health insurance coverage.” The rule amends this definition to state that HRA reimbursement for individual health insurance coverage premiums or a salary reduction arrangement are not offered in connection with a group health plan and are not insurance coverage.

EHBs For Large Employers

The rule amends existing regulations on the ban on annual dollar limits under Section 2711 of the Public Health Service Act. Section 2711 only prohibits annual dollar limits on EHB; non-EHB can continue to have annual dollar limits. Under prior regulations and guidance, group health plans and other insurers not required to cover EHB can choose to define EHB based on an EHB-benchmark plan from any state or one of the three Federal Employee Health Benefits Program options.

The rule change allows for even more flexibility for group health plans in defining their EHB requirements. Beginning in 2020, group health plans can adopt an EHB-benchmark plan selected by a state based on the new process adopted in the 2019 payment rule. This new process dramatically increased the number of EHB-benchmark plan options. This amendment to the regulation is not specific to HRAs and could have broader impacts for access to covered benefits in the group market.

Brief Implications

The impact of the new HRA-IIHIC option will depend significantly on what employers do next. The Trump administration is trying to make this an attractive option to employers, especially small businesses, and they expect employers to take them up on their offer. An estimated 11.4 million people will be in an HRA-IIHIC in 2029 while the number of people with traditional group health plan coverage will drop by up to 6.9 million.

But the rule itself is quite complex, and employers of all sizes will have to meet a number of requirements before offering an HRA-IIHIC. New substantiation and notice requirements, for instance, will result in administrative and compliance burdens. Employees are likely to be confused, particularly if employers transition from a group health plan to an HRA-IIHIC. The rule could lead to coverage losses if employers stop offering group health plans in favor of an HRA and their employees do not accept the HRA or obtain other coverage. The rule could also cut off access to marketplace subsidies, potentially resulting in higher premiums through an HRA, and consumers may face higher cost-sharing and narrower networks in the individual market relative to a traditional group health plan.

At the same time, the HRA-IIHIC might prove attractive to employers who do not currently offer coverage to their employees but now have a way to provide funds to support coverage. If the employers that opt to offer the HRA-IIHIC have generally healthy workforces, this influx into the individual market could be good for the individual market risk pool. The broader the market, the better the average risk profile and the lower the premiums. However, the Departments own estimates suggest that premiums in the individual market will rise by about 1 percent throughout the 2020 to 2029 period. This is because employers that will be attracted to the HRA option are expected to have slightly higher health care expenses than other employers and current individual market enrollees.

The final rule does include some additional safeguards to protect the individual market from the risk of employers using the HRA-IIHIC option to “dump” their higher-risk employees, such as minimum class size requirements. And the Departments reiterate their belief that employers will act in the best interest of their employees to recruit and retain talent. But the impact of these changes is not yet known.

In the meantime, the Trump administration has adopted an aggressive timeline. Despite requests for a delay in the effective date, the Departments finalized the rule for 2020, which is likely to be challenging for employers, employees, the federal exchange, and state exchanges. Insurers that have already filed their rates for 2020 may need to make adjustments, potentially to account for premium increases as a result of the rule. In addition, the exchanges may not be able to fully implement the changes needed for the 2020 open enrollment period, potentially leading to more confusion for consumers, insurers, and employers alike.