New HRA rules could allow businesses to circumvent ACA's employer mandate
If finalized, new HRA rules might let employers terminate group health plans and shift workers into the individual markets.
The new rules were proposed late last year by the U.S. Department of Labor, Department of Health and Human Services, and the Treasury Department. They would allow employers to set up HRAs to help employees pay premiums for health insurance policies within the individual marketplace in each state. If finalized, the change would let some employers terminate group health plans and shift workers into the individual markets.
Separately, the Internal Revenue Service also issued a notice (2018-88) proposing safe harbors that would allow employers to satisfy the “employer mandate” provisions under the Affordable Care Act by funding HRAs for employees to buy health insurance, thereby avoiding severe tax penalties for noncompliance, according to the IRS notice of developing guidance, which is preliminary and is not binding.
Related: Experts warn HRA expansion could hurt workers, drive up premiums
“Theoretically, this would allow employers, for the first time ever, to fully satisfy the employer mandate without offering group major medical coverage to their employees,” said Nick Welle, senior counsel at Foley & Lardner in Milwaukee who advises clients on health benefits and regulatory compliance matters.
Finn Pressly, a shareholder at employment and labor firm Littler Mendelson in Chicago, said, “I am advising clients to watch this and think about this and whether this would make sense for them depending on their needs and their culture.” If enacted, the rules change would likely affect only smaller employers and those who employ part-timers, at first. “But it could be the first step in a very long road of employers getting out of the game,” Pressly acknowledged.
Currently it is a violation of the ACA for large employers to allow health reimbursement arrangements to be used to help pay workers’ premiums instead of providing group health insurance. Under the ACA, large employers must offer affordable minimum essential coverage to 95 percent of employees in order to avoid penalties.
There is a limited small-employer exception that allows employers of fewer than 50 full-time employees or equivalents, who are not subject to the employer mandate and who don’t offer any employees group health insurance, to use Qualified Small Health Employer HRAs to reimburse employees for individual health plan premiums. The proposed rule change would allow more employers to do this, but there would be additional requirements. The change would represent a significant shift in the employee benefit landscape for employers if it comes to pass, lawyers said. The public comment period ended Dec. 28.
“Under current ACA rules there is a blanket prohibition, which a lot of employers in the under-200 employee market were bummed about. They would rather have a defined-contribution approach,” Welle said.
The Trump administration under Executive Order 13813, issued in October 2017, proposed expanding the defined-contribution approach to employer health insurance coverage as part of an overall plan to repeal and/or replace the ACA and promote competition in U.S. health care. The proposals also included allowing association health plans and limited-duration, limited-benefit health plans. While legislation overturning the ACA seems dead, some rule-making continues.
Under the proposed HRA rules, employers generally would have to contribute a fixed amount into each individual HRA sufficient that any remaining premiums the employee would have to pay wouldn’t exceed a percentage of his or her household income to be considered affordable under the employer mandate, in order to avoid penalties, Welle said.
If finalized, the new rules wouldn’t take effect until Jan. 1, 2020, at the earliest. Welle said he believes that most large employers in the interim would probably continue to offer group health plans because they provide employers with a valuable recruitment incentive. In the latest statistics from Kaiser Family Foundation, roughly 16 million Americans were enrolled in the ACA marketplace or a Basic Health Program.
“Very large employers, sophisticated Fortune 500 companies are going to want to keep group health plans to attract and retain talent,” Welle said. “The individual market and the government exchange is just so much inconsistency with the switch from a Democratic to Republican administration, there are a lot of unknowns. The larger, sophisticated employers will say they are not comfortable telling their employees to go to the individual marketplace. I don’t see changes for the large employers, the Fortune 500 types.
“But in the future, I see employers in the range of 50 to 200 employees who are burdened by the administrative responsibilities and the cost of administering health plans say this is a way they can do something for their employees but off-load some of the responsibilities. It is still developing and there is nothing to hang their hats on yet, but in 2021 or 2022 I can see the [smaller ones] saying this might be a good solution for us,” Welle said.
Pressly said the employers who right now are most interested in this are those with 50 to 100 workers and those who employ lots of part-time workers, as this could be a solution for providing coverage for them.
But for larger employers, he said, “it looks really appealing but the way the rules are written if you roll it out for one class of employees, you will have to push it to all employees in that class and the benefits vary wildly from state to state.”
Employers and employees might not fully grasp all the differences between the individual health insurance marketplaces in the states and its limitations, and employer-sponsored group health insurance coverage, Pressly said. Resistance could arise when top executives accustomed to group health plans’ flexibility and coverage for expensive procedures such as in vitro fertilization encounter the limitations of many individual health insurance plans, including differences in what states require them to provide, he said.
In 2017, only 7 percent of the total U.S. population were in nongroup health insurance and 49 percent received employer-provided insurance. A combined 35 percent were on Medicaid or Medicare; 1 percent were on some other public plan and 9 percent were uninsured, according to the Kaiser.
Pressly said, “This goes hand-in-hand with state insurance markets and you really need to understand what that is, the cost and the coverage that is available to know what the ultimate employee experience is going to look like.”
Some of the hundreds of commenters on the notice of proposed rule making by the IRS, Employee Benefits Security Administration and HHS filed Oct. 29 in the Federal Register included state public health plans, a public employees organization, unions, a global risk management, advisory and insurance brokerage firm, and think tanks, the National Federation of Business, National Association of Dental Plans, American Benefits Council, and individual health care providers. The comments period is now closed.
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