In July 2017, the U.S. Senate had the opportunity to repeal the Affordable Care Act (ACA), aka Obamacare. John McCain’s famous thumbs-down “no” vote signaled the legislation’s death on the floor of the Republican-held Senate. Following the failure to repeal major portions of the law, the Trump administration took steps to provide Americans with health care choices beyond the Affordable Care Act mandates.
Three months after the Senate vote, President Trump signed an executive order setting into motion a three-pronged plan to increase health insurance options. The three options included directing cabinet departments to make regulatory changes and increase access to association health plans (AHP), short-term, limited duration insurance plans (STLDI), and health reimbursement accounts (HRA).
Short-term plans are being sold and utilized in several states. Many states changed their insurance laws to make it easier for employers to join association health plans. However, a federal judge recently put a pause on the rule, and the rule is on hold during the appeals process. In this research update, I will discuss health reimbursement accounts and their benefits for employers, employees, and the individual market.
What is an HRA
Similar to a health savings account, HRAs are a type of account funded by employers and used for health-related expenses. Katie Keith from Health Affairs provides a summation:
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.
As was the case with association health plans, the Obama administration increased restrictions on the use of HRAs during the implementation of the Affordable Care Act. Before the ACA, employers could reimburse employees for their purchase of a non-group plan or other health expenses through the HRA. The ACA requirements on spending limits and insurance benefits curtailed the usage. Jonathan Keisling from the American Action Forum elaborates:
Several requirements in the ACA—most notably the essential health benefits and the prohibition on annual and lifetime limits on health insurance—severely curtailed this option. HRAs were considered a form of group plan under the ACA, meaning that any employer offering a stand-alone HRA would violate the ACA and expose itself to crippling penalties. HRAs have a limit on spending, which was considered an annual limit even when the HRA was enough to purchase individual market insurance.
New Final Rule
The final rule, which was issued on June 13, 2019, will, among other things, restore the ability of employers to fund HRAs. “Individual coverage HRAs” can be used to purchase individual health insurance (but not short-term, limited duration insurance plans) on the individual market.
The way to think about this type of health arrangement, compared to a traditional employer-sponsored plan, is to consider who is responsible for paying the premiums. In a traditional employer-sponsored health insurance plan, the employer is paying the premiums for each employee directly to the insurer. In the HRA arrangement, the employer is funding an account that the employee can use for paying premiums for a plan they chose on the individual market.
There are those that have concerns about “dumping” employees with chronic conditions onto the individual market through HRAs. The thinking goes that employees who have much more expensive medical needs will be encouraged by employers to utilize the HRA and buy coverage on the individual market. This would make the risk pool in that market much unhealthier and therefore raise premiums. However, the final rule stipulates that employers may only offer different plans (traditional employer-based plan vs. HRA) between different classes of employees. For example, an employer couldn’t offer multiple plans to all full-time workers but could offer one plan to full-time employees and another plan to part-time employees.
Additionally, there is another path for HRA to be used. The rule creates an “excepted benefit” HRA so that employees could use the HRA dollars for other qualified health expenses. However, the rule sets out four main requirements for this to be legal: other group plan coverage must be made available, contributions may not exceed $1,800 in 2020, eligibility for premium tax credits must remain, and individual insurance plans may not be purchased using these funds. However, it can be used for STLDI or COBRA premiums.
Benefits of an HRA
In contrast with the Obama administration’s “one-size-fits-all” approach to the health insurance markets, President Trump’s October 2017 executive order broadened the types of health insurance coverage employers and employees may purchase.
Employer-based health insurance plans have been scrutinized as contributing to issues such as inflated health insurance costs, job lock, and lack of portability for those with pre-existing conditions. However, by increasing the ability of employees to essentially “own” their health insurance by purchasing it through an HRA, those with pre-existing conditions will be better protected. Analysts hypothesize that HRAs will decrease the number of uninsured, as employers who do not offer health insurance may now see this as a more attractive and affordable option. Additionally, more people in the individual market may increase the size of the risk pool and create more stability and affordability.
The costs associated with employer-sponsored health plans have been rising for years, and employers are shifting more of the costs onto employees, which can contribute to stagnant wages lower take-home pay. Through new arrangements such as association health plans, short-term, limited duration insurance plans, and health reimbursement accounts, Americans now have more options to purchase the type of health insurance that best meets their needs and budget.