August 30, 2012 – The Future of HRAs
Restrictions and mandates under Health Care Reform have raised issues with respect to the future of health reimbursement arrangements (HRAs). Based upon the significant role HRAs play today in the provision of benefits to employees and informal comments by regulators, HRAs have a future; the real question is what kind of a future.
The Many Forces of HRAs
First officially recognized by the IRS in 2002, health reimbursement arrangements (“HRAs”) quickly became, and continue to be, a key component in employer medical benefit packages. Design flexibility allows HRAs to serve many purposes.
“HRA” is a label used to describe a type of group health plan under Section 105 of the Code. You have to look beyond the label to see what is really happening. Within that type of group health plan, there are many versions designed to accomplish various objectives (e.g., cost shifting, easing burden of higher cost sharing provision, providing funds for expenses not covered under traditional medical coverage, providing a means by which to accumulate funds for retirement, etc.).
Side by Side HRAs. HRAs often exist along with higher deductible traditional group health plans. A common use for HRAs is to provide funds to offset the increase in cost sharing provisions (e.g., co pays, coinsurance, out of pocket maximums, deductibles, etc.) under the traditional group medical plan. The HRA defines “reimbursable expense” in terms of the traditional group health plan. For example, the HRA may limit reimbursable expenses to those expenses that “but for” the application of cost sharing provisions would have been paid under the traditional group health plan.
Private Exchanges. Many “private exchange” models use an HRA as the funding mechanism. The employer contributes to the individuals’ accounts under the HRA, the account balance is then available for use by the individual to pay all or a portion of the cost of the coverage selected by the individual. In some cases, the coverage selected may be a coverage option available through a traditional group medical plan (e.g., MyPlan by Medica). In other cases, the coverage selected may be an individual policy (e.g., BloomHealth, Extend Health). In either case, the employer contribution goes to the HRA. How the HRA defines “reimbursable expense” then dictates for what the account balance may be used.
“Instead of” HRAs. Today, many people have mulitple sources from which to obtain medical coverage. Coverage may be available due to a second job, a former job, an employed spouse, a parent, or through the individual market. At the same time, it is becoming increasing difficult for employers to make group coverage available on a cost effective basis. Through an HRA, an employer can provide a contribution that the individual can tailor to its needs. If the person has coverage through a spouse, the HRA may provide money to help offset the applicable cost sharing provisions under that coverage. The HRA may provide a place to accumulate contributions for use later, when needs change or in retirement. If the person has an individual policy, the HRA can provide funds to assist in paying the cost of that coverage.
“In addition to” HRAs. Instead of the purposes described above, or in addition to the purposes described above, the HRA may provide funds for expenses not covered by other sources of traditional medical coverage (e.g., dental, orthodontia, vision, lasik, etc.).
“Nest Egg” HRAs. Some employers, particularly non-federal governmental employers, use HRAs as a mechanism for saving for post employment health expenses (e.g., Medicare premiums, supplemental coverage premiums, payment of unreimbursed amounts, etc.). Sources of employer contributions include periodic contributions over the working life of the employee and conversion of accrued but unused paid time (e.g., sick time, PTO, vacation, etc.) at the time of retirement.
Health Care Reform
As noted above, since recognition in 2002, HRAs have served, and continue to serve, many purposes. HRA designs have evolved as employer and employee needs have evolved. They are an important tool in the employer continuing to be a source of traditional group health coverage in the future. They are an important tool in the employee having a source of non-taxable funds to pay all or a portion of the cost of medical expenses. As we know, Health Care Reform (HCR) imposes many mandates and restrictions upon (1) medical plans made available by employers to their employees, and (2) insurance policies issued by insurance carriers. Because of some of the definitions used in these HCR provisions, questions exist with respect to the types of roles HRAs will be allowed to play in the HCR environment.
For example, does the prohibition on annual and lifetime maximums really apply to HRAs? If it does, should it? If it does, does it apply to all HRAs? In general, the prohibition on annual and lifetime maximums applies to group health plans, which includes self-funded medical plans sponsored by employers. HRAs are not specifically named or otherwise called out in the legislation. Rather, HRAs happen to fall within the legislation’s definition of group health plan. However, the prohibition on annual and lifetime maximums only applies with respect to “essential health benefits” provided by the group health plan. The legislation then identifies ten categories of essential health benefits. Assuming the HRA’s definition of reimbursable expense is broad enough to include essential health benefits (e.g., Section 213(d) expenses), does the ability of the individual to choose to submit for reimbursement of expenses, some of which are essential health benefits and some which are not essential health benefits, make the entire HRA subject to the prohibition on annual and lifetime maximums? What if the HRA’s definition of reimbursable expense ties directly to cost sharing provisions of a group medical plan that is subject to (and compliant with) the prohibition on annual and lifetime maximums such that when the HRA and the group medical plan are looked at together, the prohibition is satisfied? What if the HRA’s definition of reimbursable expense is limited to premiums for coverage? Premiums are not listed as an essential health benefit. Do you stop at the expense that is reimbursable or do you look through the expense that is reimbursable? Does it even make sense to apply the prohibition to group health plans that are defined contribution plans like HRAs?
IRS officials have informally acknowledged the wide spread use of HRAs and the extreme variability in HRA plan designs. The need to address HRAs and how they fit (or do not fit) into HCR requirements like the prohibition on annual/lifetime maximums has also been acknowledged.
HRAs are too important to go away. But the future of them would greatly benefit from regulatory guidance. Until such guidance, establishing and maintaining HRAs is not without risk. But in the big scheme of things, is it any more risky than having a fully insured medical plan with disparate contributions favoring higher paid employees, a cafeteria plan that does not perform any (or all) of the applicable nondiscrimination tests, a severance package that provides coverage under the medical plan that is not described in the medical plan documents, a wellness program or employee assistance program that does not provide continuation coverage under COBRA, a written plan document or description that does not meet the requirements under ERISA, permitting a cafeteria plan election change other than for a recognized exception, or choosing not to pursue repayment for incorrect debit card usage; all things we currently “live with” on a periodic basis.
If you have any questions, please contact us.
___________________________________________
The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.