Jul 21 2014 | Mitch Warren

There seems to be a lot of questions about what types of health insurance premiums health reimbursement arrangements (HRAs) can be used to pay for.

In the past, the Internal Revenue Service (IRS) has permitted employers to reimburse or otherwise pay for employees’ individual health insurance premiums on a tax-free basis. Some employers had hoped to continue this practice in the face of health care reform by dropping employer-sponsored coverage (for some or all employees) and instead subsidizing – either through a health reimbursement arrangement (HRA) or other employer payment plan – employee purchases of individual insurance policies in the state health insurance exchanges or the private market.

However, on Sept. 13, 2013, the IRS issued guidance (Notice 2013-54) clarifying that such HRAs and other employer payment plans will not satisfy two Patient Protection and Affordable Care Act (PPACA) requirements: the prohibition on annual dollar limits for essential health benefits and the requirement to cover preventive services at zero cost-sharing. As a result, for plan years beginning on or after Jan. 1, 2014, many HRAs and other employer payment plans will not be allowed. There is an exception for “integrated” HRAs and employer payment plans, as outlined in more detail below.

This guidance greatly affects employer-provided health and welfare benefits, and leaves open questions as to what types of arrangements are allowed going forward. There are specific types of HRAs that are allowed going forward; they are: integrated HRAs, spousal group coverage reimbursement and retiree-only reimbursement.

What Is an “Integrated” HRA?

Basically, an integrated HRA is one that is connected to and reimburses expenses for a group health plan. To be considered an integrated HRA, there are five requirements that must be met:

  1. The employer must offer the employee a group health plan (other than the HRA) that does not consist solely of excepted benefits.
  2. The employee receiving the HRA is actually enrolled in a group health plan other than the HRA (that group plan may be sponsored by another party, such as a spouse’s employer).
  3. The HRA is available only to employees who are enrolled in non-HRA group coverage.
  4. The HRA reimburses only copayments, coinsurance, deductibles and premiums under the non-HRA coverage (this requirement does not apply if the coverage in requirements 1–3 provides “minimum value”).
  5. The HRA at least annually (and upon termination of employee) permits the employee to permanently opt out or waive future HRA reimbursements.

If the HRA is integrated per the above requirements, then the employer could continue sponsoring the HRA without risking liability under PPACA’s requirements relating to annual dollar limits and preventive services. Otherwise, the HRA will be prohibited going forward.

Spousal Coverage Reimbursement

An example of this type of HRA would be for an employer to cover their employee for the premiums on their spouse’s coverage. To more clearly illustrate this example, say that John and Mary work for separate employers. Mary’s employer offers to pay her health insurance premiums, but if she wants to add John she will have to pay an additional $250 per month. John’s employer could offer John an HRA to pay for the premiums from Mary’s plan so long as her plan is PPACA-compliant. One potential pitfall to this approach is that if Mary’s premiums are pretax, then this could create a double pretax event that would not be allowable by the IRS.

Retiree-only Reimbursement

Retiree-only HRAs are currently permitted under PPACA. An employer is able to offer their retirees who are not yet eligible for Medicare an HRA. However, those retirees would not be eligible for subsidies through the public exchanges.

What About a Defined Contribution Arrangement? Is That Allowed Going Forward?

Yes, so long as it is structured properly. As described above, an HRA that is meant to provide a defined contribution or reimbursement toward individual coverage (both inside and outside the exchanges) is no longer allowed. However, an employer could implement a defined contribution strategy through a private exchange or through the Small Employer Health Options Program (SHOP). This approach, available for private exchange or SHOP plans, allows an employer to limit their financial exposure by providing employees with a fixed-premium percentage of the selected plan. Because the plans would be considered group coverage, the above HRA and Section 125 limitations would not apply.

Keep in mind that the IRS recently released further guidance and emphasized the consequences of failing to meet the HRA requirement. Per the IRS website, “Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.”