Health Insurance Law

Update to HRAs: Individual Coverage


Just last week, new HRA rules have been announced in a joint publication by multiple Federal agencies. These rules open up more options to employers who want to help their employees find affordable health coverage, specifically in the form of new HRAs.

These two new HRAs are called an Individual Coverage HRA and the Excepted Benefits HRA. While there is still much to be officially interpreted to this nearly 500-page document, we wanted to provide you with some basics and break down the details of Individual Coverage HRAs (ICHRA).


Basics of medical reimbursement

In a previous blog, we helped interpret the difference between HSA and HRA. I’d recommend you have a read to make sure you know the difference between the two. The new ruling is designated just to the latter, and we will look at a few of the updates to HRA rules and how they might apply to you.

The basics of HRAs is that an organization may offer a certain allowance of pre-tax (or tax-free) dollars to their employees to be spent on medical expenses. These dollars are generally use-it-or-lose-it, but they are beneficial for many reasons. 

The two biggest reasons are that the employer gets to help their employees pay for healthcare and the employees get a tax break. Practically speaking, it is often delivered in the form of a debit card but sometimes as strict reimbursements, and the user is required to submit the receipt as proof that the charge was a qualified expense.


What was it like before?

The HRA model of distributing tax-free medical dollars to your staff with (near) simplicity has been around for a while. Previously, you could use those dollars for anything from premiums to doctors copays. With the health insurance scene the mess that it was, the U.S. government got together and made a huge reform called the Affordable Care Act (ACA), also known as Obamacare.

The ACA required several new rules from every health insurance “plan” that an employer makes available to their team. One of those new rules was removing lifetime max out of pocket limits. Until the ACA, health insurance companies could cap their total payout to any insured member (often at just $1 million). If you have ever seen a bill for cancer treatment, you’d know that $1 million doesn’t even scratch the surface! This was one of the many reasons the new law was put into place.

The problem was that HRAs were considered an insurance “plan” (even though they are just dollars provided, not actual plans themselves). Standing alone, they were illegal because they did not comply with the no “lifetime limits” clause. 

The only way an HRA would be allowed is if they were “integrated” with another ACA-compliant health insurance plan that did not have a limit. The HRA could then be used for any authorized, non-premium medical expense tax-free. This change limited the usage quite a bit, so very few plans other than very rich benefit packages ever used them.


How does ICHRA change HRAs?

So what has really changed? Since an HRA in and of itself is not a true “plan,” the government has finally recognized that it should be able to be used on its own (or at least, it should be allowed to go toward premiums). A ruling passed last year, called QSEHRA {cue-sarah}, made this possible, but only for small businesses.

The new HRA rules allow for an employer of any size to use pre-tax dollars. They are required to be used in tandem with an ACA compliant plan, but an employee can use those dollars to pay for their premiums plus qualified medical expenses. More importantly, the employee is able to opt-out of those HRA dollars if it could be more affordable for them to use Premium Tax Credits instead.

There are certainly incentives to allowing for increased diversity in healthcare spending, which will inevitably increase market competition (this either makes products better or drives prices down). The organization gets to set its budget, and the employee gets better customization on how their dollars will be spent. This ruling is certainly a great addition to the menu of innovative options developed over the past few years.


What are the potential “gotchas”?

First, it is essential to know that employers have to apply these HRA dollars to everyone equally within any given class of employees (class right now is up for interpretation). As we see this applied, we endorse following standard HR best practices when doing this on your own. However, there are some useful new(er) methods of classifying employees (when consulting with an expert) that can provide a more personalized experience to care for your team.

Second, you cannot double-dip, so get that chip away from the salsa! But you do get to pick which dip you eat now! Essentially, you can pick either the HRA allowance or your Premium Tax Credit. You cannot use both. By opting into the HRA, you immediately lose your tax credits, which often is a better deal than using an HRA. But, there are many employees who make too much to qualify for PTC. In that case, they’d be super happy to have help paying premiums!

Third, (skip this if you’re not an ALE) while Applicable Large Employers are allowed to use ICHRA, it does not necessarily fulfill the employer shared responsibility (also known as the “mandate”).  If the ICHRA allowance for that individual is considered to be an affordable plan, then the mandate is fulfilled. If not, then either part A or part B of the shared responsibility will be billed to you by the IRS.


How do I know if I should reevaluate my benefits?

For many employers, what they’re doing right now may still be the best way to spend health insurance dollars. But there may be tax credits or pre-tax dollars that employers could be missing out on if you don’t look in the right spot for all of your people. We recommend a full audit to identify how you are stewarding your health benefits dollars and if it is serving your people and your organization well.