Trump Proposes Expanding HRAs

October 24, 2018

The Trump Administration is proposing to allow U.S. workers to use tax-free health reimbursement arrangements (HRAs) to shop for coverage in the individual market. According to officials, it is another move aimed at expanding consumer choices and lowering costs for small businesses.

The Departments of Labor, Treasury and the HHS released a proposed rule  that would allow employers to fund tax-exempted HRAs to help pay for workers’ individual health insurance premiums, undoing Obama-era guidance that restricted HRAs for that purpose.

The proposed rule would also allow employers that already offer traditional group health coverage to finance an HRA for up to $1,800 per year, indexed to inflation, to reimburse employees for certain  out-of-pocket medical expenses, including stand-alone dental benefits or premiums for short-term insurance plans.

Senior administration officials said reducing Obama-era limitations on the use of HRAs would increase health insurance options for workers while reducing costs and administrative burden for employers, particularly small and mid-sized ones. The proposed changes follow regulations addressing short-term and association health plans (AHPs) that the administration argues will similarly expand options and lower costs for people who struggle to afford Affordable Care Act plans.

The proposed rule harkens back to President Donald Trump’s October 2017 executive order directing agencies to expand the availability of AHPs, short-term limited-duration insurance plans, and HRAs. Regulations expanding the use of AHPs and short-term plans have already been finalized.

The proposed rule undoes Obama administration guidance that had prohibited employers from funding HRAs to pay for workers’ individual health insurance premiums. Such arrangements wouldn’t have satisfied the so-called employer mandate requiring companies with more than 50 full-time employees to provide health benefits and employers would have been required to pay a fine. Officials said those restrictions have led to a decline in employer-sponsored coverage offered by small employers.

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While the new proposed rule does not eliminate the employer mandate penalty, it would allow HRAs used to pay for individual insurance premiums on the exchange or off the exchanges to satisfy the employer mandate, depending on whether the HRA is affordable. That would depend in part on the amount the employer contributes to the HRA. Officials said the agencies will provide additional guidance to address the affordability test. The HRA would be excluded from the employees’ income and wages for federal income and payroll tax purposes, and the amount reimbursed would be tax deductible for the employer.

A senior administration official said the proposed rule addresses concerns that employers could choose to offer traditional group coverage to heathy employees while pushing costlier ones to the individual market by including guardrails to prevent discrimination. For instance, an employer that offers an HRA must offer it on the same terms for all employees of a class and may only vary that amount based on age and the number of dependents using the funds.

The proposed rule would also require employers that offer HRAs to allow a worker to opt out and instead claim a federal premium tax credit to purchase coverage on the individual exchanges.

The Treasury expects that 10 million employees spread across 800,000 employers would have insurance through HRAs, and almost 1 million of those employees would be newly insured. The agencies expect most of the companies that take advantage of the proposed HRA flexibility to have fewer than 50 employees.