An Individual CoverageHRA is affordable if the “employee's required HRA contribution” forthe month does not exceed 1/12 of the product of the employee'shousehold income for the taxable year. (Photo:Shutterstock)

New regulations issued by the Departments ofLabor, Treasury, and Health and Human Services have expanded theuse of health reimbursement accounts (HRAs) by allowingreimbursements for individual market insurance premiums.

These new “Individual Market HRAs” may prove to be game-changersin the employer-sponsored health plan arena, especially withrespect to small and mid-sized employers. Before employers adopt abenefit offering that includes Individual HRAs, they shouldconsider the implications on the Affordable Care Act's (ACA)employer shared-responsibility mandate and on theability of their employees to obtain a premium tax credit (PTC) onthe ACA marketplace.

ACA employer mandate impact

The ACA's employer shared responsibility mandate applies to“applicable large employers” (ALEs). ALEs are generally employeeswho averaged at least 50 full-time employees and equivalents ineach month of the prior year. ALEs must offer an eligibleemployer-sponsored health coverage (i.e., “minimum essentialcoverage”) to at least 95 percent of its full-timeemployees and their dependent children or pay a potentiallysignificant penalty. The coverage that ALEs offer must also beaffordable and have minimum value, and the failure to meet thoserequirements could result in a smaller, individualized penalty. Inorder for either penalty to be triggered, at least one employeewould need to opt out of available employer-sponsored coverage andreceive a PTC.

The new HRA regulations contain very little substantive guidanceregarding the impact that Individual Coverage HRAs will have onemployer mandate compliance, referring instead on on prior guidanceas laying the groundwork for later regulations. Here is what we doknow:

• Individual Coverage HRAs are minimum essentialcoverage. Therefore, if these HRAs or other forms ofminimum essential coverage are made available to95 percent or more of the full-time workforce, the largeACA penalty can be avoided.
• Individual Coverage HRAs must be “affordable.”Although prior guidance explains that the same affordabilitymethodology described below for PTC purposes can be applied forpurposes of the employer shared responsibility mandate, thatmethodology may not be the best option for employers. First,affordability in this context is determined based on a formula thatincludes household income. Employers usually do not have access tothe household income of their employees. Second, affordabilitywould be based on the “silver-level” plan cost on the marketplace,and that cost is based off of individualized factors such as placeof residence and age

Given the complexities involved in determining HRAaffordability, additional guidance containing safe harbormethodologies would be welcomed.

ACA marketplace impact

To help defray the high cost of health coverage available in themarketplace, the ACA makes available, depending on an individual'shousehold income, an advance PTC. The new regulations clarify thatto be eligible for the PTC, an individual generally cannot haveaccess to an affordable Individual Coverage HRA. Importantly, if anemployee actually enrolls in an Individual Coverage HRAS, he or shewill not have access to a PTC on the ACA marketplace, even if theHRA is unaffordable.

An Individual Coverage HRA is affordable if the “employee'srequired HRA contribution” for the month does not exceed 1/12 ofthe product of the employee's household income for the taxable yearand the “required contribution percentage.” An employee's requiredHRA contribution amount is determined by subtracting the monthlycontribution for self-only coverage by the lowest cost silver-levelplan available on the ACA marketplace. The required contributionpercentage is adjusted annually and is set at 9.86 percentfor plan years beginning in 2019. If the ACA marketplace determinesthe Individual Coverage HRA is not affordable, the HRA will bedeemed not affordable for the entire year.

Employers and plan sponsors must provide employees with writtennotice when an Individual Coverage HRA adopted and made available.The content of the notice must include a statement about theavailability of the PTC, a statement that the participant may optout of the HRA and potentially receive a PTC for any month the HRAis considered “unaffordable,” and a statement that opting out of anaffordable HRA would prohibit the participant from receiving a PTC.The Department of Labor has provided model notices for thispurpose.

Although the new Individual Coverage HRAs have the potential ofdisrupting the individual coverage market, employers may find themto be an attractive option that could stem the increasing cost ofproviding health benefits to employees. Nevertheless, the new HRAsare subject to many requirements, so employers should consult withexperienced tax and benefits professionals before adopting theseplans.

Damian A. Myers is a senior counsel in theEmployee Benefits & Executive Compensation Groupat Proskauer Rose.

Read more: 

• Unpacking the new HRA option for employee healthinsurance
• New HRA rules could allow businesses to circumventACA's employer mandate
• Experts warn HRA expansion could hurt workers,drive up premiums