The U.S. Departments of the Treasury, Health and Human Services, and Labor issued a proposed regulation on Oct. 23, 2018 that expands the usability of health reimbursement arrangements (HRAs). HRAs are designed to give workers and their families greater control over their healthcare by providing an additional way for employers to finance quality, affordable health insurance.
HRAs allow employers to reimburse their employees for medical expenses in a tax-favored way. Current regulations prohibit employers from using HRAs to reimburse employees for the cost of individual health insurance coverage. Undoing that prohibition, the proposed regulation would permit HRAs to reimburse employees for the cost of individual health insurance coverage, subject to certain conditions. These conditions mitigate the risk that health-based discrimination could increase adverse selection in the individual market, and include a disclosure provision to ensure employees understand the benefit.
Because medical expense reimbursements from HRAs are tax-preferred, HRAs – that workers and their families use to purchase coverage of their choosing – provide the same tax advantage enjoyed by traditional employer-sponsored coverage. The proposed regulation would not alter the tax treatment of traditional employer-sponsored coverage. It would merely create a new tax-preferred option for employers of any size to use when funding employee health coverage. While the employer would fund the cost of individual health insurance coverage, the employee would own the coverage, allowing the employee to keep the coverage even if he or she left the employer and was no longer covered by the HRA.
Separately, in addition to allowing HRAs to reimburse the cost of individual health insurance coverage, the proposed regulation would allow employers offering traditional employer-sponsored coverage to offer an HRA of up to $1,800 per year (indexed annually for inflation) to reimburse an employee for certain qualified medical expenses, including premiums for short-term, limited-duration insurance plans.
According to preliminary estimates from the Treasury Department, once employers and employees have fully adjusted to the new rule, roughly 800,000 employers are expected to provide HRAs to pay for individual health insurance coverage to over 10 million employees. The proposed regulation can be found here.
Comments on the proposed regulation are requested by Dec. 28, 2018. The regulation, if finalized, is proposed to be effective for plan years beginning on and after Jan. 1, 2020.