A couple years ago, I wrote extensively about the rules regarding HRAs (Health Reimbursement Arrangements) and individual health insurance in Colorado. To sum it up, it used to be against the law for employers in Colorado to reimburse employees for individual health insurance premiums. Then, the IRS said it was ok for HRAs to be used to pay for individual health insurance premiums. Colorado’s DOI resisted though, and initially said that employers could only pay – directly or indirectly – for group health insurance, period. But then they repealed that order and said it was ok for HRA funds to be used to purchase individual policies. And then Colorado passed a law in the spring of 2011 that expressly allowed employers to pay for individual health insurance premiums, but only if the employer had not had a group health plan in place during the past 12 months (this was to prevent employers from dropping their group health insurance in favor of an HRA and individual policies). There are a lot more details about the whole saga in the two posts I linked to at beginning, but that’s the story in a nutshell.
And now it looks like it’s all changing again in 2014. The IRS issued new guidelines last week about HRAs, and they’re pretty clear about the fact that stand-alone HRAs can no longer be used to reimburse employees for individual health insurance premiums for plan years starting in 2014 (most of the details about this start on page 4 of the IRS regulations document).
What I find interesting is their reasoning: They note that “an HRA is not integrated with primary health coverage offered by an employer unless, under the terms of the HRA, the HRA is available only to employees who are covered by primary group health plan coverage that is provided by the employer and that meets the annual dollar limit prohibition.” They then go on to explain that an HRA cannot be integrated with individual health insurance (obviously, because that’s part of the definition they wrote for what it means to be “integrated”). And that an HRA used to reimburse individual health insurance premiums would fail to comply with the annual dollar limit prohibition.
The most interesting thing about all of this is that for plan years starting in 2014, individual health insurance cannot have annual benefit limits (or lifetime limits, a rule already in place) on “essential health benefits.” This is the same in the small group market (although curiously enough, the large group market doesn’t have the same restrictions).
So if we look at this from a practical standpoint, if an employer funds an HRA that is used by an employee to purchase individual health insurance, the policy being purchased (as of 2014) would have to have essential health benefits covered with no annual (or lifetime) benefit limits. In the past, there were a lot of differences between the individual and group health insurance markets, which had a lot to do with the huge price differences between the two (individual health insurance has historically been much less expensive, but it’s also medically underwritten and in a lot of states doesn’t cover key benefits like maternity). That’s all changing in 2014. Individual health insurance is going to look a lot like small group health insurance, both in plan design and premiums (subsidies will help a lot of people pay much less for their coverage than the “retail” price).
So although the definition in the IRS guidelines makes it impossible for an HRA to be “integrated” with individual health insurance, there’s not really a logical reason that this should be the case.
Here’s the problem as I see it. The employer mandate does not require anything of employers with fewer than 50 workers. These employers can buy small group plans in the SHOP marketplaces (exchanges), but they do not have to. Some will qualify for small business premium tax credits to help them pay for coverage, but some will not. If small employers opt to not offer coverage, their employees will have to purchase coverage in the individual market (either via the official marketplaces/exchange, or “off exchange”). Some will qualify for subsidies based on income. But many will not. Those who don’t qualify for subsidies will be left paying the entire premium themselves.
Wouldn’t it have made more sense to allow HRAs to continue to be used to fund individual health insurance premiums? The quality of coverage in the individual market will be better in 2014 than it has historically been. There will be out-of-pocket limits that are the same as HDHP limits, and all plans will cover essential health benefits with no annual or lifetime limits. And yet small employers (who are not obligated to provide any type of health insurance at all) will be forbidden from helping their employees with any portion of the cost of individual policies via HRAs.
I would say that this is one of those instances when the intentions might have been good, but the outcome isn’t really helpful. Especially since one alternative – in the small group market anyway – is for the employer to just pay nothing at all towards health insurance.