Individual Coverage HRA

Individual coverage HRA

Individual coverage Health Reimbursement Arrangements are a new form of HRA. Not a traditional group health insurance plan.

• Employee must purchase their own health insurance and their company provides some reimbursement.

♦ It’s a specific account-based health plan that allows employers to provide defined non-taxed reimbursements to employees for qualified medical expenses, including monthly premiums and out-of-pocket costs, like copayments and deductibles.

Employees must be enrolled in individual health insurance coverage (like a plan they bought through the Marketplace) to use the funds.

Generally, employers of any size can offer an individual coverage HRA, as long as they have one employee who isn’t a self-employed owner or the spouse of a self-employed owner.

♦ These HRAs are only for employees, not self-employed individuals.

Individual coverage HRAs can be tax-advantaged and flexible, but they can also lead to coverage loss and increased burden on the employee.

Individual coverage HRAs being promoted as alternatives to the Affordable Care Act, can negatively impact low-income people.

As of January 1, 2020, employers can offer employees individual coverage HRAs instead of offering a traditional job-based health plan.

♦ The fear is that this type of HRA could draw healthier individuals away from the Affordable Care Act marketplace plans. Consequently, this may cause individual health insurance marketplace premiums to skyrocket.

There is the real potential that employers might try to shift sicker employees to this HRA and keep their healthier employees in their more expensive employer-sponsored health plan.

If you have an individual coverage HRA offer from an employer, the only way you’ll qualify for the premium tax credit to help pay for Marketplace coverage is if:

• Your employer’s individual coverage HRA doesn’t meet minimum standards for “affordability,” and

• You decline (or opt out) of it.

♦ Individual coverage HRAs may be one of the better health coverage initiatives to come out of the Trump administration.

They may be a good option for part-time and gig workers but most companies are likely to focus on their full-time employees.

Individual coverage HRAs first became available on January 1, 2020.

♦ The average monthly allowance employers have been offering was around $900 as of the middle of 2023.

Employers can choose whether to offer a premium-only or premium-plus plan.

With a premium-only plan, employers limit reimbursements to cover only the cost of their employees’ individual health insurance premiums.

With a premium-plus plan, employers also reimburse their employees’ premiums and qualifying out-of-pocket medical expenses.

• Individual coverage HRAs could provide considerable savings for employers while shifting more healthcare expenses to the employee under the catch phrases ‘cost-sharing' and 'employee responsibility.'

To date, half of employers offering individual coverage HRAs reimburse for premiums only while the other half also covers out-of-pocket expenses.

How do they work?

The individual coverage HRA, can be setup to reimburse employees on a non-taxable basis for medical care and the purchase of individual insurance policies. Employers can offer funding to part-time or seasonal employees to help them pay for health care benefits on the open market.

♦ The HRA can only be offered if the employer does not offer a traditional group health plan.

Unlike other HRAs, the individual coverage HRA is available to businesses of any size. They have no allowance caps and permits businesses to vary eligibility and allowance amounts among different classes of employees.

♦ Employers of any size can offer their employees a monthly allowance of tax-free money.

Employees then buy the healthcare services they want, including individual health insurance, and the business reimburses them up to their allowance amount.

Employers can also use these HRAs to pay employees’ Medicare premiums.

Employee benefits

• Reimbursements don’t count as income for an employee.

To participate in an individual coverage HRA, employees must have coverage through an individual health insurance policy, including on-exchange or off-exchange coverage, Medicare Parts A and B, or Medicare Part C.

The employee can be the primary policyholder or they can be covered under a family member’s individual policy.

• Employees’ family members are eligible to participate as well, provided they meet the same qualifications and the employer chooses to extend eligibility to spouses and dependents.

In theory, individual coverage HRAs allow employees the freedom to choose a plan that best meets their families’ needs. Their company then reimburses them up to a certain monthly allowance for premiums and possibly other medical expenses. The reimbursements are tax free.

♦ In truth, the words “freedom of choice” hides the fact that a heavy burden is now placed on the employee.

Few employees understand what they should be shopping for. The insurance industry describes most consumers as having a “low health literacy.” A point that is readily exploited by many brokers.

Disadvantages

To participate in an individual coverage HRA, employees will have to purchase individual health insurance or be enrolled in Medicare Part A+B or Part C.

♦ Individual coverage HRAs do NOT provide benefits to uninsured employees.

Employees participating on a spouse's group plan (from another employer) cannot participate in this type of HRA.

If your individual coverage HRA is considered 'affordable,' you will not be not be eligible to receive premium tax credits under the ACA. If your HRA is NOT considered 'affordable,' you have the option to opt out and take advantage of premium tax credits.

♦ Affordability now must pass the same test as other health plans. They must also take into consideration not just the employee's insurance cost but the family's cost in comparison to household income.

If your individual coverage HRA is affordable, you may opt out of the HRA. But the amount available to you under the HRA will still count against any federal subsidies to which you may be entitled for a Marketplace plan.

Employers benefit

Individual coverage HRAs can be useful for smaller businesses that cannot afford the rising healthcare costs associated with employer-sponsored health plans.

By setting up individual coverage HRAs companies can better predict their healthcare expenses. They no longer have to haggle with insurance companies over plan benefits and annual premium increases. This burden can be shifted to the employee.

♦ Employers have a high degree of control over individual coverage HRAs.

Employers are allowed to create different classes of employees and fund those classes differently. The employer than reimburses the employee up to their allowance amount.

It is assumed that the entire individual coverage HRA balance is spent on healthcare premiums and cost-sharing each year. The employee covers expenses beyond their allowance.

♦ Individual coverage HRAs are NOT the property of the employee.

In the rare case that the employee does not use all their allotted funds, the employer has the option to keep the funds and reset the employee’s balance at the end of the year or carryover the unspent balance to the next year.

Employers can control if individual coverage HRA funds are available to employees after separation.

Administration is complex

Administration is complex without an individual coverage HRA administrator. There are numerous rules and notifications that must be followed if an employer wishes to offer this HRA.

Benefit management companies are eager to point out that there are significant penalties for violations if an employer gets things wrong.

• It should come as no surprise that these management companies along with insurance brokers are heavily promoting these HRAs as the best thing to come along since Texas toast.

♦ Promoters of individual coverage HRAs talk about the benefits for employers, such as: getting out of the business of managing your employees’ health risk and reducing costs by replacing a defined benefit plan (ESI) with a defined contribution plan.

Sound familiar? It is the same argument that led many employers to ditch pension plans for defined-contribution plans, such as a 401(k).

• Individual coverage HRAs can be offered to a variety of employee types including, part-time, seasonal and temporary employees of staffing firms. Employers can create different classes of employees for the purpose of offering individual coverage HRAs, and the funding for these groups can vary.

Compared to the freedom of the old stand-alone HRA, the employee classes permitted with the individual coverage HRA are narrow. It may be difficult for businesses to use these classes to help them compensate high-value employees differently. Hiring and keeping their most valuable workers may be more challenging.

♦ There is no minimum required funding amount and no upper limit either. However, employers subject to the ACA Employer Mandate must make sure their individual coverage HRA are considered 'affordable.'

An employer can offer a group health insurance policy, but they cannot offer the same employee class both an individual coverage HRA and a group health insurance policy.

A business could offer full-time employees group health and part-time employees an individual coverage HRA, but they cannot offer full-time employees a choice between group health and the individual coverage HRA.