New Law Lets Small Employers Use Stand-Alone Health Reimbursement Arrangements

Thursday, December 15, 2016

President Barack Obama on Dec. 13 signed into law the 21st Century Cures Act, which will let small businesses use health reimbursement arrangements (HRAs) to fund employees who purchase individual health plans on the open market.

The bipartisan bill, which Congress passed Dec. 7, focuses primarily on speeding up drug approvals and making innovative treatments more accessible. But it also includes provisions that affect employer-provided health benefits, specifically using HRAs to pay for nongroup plan premiums and ensuring that a health plan's mental health care benefits are equivalent to its physical health care benefits.

HRA Roadblock Removed

The legislation allows small employers with fewer than 50 full-time employees or equivalents that don't sponsor a group health plan to fund employee HRAs to pay for qualified out-of-pocket medical expenses and for nongroup plan health insurance premiums, including for plans purchased on public health care exchanges under the Affordable Care Act (ACA).

Federal agencies' rules, in particular IRS Notice 2013-54 and DOL Technical Release 2013-03, have frustrated many small employers by preventing them from using so-called "stand-alone HRAs" to reimburse employees who buy nongroup health insurance coverage.

"Many employers were upset when the Obama administration shut down the ability for employers to just provide money on a pretax basis for employees to purchase their own health insurance on the open market—a trend that many saw as the wave of the future," said Brian Pinheiro, chair of the employee benefits group at law firm Ballard Spahr in Philadelphia.

The 21st Century Cures Act, which incorporates key elements of the proposed Small Business Healthcare Relief Act, creates a new type of HRA—the qualified small employer health reimbursement arrangement (QSEHRA). The legislation specifies that:

  • The maximum reimbursement for health expenses that small employers can provide through employee QSEHRAs is $4,950 for single coverage and $10,000 for family coverage, to be adjusted annually for inflation.
  • Small employers that choose to provide QSEHRAs must offer them to all full-time employees except those who have not yet completed 90 days of service, are under 25 years of age, or who are covered by a collective bargaining agreement for accident and health benefits. Part-time and seasonal workers may also be excluded.
  • Generally, an employer must make the same QSEHRA contributions for all eligible employees. However, amounts may vary based on the price of an insurance policy in the relevant individual health insurance market, which in turn can be based on the age of the employee and eligible family members, or the number of family members covered.

While the act takes effect for plan years beginning after Dec. 31, 2016, "this comes a little late in the game for employers that have already made plans for 2017, but it is an option many employers may want to consider" for subsequent years, said Joseph Lazzarotti, a principal in the Morristown, N.J. office of Jackson Lewis PC.

"For eligible small employers, this new law is welcomed and overturns guidance previously issued by the Internal Revenue Service and the Department of Labor that stated that HRA arrangements violated the ACA insurance market reforms, subjecting small employers to a penalty for providing such arrangements," said Chatrane Birbal, the Society for Human Resource Management's senior advisor for government relations. "This change provides small employers greater flexibility in terms of benefit offerings and allows eligible employers to use HRAs to help employees purchase an affordable health insurance plan that fits their individual budget and health care needs."

A cautious note was sounded by Timothy Jost, a professor at the Washington and Lee University School of Law in Lexington, Va. "Employer organizations have been lobbying for this legislation for some time," he noted. "Concerns have been expressed regarding it, however. Over half of employers with fewer than 50 employees currently offer health coverage, and fewer small employers might offer coverage, or small employers might offer less-generous coverage, once HRAs can be offered to pay for individual market coverage instead."

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So-called applicable large employers—those with 50 or more full-time employees or equivalents—still must comply with the ACA mandate to provide affordable group health coverage to full-time workers, which excludes them from using HRAs to fund employees' purchase of nongroup plans. The incoming Trump administration has pledged to "repeal and replace" the ACA, including the employer coverage mandate. However, in the meantime, "the ACA is still the law of the land," said Scott Behrens, an Employee Retirement Income Security Act compliance attorney at Lockton Companies, a benefits brokerage and consultancy based in Kansas City, Mo.

Mental Health Parity

A separate provision of the 21st Century Cures Act requires the Department of Health and Human Services (HHS) to issue guidance to assist health plan compliance with existing mental health parity law. The act also instructs the departments of HHS, Labor and the Treasury to release compliance program guidance providing examples of audit findings with existing mental health parity requirements—intended to remind plan sponsors that they could face enforcement actions and penalties for failing to comply with the mental health parity rules.

When a group health plan is found to have violated the mental health parity rules five times, the secretaries are directed to audit the plan's documents the following year to "help improve compliance' with the rule."

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"Importantly, the act makes clear that the [federal] departments have the authority to audit health plans that have repeated violations of the mental parity laws,"  explained consultants Allison Klausner and Marjorie Martin, principals with Xerox HR Services in New York City.

"Given the heightened risk of a government audit, employers are encouraged to review vendor agreements, as well as all practices, policies and procedures relating to mental health parity requirements, to assess compliance with the existing law and determine if changes are warranted," they advised. "Likewise, employers that undertake such a review will want to document steps taken."

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