Thanks to a new federal rule, employers may more flexibly either (a) provide pre-tax reimbursements for their employees’ individual health insurance premiums and other expenses, or (b) pay such expenses directly on employees’ behalf. Effective January 1, 2020, such pre-tax availability has been reinstated, following the Affordable Care Act (ACA)’s elimination and only a limited version under the 2016 21st Century Cures Act, but with some new twists. As a result, employers and their employees now enjoy more pre-tax options for health benefits, albeit with increasing complexity and varied conditions.
A Very Brief History: Changing Federal Law on Employer-Provided Health Benefits
Before the ACA, employers could provide health insurance coverage to their employees as a pre-tax benefit, such as through (1) a group health insurance plan, (2) direct payment of employees’ individual health insurance plans, or (3) reimbursement of individual health insurance costs. The latter two options are known as “health reimbursement arrangements,” or HRAs. The ACA swept these two options completely away, making such benefits taxable employee income.
Along came the 21st Century Cures Act. Effective January 1, 2017, employers could once again provide a pre-tax health benefit but only under extremely stringent conditions. Among other things, the law applied to only “small” employers (those with less than 50 employees); such employers could not offer any group health insurance coverage to employees; their employees were required to have their own health insurance; the benefit had to be provided on the same terms to all eligible employees; and annual dollar limits applied. This pre-tax health benefit is known as a “Qualified Small Employer Health Reimbursement Arrangement,” or “QSEHRA.” For more information on QSEHRAs, see our blog article here.
Health Benefit Yoga: New and Improved HRAs
Thanks to the new federal HRA rule, employers and their employees can access an increased range of options that will likely bring much desired flexibility and tax savings. Specifically, the new rule identifies two new options for health reimbursement arrangements (HRAs): individual coverage and excepted benefit.
- Individual Coverage Health Reimbursement Arrangements
Under the new rule, employers of all sizes may offer HRAs, with no limit on the benefit amount, with varied employee classes (e.g., full-time, part-time, and seasonal), and extending to health insurance premiums plus other health-related expenses. This new HRA is known as an “Individual Coverage Health Reimbursement Arrangement,” or ICHRA. Notably, ICHRA participants must maintain individual health insurance coverage. This requirement thus may encourage employees to shop for plans with coverage that best fit their needs and may encourage the insurance market to deliver.
- Excepted Benefit Health Reimbursement Arrangements
The second option is available only to employees of employers that offer a group health insurance coverage. This new HRA is the “Excepted Benefit Health Reimbursement Arrangement,” or EBHRA. An EBHRA allows employers to contribute up to $1,800 per year for employees’ qualified health expenses that are not covered by their group insurance plan such as dental, vision, home health care costs, deductibles, and co-pays.
Should We Offer New Health Benefits?
The health benefits landscape is improving overall with these attractive pre-tax HRA options. But the qualification requirements and variety of options are a matter of significant complexity, with equally significant penalties and other adverse consequences for noncompliance. A responsible employer should therefore be careful to consult with a very knowledgeable (and up-to-date) benefits consultant to learn of the best available healthcare options and to obtain maximum pre-tax benefits for its employees.