As if there were not enough confusion and waffling from the IRS regarding different mandates for the Affordable Care Act (also known as Obamacare), they have now made some changes regarding how HRAs can be used-or not-by employers to help their employees pay for their health coverage.
What is an HRA?
First, let’s talk about what an HRA actually is. An HRA is a Health Reimbursement Arrangement. Employers can set up an HRA for their employees, and employees use the funds from their HRA to pay for their medical expenses. How much each employer contributes to the HRA is up to them, as are the qualified expenses the funds can be used for.
There are several different types of HRA plans employers can choose. Sometimes an HRA is combined with a High Deductible Health Plan, and the employer designates the HRA to be used to pay medical expenses up to the deductible amount. Other HRA Plans are not combined with a health plan, so employees can choose to use the money to pay health insurance premiums for themselves and any other dependents who are covered.
Either way, the company pays into an HRA and the employee uses it to help with various medical expenses. There is no charge to the employee, nor is it figured into their annual gross income. This is a win-win scenario for many employers and employees. The employer uses an HRA to provide benefits for their employees; said benefits are tax-deductible. Employees are not charged a premium for an HRA, and in many cases the expenses for which they are reimbursed are also tax deductible.
With the new ACA mandates looming, the IRS has now issued new HRA rules for 2014. These rules say that funds from an HRA that is not linked with a High Deductible Health Plan (or other group insurance plan) can no longer be used to purchase individual health insurance policies. The reasoning behind this is simple, at least to the IRS. HRAs provide a maximum annual limit as to the amount of money that can be used; meaning employees can only use the amount of funds that are in their HRA account. With ACA mandates calling for health plans with no maximum annual benefit, an HRA with a benefit limit does not comply with the ACA regulations.
For employees who previously used their HRA to pay the premiums on individual policies for themselves and their families, this is going to be problematic to say the least. For example, employers who have fewer than 50 employees are not obligated under the ACA to provide a small-group insurance plan for employees. Therefore, these employees will be responsible for purchasing their own insurance coverage. Which, even if they have an HRA, they will still have to pay for out-of-pocket.
In addition to this, not all employees will qualify for a tax credit for their insurance purchase. Without tax credits or the ability to use an HRA to help defray some of the costs, many people will end up paying the entire premium out of their own pocket. Rates that have been released thus far show that premiums are increasing as much as 140 percent, which leaves many employees in a financial bind with no hope of recourse.
Employers Also Affected
In the past, many employers with 50 or fewer employees have used HRAs in order to help their employees with heath care coverage without purchasing an expensive small-group policy. The tax benefits for HSA contributions have made it worthwhile for employers to create this set-up, and everyone involved benefits from it.
Now, however, there is no real incentive for employers to offer either a small-group policy or an HRA. Although everyone in America is required to either purchase coverage or pay a penalty, employers fewer than 50 employees are exempt from the Employer Mandate. Therefore, there will be absolutely no reason other than the goodness of their heart for employers to continue to provide any type of benefits for their employees.
Does This Make Sense?
At this juncture, the decision made by the IRS only makes sense to them. For the general public, especially employers and employees who are directly affected by the IRS decision, it makes about as much sense as the Affordable Care Act itself.
I predict that even those companies who truly care about their employees’ well-being will ultimately decide that they can neither afford a small-group policy nor contribute to an HRA. After all, the bottom line for any business is to generate more income and shell out less money. This new IRS rule effectively allows them to do both.
As for the individuals who are looking at paying all of their health care costs out of their own pocket, I can only hope that the majority of them will qualify for a tax credit to get some relief from the projected skyrocketing rate increases. Otherwise, the IRS is going to be incredibly busy calculating and collecting the penalties from all of the people who will remain uninsured.
Wiley Long is President of HSA for America, and a passionate advocate for consumer-based solutions that will improve price transparency and lower health insurance and medical costs for people purchasing individual and family health insurance plans.