Is a New Individual Health Plan in Your Future?

First the old news: Under the Affordable Care Act (ACA), employers with at least 50 employees (or full-time equivalents) are required to provide health benefits and pay for a good portion of the cost. And many smaller employers that aren’t required to offer health coverage do so anyway. Why? They may do it to compete successfully for talented employees in today’s low unemployment environment or out of genuine concern for the well-being of their workers. What few employers like, however, is being in the time-consuming and complex business of selecting and administering health plans.

And here’s the new news: That employer sentiment is why many may be tempted by a radical liberalization of regulations governing health reimbursement arrangements (HRAs), which kicks in next year. Chances are many employers will need some time to digest the 500-plus pages of new HRA rules, so they won’t make any big changes immediately. But it’s a good idea to be prepared for changes in buying individual health coverage.

Two HRA Categories

The regulations deal with two HRA categories: “Excepted benefit” HRAs, and “individual coverage” HRAs (ICHRAs). The latter, as the name suggests, is the type that would enable an employer to give employees some money and then wish them good luck in using it, along with more of their own money to buy the coverage they need.

Excepted benefit HRAs, which are already in existence, only subsidize employee spending on benefits like dental and vision services that aren’t required by the ACA employer mandate. An employer subject to the employer mandate can’t get out from under that obligation simply by helping you purchase such “excepted” benefits. Beginning next year, employers that already sponsor a traditional health plan can also contribute up to $1,800 annually per employee to an excepted benefit HRA.

The bigger story is around the ICHRA. Previously, only small employers could offer them. Those were called “qualified small employer HRAs.” The maximum amount that employers can funnel into an ICHRA this year is $5,150 for single coverage and $10,450 for family coverage. Under the new regulations, there are no caps on employer contributions, and both large and small employers can offer them.

In fact, ICHRAs of employers with at least 50 employees are still subject to the same basic ACA rules as conventional health plans, including the breadth of coverage and satisfying affordability tests.

Tax Benefits

Also, if your employer has a “cafeteria” style plan that lets you park payroll-deducted money into it on a pre-tax basis, you can tap your cafeteria account to pay the difference between what your employer contributes to your ICHRA and the premium amounts. That keeps you from being taxed on any of the value of your health plan. (Note: This wouldn’t be the case if you bought a health policy through an ACA “public exchange.”)

Employers are given considerable leeway in how to set up an ICHRA in terms of how much to contribute to employees. For example, the regulations allow contribution amounts to vary by employees’ ages. Older people generally face higher premiums than younger ones when buying health coverage on the open market. This is also generally the case if they have ICHRAs. For that reason, employers can contribute up to three times as much to the oldest employee age bracket as they do to the youngest bracket that they establish.

Along similar lines, employers can contribute varying amounts based on the number of dependents that employees have. Contribution distinctions can also be made by employee job classification. For example, an employer can contribute more to salaried employees’ accounts than to hourly workers.

However, the regulations do limit small employers from creating lots of different employee classes with only a handful of employees in each. The reason is that an employer can choose to only require some employee segments to get their health benefits via an ICHRA, and not others. The rules are designed to keep employers from creating small employee categories that would be dominated by groups with actual or expected higher health costs than others, and forcing those groups to go the ICHRA route. (That’s known as “adverse selection.”)

Employer Flexibility

However, an employer can let employees within a classification stay in the original health plan, but require newly hired employees who fall within the same classification to receive their health benefits through an ICHRA.

Also, employees within each classification can’t be given the choice of staying in a conventional health plan or opting for an ICHRA. Your employer must require that employees within each category be all in, or not offer it to them at all.

What if you’re an employee and are forced to take an ICHRA? What if you wind up not liking the coverage you can buy that way on the open market? The regulations include a requirement that your employer allow you, prior to your enrollment date, to opt out of participating in the ICHRA (and thus employer health coverage) entirely. That would make you eligible to participate in the ACA public exchange.

Odds are, however, that if your employer is large enough to be covered by the ACA mandate, it wouldn’t make economic sense for you to do that. That’s because employers subject to the mandate face penalties if employees wind up getting their benefits via the public exchanges. In fact, that’s the basic enforcement mechanism behind the employer mandate.

Finally, if you’re thinking you might just accumulate dollars in an ICHRA and not bother to actually buy insurance in the private marketplace, think again. Under the regulations, your employer is required to check up on you and make sure you do buy coverage.

Health insurance can be a confusing topic, and it’s not one where you want to risk choosing the wrong option. If you have questions, your employer’s human resources advisor may be able to clear up any confusion. Employers should contact their employee benefits advisors with questions.