Health Reimbursement Arrangements and the Prohibition on Annual Limits

Note: See article "Small Employers Can Use HRAs and Reimburse for Individual Health Insurance Premiums" dated December 21, 2016, for subsequent guidance for small employers (with under 50 employees).

A Health Reimbursement Arrangement (HRA) is a medical expense reimbursement arrangement under Code Sections 105 and 106 whereby the employer reimburses employees for substantiated medical expenses, generally up to a specified dollar amount each year. Employers have used HRAs in recent years to help manage health insurance costs. Some employers changed their health insurance to very–high-deductible coverage (e.g., $5,000) and then used an HRA to help employees by paying for a portion of their deductible (e.g., $2,500). This would often result in significant savings in premium costs.  Alternatively, employers have dropped their coverage and put an HRA in place to reimburse employees for some of their medical expenses, including premiums.

The Patient Protection and Affordable Care Act (ACA) and subsequent interim final regulations jointly issued by the Internal Revenue Service (IRS), Department of Labor (DOL), and the Department of Health and Human Services (HHS) have made it clear that HRAs can exist only in limited circumstances starting in 2014. The issue involves the ACA requirement that health plans can no longer have an annual or lifetime limit on benefits. Annual limits have been inherent to HRAs. Employers have always set an annual limit that will limit their exposure for reimbursing expenses. Theoretically, employers that continue to maintain HRAs will need to eliminate their annual limits and will have unlimited liability exposure to reimburse their employees for their uninsured medical expenses.

HRAs that are not subject to the prohibition on the annual limit (and can stay in place) are plans that meet the HIPAA Portability exclusion rule:

1. The plan has less than two participants (i.e., a one-person plan).
2. The plan is a retiree-only plan.
3. Reimbursed expenses are limited to dental, vision, or long-term care.
4. Employer offers other group health coverage and the maximum HRA reimbursement is less than or equal to $500 per year (there is a five-times rule that is meant to limit carryover of unused benefits in an HRA, but the $500 per year limit generally always trumps it for purposes of this rule).

Other exclusions from the prohibition on the annual limit (i.e., plans that can stay in place) are:

1. HRAs that are integrated with the employer’s group health plan. (The HRA must be available only to employees who are covered by the employer’s group health coverage; it cannot be an individual health insurance contract and may not be purchased on the state Exchange.)
2. HRAs that are also Flexible Spending Arrangements (FSA). The regulations specifically say that FSAs as defined in Code Section 106(c)(2) are not subject to the prohibition on annual limits.  Reimbursable medical care expenses may not include expenses for qualified long-term care service. These types of arrangements are employer-funded FSAs that limit carryover of unused benefits from year to year.
   If employee contributions are allowed to the FSA, it is not an HRA for this rule but must be part of a cafeteria/Code Section 125 plan instead.

Since employers are reviewing benefit strategy for compliance with other provisions of the law at this time, it is important to take this rule into account in planning. Options for HRA sponsors:

1. Integrate the HRA into health plans that already satisfy the annual and lifetime limit rules.
2. Modify the HRA to eliminate the annual and lifetime limits, which may be impossible (absent issuance of favorable guidance, which the insurance industry is lobbying for).
3. Modify the HRA so it becomes compliant by design (i.e., it reimburses only HIPAA-excepted benefits—dental and vision only).
4. Terminate the HRA.