HRAs are a fairly complex topic, but if you’re being offered one at your job, it’s critical that you understand what it is, how it works, and how it’s different from the group major medical benefits you may be accustomed to.
We’ll try to break it down as clearly as possible in this blog post and discuss:
- What is an HRA
- What changed and why you may be offered one at your job in 2020 (and beyond)
- How the HRA rule change could impact the individual health insurance market
What Are HRAs and Why Am I Hearing About Them Now?
An HRA (health reimbursement arrangement) is an employer-funded plan traditionally used in conjunction with group health insurance to help employees pay for qualified medical expenses. HRAs are considered “group health plans” according to federal tax law, which allows employers to make pretax contributions to the funds.
You’re starting to hear more about HRAs now because the Trump administration finalized a rule in July 2019 that would allow integrating HRAs and other account-based group health plans with individual insurance coverage (either via the ACA Exchange or individual market) or Medicare beginning January 1, 2020.
The 2019 final rule on HRAs is a continuation of the Administration’s 2017 executive order to:
- Expand HRAs
- Make limited benefit short-term medical plans more available (duration limit repealed)
- Expand association health plans (AHPs)
The rule created two new categories of HRAs: Excepted Benefit HRAs (EBHRA) and Individual Coverage HRAs (ICHRA), which we’ll cover in more detail below.
So, what does this all mean for you? Basically, it means that your employer could be offering you different ways to pay for health insurance and expenses this year, not just major medical coverage, despite the employer mandate for health insurance still being in effect.
Options for Employer-Sponsored Health Coverage Prior to 2020
The new rule represents a shift from how HRAs have traditionally been used.
Prior to the rule change, an employer could only offer an HRA to an employee that was also enrolled in an ACA-qualifying major medical group plan, although there were some exceptions for small businesses (under 50 employees) in the form of “qualified small employer HRAs” (QSEHRAs) and for retiree health plans.
Traditionally, as a group health plan, HRA funds could not be used to pay for individual health insurance premiums, they could only be used for qualified medical expenses associated with a group health plan.
It was fairly straightforward if you were employed at a larger company: you were offered group health benefits that you could either opt in or out of, with people generally opting in unless they were getting major medical benefits through their parent or spouse.
You may have then had to decide if you wanted to enroll in an HRA, health savings account (HSA) or flexible spending account (FSA) to help with qualifying out of pocket costs, especially if your group benefits came with a high deductible.
Now, you may have other options to consider…
Options for Employer-Sponsored Health Coverage in 2020 and Beyond
Beginning with 2020 health insurance open enrollment you may be faced with additional choices. And while the additional options may be welcome for some, it does introduce complexity that you need to understand to ensure that you’re getting enough coverage and benefits.
As of 2020, employers of any size can offer any of the following:
- Traditional group health insurance – an optional traditional HRA, FSA or HSA may also be offered
- Traditional group health insurance and an Excepted Benefit HRA
- An Individual Coverage HRA
Let’s take a closer look at each scenario and what it may mean for you if you choose an HRA instead of traditional group benefits if you’re given a choice.
Traditional Group Health Insurance
First, the one you’re probably familiar with. Traditional group health insurance is what most large employers offer employees to comply with the ACA’s employer mandate. Employer group health is minimum essential coverage and complies with ACA requirements.
You may also have the option to enroll in an HSA, FSA or traditional group HRA to help with a high deductible or medical expenses.
Traditional Group Health Insurance and an EBHRA
This is a new scenario as of 2020. If your employer offers you a traditional group health policy and an Excepted Benefit HRA, you can choose one of the following paths:
- Enroll only in the group major medical policy
- Enroll in the group major medical policy and the EBHRA
- Opt out of the health insurance and only enroll in the EBHRA
Let’s consider each one individually…
The first option is the traditional group health insurance scenario. It’s fairly straightforward and doesn’t require much further exploration here (if you have specific questions about your benefits speak with a representative at your company).
If you find yourself facing a high deductible, you may be underinsured and you may want to explore supplemental health insurance to get additional benefits. Or, you may want to enroll in the Excepted Benefit HRA in addition to your major medical policy.
Let’s talk about that option…
The second option, group policy + EBHRA may be attractive to you if:
- Your employer does not offer certain benefits like dental or vision insurance. You can use the HRA funds to help pay dental and vision premiums.
- You need supplemental benefits like dental, vision, and expense-based accident insurance to help with your group plan’s high deductible or other out of pocket costs.
In this scenario, the Excepted Benefit HRA helps you gain access to additional and/or excepted benefits to help increase your benefits. You’re still relying on your group major medical policy as your primary health insurance coverage, but you’re also either layering on more benefits with a supplemental policy or you’re getting dental or vision coverage.
The third option is opting out of major medical coverage and only enrolling in the Excepted Benefit HRA, which you can then use to purchase short term medical insurance.
This is where you need to be extremely careful to make sure you’re not leaving yourself financially exposed by opting for lower-premium coverage.
Let’s look at this more closely to better understand the tradeoffs.
Even with your employer kicking in, you may still be paying quite a bit each month in premium for your major medical coverage. The average annual individual group premium in 2018 was $6,896 (or $574 per month).
Comparatively, short term medical premiums are lower by as much as 54%. And with your employer kicking in up to $1,800 annually, your premium costs could be quite low. But that’s only part of the story.
There are reasons short term premiums are less expensive – some of the most important ones to keep in mind are that short term plans are underwritten, so if you have any serious health conditions you may not qualify; and they have more limitations and exceptions, including a pre-existing condition exclusion and limited coverage of mental health and maternity care.
Here’s a quick comparison of some of the features of major medical compared to short term health insurance.
Comparing Group Major Medical to Short Term Health Insurance
|Group Major Medical Insurance||Short-Term Health Insurance|
|Average annual deductible||$1,573||$4,964**|
|Available in Every State|
|Covers Prescription Drugs|
|Covers Preventive Care|
|Covers Pre-existing Conditions|
|No Annual or Lifetime Benefit Limits||*|
*Applicable to Essential Health Benefits only
**Deductible is for 2018
You’re paying more in premium for major medical coverage because you have more protections, coverage and benefits, including a guaranteed-issue policy (no underwriting) and no policy termination or expiration.
If you do waive your group medical policy and opt to enroll in just the EBHRA, you cannot then use the funds to buy ACA-qualifying coverage, only to enroll in certain excepted benefit plans like dental, vision, and accident plans; and short term medical plans, which have benefits limits and many more coverage exclusions.
That could result in you not having access to health insurance coverage when you need it. So it’s critical to fully understand what you’re getting when you enroll in short term coverage. For most people with access to an employer-provided group health insurance policy, that is still the best option.
Need some more help comparing major medical and short term health insurance? Have a look at “What is Individual Major Medical Health Insurance and is it Right for You?” and “Is Short Term Medical Insurance Right for You?”
Just an Individual Coverage HRA
Finally, let’s look at what it means if you are offered an Individual Coverage HRA instead of ACA-qualifying major medical benefits.
Any employer of any size can now offer an ICHRA instead of an ACA-qualifying health plan, not just in conjunction with one.
In this scenario, your employer is giving you funds to go out and purchase your own individual major medical coverage either from the public health insurance exchange (healthcare.gov) or the private marketplace.
While this technically opens up many other plan options for you to consider, it could also lead to higher costs:
- If you are covered by an Individual Coverage HRA you are not eligible to receive ACA subsidies, which could result in a higher premium.
- You may face higher cost-sharing (deductible, coinsurance and copay) relative to a traditional group plan.
- More individual health insurance policies have narrow networks which can lead to higher out-of-pocket costs.
Whether or not an Individual Coverage HRA is a good value or a fair tradeoff for you will depend on how much money your employer contributes to the HRA and how expensive ACA plan premiums are in your area.
If your income is low enough that you qualify for an ACA premium tax credit, you can opt out of the Individual Coverage HRA offered by your employer in order to use the tax credit to buy individual health insurance on your own from the public ACA Exchange.
Do You Qualify for an Affordable Care Act Subsidy?
Use the ACA Subsidy Calculator to find out if you can get financial help if you enroll in ACA-qualifying major medical insurance. Learn more about subsidies.
A Closer Look at the Two New HRAs: Excepted Benefit and Individual Coverage
As previously mentioned, the final rule that goes into effect January 1, 2020 created two new types of HRAs. If your employer is offering you one of them, it’s important to really understand what it is before you opt in. Let’s look at each one in more detail.
Excepted Benefit HRA (EBHRA)
Excepted Benefit HRA funds can be used to pay for excepted benefits like vision and dental, or limited benefit medical policies like short term medical insurance.
The category of Excepted Benefits is very broad, including vision, dental, accident, critical illness, hospital indemnity, short and long term disability, long-term care, and Medicare Supplement plans. Unfortunately, not all of these plans can be funded by an EBHRA. Only vision, dental, expense-based accident plans, long-term care plans and short term medical insurance can be funded by an EBHRA.
Excepted benefits plans are not subject to ACA requirements like traditional group health insurance and individual major medical insurance are. That means they aren’t guaranteed issue, don’t necessarily cover pre existing conditions or provide coverage for the essential health benefits, and may charge you more if you’re older or have an existing health condition.
The new rule does not preempt any state regulations for short term medical insurance. States can and do fully prohibit the sale of short term plans and limit durations so an Excepted Benefit HRA may not be available to you at all or may only be available during part of the year depending on your state.
Here are some of the characteristics of the new Excepted Benefit HRA:
- Your employer must also offer minimum essential coverage in addition to the Excepted Benefit HRA. Minimum essential coverage includes ACA-qualifying group medical insurance. Your employer cannot only offer you an Excepted Benefit HRA.
- Your employer must provide benefits that are limited in amount, up to $1,800 annually, meaning your employer cannot contribute more than $1,800 annually but could contribute less.
- EBHRA funds can be used to reimburse for premiums for short term medical plans, other excepted benefits (dental, vision) and COBRA premiums or for cost-sharing (deductible, coinsurance or copay).
- EBHRAs may not reimburse for premiums for traditional group health or cost-sharing associated with Medicare Parts A, B, C, or D.
- You are not required to be enrolled in minimum essential coverage in order to be enrolled in the EBHRA. That means that you could opt out of the group major medical coverage entirely and carry only the plans you purchase through the EBHRA.
- Your employer cannot offer an employee both an Individual Coverage HRA and an Excepted Benefit HRA.
Individual Coverage HRA (ICHRA)
Individual Coverage HRAs are a new form of HRA that integrates with individual health insurance as opposed to group health insurance.
Individual coverage that can be used with an ICHRA are:
- All ACA-qualifying health insurance offered both on the public ACA Exchange and in the private marketplace
- Catastrophic health plans
- Grandmothered individual health insurance
- Fully insured student health insurance plans
Individual coverage that cannot be used with an ICHRA are:
Here are some of the characteristics of the new Individual Coverage HRA:
- Employers cannot offer both an Individual Coverage HRA and traditional group plan to the same class of employees. Meaning employers cannot make an employee choose between either an individual HRA and traditional group health insurance.
- Employers can offer a traditional group plan to one class of employees and an Individual Coverage HRA to another class. For example, full time employees could be offered group health and part-time employees could be offered the Individual Coverage HRA.
- The final rule includes ten enumerated employee classes and allows HRAs to identify additional classes but only based on a combination of two or more of the existing enumerated classes, meaning they can’t invent their own segments. The risk of adverse selection and discrimination increases as the number of classes increases.
- Employees can opt out of the Individual Coverage HRA, for example in order to claim premium tax credits for coverage through the Marketplace if they qualify.
- An individual HRA meets the employer mandate for health insurance. If the HRA meets minimum value requirements for at least 95% of full time employees and dependents, it will also meet the requirement of affordability.
- The individual HRA can (but is not required to) pay individual coverage premiums. Also, employers can specify which medical care expenses are eligible for reimbursement from the fund. Reimbursement may be allowed only for premiums, cost sharing (deductibles, copay and coinsurance), or particular medical expenses.
- Employees enrolled in an ICHRA are not eligible for premium tax credits.
Will the New HRA Rule Strengthen or Destabilize the Individual Insurance Market?
No one seems to know for sure how the HRA rule change will impact the individual health insurance market.
Though, according to experts, many of the Trump Administration’s previous ACA changes have resulted in destabilizing the ACA.
In fact, recent data indicates that 2018 was the first time since 2010 (when the ACA was passed) that the rate of uninsured Americans increased, up from 7.9% in 2017 to 8.5% despite a strong economy and the lowest poverty rate since 2001.
The Trump administration has a track record of enacting ACA rules that may have or did result in increasing individual health insurance premiums and reducing the number of enrollees in ACA-qualifying minimum essential coverage, including:
- Eliminating federal limits on short term health plans, thereby making these non-ACA plans more attractive for younger, healthier individuals.
- Eliminating the federal tax penalty for going without qualifying minimum essential coverage.
- Expanding Association Health Plans (AHPs), though this rule was struck down in March 2019 by a federal judge it remains to be seen if the Trump administration’s Department of Labor will appeal the ruling and thousands of people are enrolled in AHPs.
- Eliminating reimbursement of federal cost-sharing reductions to insurance companies (2017).
- Depressing ACA enrollment by cutting budgets for advertising (from $100 million to $10 million) and enrollment assistance programs (40% reduction).
- Curtailing Medicaid expansion (a key factor in expanded health coverage under the ACA) by requiring that states implement work requirements for recipients.
What is certain about the new HRA rule is that the impact will vary depending on employer and individual insurance markets in each state, and in some states the effect could be dramatic.
During any given month in 2019, only about 14 million people under age 65 were enrolled in individual major medical insurance compared to the 158 million Americans covered by employer group plans in 2018.
According to experts, even a small shift of high-cost insureds from the larger employer group market to the individual market could have a dramatic negative impact on the individual health insurance market by increasing premiums for everyone.
It’s expected that the HRA rule will generate 800,000 more enrollees in individual major medical plans over the next 10 years.
Finally, according to some industry experts, though the new excepted benefits HRA encompasses different types of excepted benefit plans, positioning the HRA alongside traditional group benefits and providing an opt-out for major medical makes it more likely that employees will be incentivized towards lower cost, lower benefit, and lower coverage short term health plans. And the likely result will be to shift more healthcare costs onto the employee.
Whether the new rule boosts the individual ACA market or has a destabilizing effect seems to hinge on how employers respond and whether the people being added to the individual health insurance market are less healthy than the current pool.
Summary + Next Steps
We’ve covered a lot of ground in this blog post. Depending on whether you have access to employer benefits or whether you already get an ACA-qualifying plan from the individual market, you may have different concerns.
If you need to figure out which health insurance option is right for you, check out our complete guide to how to choose health insurance.
Or, select the insurance product you’re interested in and request a quote to see plan options and costs.