Final Rule Summary: Health Reimbursement Arrangements and Other Account-Based Group Health Plans

Written By Andrew Lydens

On June 20, 2019, the Departments of Treasury, Labor, and Health and Human Services jointly issued a final rule (84 FR 28888) to expand the use and flexibility of Health Reimbursement Arrangements (HRAs) ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ). This rule introduced new types of HRAs and updated existing regulations under the Affordable Care Act (ACA) and related laws. Below is a structured summary of the rule’s key provisions and impacts.

Main Provisions and Regulatory Changes

Conditions for HRAs Integrated with Individual Insurance or Medicare (ICHRAs)

Individual Coverage HRAs must meet several conditions to be integrated with individual market policies or Medicare and comply with ACA requirements ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ) ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ):

Differences Between Traditional HRAs, ICHRAs, and QSEHRAs

HRAs are employer-funded accounts to reimburse medical expenses, but the rule distinguishes between different types:

  • Traditional HRAs (Group Health Plan HRAs): Before this rule, HRAs were generally allowed only when “integrated” with a traditional group health plan. Employers of any size could offer an HRA that works alongside their group insurance (for example, to reimburse deductibles or other out-of-pocket costs), but stand-alone HRAs (for active employees) were prohibited by the ACA’s market reforms unless they qualified as QSEHRAs or other exceptions. Traditional integrated HRAs have no dollar limit on employer contributions by law and can reimburse all qualifying medical expenses, but cannot be used to buy individual market policies (except for retiree-only HRAs). Under the new rule, an employer that continues to offer a conventional group health plan may also offer an Excepted Benefit HRA as described above, which is a limited stand-alone HRA alongside the group plan ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ). In summary, a traditional HRA is tied to a group plan, whereas the new types of HRAs below are stand-alone alternatives to group insurance.

  • Individual Coverage HRA (ICHRA): Introduced by the 2019 rule, an ICHRA is a stand-alone HRA that replaces a traditional group health plan for a class of employees. Any size employer (including those with 50+ employees subject to the employer mandate) may offer an ICHRA (The QSEHRA vs. the HRA: What's the difference?). There is no cap on the dollar amount an employer can contribute; the employer can choose how much to budget (enabling a defined-contribution approach). Unused funds can roll over year to year at the employer’s discretion (FAQs on New Health Coverage Options for Employers and Employees). ICHRAs must adhere to the integration conditions (employees must purchase individual health insurance or Medicare). Employers have flexibility to offer ICHRAs to certain classes of employees – for example, offering an ICHRA to part-time or geographically remote workers while maintaining a traditional health plan for full-time in-office staff. However, within any given class, the offer must be uniform (with only limited variations, as noted) and the employer cannot offer a group plan to employees in that class (Individual Coverage Health Reimbursement Arrangements: Policy and Application Overview). ICHRAs also allow (but do not require) employers to let employees pay any premium difference pre-tax via a cafeteria plan if the individual policy is purchased off-Exchange (FAQs on New Health Coverage Options for Employers and Employees) (Individual coverage Health Reimbursement Arrangements (HRAs) | HealthCare.gov). In effect, the ICHRA extends the tax-free employer contribution and payroll deduction benefits to the individual market. Workers covered by an ICHRA choose their own individual insurance policy (on or off the ACA Exchange) that best suits their needs, and then use the HRA reimbursements to pay premiums and any other medical expenses allowed by the HRA.

  • Qualified Small Employer HRA (QSEHRA): A QSEHRA is a pre-existing type of stand-alone HRA, established by Congress in 2016, for employers with fewer than 50 full-time employees that do not offer any group health plan. Like an ICHRA, a QSEHRA reimburses employees for individual insurance premiums and/or other medical expenses on a tax-free basis. However, QSEHRAs have annual contribution limits set by law – employers can only reimburse up to a capped amount each year (indexed annually; roughly on the order of $5,000–$10,000 per year depending on single vs. family coverage) (The QSEHRA vs. the HRA: What's the difference?) (The QSEHRA vs. the HRA: What's the difference?). Unlike the ICHRA, which can vary contributions by class or age within limits, a QSEHRA must be offered uniformly to all full-time employees (though amounts can vary based on family size). Another key difference is how QSEHRAs interact with premium tax credits: if a QSEHRA’s amount does not make a benchmark Exchange plan affordable, an eligible employee can still claim a PTC, but the PTC is reduced dollar-for-dollar by the monthly HRA amount (Individual Coverage Health Reimbursement Arrangements: Policy and Application Overview) (Individual Coverage Health Reimbursement Arrangements: Policy and Application Overview). By contrast, as described above, an affordable ICHRA offer completely disqualifies PTC. Finally, QSEHRAs are available only to small employers and those employers cannot offer any other health plan to employees, whereas ICHRAs are available to employers of all sizes (including large employers) and can be offered to one class of employees while another class is offered a traditional plan (Individual Coverage Health Reimbursement Arrangements: Policy and Application Overview).

Summary of Key Differences: In essence, an ICHRA and a QSEHRA both enable employers to contribute a defined amount for employees to buy their own insurance, but ICHRAs have more flexibility (no contribution caps, available to large employers and varied classes) while QSEHRAs are more limited (capped amounts, only for small employers with no group plan). Traditional HRAs, on the other hand, remain an adjunct to group insurance – they can only be offered alongside a conventional group plan (or as an EBHRA with limited scope) and cannot be used to pay for individual market coverage under ACA rules (Individual Coverage Health Reimbursement Arrangements: Policy and Application Overview). The introduction of ICHRAs effectively gives employers a new option to structure health benefits as a defined contribution for individual coverage, whereas previously only small employers via QSEHRA had that option in a limited way.

Effects on Eligibility for the Premium Tax Credit (PTC)

The final rule required corresponding changes to ACA premium tax credit rules in order to coordinate with HRA offerings ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ). The eligibility for PTC (subsidies for Exchange coverage) is affected as follows when an individual is offered an HRA:

In summary, the expansion of HRAs has a significant interplay with ACA subsidies: it shifts some individuals from public subsidies to an employer-funded benefit. Treasury estimated impacts on PTC outlays accordingly, and employers offering ICHRAs need to be mindful of the affordability threshold to avoid inadvertently causing employees to lose access to needed subsidies.

Special Enrollment Period (SEP) for HRA Eligibility

Because ICHRAs and QSEHRAs involve employees obtaining individual market insurance, the final rule established a Special Enrollment Period to facilitate coverage enrollment when these HRAs become available ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ). Under prior rules, individual insurance could generally only be purchased during the year if one had a qualifying life event. Gaining access to a new HRA (ICHRA/QSEHRA) is now treated as a triggering event for a special enrollment window:

  • An individual (or dependent) who is newly offered an ICHRA can enroll in an ACA-compliant individual health insurance plan outside of the normal open enrollment period. The triggering event is considered to be the first day the HRA can take effect, and the SEP rules allow the person to sign up for coverage that starts by that date ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ) ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ). In practice, this means if an employer’s ICHRA begins on January 1 (or a new hire’s ICHRA begins mid-year on, say, July 1), the employee has a window before that date to select a plan, as well as up to 60 days after, similar to other special enrollments. This ensures no gap in coverage when transitioning to an HRA-funded individual plan.

  • Similarly, an individual provided a QSEHRA for the first time gets a special enrollment opportunity. For example, if a small employer starts a QSEHRA mid-year or an employee newly qualifies for it, the employee can use the SEP to buy an individual policy to use with the QSEHRA funds.

This new HRA-related SEP applies to coverage on the ACA Exchanges and also off-Exchange individual policies, as insurers off-Exchange must honor the same enrollment events in most cases ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ). The final rule’s preamble confirms that all individuals who newly gain access to an individual coverage HRA or QSEHRA qualify for this special enrollment period, whether or not they were previously enrolled in any individual market plan ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ). The Exchange may require documentation (like the HRA offer notice from the employer) to verify eligibility for this SEP ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ), as part of program integrity measures.

Overall, this SEP was a crucial accompaniment to the HRA rule: it prevents employees from being locked out of coverage (and thus unable to use the HRA) if they become eligible at a time other than the standard enrollment season.

Implications for Employers, Employees, and the Broader Market

The 2019 HRA final rule has wide-ranging implications:

  • For Employers: The rule gives employers, especially smaller ones or those in high-cost insurance markets, a new flexible benefit design option. An employer can choose to fund an HRA (ICHRA) instead of managing a traditional group health plan. This can simplify administration and potentially control costs by capping contributions. Many commenters and policymakers viewed this “defined contribution” approach as a way to help small and mid-sized businesses offer something where previously they might have offered no health benefit at all ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ). The Departments estimated that once the rule is fully adopted, about 800,000 employers would eventually offer ICHRAs, many of them small businesses who did not previously offer coverage (FAQs on New Health Coverage Options for Employers and Employees). Larger employers can also use ICHRAs creatively – for example, to cover classes of part-time, seasonal, or geographically dispersed workers who were hard to include in a single group plan. However, employers must carefully consider the affordability of their HRA offers (to avoid negatively affecting lower-wage workers’ subsidy eligibility) and ensure they comply with the class rules and notice requirements. Applicable Large Employers (50+ workers) can use a properly structured ICHRA to satisfy the ACA employer mandate (an affordable ICHRA counts as offering minimum essential coverage). In short, employers now have more “healthcare reimbursement” options: continue traditional group insurance, go with an ICHRA for all or some employees, or for small employers, use a QSEHRA. This regulatory change was projected to particularly increase the offering rate of health benefits among small employers that struggled with rising premiums ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ).

  • For Employees: Employees receiving an ICHRA gain greater choice and portability in their health insurance. Instead of being limited to a one-size-fits-all group plan chosen by the employer, they can shop the individual market for a plan that best suits their needs (for example, selecting a different carrier, network, or metal tier) (FAQs on New Health Coverage Options for Employers and Employees) (FAQs on New Health Coverage Options for Employers and Employees). This can be beneficial for workers whose providers weren’t in the employer’s network or who want a different level of coverage. The coverage is also potentially more portable – if the employee leaves the job, they may be able to keep the same individual plan by taking over the premiums (whereas group coverage usually ends, requiring COBRA or a new plan). On the other hand, employees now bear the responsibility of navigating the individual insurance market, which can be complex. They must understand the HRA offer and make an optimal choice (for instance, deciding whether to opt out and claim a subsidy, if their income is low). There were concerns that lower-income employees might be worse off if a modest HRA offer disqualifies them from a more generous PTC ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ). The required notice and availability of tools (like the HRA affordability calculator) are meant to help employees make informed decisions. Additionally, an employee who doesn’t use the full HRA amount in a year might lose those funds (depending on the HRA’s rollover policy), whereas under a PTC they simply pay less premium. Despite these considerations, the rule is expected to benefit many employees by expanding access to employer-funded coverage. HHS projected that once employers adopt these HRAs at scale, about 11 million employees and family members will gain new coverage options or subsidies for insurance that they previously couldn’t afford (FAQs on New Health Coverage Options for Employers and Employees), including an estimated 800,000 people who were previously uninsured gaining coverage (FAQs on New Health Coverage Options for Employers and Employees).

  • For the Individual Insurance Market: The influx of employees using ICHRAs represents a significant change to the individual market risk pool. The rule was anticipated to increase enrollment in individual ACA-compliant plans, potentially bringing in a broad mix of enrollees (including people coming from employer group plans). Some analysts predicted this could help stabilize or even improve the individual market by increasing enrollment, especially if relatively healthy employee groups enter the pool ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ). In fact, commenters noted that ICHRAs could strengthen the individual market by spreading risk and encouraging plan choice and competition ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ). On the flip side, there were concerns about risk segmentation: for example, if an employer’s healthier employees opt out of the group plan to take the HRA and buy potentially cheaper plans (like STLDI via an EBHRA) while sicker employees stay on the group plan, this could worsen the employer’s group plan costs or siphon healthy lives out of ACA pools. The Departments addressed these concerns with guardrails like the class size minimums and the prohibition on offering both an HRA and group plan to the same individuals, which aim to prevent cherry-picking ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ). They also retained the rule that an EBHRA can only be offered in conjunction with a real group plan (and even then, employees must have the option of the group plan) ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ) ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ), to ensure employers don’t drop group coverage entirely in favor of a very low-benefit HRA. Overall, the individual market stands to grow and could become more like an “employer marketplace” for those funded by ICHRAs. Insurance carriers may respond by offering more variety of individual plans designed to attract HRA dollars (for example, tailored networks or benefits knowing employers are footing part of the bill). Over time, the interplay of ICHRAs, QSEHRAs, and even Association Health Plans and short-term plans (due to other 2018–2019 rule changes) will influence how both the small group and individual insurance markets evolve.

In conclusion, the 2019 HRA final rule represents a significant policy shift toward healthcare consumer choice and funding flexibility. It empowers employers to be more creative with benefit offerings and enables employees to shop for coverage with employer support, all while maintaining the tax-preferred status of employer health benefits (FAQs on New Health Coverage Options for Employers and Employees). The rule’s safeguards (like standardized classes, opt-out rights, and notice requirements) seek to balance this flexibility with protections against adverse selection and loss of benefits. Early indications and the Departments’ analysis suggested a substantial uptake of ICHRAs in the following years, potentially extending coverage to hundreds of thousands of workers and family members (FAQs on New Health Coverage Options for Employers and Employees). As with any major change, the true impact on employers, employees, insurance markets, and federal subsidy costs has been closely watched in subsequent years, but the consensus is that this rule has opened an important new avenue for expanding affordable, employer-supported health coverage ( Federal Register :: Health Reimbursement Arrangements and Other Account-Based Group Health Plans ).

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Andrew Lydens
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