Employers that sponsor traditional group health insurance plans have likely encountered the continued rising cost of employer-sponsored health insurance. Alternatively, some employers may not offer group health insurance to their employees but do want to provide a benefit that can help their workforce pay for the cost of individual health insurance. Employers in either situation should be aware of a potential alternative to offering group health insurance. A popular alternative is a benefit known as an individual coverage health reimbursement arrangement, otherwise known as an individual coverage HRA, which can be used to reimburse employees for the cost of individual health insurance. This Article is intended to provide a brief overview of individual coverage HRAs, the benefits of individual coverage HRAs, and the necessary conditions that need to be met to maintain an individual coverage HRA.

General Prohibition on Reimbursement of Healthcare Expenses

As background, the Patient Protection and Affordable Care Act (the “Affordable Care Act”) was enacted into law on March 23, 2010. The Affordable Care Act is a comprehensive set of laws that regulates group health insurance plans, which includes individual coverage HRAs. In particular, the Affordable Care Act provides for certain rules relevant to individual coverage HRAs: (i) a prohibition on setting annual and lifetime monetary limitations for essential health benefits and (ii) a prohibition on providing coverage for preventive services with cost-sharing. Typically, by its terms, an individual coverage HRA that is not integrated with a traditional group health insurance plan would violate both of those prohibitions under the Affordable Care Act because the terms of an individual coverage HRA will typically set reimbursement limitations. However, regulations were issued in 2019 that relax those rules and allow employers to implement individual coverage HRAs that, if structured properly, are deemed not to be in violation of the previously mentioned rules under the Affordable Care Act.

What are the Benefits of an Individual Coverage HRA?

An individual coverage HRA is a type of health reimbursement arrangement that can be implemented by an employer of any size, which can be used to reimburse employees for health care-related costs, provided the necessary structuring components are included. The specific benefits of an individual coverage HRA include the reimbursement for health care-related expenses on a pre-tax basis. Such expenses include the costs associated with medical care in reaching a health insurance plan’s deductible and premiums for health insurance coverage. Individual coverage HRAs are not required to impose a maximum limit of reimbursement, so the reimbursement limitation can be set at any amount. Finally, the entire annual amount that may be available for reimbursement under an individual coverage HRA is not required to be available at the beginning of a coverage period (which is typically a calendar or fiscal year). As a result, an individual coverage HRA may make reimbursement amounts available on a pro rata basis over a given coverage period.

Mandatory Conditions to Implement an Individual Coverage HRA

To properly implement and maintain an individual coverage HRA, an employer must generally ensure that the following conditions are satisfied:

1. Integration with individual health insurance coverage. The employee and any dependents covered under the individual coverage HRA must be enrolled in individual health insurance coverage.
2. Substantiation of individual health insurance coverage. An employer must implement reasonable procedures to verify an employee’s enrollment in individual health insurance coverage. This can be accomplished with a document from a third party (e.g., an explanation of benefits from an insurer) evidencing individual health insurance coverage. Alternatively, an employee can provide an attestation that the employee and any dependents are, or will be, enrolled in individual health insurance coverage.
3. No offer of traditional group health insurance. An employer is prohibited from offering traditional group health insurance coverage to the same class of employees who are eligible to participate in the individual coverage HRA. As a result, an employee cannot be given the opportunity to enroll in a group health insurance plan or participate in an individual coverage HRA.
4. Same terms and conditions for all employees. An employer must offer coverage under an individual coverage HRA on the same terms and conditions that apply to all employees within the same class who are eligible to participate in the individual coverage HRA. Essentially, this means the benefits under the individual coverage HRA cannot be more generous for certain individuals than others within the same class.
5. Must provide an opt-out provision. An employee must be provided the opportunity to opt-out of coverage and waive reimbursements under the individual coverage HRA. An individual coverage HRA should establish timelines for enrolling in and opting out of coverage, but the opt-out opportunity must be provided before the first day of the coverage period. 
6. Notice requirement. An employer is required to provide a written notice to the employees who are eligible to participate in an individual coverage HRA. The notice must be provided at least ninety (90) days before the start of each coverage period and must include certain content requirements.

Conclusion

Employers should assess the extent to which their organization may benefit from the use of an individual coverage HRA and the benefits such an arrangement can provide. Our experienced and qualified attorneys understand the complexities associated with individual coverage HRAs. We encourage you to connect with a member of our Employment, Labor, and Benefits practice group with any questions.

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