June 18,2019
From the Desk of Bob McNett…..
President Trump Announces new HRA Option for Employers to Provide Coverage to Employees.
In a Rose Garden speech last week, President Trump announced that employers, as of January 2020, will be able to use a Health Reimbursement Account (HRA) to contribute, on a tax-preferred basis, to the cost of individual plans to employees.
HRA’s are not new. They have been used for years to allow employers to reimburse employees for out-of-pocket medical expenses that go against the deductible and max out-of-pocket limits of their group health plan. However, heretofore, if an employer provides a reimbursement for the cost of an individual plan that reimbursement amount is taxable to the employee, which is a major disadvantage compared to a group health plan, where the employer contribution is received tax-free by the employee.
Essentially, this change allows an employer, using the HRA, to reimburse an employee if he purchases his own individual coverage either directly from the insurance company or, for those who qualify for a government subsidy, through the federal or state Marketplace (also known as the Exchange.) When this provision takes effect, this employer contribution will be tax-free to the employee, and still tax-deductible to the employer.
One of the advantages listed in the written guidelines released by the Trump administration is that it would remove the employer from the complex duties of trying to make decisions over the best type of plan designs to offer employees, as they do now with group health plans. Using individual plans, each employee can choose an individual plan benefit design most suited to his own needs.
Also, it will change some employer-sponsored plans to a “defined contribution” model, where an employer contributes a set amount for coverage for each employee, that will not necessarily be affected as the cost of coverage goes up. Using this model, the employee can be held responsible for any premium increases. However, the employer will have the option to adjust contributions to keep pace with increasing premiums. Most employers now base their contributions, on their group plans, on a percentage of the premium. Therefore, the employer’s cost goes up as premiums rise.
However, there are some obvious problems, from my understanding, that are not outlined by the administration’s guidelines.
First, the individual marketplace in most states has been hit hard with extreme premium increases in recent years. In Oklahoma, premiums for individual plans have doubled and tripled as claims costs have skyrocketed for this market segment. Obamacare provisions affected how individual plans are underwritten and offered by insurance companies much more than they did group health plans.
Second, benefit designs on individual plans have been slashed to provide sparser coverage when compared to group health plans.
Third, most insurance carriers have chosen not to participate in the individual market exchanges. Currently, there are only two carriers in Oklahoma that offer these plans, which limits choice. However, this could change if the HRA plans gain popularity.
Fourth, provisions of this change make it difficult to maintain a group health plan for some employees and let others purchase their own individual plans. An employer cannot offer the same class of employees the choice of a group health plan or buying their own individual plan. One thing not outlined is how employers can establish classes of employees without risking discrimination against the non-highly compensated.
A further problem that could come up, based on the fourth provision outlined above, is the problem that employees that have joint incomes high enough to preclude them from getting a government subsidy will have if the employer has to cancel the group health plan to be able to offer HRA based individual coverage. Since it looks like it will be difficult for the employer to reimburse higher amounts in the HRA’s for some employees over others, higher compensated employees (often times management and other more valued employees) could very well get hurt. Since these employees will not get a government subsidy to assist them in buying individual coverage, and individual coverage premiums are currently appreciably higher than group plan premiums, these higher-compensated employees could very well end up paying more for a leaner benefit plan than they currently get from their group health plan.
So, as with many things we face as small business people and employers, the devil may be in the details of this new HRA offering. There are definite advantages to this plan, but certainly it is not without it’s disadvantages, to my understanding of it, as currently proposed.
The new HRA provisions will not take effect until the first part of 2020, so we may see further guidelines released that might address some of these disadvantages.
For those employers for whom it make sense to adopt HRA’s for individual plans rather than doing a group plan, The McNett Agency will be able to assist our valued clients, since we sell and service individual plans both on and off the federal marketplace exchange in Oklahoma.
We will be keeping abreast of any new clarifications and guidelines that are announced between now and the first of next year, and we will keep you informed. For any questions, please feel free to call me or email me at bob@mcnettagency.com.
Robert K. McNett, LUTCF
The McNett Agency
Your small business insurance Tulsa company.
918 294 3712 Fax 918 494 6725
Toll Free 1 866 497 7119