What the New HRA Proposal Could Mean for Small Businesses

The White House has introduced a new HRA proposal, which offers cost-savings to SMBs, but negative impacts on employees with preexisting conditions.

What will the implications be of the new HRA proposal?

Small businesses and their employees who have been shut out of the health reimbursement arrangements (HRAs) market because of increases in healthcare costs and burdensome administrative tasks could find a way in under Trump’s new HRA proposal, which looks somewhat similar to past President Obama’s Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) with a few sizable exceptions. In late October, the departments of Labor, Health and Human Services, and the Treasury released the regulatory details, which White House officials said will allow employers of all sizes to “finance individually-selected health insurance on a tax-preferred basis” and give their workers more health coverage options. According to the Trump administration, the new HRA proposal will cover one million previously uninsured workers.

HRAs defined

Traditionally, HRAs are tax-free accounts established and funded by employers. Workers may use the accounts to pay healthcare premiums, including employer-sponsored and short-term health coverage, and out-of-pocket medical and dental expenses that the Internal Revenue Service (IRS) deems reimbursable.

Although there has been no official contribution limit on HRAs, employers can set an annual amount of their own and restrict the kinds of medical services that are reimbursable among the IRS’s eligibility list.

Reimbursements for qualified medical expenses are exempt from federal income and payroll taxes. Unused funds can be carried over from year to year indefinitely, although employers can limit the aggregate carryover amount.

Unlike the use of flexible spending accounts (FSAs), employers aren’t required to make contributions to HRAs until workers draw down the funds. And all the funds don’t have to be accessible at the start of the availability period.

HRAs are typically offered with high-deductible health plans; however, employers can combine HRAs with other kinds of qualified group health plans. The Affordable Care Act prohibited group health insurance plans from capping the dollar amount of essential annual or lifetime health benefits. As such, HRAs weren’t available as standalone plans.

The percentage of employees covered by small businesses with 3 to 24 staff members fell from 40 percent in 2010 to 30 percent in 2018.

The proposal’s details

The new HRA proposal would:

  • Allow all employers, including small and mid-size businesses that don’t offer coverage or whose coverage has administrative burdens, to finance employee-selected health insurance on a tax-preferred basis.
  • Allows employers who offer traditional group insurance coverage to set an annual limit of $1,800, indexed for inflation in 2020, and reimburse employees for certain qualified medical expenses, including stand-alone dental benefits and premiums for short-term health insurance plans.
  • Provides certain safeguards to reduce the risk of health-based discrimination against a select group of people because of their medical condition.
  • Provides a disclosure provision to make sure employees understand how HRAs work.  
  • Enables businesses to focus on serving their customers, rather than navigating and managing complex health benefit plan designs.

Small-business advantages

The Trump administration makes a strong case for expanding HRAs when it comes to small businesses. According to Administration statistics, the percentage of employees covered by small businesses with 3 to 24 staff members fell from 40 percent in 2010 to 30 percent in 2018. For companies with 25 to 49 workers, coverage decreased from 59 percent in 2010 to 44 percent in 2018. The hope is the proposal would help reverse these downward trends.

Among small to midsize businesses with fewer than 200 workers, 81 percent of those that provide health coverage only offer a single coverage option, compared with 42 percent of larger employers with at least 200 employees.

Under the new HRA proposal, the tax advantage of traditional employer-sponsored group insurance is extended to HRA reimbursements. Employers must provide all workers with the same options, either a traditional group health plan or an HRA for full- and part-time workers, seasonal workers, and those under 25 before a plan year begins. In short, for workers, reimbursement for health coverage premiums would be exempt from wages and income for payroll and federal tax purposes, and tax-deductible for employers.

Critics of the proposal maintain that employers discriminate against workers with the most severe health problems by being directed to use HRAs, while healthier workers would remain in employers’ traditional plans.

Federal agency officials said that many employers currently not offering coverage can help employees and their families by providing them with tax-preferred funds to pay the premiums of coverage they purchase on their own. However, the Obama administration didn’t allow the use of HRAs to pay premiums in the individual health markets because of a concern that workers with the most severe health problems would be discriminated against by being directed to use HRAs, while healthier workers would remain in employers’ traditional plans. The new HRA proposal runs counter to this concern.

Small-business drawbacks

The proposed regulation is essentially a pro-business one, which generally benefits small businesses. Although the proposal was drafted to remove Obama-era restrictions on access to HRAs and discrimination against the least healthy workers, critics of the proposal maintain that employers could still shift workers off their sponsored plans. This could be a cost-savings strategy for small businesses on small budgets, though it might pose retention risks that could force employees to look elsewhere for better, fairer healthcare coverage. The ultimate result could be that small businesses are even less competitive than large employers in this tight labor market.

The proposal generally eliminates some of both the administrative tasks and benefits associated with the Affordable Care Act. It also adds a few other regulations, such as measures requiring employers to:

  • Put in place and comply with procedures for confirming reimbursement.
  • Inform employees of the HRA’s amount at least 90 days before enrollment.
  • Disclosing options for opting out of an HRA.
  • State the possible effect of HRA enrollment on an employee’s eligibility for premium tax credits.

Healthcare coverage is the most important benefit for employees and job seekers. Small businesses that don’t offer health insurance are much less competitive than larger organizations. The new HRA proposal might draw more small employers into the healthcare market as providers, but they’ll need to consider all of the possible consequences– the positive and negative.

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