A landmark change will soon give more American workers control over their health-care coverage, but be warned: There are pitfalls.
Beginning Jan. 1, 2020, companies can provide employees with tax-free dollars to purchase an individual policy rather than offer them a traditional group-health plan. The Trump administration laid out the final rules for the so-called Health Reimbursement Arrangements, or HRAs, just this month.
The new rules for HRAs revive a health-insurance option often used by smaller businesses until the Obama administration said the Affordable Care Act, or ACA, disallowed it. In 2016 Congress reinstated HRAs for firms with fewer than 50 employees, but certain limits lessened their appeal.
Now companies of all sizes can provide employees with dollars to buy their own policies. As long as those dollars are used for ACA-approved coverage, no income or payroll taxes are due. There are no monetary limits on the companies’ payments, if they meet certain guidelines.
Firms can offer only a traditional group-health plan or an HRA to the same group of workers—not both. For this reason, large companies aren’t expected to rush in.
“If they opt in, they’ll probably do so over time for certain groups of workers,” says Seth Perretta, an attorney with Groom Law Group who advises large employers.
Small employers are expected to be the biggest users of HRAs. The Trump administration estimates that 800,000 businesses will choose them over the next 10 years, and about 90% of those will have fewer than 20 employees.
By 2029, about 11 million people will be enrolled in HRAs, according to the administration. With many of those switching from existing insurance plans, it estimates that the program will add about 800,000 people to insurance rolls. The change is expected to cost up to $9.6 billion.
Proponents of the new HRAs are pleased on several counts.
They hope an influx of buyers into the individual markets will help stabilize insurance pools, and they say HRAs will make health benefits easier for workers to evaluate.
“Workers with offers from more than one firm can compare health benefits, if the firms have HRAs,” says John Barkett, a director of policy affairs at Willis Towers Watson .
Critics warn that an influx of buyers into individual policies could be weighted toward sicker people, raising premiums.
Here’s how: Say a company with 125 employees and a group-health plan has a workforce that is sicker than average, including a worker with two children with hemophilia and others with expensive cancers. In this case, the group-health plan could become so expensive that the employer ends it and adopts an HRA—pushing all the employees, with their aggregate poorer risks, into individual markets.
“This will happen, but we don’t know the magnitude,” says Christen Linke Young, a fellow with the Brookings Institution’s Schaeffer Initiative.
The Trump administration estimates that such unloading will add 1% to individual premiums.
The new rules prevent employers from pushing individual employees into HRAs, but they can offer HRAs to a class of employees, such as all hourly workers or all new hires.
Some analysts worry that HRAs will encourage companies to move from “defined benefit” to “defined contribution” health coverage, a bit like the switch from pensions to 401(k) plans for retirement. They fear the employer’s contribution could lag.
“Health-care costs typically rise faster than inflation, but what if employers only raise HRA payments with inflation?” says Larry Levitt, a senior vice president at the nonpartisan Kaiser Family Foundation.
What’s clear about this landmark change is that it will make an already complicated process more complex. Here are some caveats:
Premium tax-credit effects. These credits were put in place by the ACA to help lower-income workers afford individual policies. But the revival of HRAs complicates these lower-paid workers’ eligibility for these credits. If an employer offers an approved but not generous HRA, a worker who signs up for it could lose his or her premium tax credit, says Ms. Young.
If an employer offers a more generous HRA, she adds, a worker might lose the tax credit even without signing up for the HRA.
HSA interactions. It is possible to combine an HRA with a Health Savings Account and High Deductible Health Plan. Details are complex, but Mr. Perretta says contributions can’t be made to an HSA for a worker if the worker can use his or her HRA to pay for general medical expenses before meeting the HDHP deductible.
What happens to unspent funds. Employers have latitude over whether unspent HRA funds can be rolled over to future years. Unspent funds also aren’t portable to a worker’s new employer. In addition, HRA funds can only be used to pay certain medical expenses. Unlike with HSAs, unspent funds cannot be used as retirement savings after a certain age.
Location, location. HRAs are likely to be more attractive in places with robust individual markets—often in urban areas—that offer participants more choices.
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