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The Departments of the Treasury, Health and Human Services, and Labor today issued a proposed regulation that expands the usability of health reimbursement arrangements (HRAs). HRAs are designed to give working Americans and their families greater control over their health care by providing an additional way for employers to finance quality, affordable health insurance.
This proposed regulation is in response to President Trump’s Executive Order on “Promoting Healthcare Choice and Competition Across the United States,” and will benefit hundreds of thousands of businesses and millions of workers and their families in the coming years.
HRAs allow employers to reimburse their employees for medical expenses in a tax-favored way. Current regulations, issued by the previous administration, prohibit employers from using HRAs to reimburse employees for the cost of individual health insurance coverage. Undoing that prohibition, the proposed regulation would permit HRAs to reimburse employees for the cost of individual health insurance coverage, subject to certain conditions. These conditions mitigate the risk that health-based discrimination could increase adverse selection in the individual market, and include a disclosure provision to ensure employees understand the benefit.
Because medical expense reimbursements from HRAs are tax-preferred, HRAs — that workers and their families use to purchase coverage of their choosing — provide the same tax advantage enjoyed by traditional employer-sponsored coverage. The proposed regulation would not alter the tax treatment of traditional employer-sponsored coverage. It would merely create a new tax-preferred option for employers of any size to use when funding employee health coverage. While the employer would fund the cost of individual health insurance coverage, the employee would own the coverage, allowing the employee to keep the coverage even if he or she left the employer and was no longer covered by the HRA.
In the near term, the proposed regulation, if finalized, would provide opportunities to employers, especially small and mid-size employers who have struggled to offer coverage, to fund the cost of individual health insurance coverage on a tax-preferred basis. The fact is that, currently, many employers simply cannot afford to offer traditional, employer-sponsored coverage to their employees as a result of the significant costs, including the administrative burdens, associated with identifying and managing such health plans.
Some small businesses and their employees have been hit hard by rising costs, driven in part by Obamacare. For firms that employ 3-to-24 workers, the percentage of workers covered by employer health benefits has fallen from 44 percent in 2010 to 30 percent in 2018. For firms that employ 25-to-49 workers, the percentage of workers covered by employer health benefits has fallen from 59 percent in 2010 to 44 percent in 2018.
Small and mid-size businesses that continue to offer coverage to their workers generally only make a single plan available. In fact, 81 percent of small employers (fewer than 200 employees), and even 42 percent of large employers, offering health benefits only provide a single coverage option for their employees. The proposed regulation, therefore, could dramatically increase the choices of coverage available for America’s workers and their families.
In the long term, by increasing choice, the proposed regulation, if finalized, has the potential to spur a truly competitive, value-driven health insurance market that empowers people to shop for their own health plans and, by virtue of consumer choice, drive health plans to deliver higher quality coverage at lower cost. The proposed regulation holds the potential of transformative impact on the health insurance landscape in the coming years.
Separately, in addition to allowing HRAs to reimburse the cost of individual health insurance coverage, the proposed regulation would allow employers offering traditional employer-sponsored coverage to offer an HRA of up to $1,800 per year (indexed annually for inflation) to reimburse an employee for certain qualified medical expenses, including premiums for short-term, limited-duration insurance plans.
According to preliminary estimates from the Treasury Department, once employers and employees have fully adjusted to the new rule, roughly 800,000 employers are expected to provide HRAs to pay for individual health insurance coverage to over 10 million employees. It is also possible that this proposed regulation would produce better incentives for both consumers and providers and thus will improve the overall health care system, as well as potentially increase workforce investment and wages. Moreover, the proposed regulation would better enable businesses to focus on what they do best – on serving their customers – and not on navigating and managing complex health benefit designs.
“Today’s proposed regulations will expand the availability of affordable health insurance for hardworking Americans. This fulfills the commitment the President made in his October 2017 Executive Order to foster competition and choice and to provide Americans — especially employees who work at small businesses — with more options for financing their healthcare. Treasury projects that this will benefit hundreds of thousands of employers and millions of workers,” said U.S. Secretary of the Treasury Steven T. Mnuchin.
“Today’s announcement is another example of President Trump’s delivering on his promise to provide for more affordable health care options for the American people. More access to association health plans, short-term insurance, and flexible HRAs complement the work we are doing at HHS to bring down drug prices and lower the cost of healthcare services. Each of these actions is focused on empowering patients through transparency, choices, and competition,” said U.S. Secretary of Health and Human Services Alex Azar.
“Of those smaller employers that provide health benefits, 81 percent offer only a single option. This proposal is about empowering American workers to have more consumer-driven health care choices. Health Reimbursement Arrangements can provide another way for employers to help their employees access quality, affordable health coverage,” said U.S. Secretary of Labor Alexander Acosta.