Effective September 23, 2010, the
health reform bill prohibits group health insurance plans from imposing
lifetime limits on
essential health benefits. However, plans may impose certain
annual limits on essential health benefits until January 1st, 2014. This new requirement applies to plans with effective dates of coverage on September 23, 2010 or later.
The annual limits restrictions phase in over the next few years as follows:
- Phase 1 (September 23, 2010 through September 22, 2011) - $750,000 maximum per participant
- Phase 2 (September 23, 2011 through September 22, 2012) - $1,000,000 maximum per participant
- Phase 3 (September 23, 2012 through December 31, 2013) - $2,000,000 maximum per participant
- Phase 4 (January 1st, 2014 Year 5 and beyond) - no annual limit allowed
Health Reimbursement Arrangements (HRAs)
Flexible Spending Accounts (FSAs)
Health Savings Accounts (HSAs)
On April 27, the IRS issued
Notice 2010-38 which expands the health care tax exclusion for adults below the age of 27 as of the end of the taxable year.
Effective March 30, 2010 employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child. This new age 27 standard replaces the lower age limits that applied under prior tax law. It also replaces the requirement that a child generally qualify as a dependent for tax purposes. The definition of "Child" includes children of employee/spouse, step children, adopted children and foster children. There is no requirement that the child be a "dependent" for tax purposes.
Section 125 Cafeteria Plans
The notice clarifies that employers with
Section 125 plans may allow employees to make pre-tax contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals (plans have until the end of 2010 to amend their cafeteria plan language).
Health Reimbursement Arrangements (HRAs) The notice clarifies that expenses incurred by a child under age 27 may be reimbursed from a
Health Reimbursement Arrangement (HRA).
Health Savings Accounts (HSAs)
The notice does not reference
Health Savings Accounts (HSAs). Because the
health reform bill did not amend the section of the code that governs HSAs, it appears that expenses incurred for an adult child who does not qualify as a tax dependent cannot be reimbursed from an HSA.
What employers with group policies should do in 2010 to
(1) Maximize the value of their benefits and
(2) Prepare for full Health Care Reform by 2014.
Employers who need to maintain their group coverage in 2010 should raise their annual deductible to the new federal standard and use tax-free dollars to minimize the financial impact on key employees.
This post is a supplement to last week’s post on why Health Care Reform is causing companies to drop group health insurance coverage. The
Health Care Reform bill signed into law on March 23, 2010 will cause most employers to switch from group to individual policies by 2014. This is because, by 2014, most employees will be eligible to purchase individual policies at substantially lower prices than employer group coverage regardless of preexisting medical conditions.
Health care reform includes
several incentives for employers to switch to individual policies in 2010. But such a switch may not be feasible until 2014 for some employers who have key employees with preexisting medical conditions.
These employers, who need to renew their group health plan in 2010, are facing significant increases in their premiums.
Why Employer Group Policy Renewals are Increasing 20-50% in 2010
Employers with group plans have already seen their premiums more than double over the past decade—increasing at 10% to 20% with each annual renewal. These rate increases pale by comparison to what is coming for group plans in 2010 because of the new federal mandates on coverage included in the Health Care Reform bill.
Here are some of the new Health Care Reform federal mandates affecting new and renewing employer group policies in 2010:
- Effective September 23, 2010 – All policies must have unlimited lifetime limits and higher annual limits on coverage
- Effective September 23, 2010 – All policies must include 100% coverage with no deductible and no copays for preventative care as defined by the federal government (e.g. mammograms, annual checkups, depression screening, alcohol counseling and interventions, etc.)
- Effective September 23, 2010 – All policies must offer coverage for children at no extra charge for preexisting conditions
- Effective September 23, 2010 – All policies must include coverage for dependent adult children up to age 26
These new federal mandates are greatly increasing the cost of group health insurance in 2010 and beyond, forcing employers to modify their group policies in order to keep them affordable for both employers and employees.
How Employers can Reduce Renewal Increases in 2010 and Beyond The simplest and most cost-effective change for employers to reduce the monthly premium on their group policy is to increase the annual deductible up to $2,500-$5,000 per employee per year. This will reduce the total monthly premium by up to 50%, a cost savings typically shared by both employers and employees.
However, while increasing the annual deductible reduces the total monthly premium up to 50%, it may create the following problems:
- Key employees may not accept the higher annual deductible. These employees may be accustomed to having 100% of their medical expenses covered by their employer.
- Some higher deductible plans do not meet new federal standard for “qualified” health insurance which includes mandatory coverage of many items plus a maximum annual deductible of $2,000 per employee or $4,000 per family. In 2014, employers with more than 50 employees must pay the federal government up to $3,000 per employee per year for employees not offered “qualified” health insurance.
For employers, the solution to these problems is to:
- Raise the annual deductible on the group plan which reduces the total monthly premium by up to 50%.
- Use a portion of the premium savings to offer a tax-advantaged Health Reimbursement Arrangement (HRA) to subsidize some or all of the increased medical expenses incurred by employees due to their higher annual deductible.
- Customize the HRA to increase or decrease the HRA benefits for different classes of employees.
How Employers Should Use Health Reimbursement Arrangements (HRAs) A health reimbursement arrangement is just what it sounds like—an “arrangement” that reimburses employees tax-free for their out-of-pocket health care expenses. HRAs can be customized to offer different amounts (say up to $200 per month) to different classes of employees. HRAs can also be customized to cover different health care items at different levels for each class of employees. For example, an HRA can be set to cover 50% of dental expenses up to $1000/year for senior managers only, while offering no dental benefit for the other employees.
Employers are not required to fund any dollars to their HRA until, and if, employees incur medical expenses and submit claims for reimbursement. Employers typically keep unused HRA balances when employees leave, and can set unused HRA balances to expire each year or roll forward for future medical expenses. Best of all, employers can administer HRAs through automatic tax-free additions to payroll so there are no checks to write or accounts to balance.
Depending on the HRA plan design and employee turnover, employers with group plans experience approximately 40% utilization of HRA benefits, while employees value their HRA at 100% of their HRA allowance.
Example. An employer raising the annual deductible on their group health insurance by $2,000/year might offer employees a $2,000/year HRA to duplicate past benefits. At 40% utilization, the employer will only spend $800/year on actual HRA reimbursements
In this example, the HRA only costs the employer $800 per employee to offer $2,000 worth of benefits and, if the employee leaves, the employer keeps the unused money.
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Moreover, HRA funds can be used to pay for premiums on individual policies, making them the ideal vehicle to manage the eventual transition of employee benefits from group to individual health insurance.
Why Employers Should Not Use Health Savings Accounts (HSA)
A health savings account is also what it sounds like—a savings account held at a bank or financial institution that can be used to pay for out-of-pocket health care expenses. However, unlike with HRAs, HSAs must be fully-funded and are 100% owned, controlled, and kept by the employee, even if the employee leaves the company.
HSAs are not good vehicles for employers to use to help employees cover the costs of a higher deductible group health policy because employers must fully-fund their HSA contributions upfront and lose control over how the money can be spent.
Example. An employer raising the annual deductible on their group health insurance by $2,000/year might offer employees a $2,000/year HSA to duplicate past benefits. Even at 40% utilization, the employer will still spend $2,000/year funding the employees' HSAs of which $1,200 is simply kept by the employee.
In this example, the HSAs cost the employer $2,000 per employee to offer $2,000 worth of benefits and, if the employee leaves, the employee keeps the unused money.
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However, HSAs are good for tax-paying individuals. HSAs are like an IRA or 401(k) on steroids. Like an ordinary IRA or 401(k), employees receive a tax deduction for amounts they contribute to their HSA and dividends accrue tax-free. But unlike an IRA or 401(k), qualified distributions from an HSA for out-of-pocket health care expenses are 100% tax-free. HSA funds can also be distributed to pay for non-health care expenses, in which case they are treated the same as taxable distributions from an IRA or 401(k). Every U.S. taxpaying individual should have an HSA and fully fund the maximum contribution to their HSA before putting one dollar into their IRA or 401(k). While every employee should be encouraged to have an HSA, and employers should design their total group health benefits so that every employee is eligible to open an HSA, there is no advantage for employers to formally include HSAs as part of their total health benefits package.
Important Features to Consider Setting up an HRA
- Online Setup, Compliance and Administration - The HRA should be completely paperless with electronic plan documents and electronic signature collection. HRAs are federally regulated under ERISA by the U.S. Department of Labor and are costly to manually administer through paper-based systems.
- HRA Classes - The HRA should allow an employer to divide employees into classes (e.g. salary, hourly, job function) and customize the HRA benefits for each class to maximize recruiting and retention.
- No Pre-funding Requirements - The HRA should not require pre-funding. Employers should never pre-fund any portion of HRA reimbursements to a third party administrator (TPA). All cash should remain with the company until an actual claim is submitted, approved, and reimbursed.
- No Debit Cards - The HRA should not have a debit card. The R in HRA stands for "Reimbursement". HRA funds can only be distributed tax-free to employees as "reimbursements" for medical expenses. While debit cards initially promise to eliminate the need to submit claims by employees, the reality is that debit card transactions are mostly unsecured loans to employees. Employees must keep and submit their receipts as claims or be forced to return the funds--a process called "Pay and Chase" by TPA-based debit card providers. Moreover, using debit cards requires employers to pre-fund HRA allowances to uninsured financial companies.
- Payroll Reimbursements - HRAs should integrate with the employer's existing payroll service and HRA reimbursements should be electronically added to employee paychecks as tax-free additions. This eliminates the need to write separate checks for HRA reimbursements and keeps a simple audit trail, for both employers and employees, without the need to manage a separate financial system.
- HSA-Compatibility - Employees can have an HRA and an HSA at the same time. So, when selecting an HRA administration platform, employers should select an HRA vendor that includes built-in features that allow employees to individually increase their annual deductible on certain items so that their HRA makes them eligible to contribute to an HSA.
- Individual Policy Reimbursements - The HRA should have the capability to reimburse for premiums on individual policies covering the employee and/or their dependents even if this feature is not made available to employees until 2014. This makes is easy to switch to individual policies for all or some employees by 2014 without implementing a new system.
