A recent set of FAQs published on the Department of Labor website has created enormous confusion regarding Health Reimbursement Accounts. If you were wondering, Can Health Reimbursement Accounts Still Reimburse Premiums, the answer is yes.
What is a Health Reimbursement Account?
A Health Reimbursement Account, which is another term for Health Reimbursement Arrangement, or HRA, is a type of self-insured medical expense reimbursement plan that allows employers to set aside funds to reimburse employees tax-free for qualified out-of-pocket medical care expenses.
Can a Health Reimbursement Account Still Reimburse Individual Health Insurance Premiums?
The recently issued DOL FAQs did not do away with reimbursing premiums from an HRA.
Nothing in PHS Act Section 2711 (or the Affordable Care Act) removes individual health insurance premiums (whether purchased inside or outside an exchange) from being tax deductible within the definition of "medical care" via IRC Section 213(d).
So, assuming an HRA can comply with the 2711 regulations (e.g. the 106(c)(2) exemption), an HRA (or any section 105 self-insured medical reimbursement plan) can still reimburse the non-subsidized portion of individual health insurance premiums (and the reimbursement can be excluded from income as allowed by IRC Section 105(b) via IRC Section 213(d)).
What Do You Mean by Non-Subsidized?
I am referring to the portion of an individual health insurance premium that is not subsidized by the federal government via a tax credit.
E.g. My individual premium is $10,000 per year. The government subsidizes $8,000 via a tax credit. I pay the remaining $2,000 out-of-pocket.
The $2,000 is the non-subsidized portion of the premium.
What Do You Mean by Tax Deductible?
I mean the $2,000 is tax deductible via 213(d). This means:
1) My HRA can be used to reimburse the $2,000 tax-free, or
2) I can deduct the $2,000 on my personal tax return via Schedule A (if I meet the threshold).
What Do The DOL FAQs Mean for HRAs?
The DOL FAQs clarify that an HRA is not considered "integrated" unless:
The employer offers primary group health insurance coverage that alone satisfies Section 2711, and
The HRA is only made available to those employees who are enrolled in the primary group health plan coverage outlined in #1.
Also, Q2 clarifies that an HRA integrated with individual policies will not be considered an "Integrated HRA" for purposes of Section 2711. This is the primary source of confusion.
In Q2, it says,
"... The Departments intend to issue guidance providing that for purposes of PHS Act section 2711, an employer-sponsored HRA cannot be integrated with individual market coverage or with an employer plan that provides coverage through individual policies..."
It is important to understand that this Q2 has nothing to do with the ability of an HRA to reimburse individual health insurance premiums under Section 105 of the tax code. That is an entirely independent issue.
The real question is: How do I design my HRA to comply with the 2711 regulations?
John Hickman (Alston & Bird) and Bill Sweetnam (Groom Law) did an excellent presentation on this topic earlier this week for ECFC. I've embed the slides below. Here are the possible HRA exemptions they outlined:
- Integrated HRAs
- Retiree HRAs
- Limited Purpose HRAs (e.g. Dental / Vision)
- Small Benefit HRAs (e.g. Wellness HRAs)
- HRAs that qualify for the Section 106(c)2 exemption
- HRAs that reimburse only benefits other than essential health benefits (e.g. Premium-only HRA)
Bill Sweetnam also outlined a type of Section 105 Arrangement that reimburses premium, but does not set an annual limit on the amounts it reimburses. Here are the slides: