HRAs and Colorado

Introduction

Through the release of numerous bulletins, notices and other documents, the Colorado Department of Insurance (DOI) has attempted to slow the adoption of Health Reimbursement Arrangements (HRAs) by its citizens in the following ways:

1. Incorrectly suggesting that HRAs are illegal in Colorado for companies with less than 50 employees.

2. Misrepresenting Colorado insurance regulations with regard to the use of HRAs by employees of small companies. 

3. Creating confusion around the use of HRAs. 

4. Using scare tactics (e.g. threats of fines and license revocation) to keep insurance agents from marketing HRAs.

The purpose of this post is to clarify these bulletins and to provide background information for Colorado agents, employers, and citizens.

Background

When health insurance began at the beginning of the 20th century, personal policies in most states were "guaranteed issue". This meant that insurance carriers had to issue coverage to all applicants regardless of their health status. Over the years, 45 states (including Colorado) amended their laws to allow personal policies to be medically underwritten in order to reduce the cost of health insurance to consumers. This meant that carriers could reject applicants based on health status or exclude specific items from coverage. In return, carriers agreed that, once issued, a personal policy could be renewed until age 65 with no increases in premium for new medical issues, and that personal policies in Colorado would meet certain mandates for coverage specified by the State of Colorado.

Between 2002 and 2009 the U.S. federal government issued new regulations that allow employers to give tax-free funds to employees to purchase their own personal policies. These new federal regulations have effectively halved the cost of personal policies on an after-tax basis. This has greatly accelerated the switch in the U.S. from group employer policies to personal (individual and family) policies. Personal health policies in the U.S. increased from 12 million in 2002 to 27 million in 2007 and are approximately 35 million today.

In Colorado, certain officials of the Colorado DOI are not pleased that their own state legislature has allowed personal health insurance policies to be medically underwritten, and these officials are also not pleased with the new federal regulations because they accelerate the trend of employers to switch from group to personal health policies. However, rather than take their displeasure to the Colorado state legislature and ask their elected state representatives to return to guaranteed-issue personal policies, these officials have implemented their own personal vendetta against health insurance agents offering personal (individual and family) health insurance policies to employees under the new federal regulations. Specifically, while a Health Reimbursement Arrangement (HRA) offers employees funds for more than 5,013 different medical purposes under IRS regulations, these Colorado officials are attempting to claim that HRA funds are "employer paid personal health insurance premiums." This is a completely false claim. Suggesting HRA money constitutes an "employer paying for insurance premiums" is similar to claiming that if (unknown to the employer) an employee uses their wages to purchase personal health insurance, then the employer has directly paid for their personal health insurance.

HRAs are legal in Colorado

Employees (including employees of small companies in Colorado) are absolutely allowed to use an HRA to reimburse themselves tax-free for individual health insurance premiums and thousands of other medical expenses. This has been clarified with the release of numerous U.S. Treasury and State publications (see IRS Publication 502 and IRS Publication 969). In a recent notice to Colorado insurance producers (i.e. agents), state officials in the department of insurance suggest that, under Colorado Insurance law, "use of an HRA to reimburse health benefit plan premiums generally prohibits the sale of medically underwritten individual benefit plans". This is incorrect. Colorado insurance regulations merely state that if a small employer pays for an employee's individual policy (i.e. benefit plan), then the carrier (not the employer) may be obligated to make the policy comply with Colorado small group requirements. This regulation should not apply to HRAs due to the following:

1. Employees (themselves) choose how to utilize their HRA funds (e.g. whether to use their HRA for insurance premiums or dental expense reimbursement).
2. The insurance carrier (and also the employer) has no way of knowing the source of the funds an employee uses to pay for their personal health insurance premium, or if months later the employee chooses to seek tax-free reimbursement from their HRA. 
3. Despite similar regulations existing in some states since 1990, there has never been a single instance of a carrier being forced to issue a personal policy under "small group laws" because an employer paid the premium on another employee's personal health insurance policy. 

There is no need for confusion

HRAs are very simple. Yet, the Colorado Department of Insurance continues to release lengthy, misleading notices and bulletins (including B-4.32) in efforts to confuse agents and employers. This has resulted in state-wide confusion with regard to the legality of HRAs in Colorado. See below for a brief summary of HRAs and related Colorado insurance regulations. The following summary is based on the information provided in B-4.32, B-4.68 a DOI notice (8/27) to insurance agents, and numerous conversations and meetings with the Department of Insurance and their counsel.

Currently, the Colorado DOI's stance is:

1. HRAs are legal for employers of all sizes in Colorado. 
2. The DOI does not regulate employers (or HRAs). Rather, they regulate carriers and producers (i.e. agents). 
3. The DOI does not want insurance agents to "encourage" a small employer to drop their group health plan 
4. An individual employee who has an HRA can absolutely buy individual health insurance and it is an individual insurance agent's responsibility to correctly represent the individual health insurance policy to the employee. 
5. If the employee chooses to receive reimbursement from an HRA for the premium, and if the employee works for a company with less than 50 employees, small group requirements may be applied to the employee's individual policy.

Insurance agents who correctly represent Colorado insurance regulations have nothing to fear

It is the responsibility of an insurance agent to correctly represent Colorado law to consumers. Over the past few months, the Department of Insurance has issued notices to insurance agents and producers in Colorado threatening license revocation and fines for educating Colorado small business about HRAs. It should be noted that the majority of small businesses (>50%) do not provide health insurance to their employees. Because HRAs are a viable (and affordable) health benefit solution for employers in Colorado, insurance agents should know how to correctly represent HRAs and related Colorado insurance regulations. The following summary is based on the information provided in B-4.32, B-4.68, a DOI notice (sent 08/27) to insurance agents, and numerous conversations and meetings with the Department of Insurance and their counsel.

In order to comply with Colorado health insurance regulations, the agents should fully represent the following to employees of small companies:

1. HRAs are legal in Colorado for all employers of any size. 
2. An employee who has an HRA can buy personal health insurance. 
3. After the employee purchases health insurance, they have a federal right to use their HRA to reimburse their premium. However, if the personal health insurance policy they choose has a restriction against using an HRA, the employee should be advised to obey this restriction by the carrier or purchase a different personal health insurance policy. 
4. If the employee chooses to take reimbursement from their HRA for individual insurance premium, the employee should be advised that small group requirements may be applied to their individual policy including: 

1. 
   
   • Mandated Benefits under 10-16-104, C.R.S.
   
   
   • adjusted community rating
• the prohibition of the use of case characteristics other than age, geographic area, and family composition under 10-16-105(8) and Colorado Insurance Regulation 4-6-8.