As Americans start to absorb the outcome of the elections, many businesses and nonprofit organizations are asking what a new, Democrat-led presidential administration might mean for health benefits. Specifically, a number of employers are asking PeopleKeep what we might foresee changing in the arena of health reimbursement arrangements (HRAs). While we are experts in HRA administration, we can’t say the same for politics! With that caveat in mind, we do have some thoughts about how HRAs might change in the near future.
For this blog post, we are taking a short-term outlook and focusing on the next one to two years. We will assume that the Supreme Court doesn’t strike down the ACA, Joe Biden is President, and that the Republicans hold a small majority in the Senate. For a wider-ranging and deep analysis of the Biden health care plan, we recommend the Kaiser Family Foundation’s issue brief.
QSEHRA and ICHRA are here to stay
As a Presidential candidate, Joe Biden outlined his healthcare plan, which has interesting implications for the qualified small employer HRA (QSEHRA) and individual coverage HRA (ICHRA) benefits even though neither are explicitly mentioned. A public insurance option and the individual mandate penalty are among the most controversial and difficult-to-enact pieces of Biden’s health care plan. If passed, these changes would have a significant impact on both the QSEHRA and ICHRA. Given our key assumptions and the timeframe we are considering, we are going to focus on potential impacts to HRAs without either a public insurance option or a reinstated individual mandate penalty.
First, we believe QSEHRAs and ICHRAs are here to stay because they complement the ACA and help drive consumer demand into insurance exchanges. They also give employers, including small employers, more choices when trying to offer employee health benefits. The QSEHRA was Obama administration legislation as part of the bipartisan 21st Century Cures Act. The ICHRA is a Trump administration addition formalized in Health Reimbursement Arrangements and Other Account-Based Group Health Plans. While ICHRAs may be more at risk of reversal, we feel that is unlikely. On a side note, integrated, or group coverage HRAs, which help augment an employer-sponsored HDHP, are also extremely unlikely to be changed in any way as integrated HRAs have been around for many years. As such, we won’t address integrated HRAs.
Trump proposals likely to be reversed
For ICHRAs and QSEHRAs, with every day that passes, it feels less and less likely that the recent Trump proposals to expand ICHRA coverage to include health care sharing ministries and direct primary care arrangements will get finalized before Biden’s inauguration. If these two proposed rules go into effect, they appear at risk for quick reversal, especially health care sharing plans, as the Obama administration (and by extension Biden) never viewed these types of plans as health insurance.
Also on the short list of “likely to be impacted” are final rules on ICHRA safe harbors around calculating affordability, which larger enterprises have been waiting for since the initial ICHRA regulations were published over a year ago. Those final rules may now be less forthcoming, which could very well slow early adopter traction for ICHRA with very large employers. So far, early traction in ICHRA is coming from small to midsize employers rather than large and very large enterprises, although that may change for 2022 as larger companies have more time to adapt. For midsize employers subject to the ACA employer mandate, using a simple safe harbor generally works for them, and their need for additional safe harbor options and more detailed definitions is less acute. Therefore, if there is a lack of final clarification on safe harbors, it’s unlikely to slow ICHRA adoption with small and midsize employers.
At minimum, the Biden administration will invest more in the health insurance exchanges. The Biden administration is expected to fund additional education and marketing around the individual insurance market and help consumers use the exchanges by providing navigators and lengthening the open enrollment period. This re-investment in and renewed emphasis on the exchanges will be helpful to QSEHRA and ICHRA adoption and usage.
Changes to affordability might make ICHRAs offered by ALEs more expensive
Biden’s several proposed changes to how affordability is calculated for employer-sponsored plans may move the needle in the other direction and make an ICHRA more difficult to offer. It’s unclear if changing the affordability—and premium tax credit—thresholds is politically viable with a divided U.S. Congress. Funding these changes will be a significant challenge. We will, however, examine what might happen to HRAs if Biden is successful with these elements of his health plan—even in some sort of compromise or modified form.
Employers with fewer than 50 full-time equivalent employees (FTEs) often want to offer a “great benefit that’s affordable for employees.” Affordability in this case is meant in a general sense, not in the sense of being affordable as defined by the ACA since they are not subject to the employer shared responsibilities provision (aka the employer mandate). For applicable large employers (ALEs) who are subject to the employer mandate, Biden’s health plan includes two main changes to calculating affordability that will increase the costs of offering an ICHRA:
- Changing the affordability threshold from 9.83% in 2021 to 8.5% of an employee’s household income. This will increase healthcare benefit costs for ALEs who must make their ICHRA benefit affordable for 95% of full time employees in order to be in compliance with the employer mandate of the ACA. It’s possible that Congress may agree to a compromise percentage of household income, like 9.0%, but the general effect would be the same.
- Changing the affordability calculation for determining premium tax credits from the second lowest cost silver plan to the second lowest cost gold plan. If, by extension, this change is applied to ICHRA affordability, that would change the affordability calculation to the lowest cost gold plan instead of the current calculation off of the lowest cost silver plan. Yes, the way affordability is calculated is different for PTC and ICHRA. This change would lead to additional increased costs for ALEs offering an ICHRA. However, for employers who choose to reimburse both premiums and other eligible out of pocket medical expenses, the impact may be mixed as gold plans generally have lower deductibles and lower out of pocket fees, which would reduce reimbursement requests for those expenses. Employees may still choose to buy a silver plan and use any remaining HRA allowance to reimburse other eligible reimbursements like prescriptions.
These proposed changes to affordability may encourage companies that are not much bigger than the ALE threshold of 50 full time equivalent employees to consider “taking the penalty” for not offering a benefit at all, or, more probably, offer a benefit that’s affordable for fewer than 95% of their full time employees (and then accept any penalties that are incurred). For employers who are ALEs but still midsize—roughly those with 50 to 200 full time equivalent employees—the ICHRA has been a welcome option that often better fits a tight budget and the need for simplicity than a traditional group health insurance plan. The proposed changes to affordability will create additional budgetary pressure on employers, but that pressure will apply to both ICHRAs and traditional group plans.
Changes to premium tax credits (PTC)
Biden’s proposed increases to premium tax credit thresholds based on the Federal Poverty Line (FPL) may make participating in a QSEHRA, where their PTC must be coordinated with the allowance, less attractive to certain employees. For an ICHRA, where PTC is completely forfeited when offered an affordable allowance, employees are not permitted to opt out if they have been offered an affordable allowance. So, employers may be more prone to use classes to offer the ICHRA only to employees who are not likely to be eligible for the more generous premium tax credits, like full-time salaried employees, and not offer an ICHRA allowance to other classes, like full-time hourly (non salaried) employees. We already see this dynamic in benefit design with our current ICHRA customers but it may become more pronounced if premium tax credits become more generous.
A very positive change to ICHRA would occur if the Biden administration succeeds in allowing employees to choose between an offer—even an affordable one—from their employer or go to the exchange and use their premium tax credits. Critically, this change would also need to apply to ICHRAs as “job-based coverage,” which isn’t clear at this stage. Overall, while it is not in the current Biden health care plan, we would very much advocate for a more flexible approach to combining QSEHRA and ICHRA allowances with premium tax credits.
While QSEHRA and ICHRA are not addressed specifically in Biden’s proposed health care plan, both of these benefits give employers an easy way to reimburse employees for health insurance purchased on the ACA marketplace and state exchanges and, therefore, are not likely to be direct targets for change. These alternatives to traditional employer sponsored group plans are increasing in popularity, especially with small to midsize employers who are facing daunting challenges during the coronavirus pandemic. So, while some changes under a Biden administration may indirectly impact QSEHRA and ICHRA design or adoption, we don’t anticipate that these changes will be so significant as to change the overarching trend, which is towards greater adoption of these alternatives that give employees greater choice and responsibility over their health care plan. In the end, that desire to shift the paradigm will win out.