HRAs and Defined Contribution − Follow-Up

My last post, “Feds Ban Defined Contribution” generated quite a flurry of comments, both on the list and directly to me. The comments were all from people I respect and admire — and they were split about evenly between people who strongly agreed with my conclusion and people who vehemently disagreed. Wow.

Clearly it is an important topic that needs more attention. Fair warning, though, for those readers who are not into benefits issues — this is not an easy subject and it will not be resolved here. Most likely, if the law survives, it will be like ERISA and endlessly litigated. For a quarter of a century, it seemed that the Supreme Court issued ERISA decisions almost annually, and even then very few people really understood ERISA or how it applied to real life situations.

First, let’s clear up my misunderstanding of what Aon Hewitt is doing. I deeply appreciate Ken Sperling for posting this comment last time −

I’m with Aon Hewitt and lead our exchange strategy, so let me clarify things: the Aon Hewitt private exchange DOES NOT use HRAs. Employer subsidies are expressed as “credits”, and as such are not subject to the recent guidance.

I apologize to Ken and Aon for getting it wrong, but in my defense this approach is brand new, just going into effect this year. An article by the Society for Human Resource Management explains it in more detail. It says –

…employers give each eligible employee fixed amounts for either individual or family coverage, regardless of the plan the employee chooses within those tiers. Workers add their own salary-deferred contributions in an amount they select, and choose among differently priced plans from competing health insurers — taking into consideration factors such as varying premiums, deductibles and networks.

Now, I suppose this might be called “defined contribution” because the employer is making a fixed amount of money available and enabling employees to top it up with their own funds to get a richer or more affordable benefits package based on their own needs and resources.

It is not, however, “defined contribution” as we have come to think of it in the retirement world, because it is missing the ingredients of individual ownership and portability that characterize 401(k) programs. The Aon approach seems to be more a multi-choice employer plan with a wider array of choices and a fixed contribution. I hope Ken will correct me if I still have this wrong.

Far more problematic is the issue of HRAs and the FAQ document released by DoL, HHS, and Treasury we discussed last time.

Using HRAs to purchase individual coverage has always been controversial. Regulations issued by what was then HCFA said in the last month of the Clinton Administration that employer money could not be used to pay individual insurance premiums, even though the IRS had no problem with it. HCFA thought this practice was a dodge of HIPAA, which required guaranteed issue of employer plans. State insurance departments varied on whether this reasoning also applied to HRAs.

The Affordable Care Act (ObamaCare) seemed to resolve the HIPAA question because it applied guaranteed issue to individual as well as employer plans. But then comes this new twist. As I wrote last time, this FAQ seems to ban using stand alone HRAs to fund individual health insurance premiums. The Mintz-Levin law firm seems to agree on that. It writes

In a set of Frequently Asked Questions (FAQs) posted to the Department of Labor’s website on January 24, the Departments of Health and Human Services, Labor, and Treasury (the “Departments”) put a stop to an approach to health plan design under which employers furnish employees with a pre-determined dollar amount (a “defined contribution”) that employees can apply toward the purchase of health insurance coverage in the individual health insurance market.

But in a series of follow-ups the Zane Benefits Group argues just the opposite. See here and here. Zane’s Rick Lindquist writes flatly –

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.

He cites a recent presentation by John Hickman of Alston Bird and Bill Sweetnam of Groom Law as support for this position, but reading through their slides I don’t see the support. He also relies quite a bit on this provision and argues that HRAs qualify as a “flexible spending arrangement.” –

“Section 106(c)(2) Flexible spending arrangement - For purposes of this subsection, a flexible spending arrangement is a benefit program which provides employees with coverage under which −

(A) specified incurred expenses may be reimbursed (subject to reimbursement maximums and other reasonable conditions), and

(B) the maximum amount of reimbursement which is reasonably available to a participant for such coverage is less than 500 percent of the value of such coverage.”

Now, I will stipulate that I ain’t as bright as I used to be (which never was all that), but for the life of me I cannot figure out what “maximum amount of reimbursement which is reasonably available to a participant for such coverage is less than 500 percent of the value of such coverage” can possibly mean. How can a reimbursement exceed 500% of the value of “such coverage?”

The other thing that came up in the comments was the question of having HRA premium payments and also a tax subsidy in a public exchange.  Actually, it never occurred to me that anyone would use the HRA to pay for public exchange coverage. I have been assuming this would all take place in a private exchange.

In any case, the more this thing is “clarified” the more confused I get.  Maybe you can help me out.

Comments (30)

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  1. Peterson says:

    “Using HRAs to purchase individual coverage has always been controversial.”

    - Great post Greg! I’m still not sure why HRAs are controversial.

  2. Benedict Popplewell says:

    “The other thing that came up in the comments was the question of having HRA premium payments and also a tax subsidy in a public exchange. Actually, it never occurred to me that anyone would use the HRA to pay for public exchange coverage. I have been assuming this would all take place in a private exchange.”

    Interesting. Seems backwards but at the same time I can see how it would work.

  3. Patel says:

    “In any case, the more this thing is “clarified” the more confused I get.” Dr. Goodman you are not alone in this struggle.

  4. Desai says:

    “Actually, it never occurred to me that anyone would use the HRA to pay for public exchange coverage. I have been assuming this would all take place in a private exchange.” It will be interesting to see how this plays out, this calls for another interesting dynamics.

  5. Harley says:

    It’s absolutely terrifying when the experts are all scratching their head at legislated solutions. Why exactly would you get reimbursed up to 500% of the value for healthcare?

  6. Julie Jennings says:

    I don’t think I understand the distinction that Ken Sperling from AON makes. If the employer is providing credits to the employee for the purchase of health insurance, does this then subject any and all of the health plans purchased to ERISA? Would these credits make the employer subject to non-discrimination testing? If they do not fall under S106 what tax code would govern the tax treatment of the value of the credits?

    This whole law makes me feel like the more I try to understand something the more confused I get!!!

  7. Jack says:

    The FAQ for PPACA should be several hundred pages long.

  8. Don McCanne says:

    The fixed contribution by the employer – a defined contribution – transfers risk from the employer to the employee. The Aon experience shows that the relatively healthy workforce with their modest incomes will select plans that increase their financial exposure in order to avoid paying the full balance of the premium for more comprehensive plans – an understandable response considering their other expenses for basic needs, education, transportation, retirement contributions, and the like.

    For many individuals and families, should medical problems develop, the additional exposure primarily through higher cost sharing, results in significant financial hardship, and this increased medical debt has been shown to be a contributor to personal bankruptcy.

    Health insurance should provide financial security in the face of medical need. If your insurance leaves you with enough medical debt to tip you into bankruptcy, it isn’t doing its job.

    In this morning’s New York Times Economix blog, Bruce Bartlett writes that “the future doesn’t look pretty” with this shift to defined contribution approaches.

  9. Steve Miller says:

    “It is not, however, ‘defined contribution’ as we have come to think of it in the retirement world, because it is missing the ingredients of individual ownership and portability that characterize 401(k) programs.”

    Actually, you could argue that “defined contribution” 401(k)s are, unlike individually controlled IRAs, plans designed by employers with limited investment options and, often, high fees (that’s a frequent criticism by employees who feel “trapped” by their 401(k) plans, since it’s the only option available for the employer match/subsidy). Employees, when leaving a job, can roll over their funds into an IRA, so it’s the funds that are portable.

  10. Devon Herrick says:

    The solution to the problem that Dr. McCanne speaks of is the HSA/HRA at birth idea that Dr. Ben Carlson spoke about at the National Prayer Breakfast. When you’re young, your health risks are low. Most of your premium dollars should go towards an HSA/HRA rather than insurance. If people would begin depositing portion of their premium dollars into an account while young, they will have sufficient resources to cover their cost-sharing when unforeseen health problems arose; or health status deteriorates later in life.

    It makes sense for an employer to “define” its contribution. As economists are fond of saying, “there’s no such thing as a free lunch!” That is: an employer contribution is not actually a benevolent contribution made because our employers like us. Rather, the employer contribution is a portion of our compensation allocated for non-taxable benefits. Human Resources Depts. that pretend employee health benefits are a free perk are doing an incredible disservice to both workers and the firms they work for.

    Any system that provides health care that’s free at the point of service necessarily has to use non-price rationing, such as waiting lines, rationing of expensive technology and drug therapies. These systems will be starved for resources due to the fact that they are taxpayer funded, and treat health care as a public good. But health care does not fit the rules for a public good because it’s rival, and exclusive.

    An example of this is my earlier example of a “free lunch,” let’s assume five friends all decide to go to lunch together. When the bill arrives, invariably someone suggests… “oh, let’s just split the bill five ways.” When this becomes the norm among friends, the perverse incentive is for people to order more than they otherwise would — like when one of the group says “does anyone want to order a shared appetizer?” or “should we get another bottle of wine?” This is done because the margin cost is getting split 5 ways. But rarely do the individuals volunteer to throw in more money than they can get by with contributing. I hate these types of lunches because it always ends up costing me more than I would have spent had I ordered what I was willing to pay for. The same is true for health care. Demand curves are downward sloping – when it’s free we want infinite demand. But, health care is not free, it must be paid for collectively. Since it’s funded collectively, we don’t have an incentive to pay very much. Thus, resources must be rationed using another means.

  11. Jon Kessler says:

    You nailed it this time Greg.

    Also, the only true portability is from funds you as an individual own. HSA

    Jon

  12. Bill Huber says:

    According to Zane Benefits the “maximum amount of reimbursement which is reasonably available to a participant for such coverage is less than 500 percent of the value of such coverage” means that your HRA must “Set a cap on annual rollover so that the maximum amount of available reimbursement is always less than 5 times the annual value of the HRA”, http://www.zanebenefits.com/blog/bid/266888/Stand-alone-HRAs-Can-Still-Reimburse-Health-Insurance-Premiums.

    As a healthy family living in one of the 45 states where you can get individual health insurance(“bronze level”) for less $5000 a year, I roll over $1000 a year since our plan has an annual value of $6000. According to the ACA the maximum amount the company can legally accumulate in my HRA is 5 x $6000 or $30,000. I am not sure this restriction applies to companies with less than 50 employees. This rollover amount is useful for covering expenses not covered by the health insurance plan. As a result I have both “essential benefits” health insurance and zero out of pocket medical costs. According to the NIHCM brief those companies looking at the group health insurance approach would be looking an a 2011 employer contribution of $11,060, an employee contribution of $3,962, and an employee deductible of $2,220. For companies with a healthy workforce, HRAs are the obvious winner for both employers and employees.

  13. Don McCanne says:

    Devon,

    You won’t be surprised to hear that many of us who advocate for social justice were quite disappointed by Dr. Ben Carson’s remarks.

    His recommendation for an HSA from birth lacks details though he gives us a hint when he says that these accounts can be passed on to family members. So they work for those who stay healthy, but what about those who deplete their accounts? Do they merely add more of their own pre-tax funds? To what limit? Is the family with a median household income really expected to keep such accounts replenished if they have serious medical problems within their family? Would catastrophic insurance be able to replace education and retirement funds that they were forced to deplete, or pay their accumulated debts incurred as a result of their medical problems?

    Really. Where does the money come from to fund the HSAs?

    HSAs divert funds from what should be our common risk pool used to pay for health care. HSAs are a method of financing health care that rewards those blessed with good health but penalizes those who have the misfortune of experiencing major injury or serious disease.

    Dr. Carson demonstrates a lack of sensitivity for those populations who are ill served by our current system – a population that he certainly should understand through his own personal experience. From his talk, he seems more concerned about being able to keep his $9 billion, should he be so fortunate, than to help meet the needs of the underserved.

  14. Ron Bachman says:

    I persoanlly took the HRA concept to Mark McClellan in September 2011 with Newt Gingrich. I informed McClellan that a funds carry over was possible if the IRS would simply rule on that interpretation of Sec 105 & 106 of the IRS code.

    For twenty years and more it had been a “non-ruling” area – NOT EVEN private letter rulings. I then worked with the White House and Bill Sweetnam at the Treasury (also Roy Ransthum, and Kevin Knopf) and John Hickman and many others that support the concept. That included industry interests from Definity (Tony Miller) and Lumenos (Chip Took).

    There was no new law, just an IRS pronoucement and regulatory interpretation. In order for the regulatory process to work, HRAs had to be interpretated within existing law with interpretations consistent with other regs. To accomplish this “threading of the needle” Bill Sweetnam and Kevin Knopf had to design HRAs as insurance contracts. HRAs are NOT savings accounts like HSAs! They are legally insurance policies. If they are established as stand alone contracts they then will have to meet the Essential Health Benefits (EHB) requirements of ACA. They do not meet that standard so they are not allowed except as a part of a comprehensive medical plan that does meet EHB standards.

    That is why at the state level to assure the use of defined contributions (pre ACA) we worked to get state laws to define HRAs as NOT insurance so the state regulators would not require guaranteed isse or other insurance standards (especially if the employer used HRAs as a defined contribution mechanism and then set up a payroll deduction process for employees to purchase individual policies with a combination of HRAs and added employee funds (maybe through salary deduction – another controversial financing by these combined approaches).

    I worked with Bill Sweetnam to understand this gambit of HRAs being insurance for federal law and NOT insurance for state law. It worked and we passed such legislation in Georgia.

    Unfortunately, it seems to me that at this time either the powers granted HHS are needed or federal legislation is needed to make stand alone HRAs NOT insurance for purposes of ACA.

    Of course, I defer to the best two legal minds behind the development and structure of the HRAs – Bill Sweetnam and John Hickman. They were both there in the trenches in 2001-02 transforming the market with these initial carry over concepts of HRAs (again they are legally insurance contracts, self-insured promises, and notional accounts from employees.

    Bill? John? Others? is my history lesson consistent with your memory?

  15. Linda Gorman says:

    Why settle for an HSA at birth when one can have the “In Our Hands” Charles Murray $10,000 a year solution?

    And could we please stop claiming that people with HSAs are exposed to catastrophic risk if they become seriously ill? Funding an HSA with premium savings can create a zero deductible policy in a few years.

    It’s a far better deal than having one’s wages reduced to pay for a bloated employer policy that one wouldn’t voluntarily choose in the first place, especially if tax treatment were equalized. And, unlike policies with coinsurance, the better HSA qualified plans are quite explicit about just how much financial risk one is likely to be exposed to.

  16. Ron Bachman says:

    The time was not 2011 but 2001 for taking HSAs to Mark McClellan. Sorry for the typo

  17. Greg Scandlen says:

    Don McCanne — Bartlett was writing about retirement, not health care. But even there he was being too gloomy, imo. Defined benefit pensions may work if you are employed by a very large company that is guaranteed to be in business 20 years from now, not so much for a small to mid-sized firm. And the PBGC is already drastically underfunded, much like all the pension promised made by state and local governments. Many of us would rather take responsibility for ourselves rather than hoping against hope that our betters will come to our rescue.

    Also, Don, HSAs are actually very good for people with high expenses — better than a typical PPO. Why? Because people get into 100% coverage faster. The one group that may be financially disadvantaged are those with middling annual expenses. I like to point out that these are the very people who are healthy enough to actively control their spending and also sick enough that it makes a difference.

  18. Greg Scandlen says:

    Ron Bachmann — Good history lesson. Not to nitpick, but it is worth clarifying that the “insurance” aspect of HRAs was never really “insurance” as most people understand it, but an employer welfare benefits plan under Sections 105 and 106. The question is how to convert that money into an actual insurance policy.

  19. Don Levit says:

    Ron:
    You never responded to the links I provided in the prior post which said that integrated HRAs were not major medical insurance policies, but were more akin to excepted benefits policies.
    While they do have insurance aspects, such as the 5 times the amount in the plan could be available for expenses, they are clearly not major medical plans, but rather limited benefit plans.
    The ACA considers stand-alone plans, as red flags, but not plans which are coordinated with major medical plans, such that both plans, together, would comprise medical insurance.
    Thinking over the possibility of subsidies in a private ecvhange, I would think they would be forbidden. The ACA clearly states that if the employee is receiving subsidies in an employer plan, he is not eligible for subsidies in the exchange, even for his dependents, and even though the cost of coverage may exceed 8 percent of household income.
    Providing employer monies for employees clearly etablishes an “employer-eligible health plan.”
    So while I think this concept can be done, without the availability of subsidies, it will face intolerable competition.
    For the lady who has $30,000 in her HRA of potential payouts, why is your deductible not $30,000, cutting over 60% off of a traditional premium?
    Don Levit

  20. Ron Bachman says:

    Greg – I accept your deferentiation between insurance and an employer welfare benefit plan. I am not an expert on that nuance. But, since Treasury thru regs created HRAs as an insurance plan it therefore must under ACA meet the requirements of the EHB standard. By itself, it cannot. Therefore, there is no possible conversion to an acceptable insurance plan if the employer plan is an HRA only. It is simply a non-starter. I asked Sweetnam about this on 3/23/2010, the day ACA passed. Bill, is at Groom Law and had already reached back to Kevin Knopf at Treasury for his opinion. Bill is really the regulatory “father of HRAs’”. He was told that “HRAs only” was probably not going to survive under ACA. As previously stated, if the HRA is a part of a comprehensive plan then HRAs are OK because the package meets EHB.

    It is the Treasury development of HRAs as a insurance plan that required us to define it at the state level as NOT insurance. It is also part of reason why 26 states would not allow HRAs only to be used for purchasing individual policies. Some argued that the HRA funding was already an insurance plan that required satisfaction of all group laws, like guaranteed issue of any individual policies purchased. The end product did not define the states requirements, it was the HRA only that was determinative. The states can regulate insurance. If it is defined (for state purposes only) that HRAs are nit insurance, then states could not outlaw their use as a defined benefit plan to purchase individual insurance. However, ACA has taken that state gambit away with the EHB standard on employer plans.

    The only way around this strange mess is to have HHS with its broad interpretation powers under ACA to allow HRA only plans as not insurance, or to eventually pass federal legislation defining HRAs as NOT insurance.

    Don- As to plans with HRAs in a government exchange and subsidies you are probably right. I have not focused on the details of subsidies there, but your logic seems right to me.

    I think employers could provide an HRA stand alone if there is not exchange subsidies involved and they want to add funding for the cost sharing of plans selected. Such HRA could be used even by those individuals who don’t buy any insurance and are under a potential penalty. The HRA could be used to pay otherwise out of pocket medical expenses or any 213(d) Qualified Medical Expense (QME).

  21. Greg Scandlen says:

    Excellent comment, Ron. What a mess.

  22. Dennis Kelly says:

    Greg, I am with you.
    As in nature, a good cold dark damp fog can not last forever. The sun, water and darkness from which it emerges eventually become at cross purpose with each other’s natural existence. Eventually, the light wins and then retreats into darkness for another season.

    Keep up your good work. There are not many of you left (or right) the know the difference between health care, health insurance and good policies that help them be more affordable. you are always the first to recognize policies that are at cross purpose with affordability, access, ownership and consumer control. Good work you faithful servant of we the people.

  23. Richard Matthews says:

    Greg et al,
    How about this – an Individual Premium Account under Section 125? Would that not provide a distinction without a difference to this HRA dilemma?

    Assume the Defined Contribution is a flat amount of $1000 per employee per month. Couldn’t that simply be added to employee wages as a “gross up” and then each employee could do as they choose – purchase from the exchange and NOT be able to use the IPA under Section 125, or purchase an individual plan OUTSIDE the exchange and use the IPA under Section 125.

    Now, the employer might have to make some assumptions for budgeting purposes because wages are taxable events to the employer and 125 premiums are not. But that should be easy enough to do and modify year to year as needed. So long as one meets the anti-discrimination requirements, maybe even try something like a $750 gross up if one goes to the exchange and the full $1000 if they use Section 125.

    Of course this is really just a move to true “Total Compensation” rather than a true Defined Contribution plan, but what better way to finally get employers out of the benefits business (assuming they wish to do so) and teach employees that insurance really does cost money while providing them with true ownership of a plan.

    Dick Matthews

  24. Ken Sperling says:

    Greg,

    Thanks for recognizing and clarifying…you’re a good egg. Yes, these private exchanges are brand new and not all of them work the same, particularly when some of them are targeted at Medicare-eligible retirees (where HRAs are a desired funding vehicle) vs. actives (where using HRAs are a little more dicey). To answer the other posters, the plans in the Aon Hewitt Corporate Exchange are group contracts covered under ERISA.

    Ken

  25. Dennis Kelly says:

    Ken,
    You mentioned that,”To answer the other posters, the plans in the Aon Hewitt Corporate Exchange are group contracts covered under ERISA.”

    I hate to answer a question with a question, but does this mean that the AON plans are a form of WEWA? Do they have licenses in all states?

    Normally, group contracts are covered under state insurance laws, unless they are a self-funded employer plan under ERISA.

    Thanks for adding some clarity to the observation.

    Also, Thanks for your input to the blog.

  26. Andrew Crowe says:

    Interesting discussion….and still no clarity. I am under the impression that Non-integrated HRA’s for groups less than 50 will be allowed (or not reviewed). Here’s the way I see it (and you get what you pay for here :)) This administration wants people covered, they want to show and promote “new covered lives due to the exchange”. This is simply a way to get more covered lives in the exchange. A “wind” for small employers and “hard working” Americans…etc etc. So, what client would like to be the first?

    SC

  27. Andrew Crowe says:

    Interesting discussion….and still no clarity. I am under the impression that Non-integrated HRA’s for groups less than 50 will be allowed (or not reviewed). Here’s the way I see it (and you get what you pay for here :)) This administration wants people covered, they want to show and promote “new covered lives due to the exchange”. This is simply a way to get more covered lives in the exchange. A “win” for small employers and “hard working” Americans…etc etc. So, what client would like to be the first?

    SC

  28. Ron Bachman says:

    Richard, Good luck with that Sec. 125 approach to faux HRAs. An employer cannot make a deduction for Sec 125 that is greater than the cobra equivalent amount of the insurance. Since there would be no insurance under your approach that gambit would not work.

    Andrew,you have more faith in the bureacrats than I do. I have been told that stand alone HRAs will NOT be allowed for reasons I have previously posted. I do believe that the headlines of the future will be that uninsureds continue to be larger than anticipated. The solution….A Single Payer System. This administration wants these reforms and exchanges to fail so they can again save us.

  29. Richard Matthews says:

    Sorry Ron, but I believe you are wrong on the IPA – Individual Premium Account under Section 125. I believe there is NO question that employees may purchase individual medical plans under Section 125 using the IPA.

    The rub has been that individual plans that are list billed are often considered “group” plans and subject to anti discrimination rules that preclude medical underwriting. This of course goes away on 1/1/14.

    FWIW, I have two ERISA attorneys that agree with me on this. Of course they could be wrong. But I only mention this to underscore the point that reasonable people may differ.

    RAM

  30. Ron Bachman says:

    Richard, I agree that we as non-lawyers should leave it up to them and the bureaucats at Treasury, DOL, and HHS to clarify. I only know that in 2002 HRAs were nearly disallowed because Treasury was concerned that an employer could reduce salary under 125 by more than the HRA promise and the policy premium. To overcome this they agree to a limit of the COBRA equivalent of the group plan. Of course, “HRA only” promises are allowed without any Sec 125 salary reductions. As previously stated in this blog, HRA only plans will not qualify as EHB, but can be combined with other EHB plans. To do a Section 125 reduction for purchasing insurance without a group plan may be the problem that you identified (“the individual plans that are listed are often considered group plans”).

    We may be talking apples and oranges. My point is that you can’t use Sec 125 to create funding for an “HRA only”. The IPA as you propose may be another animal (or fruit) that lawyers can propose to the feds. I have my doubts, but good luck.