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.
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.