IRS Opens Door to Defined Contribution Approach to Health Benefits

November 30, 2018

An IRS notice on the Trump administration’s proposed Health Reimbursement Arrangement (HRA) rule could pave the way for a tax-preferred defined contribution approach that employers could adopt to provide health care benefits.

Current ACA rules do not let large employers offer an HRA for employees to purchase individual coverage without being subject to the ACA’s employer penalties.

There would be no ACA employer penalties for using an HRA if certain conditions are met, according to the notice. 

These conditions are:  

  • The amount of the HRA contribution by an employer must meet the ACA’s affordability standard; and
  • An employer may not offer any other health care plan besides the HRA to any employee in one of six possible groups of workers (part-time, full-time, seasonal employees, overseas employees, employees in different locations, and employees covered by collective bargaining contracts).

Employers could provide an HRA or traditional benefits to different classes of workers.

Different HRA amounts would be allowed for employees by age and number of dependents.

Outlook: The proposed rules would allow HRAs to be used beginning 2020, but they may be challenged in court, or overturned by Congress.  However, should Democrats in Congress embrace the policy change or codify it into law, it could have as significant an impact on health care benefits as the 401K rules have had on retirement benefits.  Looking forward, the concept also could provide an alternative for employers to offer health benefits to certain contingent workers—independent contractors and employees of smaller contractors—if they could be assured by law that it would not deem them an employer and the benefit could be offered on a tax-preferred basis to these workers.  Such an approach could expand benefits to a growing segment of the workforce.