Spousal Incentive Opt-Out HRA Plans

What is a Spousal Incentive Opt-Out HRA Plan?

While many organizations have a taxable cash opt-out or waiver incentive that is offered to employees who are covered by health insurance coverage elsewhere, a spousal incentive opt-out HRA (sometimes called a spousal HRA, etc.) provides an opportunity to offer a larger, tax-free incentive to employees at similar (tax deductible) cost to employers.  A spousal incentive opt-out HRA plan is an arrangement where employers offer financial incentives to employees whose spouses have access to health insurance through their own employer and choose to opt-out of the company’s health plan in favor of the spouse’s plan. Instead of covering the family under the company’s plan, the employer provides a tax-free HRA incentive to the employee, which can be used to reimburse eligible medical expenses.

How Does It Work? 

Here’s a simplified breakdown of how these plans typically work: 

1. Eligibility: The employee’s spouse must have access to their own employer-sponsored health plan, and the family must enroll in that coverage after opting out of the company’s plan.  The employee must prove this enrollment.

2. Incentive/Usage: The employer provides an HRA as an incentive, which is usually a set amount of money that can be used for qualifying medical expenses, including deductibles, copayments, and other out-of-pocket healthcare costs.  The exact amount and the types of eligible expenses are determined by the employer.  The HRA funds are tax-free and can be used throughout the year for various medical expenses.

3. Administration: While HRAs can be administered by an employer, they are typically administered by a separate TPA, similar to the work done for Flexible Spending Accounts (FSAs).

Benefits for Employers 

1. Cost Savings: Employers save on the premiums they would otherwise pay to cover the spouse under the company plan.

2. Risk Management: By encouraging spouses to use their own employer’s plan to cover the entire family, the overall risk pool for the company’s health plan can become more stable and predictable.

3. Employee Satisfaction: Offering an HRA as an incentive provides a valuable benefit to employees, showing that the company cares about providing flexible and supportive options for their healthcare needs.  The HRA also provides a much greater potential benefit to employees vs a traditional, taxable cash incentive.

Benefits for Employees

1. Financial Incentive: Employees receive a financial benefit for opting out of the company plan for their spouse’s coverage, which can help offset the employee’s healthcare costs.  As stated above, the financial benefit in an HRA is usually significantly higher than the taxable cash incentive.

2. Flexibility: The HRA funds can be used for a wide range of medical expenses, as determined by the employer, offering flexibility and financial support.

3. Simplified Coverage: For some families, having all family members on the same health plan can simplify coverage and coordination of benefits.

Considerations

While spousal incentive opt-out HRA plans offer numerous benefits, there are a few things to consider:

• Spousal Carveout or Surcharge:  Spousal incentive opt-out HRAs are often paired with programs that either exclude a spouse’s enrollment in the company’s health plan if they have coverage available to them at their employer (carveout) or may simply add a surcharge to employees who cover their spouse on the company’s health plan when they have coverage available to them at their employer.

• Eligibility:  An employer may limit the availability of the HRA incentive to those with spousal coverage available vs a parent’s coverage available.

• Group Health Plan Integration: It is imperative that the spouse has comprehensive health coverage available to entire family, and that the family enrolls in that coverage.  The HRA must be integrated with the spouse’s group health plan to avoid healthcare reform issues.

• Health Savings Accounts (HSAs):  In order for someone to contribute to or receive contributions to an HSA, they must not be enrolled in any non-high deductible health plan (HDHP) coverage.  A spousal incentive opt-out HRA would constitute a non-HDHP coverage.  Therefore, if an employee accepts the HRA incentive, the spouse could NOT contribute to an HSA.  For some people, the HRA may offset the lack of an HSA.  For others, they may wish to continue to fund their HSA and may wish to either forgo the HRA incentive OR you can offer a lower, taxable cash opt-out incentive alongside the HRA incentive OR offer as a limited purpose HRA for dental and vision expenses only.

• COBRA Continuation:  The spousal incentive opt-out HRA is a COBRA qualified benefit.  This means that employees could elect to continue their HRA after a COBRA qualifying event.

• Communication: Clear communication with employees about how the HRA works, the rules above and what expenses are eligible is crucial.

• Compliance:  The design of the spousal incentive opt-out HRA must maintain compliance with the ACA, HIPAA nondiscrimination rules, §125 nondiscrimination rules, Medicare Secondary Payer (MSP) rules, etc.

Conclusion

Spousal incentive opt-out HRA plans can be a win-win for both employers and employees, offering cost savings, flexibility, and valuable benefits. By understanding how these plans work and implementing them thoughtfully, companies can enhance their benefits offerings and support their employees’ diverse needs.

Is your company ready to explore the potential of spousal incentive opt-out HRA plans? Reach out to your Rose Street Advisors’ Relationship Manager or contact us at info@rosestreetadvisors.com to learn more and see if this innovative option is right for you.