The Health and Human Services, Labor, and Treasury departments put the kibosh on some uses of health reimbursement arrangements (HRAs) for active employees, under Affordable Care Act (ACA) guidance they jointly issued in late January.

Employers establish and fund HRAs for various purposes, often to pay certain employee or retiree medical expenses, including insurance costs, up to a certain amount per year (although unused amounts can be rolled over to the next year). The employer gets a tax deduction for its contributions, which are also tax-free to the employees or retirees. And as with 401(k) plans, HRAs operate under the defined-contribution (rather than defined-benefit) model, so the employer knows in advance what its annual costs will be for health-care benefits provided to the covered employees or retirees.

(HRAs differ from health savings accounts [HSAs], through which workers sock away pretax dollars from their own earnings to pay for medical expenses incurred during a single plan year.)

HRAs have been a key element of retiree health benefits for some time, and the new guidance does not affect those arrangements. But employers have increasingly been using HRAs for active employees, and some employers, especially small ones, have used them for the purpose of providing funds with which employees can buy individual insurance policies through private health-insurance exchanges. That frees the employer from having to negotiate with insurance carriers and administer group plans.

The new guidance by the HHS, DoL, and DoT effectively prohibits employers with at least 50 full-time employees from taking that approach. They could still do it, but the funds would have no tax advantages. Not only that, the employer would not be deemed as offering a qualified plan under the ACA and therefore would be assessed an annual $2,000 or $3,000 per-employee penalty.

“The big implication of the guidance is that it kills the idea of having private exchanges populated with individual insurance products,” says Michael Thompson, health-care practice leader for the Northeast region at PricewaterhouseCoopers. The combined penalties and loss of tax benefits “would blow the whole thing out of the water.”

The government’s motivation for the move apparently is to back up President Obama’s guarantee that under the ACA, “if you like your company’s health plan, you can keep it.” Says Thompson, “Some companies that have talked about moving to defined contributions for health-benefits plans are really looking at it as a transitional strategy to getting out of health care altogether. That’s what the government was worried about.”

But most of the private exchanges that offer individual insurance products are aimed at companies with fewer than 50 employees. And most of the better-known players in the private-exchange market for active employees — Liazon and recent entrants Aon Hewitt, Mercer, and Towers Watson (with its newly announced OneExchange) — tell CFO that they offer access to group plans only. They never planned to provide access to individual policies and the new guidance does not affect them, they all say.

Another major provider, Bloom Health, acknowledges that it offers both individual and group plans in its exchanges. The company declined further comment.

For her part, Judy Bauserman, a partner with Mercer, thinks the death of private exchanges offering access to individual policies is not so certain. “Say a company gives people money to spend on health coverage but not direct medical expenses, that can be used only during the current year and employees forfeit any remaining amount,” she says. “It’s not clear that that is an HRA. So there may still be some opportunities for organizations that want to use exchanges for employees to purchase individual coverage.”

Another point of view is that existing exchanges are not necessarily a good fit for group health plans, either. “The whole idea of an exchange is to provide choice well beyond the two or three group plans that an employer typically would offer, and let employees pick plans with only the benefits they need,” says Mark Whitcher, CEO of KTP Advisors, a benefits-services company. “That is not practical with group plans. It’s like building a stock exchange that only traded mutual funds and not the individual stocks.”

For all practical purposes, predicts Whitcher, private exchanges ultimately will be limited to offering individual policies to small employers and the uninsured. “They will have a tough time at larger companies, because they will only offer a collection of group plans, and so a key advantage of an exchange will not apply,” he says.

But two very large companies, Darden Restaurants and Sears, are currently using Aon Hewitt’s exchange. An article in today’s New York Times notes that 90% of Darden’s full-time Florida employees chose a Blue Cross Blue Shield of Florida plan. Darden declined to provide a breakdown of carrier share nationwide, as did Aon Hewitt.

But is it really an “exchange” if 90% of the business goes to one carrier? As Bauserman notes, “There really isn’t a clear definition of private exchange. There are no rules that govern what [it has] to be, and each organization offering one is defining it a little bit differently.”

Towers Watson and Mercer, which, like Aon Hewitt, generally serve very large companies with their consulting services, say they’re targeting that market for their active-employee exchanges as well. Bryce Williams, managing director for exchange solutions at Towers Watson, notes that OneExchange will be offering self-insured plans to companies seeking to provide active employees with a private exchange. By contrast, the plans Darden and Sears are offering employees through the Aon Hewitt exchange are fully insured plans, which generally are more expensive than self-insured ones.

Liazon does serve some companies with more than 50 employees, and in fact has one client with 3,000 employees, according to co-founder and chief strategist Alan Cohen. Of the new guidance, he says, “Offering individual insurance to employees is nonsensical anyway, because group insurance is simply better. We were not surprised by the guidance.”

Bloom Health told CFO last October that the company had 140 corporate clients with an aggregate total of 106,000 covered lives, or an average of 757 per customer.