On September 13, the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) issued new guidance¹ relating to the applicability of the Patient Protection and Affordable Care Act (PPACA) to certain kinds of health care arrangements. The guidance addresses how two of the “market reforms” implemented by PPACA—the prohibition on annual dollar limits on benefits and the requirement to cover specified preventive services—apply to (1) health reimbursement arrangements (HRAs); (2) arrangements in which an employer reimburses an employee for the cost of, or directly purchases, an individual health insurance policy for the employee (employer payment plans); and (3) certain health flexible spending arrangements (health FSAs). Significantly, the guidance explains the circumstances under which an HRA will be considered “integrated” with another group health plan such that it will not violate the annual dollar limit prohibition and preventive services requirement. The guidance also clarifies certain rules regarding cafeteria plans under section 125 of the Internal Revenue Code of 1986, as amended (Code), employee assistance programs (EAPs), and employees’ or retirees’ eligibility for premium tax credits under Code section 36B if they participate in an HRA.

Consistent with prior guidance and FAQs issued in January 2013 by the DOL, Department of Health and Human Services (HHS) and the IRS (together, the Departments), the new guidance notes that HRAs, employer payment plans and health FSAs are generally group health plans for purposes of the Employee Retirement Income Security Act (ERISA) and the Code. One of the key takeaways of the new guidance is that such group health plans that are used to purchase coverage on the individual market cannot be integrated with that individual coverage for purposes of complying with the annual dollar limit prohibition or the preventive services requirement. As a result, employers cannot use one of these types of plans to subsidize employees’ purchase of coverage on an insurance exchange or in the individual market. The new guidance also confirms that in order for an HRA to be integrated with another group health plan, the employee receiving amounts under the integrated HRA must actually be enrolled in that other group health plan.

The Need for Integration Rules. A stand-alone HRA cannot satisfy the prohibition on annual dollar limits since an HRA limits reimbursements to the dollar amount credited to the account. The preamble to the interim final regulations on annual limits says an HRA can be integrated with a more traditional group health plan to satisfy the rules, but did not provide detailed rules as to how integration applies. The new guidance provides a number of rules regarding permissible integration for an HRA and also addresses integration for employer payment plans and health FSAs.

Large employers should take note of the guidance relating to integration of HRAs with other group health plans that provide minimum value, and the ways in which amounts credited under an HRA are (or are not) counted towards determining whether an employer’s coverage is affordable or provides minimum value.

No Integration in the Individual Market. As noted above, the new guidance provides that an HRA, employer payment plan, or health FSA cannot be integrated with coverage purchased on the individual market for purposes of complying with the annual dollar limit prohibition or the preventive services requirement. Thus, for example, if an HRA is used to purchase coverage on the individual market, the HRA cannot be integrated with that coverage and, because the HRA has a built-in dollar limit, the HRA will violate the annual dollar limit prohibition.

Similarly, the new guidance says that an employer’s reimbursement of premiums an employee pays for individual coverage or the employer’s direct payment of those premiums will be considered to be a group health plan that imposes an annual dollar limit equal to the amount of the premiums. Since this type of group health plan also cannot be integrated with the individual coverage, it will not satisfy the prohibition on annual limits.

Two Tests for Integration of an HRA. The guidance provides two tests for determining whether an HRA is properly integrated with another group health plan: the Minimum Value Test and the Minimum Value Not Required Test.

Minimum Value Test. For purposes of complying with the annual dollar limit prohibition and the preventive services requirement, an HRA is considered integrated with another group health plan that provides minimum value only if three requirements are met:

• The employee receiving the HRA is actually enrolled in a group health plan that provides minimum value under Code section 36B(c)(2)(C)(ii) (whether or not the employer sponsors the plan providing such coverage) (non-HRA MV group coverage);
• The HRA is available only to employees who are actually enrolled in non-HRA MV group coverage (whether or not the employer sponsors the plan providing such coverage); and
• The terms of the HRA give the employee an annual opportunity to permanently opt out of and waive future reimbursements from the HRA and, upon termination of employment, either the unused amounts in the HRA are forfeited or the employee has the option to permanently opt out of and waive future reimbursements from the HRA.

Under these rules, the HRA can be integrated with a plan sponsored by the employee’s employer or a plan sponsored by a third party, such as the employer of the employee’s spouse. Examples in the guidance make clear that an employer can rely on an employee’s attestation that the employee is enrolled in the third party’s plan and that the plan provides minimum value.

Minimum Value Not Required Test. An HRA is considered integrated with another group health plan that does not provide minimum value only if five requirements are met:

• The employer offers a non-HRA group health plan that does not consist solely of excepted benefits;
• The employee receiving the HRA is actually enrolled in a group health plan that does not consist solely of excepted benefits (whether or not the employer sponsors the plan providing such coverage) (non-HRA group coverage);
• The HRA is available only to employees who are actually enrolled in non-HRA group coverage (whether or not the employer sponsors the plan providing such coverage);
• The HRA is limited to reimbursement of one or more of the following:
  • Co-payments, co-insurance, deductibles, and premiums under the non-HRA group coverage; or
  • Medical care as defined in IRC § 213(d); and
• The terms of the HRA give the employee an annual opportunity to permanently opt out of and waive future reimbursements from the HRA and, upon termination of employment, either the unused amounts in the HRA are forfeited, or the employee has the option to permanently opt out of and waive future reimbursements from the HRA.

Again, examples in the guidance make clear that an employer can rely on an employee’s attestation that he or she is enrolled in a plan of his or her spouse’s employer or another third party, and an HRA that reimburses cost-sharing, e.g., co-payments and deductibles, can rely on an employee’s attestation that an expense submitted for reimbursement is a co-payment or deductible under the third party’s plan.

The new guidance reminds us that if an individual actually enrolls in employer-sponsored minimum essential coverage, the individual is not eligible for a premium tax credit under Code section 36B, regardless of whether the employer-sponsored coverage is affordable or provides minimum value, as long as the employer-sponsored coverage does not consist solely of excepted benefits. For this reason, the Minimum Value Test and Minimum Value Not Required Test both require that employees have an ability to opt out of coverage under an HRA and waive future reimbursements.

Other Rules for HRAs. The guidance includes the following additional rules regarding integration of HRAs with other group health plans:

• Where an employee is covered by an HRA integrated with another group health plan and ceases to be covered by that other group health plan, the employee may continue to use amounts remaining in the HRA to reimburse medical expenses.
• Where an HRA is integrated with another group health plan and that other group health plan does not cover one or more categories of essential benefits, but the HRA does cover the essential health benefits, the HRA will be considered to violate the annual dollar limit prohibition to the extent that it limits the coverage to the HRA’s maximum benefit.
  • However, if the other group health plan provides minimum value, the HRA will not be considered to violate the annual dollar limit prohibition even if the other group health plan does not cover one or more categories of essential health benefits.
• Retiree-only HRAs and other HRAs that have fewer than two participants who are active employees are considered minimum essential coverage.
  • Therefore, participants covered under these plans will not be eligible for a premium tax credit under Code section 36B for any month in which the HRA has a balance.
• Where an HRA is integrated with another group health plan that is sponsored by the same employer (the primary employer-sponsored plan), current-year “contributions” or credits to the HRA may be taken into consideration for purposes of determining whether the primary employer-sponsored plan satisfies the affordability or minimum value requirements, but not both.
  • Code section 36B (by reference to Code section 5000A) provides that an individual who is eligible for employer-sponsored coverage that is affordable and provides minimum value is not eligible for a premium tax credit.
  • If the current-year credits in the HRA may be used to reduce cost-sharing for covered medical expenses under the primary employer-sponsored plan, those amounts count toward satisfying the minimum value requirement.
  • If the current-year credits in the HRA may be used to pay premiums, or to pay both premiums and cost-sharing expenses, those amounts count toward satisfying the affordability requirement.
  • Current-year credits in an employer’s HRA cannot count toward satisfying the affordability or minimum value requirements of another employer’s group health plan, even if the HRA is otherwise integrated with that other employer’s group health plan for purposes of complying with the annual dollar limit prohibition or the preventive services requirement.
  • If an employer offers an HRA on the condition that the employee does not enroll in the employer’s non-HRA coverage, but rather enrolls in non-HRA coverage from a different source, current-year credits in the employer’s HRA will not count toward satisfying either the affordability or the minimum value requirements of the employer’s non-HRA coverage.

Special Rules for Health FSAs. The guidance says that health FSAs that provide only excepted benefits are not subject to the preventive services requirement. However, health FSAs that do not qualify as excepted benefits are subject to the preventive services requirement. In addition, health FSAs are exempt from the annual dollar limit prohibition regardless of whether they qualify as excepted benefits, but only if the health FSA is offered through a cafeteria plan under Code section 125.

• The Departments will amend the annual dollar limit prohibition regulations to conform to this new guidance.
• The Departments are still considering whether an HRA that is not integrated with another group health plan may be treated as a health FSA for purposes of exemption from the annual dollar limit prohibition.

EAPs. An EAP will be treated as providing excepted benefits, and thus will be exempt from the annual dollar limit prohibition and the preventive services requirement, only to the extent that it does not provide “significant benefits in the nature of medical care or treatment.” Employers may use a reasonable, good faith interpretation of whether or not an EAP provides significant benefits in the nature of medical care or treatment.

Use of 125 Plan to Purchase Exchange Coverage. For taxable years beginning after December 31, 2013, a cafeteria plan under Code section 125 may not be used to purchase health coverage on a public exchange. However, employers that currently allow employees to purchase coverage on a public exchange under a Code section 125 cafeteria plan may continue to do so for the remainder of the current plan year without the benefit being taxable to the employee.² Individuals covered by public exchange coverage purchased under a Code section 125 plan are not eligible for a premium tax credit under Code section 36B.

Effective Date. The guidance applies to plan years beginning on or after January 1, 2014, but can be relied upon for earlier years. To the extent that legislative action is required to amend the terms of a governmental plan to bring it into compliance, the applicability date of the new guidance is the later of January 1, 2014, or the first day of the first plan year following the first close of the legislative body’s regular legislative session after September 13, 2013. Planned regulatory amendments restricting the exemption from the annual dollar limit prohibition to health FSAs offered through a Code section 125 cafeteria plan will be retroactive to September 13, 2013.

1 DOL Technical Release 2013-03 (Sept. 13, 2013), available at http://www.dol.gov/ebsa/newsroom/tr13-03.html; IRS Notice 2013-54, available at http://www.irs.gov/pub/irs-drop/n-13-54.pdf. The Department of Health and Human Services is also expected to issue guidance stating its concurrence with the application of laws under its jurisdiction, as set forth in the Technical Release and Notice.
2 Massachusetts already has a functioning health insurance exchange, and several other states are poised to open their own health exchanges on October 1, 2013.