The Affordable Care Act Creates Compliance Challenges For HRAs And Other Arrangements

by Perkins Coie
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On September 13, 2013 the U.S. Department of the Treasury (IRS), the U.S. Department of Health and Human Services (HHS), and the U.S. Department of Labor (DOL), collectively referred to herein as the Departments, coordinated the issuance of guidance regarding the application of certain provisions of the Affordable Care Act (ACA) to health reimbursement arrangements and other employer-sponsored healthcare arrangements.  This guidance is available as IRS Notice 2013-54.  It was also issued in substantially identical form as DOL Technical Release 2013-03.  The Centers for Medicare & Medicaid Services concurred on behalf of HHS with both the IRS’s and DOL’s guidance. 

Health Reimbursement Arrangements

Background

A health reimbursement arrangement (HRA) is an arrangement that can be used to reimburse employees for certain medical care expenses.  HRAs provide a maximum dollar amount available for a given period of coverage and can be unfunded notional accounts or fully-funded trusts.  Amounts not used during the period of coverage may be forfeited or may be carried over and used in subsequent periods of coverage, depending on the terms of the plan.  HRAs must be funded solely by employer contributions and cannot be funded by salary reduction elections through a cafeteria plan or otherwise.  Amounts properly reimbursed pursuant to an HRA are excluded from the gross income of employees.  HRAs are considered to be group health plans within the meaning of the Tax Code and ERISA.

The Departments confirmed that HRAs with fewer than two participants who are current employees on the first day of the plan year, e.g., retiree-only HRAs, (1) provide minimum essential coverage for purposes of making participants in the HRA ineligible for a premium subsidy through the insurance marketplaces (aka exchanges), and (2) generally are not subject to the group health plan mandates discussed below. 

Under the ACA, with limited exceptions, group health plans (1) may not place annual dollar limits on essential health benefits, effective for plan years beginning on or after January 1, 2014; and (2) must provide certain preventive services without imposing any cost-sharing.  The Departments concluded that stand-alone HRAs, i.e., those that are not “integrated” with other group health coverage, do not satisfy either of these mandates.  Therefore, if an employer wishes to continue offering an HRA without violating the ACA, the HRA must be integrated with another group health plan that separately satisfies the annual dollar limit prohibition and the preventive services requirement.

Under the new guidance there are two different approaches available to integrate an HRA with a group health plan for purposes of the annual dollar limit prohibition and the preventive services requirement:  one that applies if the other group health plan provides minimum value, and another that applies if it does not.  Minimum value is defined as coverage of at least 60% of the total allowed cost of benefits provided under the plan—it is a measure of benefits, not a measure of premiums.

Integration Method: Minimum Value Not Required

Under this method, an HRA is integrated with another group health plan if all of the following are satisfied:

  • The employer sponsoring the HRA offers employees a group health plan, other than the HRA, that does not consist solely of excepted benefits and that satisfies the annual dollar limit prohibition and the preventive services requirement (a “non-HRA group health plan”).  Excepted benefits include certain accident-only coverage, disability income, limited-scope dental or vision plans, long-term care benefits, etc.
  • The employee receiving benefits pursuant to the HRA is actually enrolled in a non-HRA group health plan whether sponsored by the employer or another employer.
  • The HRA is only available to employees who are enrolled in a non-HRA group health plan whether sponsored by the employer or another employer.
  • The HRA is limited to reimbursement of one or more of the following:
    • Co-payments;
    • Co-insurance;
    • Deductibles;
    • Premiums under the non-HRA group health plan; and
    • Medical care that does not constitute essential health benefits.
  • Under the terms of the HRA, employees or former employees are permitted to permanently opt out of and waive future reimbursements from the HRA on an annual basis and, upon termination of employment, either the remaining amounts in the HRA are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA.

Integration Method: Minimum Value Required

Under this method, an HRA is integrated with another group health plan if all of the following are satisfied:

  • The employer sponsoring the HRA offers employees a group health plan, other than the HRA, that provides minimum value; is not limited to excepted benefits; and satisfies the annual dollar limit prohibition and the preventive services requirement (a “non-HRA MV group health plan”).
  • The employee receiving benefits pursuant to the HRA is actually enrolled in a non-HRA MV group health plan, whether sponsored by the employer or another employer.
  • The HRA is only available to employees who are actually enrolled in a non-HRA MV group health plan, whether sponsored by the employer or another employer.
  • Under the terms of the HRA, employees or former employees are permitted to permanently opt out of and waive future reimbursements from the HRA on an annual basis and, upon termination of employment, either the remaining amounts in the HRA are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA.

Unlike integration of an HRA with a non-HRA group health plan that does not provide minimum value, this second method places no restrictions on the types of medical expense reimbursements available under the HRA.

Integration under either method does not require that the HRA and the group health plan coverage with which it is integrated be treated as the same plan.  This means that they need not share the same plan sponsor, the same plan document or file a single Form 5500 with the DOL, if applicable.

No Integration with Individual Health Plans

The Departments stated in the guidance that an HRA used to purchase coverage on the individual market is not considered integrated with such individual coverage for purposes of either the annual dollar limit prohibition or the preventive services requirement.  As a result, such HRAs will be treated as stand-alone and will fail to comply with these requirements.

The IRS previously held that an employer’s reimbursement of an employee’s substantiated premiums for non-employer sponsored health insurance coverage could be excluded from the employee’s gross income.  This exclusion also applies if the employer pays the premiums directly to the insurance provider.  These “employer payment plans” are group health plans for purposes of the Tax Code and ERISA. 

The Departments clarified in the guidance that employer payment plans are subject to the annual dollar limit prohibition and the preventive services requirement.  These plans fail to comply with the annual dollar limit prohibition since they are considered to impose an annual limit up to the cost of the individual insurance coverage purchased by the employee.  They also fail to comply with the preventive services requirement since they do not provide coverage of preventive services without cost-sharing in all cases and they cannot be integrated with any individual health insurance plan that does provide such coverage.

Health Flexible Spending Arrangements

Health flexible spending arrangements (Health FSAs) are another type of arrangement through which employees receive reimbursements for certain medical expenses.  Employee contributions are typically made pursuant to salary reduction agreements on a pre-tax basis, but employers may make separate contributions to the accounts as well.  For plan years beginning after December 31, 2012, the amount of any salary reduction is limited to $2,500.

Health FSAs are generally considered to be group health plans for purposes of the Tax Code and ERISA.  But if a Health FSA is treated as an excepted benefit, it is not subject to the annual dollar limit prohibition and the preventive services requirement under the ACA. 

An employer-sponsored Health FSA offered under a cafeteria plan will be treated as an excepted benefit if the following requirements are satisfied:

  • It is structured such that the maximum benefit payable to any participant does not exceed two times the participant’s salary reduction election for the plan year, or, if greater, $500 plus the amount of the participant’s salary-reduction election.
  • The employer also makes group health plan coverage that is not limited to excepted benefits available to its employees.

However, this exemption only applies to Health FSAs offered under a cafeteria plan of an employer. 

Cafeteria Plans

For taxable years beginning after December 31, 2013, employers can no longer allow employees to pay premiums for individual health plan coverage offered through an insurance marketplace on a pre-tax basis through a cafeteria plan.  In other words, employers may not offer such plans as a qualified benefit under a cafeteria plan.  Under transition guidance, the restriction will not apply to cafeteria plans that were non-calendar-year plans as of September 13, 2013 until the first plan year that begins after December 31, 2013.  But the Departments noted that an employee will not be eligible for a premium subsidy for any month in which the employee was covered by an individual plan purchased through the insurance marketplace as a benefit under a cafeteria plan.

Practical Tips

  • Employers that currently offer stand-alone HRAs should consider whether to integrate the HRA with group health plan coverage that satisfies the annual dollar limit prohibition and the preventive services requirement. It may require some drastic changes depending on the nature of the existing plan.  Another option is to terminate the HRA, depending on the terms of the plan.
  • With respect to employer payment plans, the Departments noted that an employer may establish a payroll practice of forwarding a portion of an employee’s after-tax wages to a health insurance provider at the employee’s direction without establishing a group health plan if certain DOL standards are met.  Employers offering employer payment plans that currently reimburse or pay premiums directly to insurers on a pre-tax basis may want to consider terminating such plans and establishing a payroll practice to allow employees to pay for their individual coverage on an after-tax basis.
  • Employers that currently offer a Health FSA through a cafeteria plan should review the plan’s terms to ensure that the maximum benefit payable does not exceed the greater of (1) two-times a participant’s salary-reduction election for the plan year, and (2) $500 plus a participant’s salary-reduction election for the plan year.  Additionally, in order to avoid the application of the annual dollar limit prohibition and the preventive services requirement to the Health FSA, employers must ensure that group health plan coverage that is not limited to excepted benefits is available to employees.
  • Employers currently offering individual health plan coverage purchased through insurance marketplaces as a qualified benefit under a cafeteria plan will need to amend the plan to drop that option as of the first plan year that begins on or after January 1, 2014.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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