IntroductionThe Department of Treasury/Internal Revenue Service (IRS) and Department of Labor (DOL), collectively referred to as the "Departments", recently released updated guidance on the "Application of Market Reform and other Provisions of the Affordable Care Act to HRAs, Health FSAs, and Certain other Employer Healthcare Arrangements" (IRS Notice 2013-54 and DOL Technical Release 2013-03 - the text of the two releases is the same). The guidance clarifies a large number of issues that require action. Briefly, the guidance clarifies the following:
- All HRAs should be designed as integrated HRAs. Stand-alone HRAs are no longer permitted.
- Health FSAs offered as part of a cafeteria plan must be designed as excepted benefits: 1) employer must provide other group health coverage and 2) employer contributions to the health FSAs must be at or below $500 or not more than a 100% match of employee contributions.
- Employers may no longer reimburse employees for individual health insurance coverage on a pre-tax basis unless the employer is participating in a SHOP (Small Business Health Options Program).
Account-Based Health Reimbursement Plans and Group Health Plans
This article collectively refers to "account-based health reimbursement plans" to include all of the following:
- reimbursement arrangements described in Revenue Ruling 61-146 and/or arrangements under which the employer uses its funds to directly pay the premium for individual health insurance policies covering the employee (Notice 2013-54 refers to these as "employer payment plans"),
- Health Reimbursement Arrangements (HRAs and/or medical expense reimbursement plans or "MERPs"), and
- cafeteria plans with a premium reimbursement account and/or a health flexible spending account.
In general (as clarified by Notice 2013-54), account-based health reimbursement plans are considered "group health plans". This means that even if the primary benefit of the plan is to help fund premiums for individual health coverage, the reimbursement arrangements themselves become subject to the health care reform rules, generally resulting in noncompliance.
Most of the key provisions of the Affordable Care Act affect group health plans (many key provisions similarly apply to individual health insurance coverage beginning in 2014). Some of these provisions include: prohibition on annual and lifetime limits, prohibitions on rescissions, prohibitions on cost sharing for preventive services, coverage of adult children (assuming dependent coverage is offered), patient protections regarding the choice of doctor and other services, prohibition on excluding pre-existing conditions, waiting periods over 90 days prohibited, and annual reporting requirements (currently awaiting guidance). Many of these requirements can be met by account-based health reimbursement plans - and many can be met without a need for a change in plan design (HRA plans and cafeteria plans typically do not discriminate based on pre-existing conditions, for example). The prohibition on annual limits, however, is generally incompatible with account-based health reimbursement plans. IRS Notice 2013-54 also provides that it is impossible for a health FSAs that is not an excepted benefit to meet the preventive care rules.
Before explaining these two provisions in detail, however, it is important to first consider whether the account-based health reimbursement plan is a "group health plan" that is subject to these rules. As noted above, most account-based health reimbursement plans are considered "group health plans" but there are a few key exceptions for "excepted benefits". Most health care reform provisions were added to the existing HIPAA portability rules and so the same excepted benefit rules apply. The excepted benefit rules are covered in detail at Treas. Reg. section 54.9831-1 (excepted benefits begin at paragraph (c)). The most commonly applicable excepted benefits to account-based health reimbursement plans include:
- Plans that have less than two participants who are current employees as of the first day of the plan year (retiree-only plans) (Please note that plans set up to benefit just one employee would generally fail nondiscrimination.);
- Plans that provide coverage (reimbursements) for benefits that are limited to dental, vision and long-term care benefits that are not an integral part of a group health plan; or
Plans that are FSAs and the employer offers other group health plan coverage (that is not just dental, vision or long term care coverage) where the maximum benefit payable to a participant under the HRA is less than or equal to the greater of:
- two times the participant's salary reduction election under the arrangement for the year or
The prohibition on annual limits first became effective the first plan year beginning on or after September 23, 2010. In regulations released in June of 2010, the Departments exempted FSAs from the annual limit rules. This would, of course, exempt health FSAs offered as part of a cafeteria plan from the annual limit rules. In addition, as we discussed in our article HRA Plans and the Prohibition on Annual Limits, an HRA can be considered an FSA if certain conditions are met.* In the recent IRS Notice 2013-54, the Departments clarify that the exemption from the annual limit rules was only intended to apply to health FSAs that are offered through a Code section 125 (cafeteria) plan and "the Departments intend to amend the annual dollar limit prohibition regulations to conform to this Q&A 8 retroactively applicable as of September 13, 2013."**
This means that HRAs - and any other account-based health reimbursement plan that is not a health FSA offered as part of a cafeteria plan and is not an excepted benefit - are generally subject to the prohibition on annual limits. Note however, the Departments have determined:
... if an HRA is integrated with other coverage as part of a group health plan and the other coverage alone would comply with the annual dollar limit prohibition, the fact that benefits under the HRA by itself are limited does not fail to comply with the annual dollar limit prohibition because the combined benefit satisfies the requirements.
The guidance clearly provides that group health plans cannot be integrated with individual market coverage for purposes of the annual dollar limit prohibition (IRS Notice 2013-54, Q&A 1). Therefore, the only exceptions to the prohibition on annual limits that apply to account-based health reimbursement plans are 1) health FSAs offered as part of a cafeteria plan and 2) HRAs integrated with a group health plan that complies with the annual dollar limit prohibition. If an account-based health reimbursement plan is a group health plan (it offers non-excepted benefits), it generally must be a design in the preceding sentence. Designs that would be subject to the annual limit prohibition and therefore not in compliance, include: 1) stand-alone HRAs, 2) employer payment plans and 3) cafeteria plans reimbursing premiums for individual health coverage with employer contributions where the employer is not particpating in a SHOP.
Effective plan years beginning after September 23, 2010, group health plans are required to cover preventive care without cost sharing. IRS Notice 2013-54 specifically addresses the preventive care rules with respect to health FSAs that are part of a cafeteria plan and integrated HRAs - but the rule applies differently to each plan type. Q&A 2 provides "[s]imilar to the analysis of the annual dollar limit prohibition, an HRA that is integrated with a group health plan will comply with the preventive services requirements if the group health plan with which the HRA is integrated complies with the preventive services requirements." However, in Q&A 7, the Departments clarify that the integration concept does not apply to a health FSA that is part of a cafeteria plan and they further seem to clarify that it would be impossible for a health FSA to meet the preventive service requirements: "Because a health FSA that is not excepted benefits is not integrated with a group health plan, it will fail to meet the preventive services requirements."
What This Means for HRAs
HRAs must be designed as integrated HRAs. Stand-alone HRAs must either be terminated or spent down as was described in FAQs about Affordable Care Act Implementation Part XI. ftwilliam.com will prepare model spend-down amendments for our welfare plan document subscribers.
Notice 2013-54 provides that "integration does not require that the HRA and the coverage with which it is integrated share the same plan sponsor, the same plan document or governing instruments, or file a single Form 5500, if applicable."*** The notice spells out two possible methods to provide an integrated HRA. The methods differ according to whether minimum value is required.
Minimum value generally means that a plan covers at least 60% of the total allowed cost of benefits. Minimum value is applicable to an individual's eligibility for the premium tax credit (which may impact the employer's liability for the shared responsibility payment). If an individual receives coverage that provides minimum value, he/she is generally not eligible for the premium tax credit unless the minimum value coverage is not affordable (costs more than 9.5% of his/her income).
The two integration methods are (differences are highlighted in bold):
- Minimum Value Not Required.
- The employer must offer other group health coverage (other than the HRA) that does not consist solely of excepted benefits.
- Employees are only eligible for the HRA if they are actually enrolled in a group health plan (other than an HRA). The other group health plan can be offered by a different employer (such as the employee's spouse).
- The HRA must be limited to reimbursements of copays, co-insurance, deductibles, premiums, and medical care that does not constitute essential health benefits.
- An employee must be permitted to opt out of the HRA at least annually or to permanently opt out and waive all future reimbursements from the HRA. Upon termination, the remaining amounts in the HRA are forfeited.
- Minimum Value Required.
Group health plans are required to disclose whether the plan meets minimum value annually with its summary of benefits and coverage notice.
- The employer must offer other group health coverage (other than the HRA) that provides minimum value.
- Employees are only eligible for the HRA if they are actually enrolled in a group health plan (other than an HRA) that provides minimum value. The other group health plan can be offered by a different employer (such as the employee's spouse).
- The HRA reimbursements are generally not limited (other than being limited to health expenses under Code section 213(d)).
- An employee (or former employee) must be permitted to opt out of the HRA at least annually or to permanently opt out and waive all future reimbursements from the HRA. Upon termination, the remaining amounts in the HRA are forfeited.
What This Means for Health FSAs Offered Under Cafeteria Plans
Cafeteria plans that offer health FSAs must be designed so that the benefits offered are excepted benefits: 1) the employer must provide other group health coverage and 2) employer contributions to the health FSAs must be under $500 or not more than a 100% match of employee contributions. Notice 2013-54 makes clear that the integration concept does not apply to cafeteria plans so even though these plans are exempt from the annual limit prohibition, these plans do need to ensure the benefits offered are excepted benefits.
What This Means for Premium Reimbursement Plans
Many employers are particularly interested in helping employees pay for individual policies purchased on the exchange or the private insurance market. IRS Notice 2013-54 limits the ways in which an employer can assist with individual premiums. Please note that Notice 2013-54 does not affect an employer's ability to help pay for employer-sponsored coverage. The only premium reimbursement plans that may be offered (where an employer reimburses employees for their share of health insurance premiums on a pre-tax basis) are one of the following arrangements:
- POPs: a premium only plan, as defined in Treas. Reg. section 1.125-1(a)(5), "is a cafeteria plan that offers as its sole benefit an election between cash (for example, salary) and payment of the employee share of the employer-provided accident and health insurance premium (excludible from the employee's gross income under section 106)." (Emphasis added.)
- SHOP Premium Reimbursement Plans: These plans must be offered under a Code section 125 cafeteria plan. Note that the cafeteria plan would generally be prohibited from offering a health FSA since that coverage could only be in compliance (an excepted benefit) if the employer offers other group health coverage.
- Retiree-only HRA plans (these are excepted benefits and would therefore not be subject to health care reform rules).
"SHOP" stands for Small Business Health Options Program. Each SHOP can be run a bit differently depending upon the exchange available in a particular state. SHOPs presumably have a number of benefits but most relevant to this article is the ability to pre-tax the employee's share of individual premiums through a cafeteria plan. Code section 125(f) was added by health care reform and generally prohibits pre-tax payment of an employee's share of individual policies purchased on an exchange. There is one exception -- and that is for policies purchased through a SHOP. In general, SHOPs are only available to small businesses (and even the size of the business eligible to participate can be variable depending upon the state's exchange).
Any other arrangement would likely fail to be in compliance with health care reform. HRAs cannot be used since those plans must be integrated with an employer sponsored plan that meets the health care reform requirements. Cafeteria plans generally cannot be used since health FSAs are prohibited from reimbursing premiums and Code section 125 plans, in general, are prohibited from reimbursing individual policy premiums for plans purchased on a governmental exchange (exception for SHOPs). Other "employer payment plans" could not be used because any employer contribution to those plans would make them group health plans subject to the health care reform rules (since these plans are not FSAs they cannot rely on the $500 limit or 100% match limit for excepted coverage).
An employer can always choose to raise an employee's taxable pay based upon the premiums they are paying for individual (or other) insurance. Notice 2013-54 also permits "payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee... if the standards of the DOL's regulation at 29 C.F.R. section 2510.3-1(j) are met" (IRS Notice 2013-54).
The guidance implies that integrated HRAs may be generally exempt from most health care reform provisions. Unfortunately, the guidance does not address other health care reform requirements and questions remain. For example, regulations have yet to be released regarding the annual reporting requirements. The annual reporting rules require group health plans to report on whether benefits under the plan are improving health outcomes, preventing hospital readmissions, improving patient safety and implementing wellness and health promotion. Presumably, the guidance will handle integrated HRAs in a manner similar to the Summaries of Benefits and Coverage (SBCs) where HRAs are not exempt from the SBCs but have a few options for compliance - inserting information about the HRA into the existing SBC or providing a separate SBC just for the HRA. An integrated HRA would likely not be able to report on any of the required information should the regulations not provide an exception. As of yet, no guidance on the annual reporting requirements has been released.
The Notice also does not address employer-funded individual health plans. Employer funding of individual health plans generally would have the effect of making the health plan a group health plan. Employers should be extremely cautious before pursuing this method of funding health insurance plans for their employees. We presume most individual policies available on the public exchanges will prohibit employer funding of the premiums (as is common in the general marketplace now).
Finally, the notice does not explain its position in Q&A 7: "Because a health FSA that is not excepted benefits is not integrated with a group health plan, it will fail to meet the preventive services requirements." If an employer offers other group health coverage or the employee is enrolled in individual coverage - all of which are now required cover preventive care without cost sharing - no preventive care claims should be presented to the health FSA. Presumably the Departments have taken the position that an annual limit on claims in the health FSA is simply incompatible with the rule that no cost-sharing can occur on preventive care.
Please join us Thursday, October 24, 2013 1:00 pm Central Daylight Time to discuss the issues in this article and more.
* The IRS has explicitly said that an HRA can be an FSA in IRS Notice 2002-45.
** Note that the recent IRS Notice 2013-54 also provides near the end of Q&A 7 "The Departments are also considering whether an HRA may be treated as a health FSA for purposes of the exclusion from the annual dollar limit prohibition." This appears to contradict Q&A 8.
*** This does appear to modify slightly the prior statement that "an HRA is not considered integrated with primary health coverage offered by the employer unless, under the terms of the HRA, the HRA is available only to employees who are covered by primary group health plan coverage provided by the employer and meeting the requirements of PHS Act section 2711" (FAQs about Affordable Care Act Implementation Part XI).
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