IRS guidance on the application of the Affordable Care Act’s market reform provisions to HRAs and FSAs

Reprinted with permission from Employee Benefit Review - August 2014

The Internal Revenue Service (IRS) recently published guidance in Notice 2013-54 (the “Notice”) on the application of certain market reform provisions of the Affordable Care Act to Health Reimbursement Accounts (HRAs), Health Flexible Spending Accounts (“health FSAs”), and certain other employer healthcare arrangements. The guidance was issued in coordination with the Departments of Labor and Health and Human Services and was designed to clarify the government’s position with respect to having these arrangements as standalone health plans.

Background

The Affordable Care Act (ACA) requires certain large employers to either offer a group health plan that meets specified minimum requirements, including annual dollar limit prohibitions and preventative services requirements or to pay a penalty. After the passage of the ACA, many employers hoped they might have an option to provide an employee with pretax contributions, through a stand- alone HRA for example, that the employee could then use to purchase health insurance coverage on the individual market through a state exchange plan. However, the recently published Notice clarified that such a design will not work. The Notice provides that HRAs, health FSAs, and certain other employer payment plans that are not integrated with another employer group health plan that provides the specified coverage will be considered to be employer group health plans that will not comply with the annual dollar limit prohibition or the preventative services requirement of the ACA. Further, according to the guidance, these pretax funding arrangements cannot be considered integrated with coverage purchased on the individual market. Therefore, employers who only give employees pretax contributions to purchase coverage on the individual market will be offering a group health plan that does not meet the requirements of the ACA market reforms.

Market Reforms Addressed in this Guidance

The guidance in Notice 2013-54 addresses two specific market reform provisions and clarifies how these two reforms apply to HRAs, health FSAs, and certain other employer healthcare payment plans. The first provision addressed is PHS Act §2711, the annual dollar limit prohibition. According to this provision, a group health plan may not establish any annual limit on the dollar amount of essential health benefits for any individual. The second provision addressed is PHS Act §2713, the preventative services requirements. According to this provision, all non-grandfathered in group health plans must provide certain preventative services without imposing any cost-sharing requirements for these services.

Market Reforms and Health Reimbursement Arrangements (HRAs)

HRAs are arrangements funded by an employer that reimburse an employee for medical care expenses incurred by the employee or other covered family members up to a maximum dollar amount for the coverage period. According to the new IRS guidance, HRAs are generally considered group health plans. This means that the HRAs themselves are subject to the market reforms applicable to group health plans, including annual dollar limit prohibitions and preventative services requirements. If an HRA is integrated with other coverage, like a high-deductible group health plan, and the other coverage alone would comply with these two market reforms, then the integrated HRA is considered in compliance with the limits.

Notice 2013-54 describes the methods through which an HRA will be considered integrated with a group health plan for purposes of these market reforms. The first method described in the guidance is Minimum Value Not Required. Under this method, an HRA will be considered integrated with a group health plan for the purposes of the annual dollar limit prohibition and preventative services requirement if:

1. The employer offers a group health plan, other than the HRA, to the employee that does not consist of solely excepted benefits;
2. The employee receiving the HRA is actually enrolled in a group health plan, other than an HRA, that does not consist solely of excepted benefits. The other group health plan does not have to be sponsored by the employer. It may, for example, be sponsored by the employer of the employee’s spouse;
3. The HRA is only available to employees who are enrolled in non-HRA group coverage, again regardless of whether the employer sponsors the other group coverage;
4. The HRA is limited to reimbursement of co-pays, co-insurance, deductibles, premiums, and medical care that does not constitute essential health-care benefits; and
5. Under the terms of the HRA, an employee is permitted to permanently opt out of and waive future reimbursements from the HRA at least annual. Upon termination, the remaining amount in the HRA is forfeited or the employee is permitted to opt out of and waive all future reimbursements from the HRA.

Under the Minimum Value Required method, an HRA is integrated with a group health plan for the purposes of the annual dollar limit prohibition and the preventative services requirement if:

1. The employer offers a group health plan to the employee that provides minimum value pursuant to Code § 36B(c)(2)(C)(ii);
2. The employee receiving the HRA is actually enrolled in a group health plan that provides minimum value, regardless of whether the employer sponsors the other plan;
3. The HRA is only available to employees who are actually enrolled in the minimum value group coverage;
4. Under the terms of the HRA, an employee is permitted to permanently opt out of and waive future reimbursements from the HRA at least annual. Upon termination, the remaining amount in the HRA is forfeited or the employee is permitted to opt out of and waive all future reimbursements from the HRA.

If an employee is covered by a group health plan and an HRA integrated through one of the above methods, but then ceases to be covered by the group health plan, the amounts credited to the HRA while it was integrated can still be used to reimburse medical expenses without causing the HRA to fail to comply with these two market reforms. However, the new guidance makes clear that stand-alone HRAs used to purchase coverage on the individual market will not be considered to be integrated with that individual market coverage for the purposes of these market reforms. An HRA used to purchase insurance through the marketplace would not comply with the annual dollar limit prohibition because the non-integrated HRA is considered to impose an annual limit up to the cost of the individual coverage purchased through the marketplace. An HRA used to purchase coverage on the individual market would also fail to meet the preventative service requirements because an HRA that is not integrated with a group health plan does not provide preventative services without cost-sharing in all instances as is required by the ACA.

Note that if a stand-alone HRA is limited to retirees or provides reimbursements only for excepted benefits, the HRA is not subject to the annual dollar limit prohibition or the preventative services requirement.

Market Reforms and Employer Payment Plans

An employer payment plan, as referred to in this guidance, is an arrangement in which an employer reimburses an employee for the premiums of non-employer sponsored insurance. These payments are excluded from the employee’s gross income under Code §106. The use of employer payment plans was limited by this new guidance. According to this guidance, the employer contribution makes these payment plans “group health plans.” As such, they will fail to comply with the annual dollar limit prohibition and preventative services requirement for the same reasons non-integrated HRAs will fail to comply.

However, this guidance specifies that payroll practices in which an employer forwards post-tax employee wages to an insurance provider are permitted if they meet the requirements of 29 CFR §2510.3-1(j). Employers may also continue to help pay for employer-sponsored coverage or raise an employee’s taxable pay to help pay for other insurance premiums.

Market Reforms and Health Flexible Spending Arrangements (Health FSAs)

A health flexible spending arrangement (health FSA) is a benefit that reimburses employees for medical care expenses incurred by the employee or eligible family members. This new guidance clarifies that health FSAs are not subject to the market reforms if they qualify as excepted benefits. Health FSAs are considered to provide only excepted benefits if:

The employer also makes group health coverage available that is not limited to excepted benefits; and

1. The employer also makes group health coverage available that is not limited to excepted benefits; and
2. The maximum benefit payable to any participant is no more than two times the participant’s salary reduction election under the arrangement, or if greater, no more than $500 plus the amount of the participant’s salary reduction election.

A health FSA that does not qualify as excepted benefits is subject to the preventative services requirement. Because a health FSA that is not excepted benefits is not integrated with another group health plan, it will fail to meet the preventative services requirement because it does not provide preventative services without cost-sharing in all instances. Further, the guidance clarifies that a health FSA that is not offered through a Code §125 plan is also subject to the annual dollar limit prohibition, and will fail to comply with it.

Conclusion

The new IRS guidance limits the ability of employers to set up HRAs, health FSAs, and other stand-alone employer payment plans for employees to use to purchase coverage on the individual market. According to the Notice, these arrangements are considered group health plans for the purposes of the annual dollar limit prohibition and the preventative services requirement of the ACA. These arrangements will only comply with the market reforms for group health plans if they are integrated with a group health plan that would satisfy the reforms on their own, or if the arrangement is only for excepted benefits. Since this new guidance clarifies that these arrangements cannot be integrated with coverage purchased on the individual market, any stand-alone HRA, health FSA not limited to excepted benefits, or other employer payment plan described in the Notice will fail to comply with the annual dollar limit prohibition and the preventative services requirement of the ACA market reforms.

If you have any questions about this topic, please contact Employee Benefits chair Lori Jones.