The Departments of the Treasury, Health and Human Service, and Labor have in a coordinated effort issued new guidance on the application of certain provisions of the Affordable Care Act (ACA) to health reimbursement arrangements (HRAs), “employer payment plans”, and health flexible spending accounts (FSAs). Each of these arrangements are “group health plans” and, as a result, unless certain exceptions apply, they will be subject to many new requirements for “group health plans” under the ACA.
This bulletin will:
- provide a brief description of the three types of plans;
- highlight applicable new requirements for “group health plans” under the ACA;
- discuss how the plans may satisfy the new ACA requirements; and
- offer some helpful Q and A’s.
I. Plan descriptions
HRAs. An HRA is an arrangement that is funded solely by an employer and that reimburses an employee for medical care expenses (including health insurance premiums) incurred by the employee, or the employee’s spouse, dependents, and any children under the age of 27, up to a maximum dollar amount for a coverage period.
Employer payment plans. An “employer payment plan” is a health plan under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy (i.e., a non-employer sponsored health insurance). Generally, employer payments made these arrangements are excluded from the employee’s gross income under Code § 106.
Health FSAs. A health FSA is a benefit designed to reimburse employees for medical care expenses (excluding insurance premiums) incurred by an employee, or the employee’s spouse, dependents, and any children under the age of 27. Employers generally offer health FSAs through a cafeteria plan that satisfies the requirements of Code § 125, and as a result are not included in gross income of the employee. The current maximum salary reduction permitted for health FSA in a cafeteria plan is $2,500.
II. ACA requirements relevant to the plans described above
Annual dollar limits. A group health plan may not establish any annual limit on the dollar amount of essential health benefits for any individual; this requirement is often referred to as the annual dollar limit prohibition.
Preventative care services. A group health plan must provide certain preventative care services without imposing any cost-sharing requirements for these services.
Affordability and Minimum Value. Large employers (in Iowa, that means employers who have 50 or more full time equivalent employees) may be subject to a penalty to the extent their employees are eligible to purchase a qualified health plan through the Exchange with the assistance of a premium tax credit and, in fact, do purchase such insurance. (**This is often referred to as the “employer mandate” and the federal government has suspended enforcement of this provision until 2015, however it has encouraged voluntary compliance**). An employer can avoid the penalty if the employer offers its employees “minimum essential coverage”. Under the definition in the tax code, an individual is treated as eligible for that coverage only if (1) the coverage is affordable and provides minimum value or (2) if the individual enrolls in the coverage.
Generally, coverage will be considered affordable when the employee portion of monthly premiums of an employee sponsored health plan (for self-only coverage) is less than 9.5% of the family’s monthly income. Coverage provides minimum value if on the whole, the insurance will pay for at least 60% of covered health care expenses for a typical population—this is a calculation determined by actuarial values.
III. Satisfying the ACA requirements
Integration-HRAs. If an HRA is integrated (or piggy backs) with other coverage as part of a group health plan and the other coverage alone would comply with the annual dollar limit prohibition and preventative care requirements, the fact that benefits under an HRA are limited standing alone does not fail to comply with the annual dollar limit prohibition or preventative care requirements because the combined benefit satisfies the requirements.
The guidance provides two ways for an HRA to be considered “integrated” with primary health coverage—one in which minimum value is considered and one in which it is not, which method depends applies on how an employee is allowed to use the HRA funds. Under both methods:
(1) the employer must offer a group health plan (other than the HRA) to the employee that does not consist solely of excepted benefits;
(2) the employee receiving the HRA must actually be enrolled in a group health plan (other than the HRA) that does not consist solely of excepted benefits, regardless of whether the employer sponsors the plan (non-HRA group coverage);
(3) the HRA may only be available to employees who are enrolled in non-HRA group coverage, regardless of whether the employer sponsors the non-HRA group coverage (for example, the HRA may be offered only to employees who do not enroll in the employer’s group health plan but are enrolled in other non-HRA group coverage, such as a plan maintained by the employer of the employee’s spouse); and
(4) under the terms of the HRA, an employee (or former employee) must be permitted to permanently opt out of and waive future reimbursements from the HRA at least annually 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.
If the HRA is limited to reimbursement of co-payments, co-insurance, deductibles, and premiums under employer’s group health plan or other non-HRA group coverage (as applicable), as well as certain medical care that does not constitute essential health benefits, then whether the group health plan described in (1) satisfies the minimum value requirements. However, the HRA is not so limited, required group health plan must satisfy the minimum value requirements (i.e., the insurance will pay for at least 60% of covered health care expenses for a typical population).
FSAs. If a health FSA is offered through a cafeteria plan, it will not be subject to the annual dollar limit prohibition. Such FSAs are instead subject to the annual $2,500 salary reduction limitation. The IRS in Notice 2013-71 recently relaxed the “use-or-lose” requirement associated with FSAs, allowing taxpayer to carryover $500 unused funds to a following plan year when certain requirements are met.
An FSA offered on its own through a cafeteria plan is still considered a “group health plan” and is not automatically exempt from the other ACA requirements, in particular the preventative care requirements. Most FSAs would not be able to satisfy the preventative care requirements on their own, but the regulations provide an alternative where the FSA will be treated as providing only “excepted benefits” and, therefore, not subject to the preventative care requirement, if certain conditions are met. The most important condition is that in addition to the FSA, employer also makes available group health plan coverage that is not limited to excepted benefits.
Employer payment plans. Similarly, the guidance intends for employer payment plans to be characterized as providing only “excepted benefits” under the regulations, but only if the employer payment plan “does not provide significant benefits in the nature of medical care or treatment.” The guidance instructs employers to use a reasonable, good faith interpretation of whether a plan “provides significant benefits in the nature of medical care or treatment”.
Counting employer contributions. If an employer offers an employee both a primary eligible employer-sponsored plan and an HRA that would be integrated with the primary plan if the employee enrolled in the plan, amounts newly made available for the current plan year under the HRA may be considered in determining whether the arrangement satisfies either the affordability requirement or the minimum value requirement, but not both. If an employee may only use the HRA to pay cost-sharing obligations (e.g., co-payments or deductibles, but not premiums) then the employer contributions to the HRA may only count toward the minimum value requirement. If the HRA may be used to pay premiums or cost-sharing obligations, then employer contributions to the HRA count only toward the affordability requirement.
IV. Questions and Answers
Q1: Can an employer allow employees to pay for individual insurance purchased from a state or federally-facilitated Exchange on a pre-tax basis through the employer’s cafeteria plan?
A1: No. The ACA, as well as the new guidance, makes clear that an employee cannot pay for Exchange-based individual insurance through an employer’s cafeteria plan.
Q2: Can an employer pay on a tax-favored basis (either directly or through reimbursement) for some or all of an employee’s cost of individual insurance where purchased from an Exchange? Or outside an Exchange?
A2: Based on the New Guidance, the answer appears to be “no.” As noted above, the new guidance confirms that stand-alone HRAs are not permitted. Thus, HRAs, which up until now have been a commonly-used tax-advantaged vehicle for reimbursing an employee’s costs for qualified medical expenses (including medical insurance premiums) generally can no longer be used for this purpose.
Q3: What happens if an employer offers a stand-alone HRA or an HRA that is not sufficiently integrated with qualifying major medical coverage?
A3: Depending on its specific terms, the HRA would be in violation of ACA’s market reforms, including possibly the prohibitions on the use of annual and lifetime dollar limits on essential health benefits (EHBs) and the requirement to provide “first-dollar” preventive care benefits. The penalties for violating each market reform are generally $100 per day, per affected individual.
One other thing to keep in mind is that the HRA will qualify as “minimum essential coverage” for any individual who enjoys coverage under the HRA. As such, the individual will be deemed to have satisfied his individual mandate obligation under the Code by reason of the HRA coverage (at least for any month in which he has such coverage). However, the individual (including an employee’s spouse and/or dependents who indirectly enjoy coverage via the employee’s HRA) will be ineligible for any federal subsidies offered through the Exchange (including premium tax credits and cost-sharing reductions). The HRA coverage may also limit an individual’s ability to enroll in Exchange-based coverage more generally.
Q4: Can an employer continue to sponsor a stand-alone health FSA for its employees?
A4. Yes, so long as the health FSA qualifies as HIPAA-excepted, that is it only provides the following benefits: coverage only for accidents (including accidental death and dismemberment coverage); disability income coverage; liability insurance, including general liability and auto liability insurance; coverage issued as a supplement to liability insurance; workers’ compensation or similar coverage; automobile medical payment insurance; credit-only insurance; coverage for on-site medical clinics; and other similar coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits.
In addition, a health FSA is considered to provide only excepted benefits if other group health plan coverage not limited to excepted benefits is made available for the year to employees by the employer, and the FSA is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the arrangement for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election).