This is the 40th in a series of WorkCite articles concerning the Patient Protection and Affordable Care Act and its companion statute, the Health Care and Education Reconciliation Act of 2010 (referred to collectively as the Act). In this article, we discuss the guidance issued last month by the Internal Revenue Service (IRS) in Notice 2013-54 and by the Department of Labor (DOL) in Technical Release 2013-03 (referred to collectively as the Guidance). As explained below:
- Employers will have to review their health reimbursement arrangements (HRAs) and health flexible spending accounts (Health FSAs) to determine whether these arrangements comply with the Guidance for plan years beginning on or after Jan. 1, 2014.
- Employers maintaining employer payment plans will have to eliminate these plans for plan years beginning on or after Jan. 1, 2014, in order to comply with the Guidance. The term “employer payment plan,” as used in the Guidance, is an arrangement whereby the employer either reimburses an employee’s substantiated premiums for non-employer-sponsored hospital and medical insurance or pays such premiums directly to the insurance company; in either case, under Revenue Ruling 61-146 such amounts are excluded from the employee’s gross income under Section 106 of the Internal Revenue Code (Code). This term does not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage.
Basic Requirements of the Guidance
Effective with the plan year beginning on or after Jan. 1, 2014, HRAs, Health FSAs and employer payment plans will in general be considered group health plans, subject to the Act’s “market reforms,” including:
- The requirement that a group health plan may not establish any annual dollar limit on “essential health benefits.”
- The requirement that non-grandfathered group health plans provide certain preventive services without any cost-sharing requirements.
For violations of any of these market reforms, employers must report and pay excise taxes of $100 per day per each affected individual under Code Section 4980D.
For plan years on or after Jan. 1, 2014, the Guidance establishes the following new requirements for HRAs, Health FSAs and employer payment plans:
- Each such arrangement or plan must either (i) be integrated with a group health plan or (ii) provide only “excepted benefits” under the Act (such as retiree-only benefits or coverage for dental and vision that are not an integral part of a group health plan).
- Because these arrangements and plans are considered group health plans under the Act, they are treated as “minimum essential coverage” for employees (unless coverage consists only of excepted benefits) and thus prevent covered employees from obtaining premium subsidies for coverage purchased on the insurance exchanges established under the Act.
- A Health FSA will be considered to provide only excepted benefits if the employer also makes available group health plan coverage that is not limited to excepted benefits and the Health FSA is structured so that the maximum benefit payable to any participant cannot exceed the greater of two times the participant’s salary reduction election for the Health FSA for the year or $500 plus the amount of participant’s salary reduction election.
- The Act’s annual dollar limit prohibition exempts Health FSAs that are offered through a Code Section 125 cafeteria plan and thus subject to the separate annual limitation of Section 125(i), which limits the amount of salary reduction to $2,500 (indexed annually for plan years beginning after Dec. 31, 2013).
- Stand-alone HRAs limited to retirees are not subject to the Act’s market reforms but are still considered “minimum essential coverage” so that covered retirees will not be eligible for premium tax credits for insurance coverage purchased on one of the exchanges.
When Is an HRA Integrated With Another Group Health Plan?
Generally speaking, a traditional stand-alone HRA for employees cannot comply with the Act’s requirements and can no longer be used by employers to pay for an employee’s individually purchased health insurance premiums.
The IRS and DOL have confirmed that an HRA may comply with the Act if it is integrated with an Act-compliant group health plan (but may not be integrated with individual market health insurance). Nonintegrated HRAs that do not provide only excepted benefits must be spent down or terminated.
An HRA will be treated as integrated with a group health plan if the HRA meets one of the two tests described below, depending on whether the HRA provides minimum value under the Act. A group health plan provides “minimum value” under the Act if its share of the total allowed costs of benefits under the plan is at least 60 percent of such costs. Under either test, the Guidance permits the HRA and the group health plan to have different sponsors, such as group health coverage offered by an individual’s employer and his or her spouse’s employer. Both tests also require that an employee be able to “opt out” of the HRA so that the employee would be able to claim a premium tax credit for coverage purchased under an exchange. In general, an HRA integrated with a group health plan that provides minimum value may reimburse for a broader set of expenses than a plan that is not so integrated.
Integration of HRA With Group Health Plan That Provides Minimum Value
In order for an HRA to be integrated with a group health plan that provides minimum value:
- The employer must offer a group health plan (other than the HRA) that does not consist solely of excepted benefits.
- The employee in the HRA must be enrolled in a group health plan providing minimum value (whether or not sponsored by his or her employer).
- The HRA may be available only to employees who are enrolled in a group health plan providing minimum value.
- The HRA must give the employee an election to opt out and waive future reimbursements at least annually and upon termination of employment.
Where the above requirements are met, the HRA may reimburse the same type of expenses as before the Act’s requirements took effect.
Example: Employer “A” sponsors a group health plan that provides minimum value and an HRA for its employees. The HRA is available only to A’s employees who are either enrolled in its group health plan or in another non-HRA, minimum-value group health plan through a family member. Under the HRA, an employee may permanently opt out of and waive future reimbursements from the HRA, both upon termination of employment and at least annually. “B,” an employee of A, enrolls in a non-HRA, minimum-value group health plan sponsored by B’s spouse’s employer, “C,” and attests to A that he is covered by C’s plan and that such plan provides minimum value. In these circumstances, the HRA is integrated with C’s plan.
Integration With a Group Health Plan That Does Not Provide Minimum Value
In order for an HRA to be integrated with a group health plan that does not provide minimum value:
- The employer’s group health plan (other than the HRA) must not consist of only excepted benefits.
- The employee in the HRA must be enrolled in a group health plan that does not consist of only excepted benefits (whether or not sponsored by his or her employer).
- The HRA must limit reimbursement to one or more of copayments, coinsurance, deductibles and premiums under the non-HRA group coverage or for medical care other than essential health benefits.
- The HRA must give the employee an election to opt out of and waive future reimbursements at least annually and upon termination of employment.
Example : Employer “D” sponsors a group health plan and an HRA available only to employees who are either enrolled in its group health plan or in a non-HRA group health plan through a family member. The HRA is limited to reimbursement of copayments, coinsurance, deductibles and premiums in the integrated health plan as well as medical care that does not constitute essential health benefits. An employee may opt out of and waive future reimbursements from the HRA both upon termination of employment and at least annually. Employee “E” enrolls in a non-HRA group health plan sponsored by E’s spouse’s employer, “F,” and attests to D that he is covered by F’s plan and that the expenses for which E seeks reimbursement from the HRA are copayments, coinsurance, deductibles or premiums in F’s health plan or medical care that does not constitute essential health benefits. In these circumstances, the HRA is integrated with F’s plan.
The Guidance confirms that participants in integrated HRAs who lose coverage under the underlying group health plan may continue to spend down amounts remaining in their accounts. In addition, an HRA integrated with an employer’s group health plan is grouped together with the underlying plan for purposes of determining whether the plan satisfies either the Act’s minimum value requirement or the Act’s affordability requirement but not both. HRAs integrated with another employer’s group health plan cannot count toward satisfying either of these requirements.
New Design Requirements for Health FSAs
Effective with plan years beginning on or after Jan. 1, 2014, Health FSAs must meet one of the following designs:
- The Health FSA provides only excepted benefits. Dental and vision benefits that are not an integral part of a group health plan are excepted benefits. A Health FSA is deemed to provide only excepted benefits if the employer also makes available group health plan coverage that is not limited to excepted benefits and the Health FSA is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the Health FSA for the year (or, if greater, cannot exceed $500 plus the amount of participant’s salary reduction election).
- Dental and vision benefits that are not an integral part of a group health plan are excepted benefits.
- A Health FSA is deemed to provide only excepted benefits if the employer also makes available group health plan coverage that is not limited to excepted benefits and the Health FSA is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the Health FSA for the year (or, if greater, cannot exceed $500 plus the amount of participant’s salary reduction election).
- The Health FSA is offered through a Code Section 125 cafeteria plan and is thus subject to the separate annual limitation of Section 125(i), which limits the amount of salary reduction to $2,500 (indexed annually for plan years beginning after Dec. 31, 2013).
Employer Payment Plans Are Not Viable for Plan Years on or After Jan. 1, 2014
Though not as common as HRAs and Health FSAs, some employers have reimbursed employees on a pretax basis for non-employer health coverage. Unfortunately, in the Guidance the IRS and DOL have foreclosed these arrangements by determining that employer payment plans are considered group health plans under the Act.
As a group health plan, an employer payment plan would need to comply with all of the Act’s market reforms, including provision of preventive care services and prohibition on annual and lifetime dollar limitations. By definition, these plans cannot meet these requirements and will subject the employer to potential excise taxes if continued for plan years beginning on or after Jan. 1, 2014.
Consequently, employers will not be able to reimburse employees on a pretax basis for premiums to purchase coverage under an exchange established under the Act.
For further information, please contact any of the authors, Taylor Wedge French, James P. McElligott Jr. and Larry R. Goldstein, or any other member of the McGuireWoods employee benefits team.