Imagine that you are filling out Internal Revenue Service Form 1095-Cs for 2015 for an employer that offers employees the opportunity to elect self-only or family coverage under a minimum value group health plan. The plan includes a health reimbursement account (HRA) that the employee can use for copayments and deductibles under the plan. You are about to fill out Part III for an employee who elected self-coverage, by listing only the employee as a covered person when a question occurs to you: If the HRA can be used to pay for copayments and deductibles incurred by the employee’s spouse and dependents, should the spouse and dependents be listed in Part III as covered individuals (even though they are “covered” only under the HRA)? Then another question occurs to you: Can an HRA satisfy the market reform requirements of the Affordable Care Act (ACA) if it reimburses copayments and deductibles incurred by the employee’s spouse and dependents despite the employee’s enrollment for self-only coverage under the group health plan of which the HRA is a component part?
Both of these questions are important because they may increase (or lighten) your reporting burdens or reveal a latent compliance problem with your HRA. Fortunately, the Internal Revenue Service (IRS) has anticipated your concerns and, in Notice 2015-87 issued on December 16, 2015, answered both of these questions. Before turning to the answers, a refresher on HRA basics may be helpful.
Before the ACA, HRAs were a growing phenomenon as employers sought ways to incentivize employees to become more cost-conscious consumers of health care. The IRS defines an HRA as an arrangement that is funded solely by an employer and that reimburses an employee for medical care expenses of the employee or of his or her spouse and dependents, up to a maximum dollar amount for a coverage period. IRS Notice 2002-45, 2002-02 CB 93; Revenue Ruling 2002-41, 2002-2 CB 75. The reimbursement is excludable from the employee’s income, provided it is used for a permissible purpose. Amounts that remain in the individual’s HRA at the end of the year generally can be carried over and used to reimburse expenses incurred in later years, thereby avoid the use-it-or-lose-it rule that bedevils the close cousin of the HRA, the flexible spending arrangement. HRAs are considered to be group health plans within the meaning of Code § 9832(a), § 733(a) of the Employee Retirement Income Security Act of 1974 (ERISA), and § 2791(a) of the Public Health Service Act (PHSA). This status has important implications under the ACA’s insurance market reforms.
HRAs Under the ACA
In recent years, HRA adoption and utilization has declined as a result of the ACA, primarily because many pre-ACA HRAs would fail to satisfy two market reform requirements added to the PHSA by the ACA. The first is the ban on annual maximum benefits imposed on group health plans by PHSA § 2711. Since the amount reimbursable under an HRA is limited to the account balance, the HRA effectively has an annual limit by its very nature. The second ACA hurdle is the requirement imposed on non-grandfathered plans to cover certain preventive care on a first dollar basis. HRAs typically do not cover preventive care on a first dollar basis.
HRAs have not disappeared entirely, however. Prior IRS guidance carved out a limited exception under which an HRA will be deemed to satisfy the annual limit prohibition and the preventive care requirement. The essence of the exception is that the HRA must be “integrated” with another group health plan that does satisfy PHSA §§ 2711 and 2713.
An HRA is integrated with a group health plan for purposes of the annual dollar limit prohibition and the preventive services requirement if it meets one of two “integration methods.” (The answer to question 4 in Notice 2013-54 covers this issue.) The first integration method requires that (1) the employer offers a group health plan other than the HRA to the employee (one that does not consist solely of excepted benefits); (2) the employee receiving the HRA is actually enrolled in the non-HRA group health plan; (3) the HRA is available only to employees who are enrolled in the non-HRA group coverage; (4) the HRA is limited to reimbursement of one or more of the following: copayments, coinsurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care (as defined under Code § 213(d)) that does not constitute essential health benefits; and (5) under the terms of the HRA, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA at least annually and upon termination of employment.
Alternatively, an HRA that is not limited with respect to reimbursements under the first integration method is integrated with a group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements if (1) the employer offers a group health plan to the employee that provides minimum value (MV); (2) the employee receiving the HRA is actually enrolled in the MV group health plan; (3) the HRA is available only to employees who are actually enrolled in the non-HRA MV group coverage; and (4) under the terms of the HRA, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA at least annually and upon termination of employment.
Notice 2015-87 Provides an Unwelcome Answer—But Also Relief
In the answer to question 4 in Notice 2015-87, the IRS ruled that an HRA is not integrated with a non-HRA plan if the HRA covers family members who are themselves not covered under the non-HRA plan. Here is the substance of the ruling:
Question 4: … May an HRA available to reimburse the medical expenses of an employee’s spouse and/or dependents (a family HRA) be integrated with self-only coverage under the employer’s other group health plan?
Answer 4: No. An HRA is permitted to be integrated with the employer’s other group health plan coverage for purposes of the application of the group market reforms only as to the individuals who are enrolled in both the HRA and the employer’s other group health plan. If the spouse and/or dependents are not enrolled in the employer’s group health plan coverage, the coverage of these individuals under the HRA cannot be integrated with the coverage under the employer’s group health plan, and the HRA coverage generally would fail to meet the group market reforms [emphasis added].
Answer 4 goes on to provide temporary transitional relief from this ruling.
Treasury and IRS are aware that many HRAs do not currently contain the restriction necessary to integrate an HRA with employee-only coverage under the employer’s other group health plan because the HRA is intended to reimburse only limited expenses such as co-pays and employees have been permitted to use them for these types of expenses of other family members regardless of whether those family members were also enrolled in the employer’s other group health plan. To facilitate transition to compliance with the group market reforms through the use of integrated HRAs, Treasury and IRS will not treat an HRA available for the expenses of family members not enrolled in the employer’s other group health plan for plan years beginning before January 1, 2016, as failing to be integrated with an employer’s other group health plan for plan years beginning before January 1, 2016, nor will they treat an HRA and group health plan that otherwise would be integrated based on the terms of the plan as of December 16, 2015 as failing to be integrated with an employer’s other group health plan for plan years beginning before January 1, 2017, solely because the HRA covers expenses of one or more of an employee’s family members even if those family members are not also enrolled in the employer’s other group health plan [emphasis added].
Thus, owing solely to the foregoing transition relief created by the IRS, it was possible in 2015 for an HRA to cover an employee’s spouse and dependents even if the employee elected self-only coverage for 2015.
Returning to our first question in light of the IRS’s position: Should the employee’s spouse and dependents be listed in Part III on Form 1095-C as covered individuals because they were “covered” by the HRA, even though they were not covered by the main plan (the non-HRA portion of the plan)? According to Notice 2015-87, the answer is yes: “[T]he employer will be responsible under § 6055 for reporting the coverage as minimum essential coverage for each individual the medical expenses for whom are reimbursable by the HRA who is not also enrolled in the employer’s group health plan.”
This is just another wrinkle to keep in mind as you prepare your Form 1095-C reporting for 2015.