Plan sponsors should review their health reimbursement arrangements, employer payment plans, health flexible spending arrangements, and employee assistance programs to ensure they comply with ACA market reforms.
On September 13, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued Notice 2013-54.1 On the same day, the U.S. Department of Labor (DOL) issued virtually identical guidance in its Technical Release 2013-03.2 Both documents (collectively, the Guidance) provide critical information and supplement earlier agency pronouncements on the application of certain market reform provisions under the Affordable Care Act (ACA) to health reimbursement arrangements (HRAs), employer payment plans, health flexible spending arrangements (FSAs), and employee assistance programs (EAPs). The Guidance provides some relief from these market reforms, but significant and complicated compliance traps remain, particularly for stand-alone HRAs, employer payment plans, and nonexcepted FSAs. Plan sponsors should consult the Guidance and review their plans in order to avoid penalties for noncompliance with the ACA market reforms, as penalties can amount to up to $100 per day, per violation, per affected individual. The Guidance is effective for plan years beginning on or after January 1, 2014.
Stand-alone HRAs for current employees will not comply with the ACA.
Stand-alone HRAs will not satisfy the ACA’s prohibition on annual dollar limits or the requirement that certain preventive services be provided without cost sharing. However, building on earlier guidance, an HRA can be “integrated” with other group health plan coverage and satisfy the ACA in conjunction with that plan, even if the other plan does not (1) share the same plan document, (2) file a single Form 5500, or (3) have the same plan sponsor. In general, to be integrated, an HRA must meet the following criteria:
- The employer must offer a group health plan that provides coverage beyond excepted benefits.
- The employee receiving the HRA must actually be enrolled in such a group health plan, regardless of whether the employer sponsors that plan. For example, the HRA may be offered only to employees who are enrolled in other non-HRA group coverage, such as a plan maintained by the employer of the employee’s spouse.
- Under the terms of the HRA, an employee must be permitted to opt out of and waive future reimbursements from the HRA at least annually.
- Upon termination of employment, either the remaining amounts in the HRA are forfeited or the employee must be permitted to opt out of and waive future reimbursements from the HRA.
If the HRA is integrated with a health plan that does not provide minimum value under the ACA, it must meet the following additional requirement:
- HRA reimbursements must be limited to reimbursements of one or more of the following: (1) co-payments, co-insurance, deductibles, and premiums under the non-HRA group coverage or (2) “medical care” (as defined under Internal Revenue Code 213(d)) that does not constitute essential health benefits.
The opt-out/waiver/forfeiture requirements are in recognition of the fact that HRA coverage will constitute minimum essential coverage that would preclude eligibility for premium assistance on an Exchange.
Plan sponsors need to immediately review any existing stand-alone HRAs offered to current employees to make sure they are properly integrated in 2014 or are terminated before the last day of the 2013 plan year. (Earlier guidance provided that certain unused amounts credited to an HRA before January 1, 2014 could continue to be used after 2013 without violating the ACA.) Even if properly integrated, almost all current HRAs will, at a minimum, need to add the opt-out/waiver/forfeiture provisions as these are not typical HRA design elements.
The future of HRAs established in accordance with San Francisco’s Health Care Security Ordinance looks bleak. Without further relief, these arrangements will no longer be permitted in 2014, and employers may need to offer appropriate group health coverage or make direct payments to the City of San Francisco to meet the requirements of the ordinance.
HRAs and employer payment plans cannot be integrated with individual market coverage.
The Guidance also clarifies that group health plans providing tax-preferred health coverage—including, but not limited to, HRAs—cannot be integrated with individual market coverage. This means that any group health plan that facilitates the purchase of individual market coverage on a tax-preferred basis, whether inside or outside an Exchange, will not comply with the ACA’s market reforms. This includes so-called “employer payment plans” that reimburse employees’ substantiated premiums for individual coverage on a tax-favored basis, effectively ending those plans for current employees. However, as the Guidance also makes clear, an employer arrangement that pays for such coverage on an after-tax basis is usually not a group health plan and therefore is not subject to the ACA market reforms.
Retiree-only stand-alone HRAs continue to be acceptable.
The rules described above, however, do not apply to stand-alone HRAs covering fewer than two current employees, such as a retiree-only stand-alone HRA. The Guidance reaffirms that such plans are not subject to the ACA annual limit or preventive care rules. The Guidance also clarifies that a retiree-only stand-alone HRA constitutes minimum essential coverage in satisfaction of the ACA’s individual mandate. This means not only that a participant in such a plan is not subject to the individual mandate penalties but also that the participant will not be eligible to receive a premium subsidy through an Exchange. An employer payment plan reimbursing retirees for health premiums would also be excepted from ACA mandates under the retiree-only plan rule. Because HRA coverage will constitute minimum essential coverage that would preclude eligibility for premium assistance on an Exchange, consideration should be given to adding an opt-out/waiver right, even though such a feature would not be required from a legal standpoint.
Exchange coverage cannot be purchased pre-tax under a cafeteria plan.
The ACA provides, and the Guidance reaffirms, that, for plan years that begin after December 31, 2013, Exchange coverage is not a “qualified benefit” that can be purchased pre-tax under Internal Revenue Code section 125 for most employers. The Guidance includes a limited exception to this rule for non-calendar year plans that pre-date September 13, 2013 (such as Massachusetts Connector plans). This exception provides that such plans can allow the purchase of Exchange coverage through a cafeteria plan for the duration of the plan year beginning in 2013 but that the premium tax credit cannot apply to such Exchange coverage. However, this prohibition on Exchange coverage through a cafeteria plan does not address other individual market coverage. Until further guidance is issued, it may be possible for an employer to allow employees to use their cafeteria plan to purchase, on a pre-tax basis, non-Exchange individual coverage.
The ACA market reforms do not apply to nonexcepted health FSAs.
The Guidance confirms that the ACA market reforms do not apply to health FSAs, as long as the FSA is an excepted benefit. A health FSA meets this standard only if the employer also makes available other nonexcepted group health plan coverage and if the maximum benefit payable from the FSA does not exceed either two times the participant’s salary reduction election for the year (or, if greater, $500 plus the amount of the participant’s salary reduction). The Guidance also clarifies that this relief is only available to health FSAs offered through an Internal Revenue Code section 125 plan, effectively prohibiting an employer from taking advantage of the special health FSA rule to maintain a nonintegrated HRA with employer contributions of $500 or less. Finally, the Guidance states that a health FSA that does not qualify as an excepted benefit fails to meet the ACA mandates. Sponsors of health FSAs will want to make sure that each employee who is offered the opportunity to contribute to a health FSA is also eligible for other nonexcepted group health coverage and that the FSA itself satisfies the maximum benefit requirements.
EAPs are generally excepted benefits.
The Guidance provides welcome clarification on the status of EAPs by extending the existing EAP/health savings account concept. Specifically, EAPs will be considered excepted benefits that are not subject to the ACA requirements as long as they do not provide “significant benefits in the nature of medical care or treatment.” Until further rulemaking is issued—and at least through 2014—this standard will continue to be based upon a reasonable, good-faith interpretation of significant medical care or treatment. An EAP satisfying this rule will not constitute minimum essential coverage that would preclude eligibility for a subsidy on the Exchanges, nor will it permit an employer offering only an EAP to escape the first part of the shared responsibility excise tax. The fact that an employer has determined that its EAP provides medical benefits and is thus subject to ERISA does not necessarily mean that the EAP provides “significant” medical benefits for this purpose.
Contributions to an integrated HRA count toward the determination of a plan’s value or affordability but do not count toward both.
If an employer offers a primary eligible employer-sponsored health plan and an HRA that would be integrated with that primary coverage if the employee enrolled, special rules apply in determining whether the employer-sponsored health coverage provides minimum value or is affordable for purposes of eligibility for a subsidy on an Exchange (and, by extension, for purposes of determining whether the employer shared responsibility excise tax applies). If the employee may use the HRA only to reduce cost sharing for covered medical expenses under the primary employer-sponsored plan, HRA contributions count only toward the minimum value requirement. If the employee may use HRA contributions to pay premiums and cost sharing under the primary employer-sponsored plan, such HRA contributions count only toward the affordability requirement. The Guidance provides that HRA contributions do not count toward the minimum value or affordability requirements of a health plan offered by another employer. In addition, the HRA contributions do not count toward the minimum value or affordability requirements of the non-HRA coverage sponsored by the same employer if the employer conditions HRA contributions on the employee electing coverage under non-HRA coverage from another employer or any other source.