This Client Advisory focuses on important updates under the Patient Protection and Affordable Care Act (PPACA) and its application to Health Reimbursement Arrangements (HRAs). The new guidance applies to both private and government entities.
In general, HRAs are employer-funded group health plans where employees can be reimbursed tax-free for qualified medical expenses up to a fixed dollar amount per year, and unused amounts are often carried over to be used in subsequent years. HRAs are not the same as medical Flexible Spending Arrangements (FSAs) which generally include voluntary salary reduction contributions by employees. HRAs must be funded solely by the employer. All FSAs are exempt from the prohibition on annual limits under PPACA. In addition, Medical Savings Accounts (MSAs) and Health Savings Accounts (HSAs) are not subject to the rules prohibiting annual limits because MSAs and HSAs are not treated as group health plans under PPACA.
Prior to PPACA, group health plans could impose annual limits on benefits to be provided. Under PPACA, a group health plan is restricted from imposing any annual limit higher than $1,250,000 on essential health benefits for plan years beginning on or after September 23, 2011. For plan years beginning on or after January 1, 2014, annual limits on essential benefits are prohibited completely.
Until recently, it was unclear whether HRAs would continue to be a viable option for employers since, by definition, HRAs always include an annual limit on benefits. It was also unclear whether employers would need to file for a waiver of the annual limit requirement. Guidance issued by the Department of Health and Human Services (HHS) on August 19, 2011, provides some relief for employers who want to continue to offer these benefits to employees (at least until January 1, 2014).
Under the guidance, two types of HRAs are exempt from the waiver process altogether and are not required to comply with the requirements below. The first type includes HRAs that qualify as grandfathered health plans under the PPACA (click here to read our Client Advisory regarding plans that meet the requirement of grandfathered health plans). The second type includes HRAs that are "integrated" with other health coverage as part of a group health plan, if the other coverage alone complies with PPACA's lifetime and annual limit requirements. Unfortunately, there is no clear guidance as to when and how an HRA is "integrated" with a major medical plan. To date, no guidance or regulations define what it means for an HRA to be "integrated" with other health coverage.
Even if an HRA does not meet the requirements above, it can still qualify for an exemption from filing a waiver if the HRA was in effect prior to September 23, 2010, provided it complies with the following requirements:
- Employers must comply with annual participant notice requirements. In order to make sure an HRA qualifies for the waiver exemption, an employer should provide this notice by the end of 2011 for HRAs with a 2011 calendar plan year (in addition to providing the notice in summary plan documents for 2012 and 2013). HHS has issued a model notice that must be used for these purposes, which can be found at http://cciio.cms.gov/resources/other/index.html#alw (at the link titled "Annual Limit Waiver Application Instructions"). For calendar year plans, this notice should be distributed no later than December 31, 2011.
- Plan administrators must comply with all of the record retention requirements set forth in the waiver application process. Records must be kept including all information that an applicant would have used if it were required to fill out a waiver application, including (but not limited to): benefit structures in the HRA, current annual limit(s), and the total number of individuals covered by the HRA (including dependents). These records should be kept until at least January 1, 2014. For more information on the records that should be kept, please see the waiver application at: http://cciio.cms.gov/resources/other/index.html#alw (at the link titled "Annual Limit Waiver Application-New Application Form").
- HRAs must have and retain a carry forward function to allow participants to carry forward unused amounts remaining at the end of a coverage period for use in subsequent coverage periods. The guidance is not clear as to whether an HRA without a carry forward function would qualify for the waiver exemption. Until further guidance is issued, to be conservative, employers with HRAs without a carry forward function should consider either adding such a function or applying for a waiver by September 22, 2011.
Employers with HRAs should evaluate whether or not they qualify for the waiver exemption. If they do not, waiver applications must be received by HHS by September 22, 2011.
This guidance gives employers some comfort that most HRAs in existence before September 23, 2010, will continue to be viable options until at least 2014. We will continue to review new guidance and let you know if any additional guidance is issued on this point.