New Guidance Addresses Effect of ACA on HRAs, Health FSAs & Premium Reimbursement Accounts

On September 13, 2013, the DOL and IRS issued complex technical new guidance on how certain provisions of  the Affordable Care Act (ACA) apply to to HRAs, Health FSAs, and certain other employer healthcare arrangements.  The guidance is DOL Tech. Rel. 2013-03 and IRS Notice 2013-54.

What the Guidance Addresses

Most of the guidance addresses how two of the ACA “market reform” provisions –

1.  the prohibition on annual dollar limits on essential health benefits (EHBs) and
2. the requirement of “first-dollar” coverage of specified preventive services —

apply to Health Reimbursement Accounts (HRAs), “premium reimbursement arrangements” (PRAs) and certain Health Flexible Spending Accounts (HFSAs).

Some key provisions are summarized below, followed by a  more detailed analysis.

Key Provisions in the Guidance

• Employers cannot offer “stand-alone” HRAs or PRAs for active employees – and HRAs can only be integrated with group health coverage, not with individual policies.  This applies for plan years beginning in 2014.  PRAs are a subset of HRAs.  This prevents employers from using HRAs or PRAs to reimburse employees for individual health insurance policies they buy either in the new Health Insurance Marketplace or outside it.
• HRAs for early retirees are allowed — These HRAs will be allowed on a “stand-alone” basis and will be considered ‘minimum essential coverage” (MEC).  The ramifications of this are that a retiree who has money available in an HRA:  1) will not have to pay an individual mandate penalty, but also 2) will not be eligible to receive the Code § 36B premium tax credit for individual coverage in the Marketplace.
• HRAs can be integrated with other group health coverage – The guidance provides two different integration methods and details the requirements that must be met under each.
• EAPs – An employee assistance program (EAP) generally will be considered an “excepted benefit” and thus will not have to comply with the ACA market reforms if it does not provide “significant benefits in the nature of medical care or treatment.”
• Eligibility for a premium tax credit —  If an employee (or retiree) enrolls in any employer-sponsored minimum essential coverage, the employee is ineligible for the Code § 36B premium tax credit for individual coverage in the Marketplace.  The following types of coverage are eligible employer-sponsored plans and, therefore, are “minimum essential coverage,” unless the coverage consists solely of “excepted” benefits:  coverage provided through Code § 125 plans, employer payment plans (PRAs), health FSAs, and HRAs.
• Pre-tax payment for exchange coverage is not allowed — An employer cannot allow employees to pay their premiums on a pre-tax basis for a qualified health plan offered through an Exchange.  This generally applies in 2014, but in states that established exchanges prior to 2014 and allowed employee pre-tax payment of premiums, non-calendar year plans that already allow employees to pay pre-tax for exchange coverage may continue to do so through the end of the 2013 plan year.

Details on the Guidance

Many employers offer their employees HRAs, PRAs and/or health FSAs, in addition to major medical plans.  For 2014, some employers would like to use these accounts to reimburse employees for all or part of their premiums to purchase individual coverage in a health insurance marketplace (or outside of it).  Others would like to drop health coverage for some or all employees and allow them to pay pre-tax for individual coverage they purchase in a marketplace.  This guidance makes it clear that neither of these strategies are allowable.  The following questions and answers explain why.

1.  Why do Employers Want to Offer HRAs and PRAs?

Some benefits advisors have been touting “premium reimbursement accounts” (PRAs) lately, as a way for employers to reimburse employees for the premiums they pay to buy individual health insurance policies, either in the Marketplace or outside it.  The strategy was to allow low-income employees to purchase heavily subsidized coverage in the Marketplace and have the employer reimburse them for the low premiums they paid for subsidized coverage, rather than have such employees enroll in the employer’s group health plan.  Alternatively, some employers considered not offering employer group coverage at all, but instead using an HRA or PRA to reimburse all employees for individual coverage they purchased.  Today’s guidance effectively ends an employer’s ability to use HRAs or PRAs for this purpose.

The guidance also clarifies that a PRA is a form of an HRA, and both are categories of group health plans.

2.  What is a “Premium Reimbursement Arrangement”?

A premium reimbursement arrangement (PRA)–which the guidance calls an “employer payment plan”– is a group health plan under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy, or an arrangement under which an employer uses its funds to directly pay the premium for an individual health insurance policy covering the employee.  The first type of PRA is described in Rev. Rule. 61-146.

3. Why are “Stand-Alone” HRAs and PRAs Not Allowed for Active Employees?

HRAs and PRAs are types of employer group health plans,  so they generally must comply with ACA market reforms, one of which is the prohibition on annual dollar limits on “essential health benefits” (EHBs).  An HRA by definition does not meet this requirement, because the employer sets the maximum amount it will pay annually per HRA participant.   An HRA can meet the requirement, however, if it is “integrated” (or paired) with another group health plan that does meet the prohibition on annual dollar limits.

4.  Why can’t HRAs and PRAs be Integrated with Individual Coverage?

The reason HRAs and PRAs cannot be integrated with individual coverage is basically the same as explained above.   Since HRAs and PRAs are “group health plans,” they must meet ACA requirements, such as the prohibition on annual dollar limits.  They cannot (by definition) do this on a “stand-alone” basis, but they can if they are integrated with another group health plan that meets the requirements.  The guidance (FAQ 3) also specifies that HRAs or PRAs that are used to purchase individual coverage are not integrated with that individual coverage for purposes of the preventive services requirement (one of the other market reforms under the ACA).

5.  Are Retiree-Only “Stand-Alone” HRAs Allowed?

Yes.  Retiree-only stand-alone HRAs are allowed because HRAs with fewer than two participants who are current employees are not generally required to comply with the ACA “market reform” provisions (such as the prohibition on annual dollar limits).   Thus, an employer can offer to pay, through an HRA, for all or part of an early retiree’s premium for individual coverage (in or outside of a Marketplace). However, retiree-only stand-alone HRAs are employer-sponsored group plans so they do constitute minimum essential coverage.  This means that an early retiree who is covered by a stand-alone HRA for any month is not eligible for a premium tax credit for that month, if the retiree purchases individual coverage in a Marketplace.  (FAQ 10)

6.  So an HRA that is “Integrated” with another Group Health Plan will meet the market reform requirements?

An HRA that is integrated with another group health plan will considered compliant with the annual dollar limit prohibition and the preventive services requirement only if the non-HRA group health plan with which it is integrated meets these requirements.

7.  Under what Circumstances will an HRA be Considered to be “Integrated” with a Group Health Plan?

There are two allowable integration methods.  One requires that the non-HRA group coverage provide minimum value, and the other requires only that the non-HRA group coverage consist not solely of “excepted” benefits.  Under both methods, the HRA and the group health coverage with which it is integrated are not required to share the same plan sponsor, same plan document or governing instruments, or file a single Form 5500.  So, the HRA of one employer could be considered to be integrated with the non-HRA group health plan of an unrelated employer.  This could result if an employee elects coverage under her employer’s HRA and also enrolls in a group health plan offered by her husband’s employer.  (FAQ 4 describes these two integration methods)

 Method 1:  Minimum Value Not Required:

An HRA is integrated with another group health plan (GHP) for purposes of the annual dollar limit prohibition and the preventive services requirement if all the following requirements are met:

1. The employer offers a GHP (other than the HRA) to the employee that is not solely “excepted” benefits.
2. The employee receiving the HRA is actually enrolled in a GHP (other than the HRA) that does not consist solely of excepted benefits, regardless of whether the other coverage is sponsored by this employer or another employer (e.g., the employee’s spouse’s employer).
3. The HRA is only available to employees who are enrolled in non-HRA coverage, whether it is sponsored by this employer or another employer.
4. The HRA is limited to reimbursement of one or more of the following:  co-payments, coinsurance, deductibles and premiums under the non-HRA group coverage, as well as medical care (defined in Code section 2013(d)) that does not constitute essential health benefits. AND
5. Under the terms of the HRA, the 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, either the remaining amounts in the HRA are forfeited or the employee is allowed to permanently opt out of and waive future reimbursements from the HRA.   This opt-out feature is required because the HRA benefits will be considered “minimum essential coverage” (MEC) and will prevent the individual from claiming the premium tax credit if the individual buys coverage in a marketplace.

Method 2:  Minimum Value Is Required:

An HRA is integrated with another group health plan (GHP) for purposes of the annual dollar limit prohibition and the preventive services requirement if the non-HRA group health plan does provide minimum value, and the HRA does not include the limitations on reimbursements that are in item #4 above.  All four of  the following requirements must be met:

1. The employer offers a GHP (other than the HRA) to the employee that provides minimum value (pursuant to Code section 36B(c)(2)(C)(ii).
2. The employee receiving the HRA is actually enrolled in a GHP (other than the HRA) that provides minimum value, regardless of whether the other coverage is sponsored by this employer or another employer (e.g., the employee’s spouse’s employer).
3. The HRA is only available to employees who are enrolled in non-HRA coverage that provides minimum value, whether it is sponsored by this employer or another employer.
4. Under the terms of the HRA, the 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, either the remaining amounts in the HRA are forfeited or the employee is allowed to permanently opt out of and waive future reimbursements from the HRA.   This opt-out feature is required for the same reason noted above in item #5.

8. If an employee elects coverage under her employer’s HRA (Employer #1) and also is enrolled in a group health plan offerred by her husband’s employer (Employer #2), does the Employer #1’s HRA count toward determining whether Employer #2’s group  health plan meet affordability or minimum value?

No.  Employer #2’s group health plan must meet affordability and minimum value requirements on its own, without taking into account any HRAs offered by other employers.

9. The two integration  methods above say an employee musts be allowed to permanently waive or forfeit unused or future HRA amounts annually or at termination of employment.  If an employee is covered by an integrated HRA and group health plan, and the employee ceases to be covered under the group health plan, may the employee decline to waive or forfeit HRA amounts and instead still use amounts remaining in the HRA?

Yes.  FAQ 5 says that, even if an HRA is no longer integrated with a group health plan, unused amounts that were credited while it was integrated may be used to reimburse medical benefits in accordance with the terms of the HRA, and the HRA will not be deemed noncompliant with market reforms. E.g., under the first integration  method above (“Minimum Value Not Required”), the HRA could still only reimburse for co-payments, coinsurance, deductibles, premiums, and medical expenses that are not essential health benefits.

However, there are ramifications for the employee. The HRA coverage is an eligible employer-sponsored plan (unless it consists solely of excepted benefits), so it is minimum essential coverage (MEC) for purposes of Code section 5000A.  This means that an employee who has unused HRA amounts available will not be eligible for a premium tax credit to buy individual insurance in the Marketplace.

10. Does an HRA comply with the prohibition on annual dollar limits if the group health plan with which the HRA is integrated does not cover a category of essential health benefits (EHBs) and the HRA is available to cover that category and limits the coverage to the HRA’s maximum benefit?

Generally, no.  FAQ 6 provides that an HRA in such an arrangement would not be compliant with the prohibition on annual dollar limits.  However, this situation should not arise if the group health plan is a non-grandfathered, small-group insured plan, because such plans are required to cover all categories of EHBs.

Additionally, if the HRA is integrated with a group plan that does provide minimum value, the HRA will not be treated as imposing an annual limit in violation of the annual dollar limit prohibition, even if the other group health plan does not cover a category of EHBs and the HRA is available to cover that category and limits the coverage to the HRA’s maximum.  This seems to be a concession to large group plans that do not (and are not required to) cover all 10 categories of EHBs.

11.  Can Employers still Provide Stand-Alone Health FSAs (HFSAs)?

Yes, employers can still provide HFSAs, which are allowed under Code sections 125 and 106(c)(2).  HFSAs can be funded by both employee salary-reduction contributions and employer contributions. Amounts remaining at the end of each plan year (plus a grace period, if the plan provides) are forfeited; they do not roll over for use in subsequent years, as under an HRA or Health Savings Account (HSA).

FAQ 7 of the guidance provides that “A HFSA that is considered to provide only excepted benefits is not subject to the market reforms.”  An HFSA that does not qualify as excepted benefits, however, generally is subject to the market reforms, including the preventive services requirements.

Questions have arisen as to whether a stand-alone HRA (i.e., that is not integrated with a group health plan) may be treated as a health FSA, per Notice 2002-45.  FAQ 8 clarifies that it cannot.  FAQ 8 says the statement in Notice 2002-45 was intended to clarify the rules limiting the payment of long-term care expenses by HFSAs.  It goes on to say that treating an HRA as a HFSA that is not excepted benefits “would not exempt the HRA from compliance with the other market reforms, including the preventive services requirements, which the HRA would fail to meet because the HRA would not be integrated with a group health plan.”

12.  What are “Excepted” Benefits?

There are several types of “excepted” benefits defined at ERISA section 733(c), including certain Health FSAs, “limited scope” dental and vision benefits, and fixed indemnity policies or coverage for a specific disease or illness.   This article focuses on the HFSA category.

An “excepted” HFSA plan is one that meets the IRC section 106(c)(2) definition and in which:

  1)  The maximum annual benefit payable to any participant is less than the greater of:

• two times the participant’s annual salary reduction amount for the HFSA, or,
• the participant’s salary reduction amount for the year plus $500; and

2)     Participants also are eligible for coverage under another group health plan that is a not limited to  excepted benefits (e.g., that is major medical coverage).

 13. So if an Employer Offers an HRA, PRA or HFSA, will an Employee be Ineligible for a premium tax credit?

If an employee (or retiree) enrolls in any employer-sponsored minimum essential coverage, the employee is ineligible for the Code § 36B premium tax credit for individual coverage in the Marketplace.  The following types of coverage are eligible employer-sponsored plans and, therefore, are minimum essential coverage, unless the coverage consists solely of excepted benefits:  coverage provided through Code § 125 plans, employer payment plans (PRAs), health FSAs, and HRAs.

14. Can an Employer allow Employees to Pay Pre-tax for Marketplace (Exchange) Coverage?

No.  An employer cannot allow employees to pay their premiums on a pre-tax basis for individual qualified health plans (QHPs) offered through a Marketplace.  This generally applies in 2014, but in states that established exchanges prior to 2014 and allowed employee pre-tax payment of premiums, non-calendar year plans that already allow employees to pay pre-tax for exchange coverage may continue to do so through the end of the 2013 plan year.

15. Are EAPs employer group health plans that are subject to the ACA market reforms?

No, usually not.  FAQ 9 states that the Departments intend to amend existing regulations to provide that an EAP generally will be considered an “excepted benefit” and thus will not have to comply with the ACA market reforms if it does not provide “significant benefits in the nature of medical care or treatment.” At least until the end of 2014, employers may use a reasonable, good faith interpretation of whether an EAP provides significant benefits in the nature of medical care or treatment.