New guidance prohibits employers from using individual accounts, such as health reimbursement accounts (HRAs) and flexible spending accounts (FSAs), to reimburse employees for premiums they buy in a public or private exchange. Under the guidance, however, employers may use certain “integrated” HRAs to reimburse retirees tax-free for individual policy premiums.
Department of Labor (DOL) Technical Release 2013-03 and Internal Revenue Service (IRS) Notice 2013-54 also explain how the ban on annual dollar limits in health plans and the first-dollar preventive care coverage mandate of the Patient Protection and Affordable Care Act (PPACA) apply to the following arrangements:
- HRAs, including those integrated with a group health plan
- Group health plans under which an employer reimburses an employee for health insurance premiums, or arrangements where the employer pays an employee’s premium for an individual health policy (collectively, an employer payment plan)
- Certain FSAs
- Employee assistance programs (EAPs)
The guidance generally applies for plan years beginning on and after January 1, 2014.
The health care reform law imposes 20 market reforms on employer group health plans. However, the PPACA market reforms do not apply to plans with fewer than two participants who are employees on the first day of the plan year or to group health plans providing only “excepted benefits.” These excepted benefits include accident-only coverage, disability income, certain limited-scope dental and vision benefits, certain long-term care benefits and some health FSAs.
The guidance specifically addresses the prohibition against annual dollar limits on essential health benefits and the requirement that non-grandfathered group health plans provide preventive services without cost sharing.
According to previous guidance on active employee HRAs:
- Where HRAs are integrated with other coverage as part of a group health plan, and the other coverage alone complies with the annual dollar limit prohibition, the combined benefits satisfy the requirements.
- An HRA may be integrated with primary employer health coverage as long as the HRA is offered only to employees who also participate in an employer group health plan with no annual dollar limits.
- An employer-sponsored HRA cannot be integrated with individual market coverage.
Active employee Health Reimbursement Accounts — New guidance
The new guidance reaffirms that stand-alone HRAs do not meet the PPACA’s annual dollar maximums and preventive benefits requirements. The guidance provides two ways of integrating HRAs with group health plans so that these requirements are met. Neither method requires that the HRA and associated coverage share the same plan sponsor, plan document or governing instruments, or that they file a single Form 5500.
Integration Method 1: Minimum value not required
To integrate an HRA with another group health plan for purposes of the annual dollar limit prohibition and preventive services requirements, the following conditions must be met:
- The employer’s group health plan provides more than excepted benefits.
- The HRA participant is enrolled in the group health plan that is integrated with the HRA.
- The HRA is available only to employees also enrolled in non-HRA group coverage (which might be a group health plan offered by another employer, such as a spouse’s employer).
- The HRA is limited to reimbursing one or more of the following: copayments, coinsurance, deductibles and premiums under the non-HRA group coverage, as well as medical care that does not constitute essential health benefits.
- Under the HRA, employees (or former employees) may permanently opt out of and waive future reimbursements from the HRA at least annually and, upon terminating employment, either forfeit the HRA balance or opt out of and waive future HRA reimbursements. By opting out of HRA coverage, individuals may preserve their eligibility for a federal premium tax credit.
Employer A sponsors a group health plan and an HRA, which meets the above conditions. Employer A employs Employee X, who enrolls in non-HRA group coverage sponsored by Employer B, his spouse’s employer. Employer A and Employer B are not treated as a single employer, and Employee X informs Employer A that he is covered by Employer B’s non-HRA group coverage.
When seeking reimbursement under Employer A’s HRA, Employee X attests that the expense is a copayment, coinsurance, deductible or premium under Employer B’s group health plan or medical care that is not an essential health benefit.
Employer A’s HRA is “integrated” with Employer B’s group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements, so the HRA does not violate those mandates.
Integration Method 2: Minimum value required
Alternatively, an HRA that does not limit reimbursements may be integrated with a group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements if the following conditions are met:
- The employer offers a group health plan that provides minimum value under the PPACA.
- The HRA participant is enrolled in a group health plan that provides minimum value, whether or not it is an employer-sponsored plan.
- The HRA is available only to employees who are enrolled in non-HRA minimum value group coverage (whether or not it is an employer-sponsored plan).
- Under the HRA, the employee (or former employee) may permanently opt out of and waive future HRA reimbursements at least annually, and, upon termination of employment, the employee may either forfeit the remaining balance or opt out of the HRA and waive future reimbursements.
Employer A sponsors a group health plan that provides minimum value and also sponsors an HRA, which meets the conditions above. Employer A employs Employee X. Employee X enrolls in a non-HRA group health plan sponsored by Employer B, which employs his spouse.
Employer A and Employer B are not treated as a single employer, and Employee X attests to Employer A that he is covered by Employer B’s group plan that provides minimum value coverage. Employer A’s HRA is integrated with Employer B’s group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements.
Unused HRA amounts
Unused HRA amounts that were credited while the HRA was integrated with other group health plan coverage may be used to reimburse medical expenses incurred even after the employee is no longer covered by the other integrated group health plan. Unless the coverage consists entirely of excepted benefits, coverage provided through an HRA constitutes an eligible employer-sponsored plan and thus minimum essential coverage under the individual mandate.
Group health plans and essential health benefits
An HRA integrated with a group health plan will generally violate the prohibition on annual dollar limits if the HRA covers a category of essential health benefits not covered by the group health plan and limits the coverage to the HRA’s maximum benefit. Under the minimum value required integration method, however, as long as a group health plan provides minimum value, the integrated HRA will not violate the prohibition on annual limits.
Calculating minimum value/affordability for premium tax credit
To be eligible for a premium tax credit in an exchange, the individual must not be eligible for employer-sponsored coverage that is affordable — meaning premiums for self-only coverage in the lowest-cost option do not exceed 9.5% of household income — and that provides minimum value (an actuarial value of at least 60%).
- If an employer offers a primary eligible plan integrated with an HRA, new HRA contributions available for the year may count toward satisfying either the affordability requirement or the minimum value requirement, but not both.
- New HRA contributions available only for cost sharing for covered medical expenses under the primary employer plan may count only toward satisfying the minimum value requirement.
- New HRA contributions available for premiums or for both premiums and cost sharing under the primary employer plan may count only toward satisfying the affordability requirement.
- An HRA integrated with a primary employer plan for purposes of the annual dollar limit prohibition and the preventive services requirements does not count toward the affordability or minimum value requirements.
- If an HRA is conditional on the employee not enrolling in non-HRA coverage offered by the employer and the employee enrolls instead in non-HRA coverage from a different source, the HRA does not count in determining whether the employer’s non-HRA coverage satisfies either the affordability or minimum value requirements.
- For purposes of the premium tax credit, the affordability and minimum value requirements do not apply if the employee enrolls in employer-sponsored minimum essential coverage, a health FSA or an HRA, but only if the coverage does not consist solely of excepted benefits. Employees enrolled in employer-sponsored minimum essential coverage are not eligible for premium tax credits.
Retiree-only Health Reimbursement Accounts
Under earlier regulations, the exemption from the prohibition on annual dollar limits for plans with fewer than two current employees applies to stand-alone, retiree-only HRAs. Under the new guidance, retiree-only HRAs constitute minimum essential coverage for purposes of the individual mandate for months in which there are funds in the HRA (including balances after the employer has stopped contributing). Thus, participants in retiree-only HRAs for any month are not eligible for a premium tax credit in an exchange for that month.
Health insurance market reforms generally do not apply to retiree-only HRAs and thus should not affect employers’ decisions to offer them.
Cafeteria plans and exchange coverage
For taxable years beginning after December 31, 2013, “qualified benefits” under cafeteria plans may not include qualified health plans offered through an exchange. This is the case even in states with previously established exchanges, such as Massachusetts, where existing cafeteria plan provisions allow employees to enroll in health coverage through the exchange and pay for that coverage on a pretax basis.
Health Flexible Spending Accounts
Health FSAs (as defined in Internal Revenue Code Section 106) are not subject to the prohibition on annual dollar limits.
- Excepted benefits. As noted earlier, market reforms do not apply to group health plans providing excepted benefits. Health FSAs are group health plans and will be considered to provide only excepted benefits as long as two conditions are met: (1) The employer also offers a group health plan that is not limited to excepted benefits, and (2) the health FSA is structured so a participant’s maximum benefit cannot exceed twice his or her salary reduction election for the year (or, if greater, cannot exceed $500 plus the amount of the salary reduction election). Otherwise, health FSAs are generally subject to the market reforms.
- HRA as a health FSA. Earlier IRS guidance suggested that, in some circumstances, an HRA could be treated as a health FSA, and the departments are considering whether an HRA may be treated as a health FSA for purposes of the exclusion from the annual dollar limit prohibition. However, treating an HRA as a health FSA 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 it would not be integrated with a group health plan.
Employee Assistance Programs
EAPs generally are considered to provide excepted benefits as long as they do not provide significant medical or treatment benefits; thus, in most cases they do not constitute minimum essential coverage. The departments intend to amend earlier regulations to reflect this position.
It appears that modest stand-alone EAP coverage need not be reported to the IRS annually as minimum essential coverage, and such coverage does not satisfy the individual mandate. These benefits would not disqualify the recipient from the federal premium tax credit, and the employer need not disclose the benefits in a Summary of Benefits and Coverage (SBC).
Employers offering HRAs should confirm whether their HRAs are integrated with health plan coverage. Integrated HRAs will not violate the ban on annual dollar limits or the first-dollar preventive services mandate. Given the implications of the new rules, employers might want to reconsider offering stand-alone HRAs. Employer-sponsored health FSAs must provide only excepted benefits or comply with the PPACA market reforms.
Employers in states that allow employees to buy coverage in an exchange with pretax dollars through a cafeteria plan will need to adjust calendar-year plans beginning in 2014 and non-calendar-year plans for plan years beginning after December 31, 2013.
Most typical EAP benefits — such as limited counseling services — are considered excepted benefits and thus will not constitute minimum essential coverage or require an SBC.