Health Reimbursement Arrangements (HRAs) are, in general, considered group health plans as defined in the Affordable Care Act (ACA) and are subject to coverage mandates on such plans. The Internal Revenue Service (IRS) and Department of Labor (DOL) recently issued guidance that addresses the application of two particular ACA mandates to HRAs and health flexible spending accounts (FSAs). Both the IRS and DOL concluded that an HRA that is subject to the annual limit prohibition and preventive care requirement will not be able to comply with these mandates. Accordingly, an HRA either needs to be designed to be exempt from the ACA mandates or must be amended to not allow current funding, but allow prior funding to be used for appropriate expenses.
Although an HRA cannot comply with the annual limit prohibition and the preventive care requirement, it might be possible to design an alternative, such as a Section 105 medical expense reimbursement plan. Such a plan would likely need to do two things: cover all preventive care without cost sharing and without any annual limits; and impose no annual limits on any other “essential health benefits” covered under the plan.
The recent guidance addressed the impact of the ACA on health FSAs offered through a Section 125 cafeteria plan. As with HRAs, health FSAs are, in general, considered group health plans for purposes of the ACA, particularly the preventive care requirement. The IRS and DOL concluded that a health FSA that is subject to the preventive care mandate will not be able to comply with it. Accordingly, a health FSA either needs to be designed to be exempt from the ACA mandates or must be terminated.
The ACA requirements described above are generally effective the first day of the plan year beginning on or after January 1, 2014.
The IRS and DOL have identified several types of HRAs that are exempt from the ACA mandates identified above. If the HRA satisfies the conditions of one of the exemptions described below, it will not be subject to the annual limit prohibition and the preventive care requirement.
Integrated HRA – An integrated HRA is related to and depends upon the existence of a group medical plan that satisfies the ACA mandates. Specifically, to be an integrated HRA, contributions may be made only for participants who are currently covered under an employer-sponsored group medical plan. The group medical plan can be sponsored by the same employer who sponsors the HRA or another employer (e.g., a spouse’s employer).
There are two types of integrated HRAs. An HRA that is integrated with a group health plan that provides at least 60 percent minimum value may reimburse all 213(d) medical expenses. An HRA that is integrated with a group health plan that does not provide 60 percent minimum value may reimburse only a limited set of medical expenses, including only deductibles, co-pays, co-insurance and premiums under the group medical plan plus expenses for care that does not qualify as an essential health benefit under the ACA.
An integrated HRA must offer participants an opportunity to permanently opt out of coverage and forfeit their account balances on at least an annual basis and upon termination of employment. The primary purpose of this amendment is to allow employees who have ceased to be covered under the group medical plan but who continue to be entitled to benefits from the HRA (e.g., spend down access) to terminate coverage under the HRA and not be disqualified from subsidized coverage through a public insurance exchange.
An integrated HRA may allow participants who have ceased to be covered under the group medical plan to spend down the balance of their accounts without jeopardizing the HRA’s status as integrated.
HRAs Covering Fewer Than Two Employees - An HRA that, as of the first day of the plan year, provides coverage to fewer than two current employees is exempt. This exemption is often relied upon for post-employment HRAs and retiree-only HRAs, but technically it applies to an HRA covering no more than one current employee.
Note, for HRAs specifically designed to cover one active employee, consideration must be given to compliance with the Section 105(h) nondiscrimination requirements.
To determine whether an HRA satisfies this exemption, the focus is on access to the account. Although the IRS has not specifically addressed this issue, if an HRA account is created for an employee for purposes of tracking contributions made during employment, the HRA should not fail to be exempt provided that only expenses incurred after employment ceases are reimbursed from the HRA.
An HRA must include several terms in order to ensure it qualifies as a post-employment HRA. For example, if a participant terminates employment and is subsequently rehired by the employer, the HRA should not reimburse expenses incurred during the period of reemployment. Furthermore, reimbursements should not be provided to employees who remain employees but have experienced some type of change in employment status, such as a change to part-time hours, a long-term leave of absence, or a phased retirement. The one exception to this rule applies to employees on long-term disability. According to regulatory guidance, until further guidance is issued on this topic, a plan that provides benefits solely to former employees and employees on long-term disability will qualify for the exemption.
Note, coverage under an HRA of this type disqualifies the participant from receiving a subsidy from a public insurance exchange. Although it is not required to do so, the HRA may allow participants to opt out and forfeit their accounts to avoid being disqualified for a subsidy. Other plan designs may be available to address subsidy eligibility.
HIPAA Excepted Benefits - All group health plans that are excepted benefits under the HIPAA portability rules are also exempt from the ACA mandates. The following types of HRAs qualify as HIPAA excepted benefits:
- An HRA that reimburses only dental and vision expenses that is not an integral part of the employer’s group health plan (if any).
- An HRA that meets the following conditions: all participants are eligible for group health plan coverage through the employer that is not an excepted benefit under HIPAA; and the annual maximum benefit available under the HRA does not exceed $500.
Regardless of whether an HRA is exempt from the ACA mandates, regulatory guidance indicates that, in general, HRA participants may be allowed to spend down the balances of their accounts attributable to contributions made before January 1, 2014. More specifically, the account balance may be spent down if it is attributable to contributions credited to the participant’s account prior to January 1, 2013, and contributions credited to the participant’s account during 2013 in accordance with the terms and conditions of the plan as of January 1, 2013.
If an HRA will not be exempt from the ACA mandates in 2014, an employer may freeze the HRA (i.e., cease making contributions) and allow participants to spend down all or a part of the existing account balances. Note, however, that coverage under a frozen HRA disqualifies the participant from receiving a subsidy from a public insurance exchange.
HRAs and Individual Medical Insurance Policies
The recent regulatory guidance confirmed that an HRA cannot be integrated with a medical insurance policy issued on the individual market. Accordingly, it will not be possible for an employer who does not sponsor a group medical plan to continue to make contributions to an HRA for the purpose of reimbursing individual medical insurance premiums for active employees. Such an HRA will not meet any of the exemptions described above. An employer may freeze an HRA (as described above) that has been used to purchase individual medical insurance policies, and participants may be allowed to spend down their account balances (including on insurance premiums), but no new contributions should be made.
Note: If an HRA is exempt from the ACA, the HRA will be able to reimburse premiums of individual medical insurance policies unless the HRA is a limited scope HRA or an HRA that is integrated with a group medical plan that does not provide at least 60 percent minimum value.
Other Types of Individual Policy Arrangements
According to the regulatory guidance, other individual policy arrangements that qualify as “employer payment plans” are treated the same as HRAs for purposes of ACA compliance. These plans cannot be integrated with the underlying individual medical insurance policy, and as a result must comply with the ACA mandates on their own or will be out of compliance.
The guidance does not specifically define “employer payment plans.” One possible type of employer payment plan is an arrangement by which employees are able to purchase individual insurance policies with pre-tax salary reduction contributions through an employer’s cafeteria plan. Although the regulatory guidance did not specifically prohibit the use of cafeteria plans to purchase individual medical insurance policies, many people have concluded that the use of pre-tax funding to purchase individual medical insurance policies creates an employer payment plan that will not satisfy the ACA mandates. Employers that allow employees to purchase individual medical insurance policies through a Section 125 plan should speak with qualified benefits counsel regarding the risks associates with such a practice.
One type of individual policy arrangement that can be used in 2014 and beyond is an after-tax arrangement. The regulatory guidance indicated that employers may sponsor an arrangement for the purchase of individual medical insurance policies provided that employees are offered the choice between cash and an after-tax amount to be applied toward health coverage, and the arrangement satisfies the DOL’s voluntary plan safe harbor.
Exempt Health FSAs
In general, any group health plan that qualifies as an excepted benefit under the HIPAA portability rules is not subject to the ACA mandates that apply to group health plans. Accordingly, starting with the 2014 plan year, an employer must ensure that its health FSA is a HIPAA excepted benefit. There are two types of health FSAs that qualify as HIPAA excepted benefits:
- Health FSAs that satisfy the following conditions: the participants of the health FSA are eligible for coverage under a group health plan sponsored by the employer that is not a HIPAA excepted benefit (e.g., a group medical plan); and the maximum benefit available to any participant under the plan for a plan year does not exceed the greater of twice the participant’s salary reduction contribution to the plan, or the participant’s salary reduction contribution to the plan plus $500. Note, for this purpose, salary reduction contributions generally include employer contributions to a cafeteria plan that may be cashed out by participants.
Note that, in light of the foregoing, employers who either do not sponsor a group health plan or make significant employer contributions to their health FSAs likely will need to make significant changes to the plan for 2014.
- Health FSAs that reimburse only dental and vision expenses. A group health plan that provides only dental and vision benefits and is not an integral part of a group medical plan is an excepted benefit under HIPAA. Accordingly, if eligible expenses under the health FSA are limited to dental and vision expenses, the health FSA can be an HIPAA excepted benefit even if the participants are not eligible for group medical coverage through the employer and/or the employer’s contribution to the plan is too large to be an excepted health FSA as described above.
For additional information contact your Eide Bailly service provider or Eide Bailly’s Health Care Reform team.