IRS Releases New Guidance on Applicability of ACA Market Reforms to HRAs and Other Group Health Plans
Joshua L. Cannon
On September 13, 2013, the IRS released Notice 2013-54 (the “Notice”), which provides additional guidance on the application of the market reform provisions of the Affordable Care Act (“ACA”) to health reimbursement arrangements (“HRAs”), employer payment plans, and health flexible spending arrangements (“health FSAs”). This new guidance is useful in that it continues to clarify under what conditions employers will be able to offer these plan designs. In particular, the Notice focuses on the circumstances in which HRAs, employer payment plans, and health FSAs must comply with the ACA’s “no annual limit” and “no cost preventative services” rules (together, the “Market Reforms”).
ACA Market Reforms
The ACA imposes a number of reforms on health insurance companies, and to a lesser degree, group health plans (which, by definition, includes HRAs, employer payment plans, and health FSAs). These reforms are found in the Public Health Service Act, but are also incorporated by reference into the Internal Revenue Code and ERISA. The reforms are varied and often significant, and include the prohibition on pre-existing condition exclusions, the modified community rating regime, and new anti-discrimination rules.
As noted above, the Notice focuses on the “no annual limit” rule and the “no cost preventative services” rule. The “no annual limit” prohibits health insurance issuers and group health plans from imposing an annual limit on the amount of benefits available for the ACA’s list of “essential health benefits.” As for the “no cost preventative services” rule, health insurance companies and group health plans must provide certain preventative care, such as annual physicals and contraception, without any cost-sharing.
Impact on HRAs
HRAs are employer-funded plans which reimburse employees for Code section 213(d) medical expenses up to a specified maximum amount.
In the Notice, the IRS maintains that whether an HRA needs to comply with the Market Reforms is dependent upon whether the HRA is considered to be “integrated” with major medical coverage offered by an employer, i.e., employer coverage that covers the ACA’s essential health benefits package with no annual limits. The Notice reiterates and expands upon the IRS’s position taken in earlier guidance released in January 2013: an integrated HRA does not need to separately comply with the Market Reforms, while a “stand-alone” HRA will have to meet these Reforms. A stand-alone HRA is one that is offered by the employer, but not in connection with a major medical group health plan, or in connection with health insurance purchased on the individual market.
The Notice sets forth two tests for whether an HRA will be integrated with other employer coverage. Under the first method, an HRA is integrated with other coverage if (1) the employer offers a group health plan (other than the HRA) that does not consist solely of excepted benefits; (2) the employee receiving the HRA actually enrolls in such a group health plan (though such plan does not need to be sponsored by the employer; so, for example, enrollment in a group health plan of a spouse’s employer would work); (3) the HRA is available only to employees who are enrolled in the non-HRA group coverage; (4) the HRA is limited to reimbursement of copayments, coinsurance, deductibles, and/or premiums under the non-HRA group coverage, as well as medical care that does not constitute essential health benefits; and (5) the HRA provides employees with an opportunity to permanently opt out and waive future reimbursements at least annually.
The second integration test is similar to the first test, but the HRA does not need to be limited to reimbursement of copayments, deductibles, etc., but as a result, the employer’s non-HRA group health coverage must provide “minimum value.”
Under the Notice, these tests are the only ways that the IRS will consider an HRA to be integrated with major medical coverage for purposes of complying with the Market Reforms. As a result, the usefulness of stand-alone HRAs is likely to be severely limited.
Lastly, the Notice provides some clarification regarding HRAs which also meet the definition of a health FSA. This “dual” status is important because health FSAs are exempt from the “no annual limit” rule. After the IRS issued guidance on the “no annual limit” rule in January 2013, several commentators wondered whether such HRAs were also exempt from the rule. In the Notice, the IRS clearly debunks this notion. First, the Notice indicates that the statement in the original notice regarding HRAs (Notice 2002-45) which suggested that HRAs may also be health FSAs in certain circumstances was intended to clarify the rules limiting the payment of long-term care expenses by health FSAs. The IRS also notes that, even if an HRA were treated as a health FSA, if the HRA does not provide only excepted benefits, then it would still need to comply with the “no cost preventative services” rule (which it is unlikely to do). Finally, the IRS clarifies that the exemption for health FSAs from the “no annual limit” rule is limited to those health FSAs offered through a cafeteria plan, which are subject to the $2,500 limitation on elective deferrals to such accounts.
Impact on Employer Payment Plans
An employer payment plan is a plan under which the employer reimburses the employee for substantiated health insurance premiums purchased on the individual market. Alternatively, the plan may provide that the employer may pay the premiums directly to the employee’s insurance company.
According to the Notice, such a plan fails to comply with the Market Reforms because it cannot be integrated with the individual market coverage purchased by the employee. Therefore, the plan is considered to impose an annual limit up to the cost of the coverage and does not provide preventative services without cost-sharing. Given the IRS’s apparent position, it is not clear how these plans could be effectively used going forward, since the IRS treats such plans as imposing an annual limit, even if the employer agrees to reimburse 100% of the employee’s premium, regardless of cost.
Impact on Health FSAs
Health FSAs are accounts used to reimburse employees and their families for medical expenses and are typically funded via elective deferrals to a cafeteria plan. Health FSAs also meet the definition of group health plans, and thus will need to comply with the Market Reforms. However, health FSAs may be structured to provide only excepted benefits, in which case, they will not need to comply with these rules. Excepted benefits consist of a relatively narrow category of coverages, such as limited scope dental and vision and coverage for a specific disease. In order for a health FSA to provide only excepted benefits, the health FSA must be offered in connection with major medical coverage and provide a maximum benefit no greater than two times a participant’s salary reduction election for the health FSA for that plan year (or, if greater, $500 plus the amount of the participant’s salary reduction election).
Impact on Premium Tax Credits and the Employer Mandate
Significantly, the Notice expressly acknowledges that “coverage provided through Code § 125 [cafeteria] plans, employer payment plans, health FSAs, and HRAs are eligible employer-sponsored plans and, therefore, are minimum essential coverage, unless the coverage consists of excepted benefits.” This acknowledgement is noteworthy because whether an employee is offered and/or participates in an eligible employer-sponsored plan has an impact on both the employee’s eligibility for a premium tax credit for coverage purchased through the Exchanges and the employer’s liability under ACA’s employer mandate provisions.
The Notice also provides guidance on how an integrated HRA impacts the determination of whether the employer’s coverage is affordable and provides minimum value for purposes of the premium tax credit. Depending on how the HRA is structured, it will have an impact on the coverage’s affordability or minimum value, but not both.
Certainly, the Notice is useful in that it provides guidance on some lingering issues as to how the ACA’s various rules impact popular employee health benefit plan designs. Nonetheless, this guidance leaves something to be desired in terms of providing a framework in which employers will be able to offer these plans other than in connection with major medical coverage.
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