Labor and Treasury/IRS Opine on Integrated and Non-Integrated HRAs, Medical FSAs, and EAPs

On September 13, 2013, the Department of Labor¹ and the Treasury Department/IRS² (the “Departments”) issued coordinated guidance on a handful of items relating to the implementation of the Affordable Care Act (the “Act”), including:

1. Application of the Act’s insurance market reforms to health reimbursement arrangements (HRAs) and certain other health care arrangements;
2. Application of the Act’s insurance market reforms to certain health Flexible Spending Accounts (health FSAs); and
3. Treatment of employee assistance programs or EAPs as excepted benefits.

The guidance generally applies for all plan years beginning on and after January 1, 2014, but it may be applied for prior periods.

With respect to HRAs and medical FSAs, the guidance addresses the following provisions of the Act —

• Public Health Service Act § 2711, which generally bars group health plans from imposing annual or lifetime limits on the dollar amount of benefits (the “annual dollar limit prohibition”); and
• Public Health Service Act § 2713, which requires non-grandfathered group health plans to provide preventive services without imposing any cost-sharing requirements (the “preventative services requirement”).

For purposes of regulating HRAs and medical FSAs the Departments introduce and define a new term, “employer payment plan,” to mean and include 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 such as … arrangements under which the employer uses its funds to directly pay the premium for an individual health insurance policy covering the employee ….”

An example of an employer payment plan is an arrangement under which an employer reimburses an employee’s substantiated premiums for non-employer sponsored medical insurance.³ An employer payment plan does not, however, include “an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage.” (Emphasis added). While not expressly stated in the guidance, the clear implication of this statement is that the payment of individual market premiums with pre-tax amounts under a section 125 cafeteria plan would constitute an employer payment plan. For tax (but not ERISA) purposes, amounts deducted from employees’ pay under a cafeteria plan election are treated as employer contributions. This is so because employee deferrals are made under a salary reduction agreement: the employee agrees to a reduction in salary in a specified amount and the employer agrees to contribute a like amount toward the purchase of qualified benefits (medical coverage, in this instance).

The effect of the guidance is to make it impossible for any employer payment plan other than a plan that provides only excepted benefits (discussed below) to provide for the purchase of health coverage in the individual market.

The guidance separately establishes a rule under which certain EAPs are treated as excepted benefits, thereby ensuring that they do not constitute minimum essential coverage. This rule was needed to permit low- and moderate-income employees to be covered under an EAP without being rendered ineligible for premium tax credits otherwise available to them through public exchanges. The Departments remind us on this score that if an individual chooses to enroll in employer-sponsored minimum essential coverage — i.e., coverage the is not limited to excepted benefits — the individual is not eligible for a premium tax credit regardless of whether the employer-sponsored coverage is affordable or provides minimum value.

The guidance is organized as a set of 12 sets of questions and answers covering the following topics.

Health Reimbursement Arrangements (HRAs) (including HRAs integrated with a group health plan)

An HRA is an arrangement that is funded solely by an employer and that reimburses an employee for medical care expenses incurred by the employee, or his spouse, dependents, and any children who, as of the end of the taxable year, have not attained age 27, up to a maximum dollar amount for a coverage period. Reimbursements are excludable from the employee’s income. Amounts that remain at the end of the year generally can be used to reimburse expenses incurred in later years. HRAs are often used in conjunction with fully-insured group health plans to help employees cover uninsured out-of-pocked costs (e.g., co-pays, deductibles, coinsurance and other cost sharing amounts). When used in this fashion, they are sometimes referred to colloquially as “medical expense reimbursement plans” or “MERPs.”

HRAs are not, however, limited to the payment of unreimbursed medical expenses. HRA amounts can also be applied to pay health insurance premiums. It is this aspect of HRAs that has been seized upon by proponents of “consumer-driven health care” (or “CDHC”) to enable a defined contribution model for employer-based health insurance. Under one CDHC approach, the employer provides a sum of money, which employees may apply to the purchase of health insurance coverage in the individual market without restriction and without any further employer involvement. The guidance unequivocally bans the use of HRAs to enable CDHC arrangements of this sort. According to the Departments, these arrangements run afoul of both the annual dollar limit prohibition and the preventative services requirement.

The Departments first addressed the issue of the coordination of HRAs with other health coverage in interim final regulations issued in 2010 implementing the annual dollar limit prohibition. According to the Departments, if an HRA is integrated with other coverage as part of a group health plan and the other coverage alone would comply with the annual dollar limit prohibition, then the HRA will not fail to comply. An HRA that was not integrated in this manner, however, would not comply. This latter arrangement is referred to as a “standalone” HRA.

On January 24, 2013, the Departments reaffirmed and further clarified their stance on integrated and standalone HRAs, saying, “an HRA is not integrated with primary health coverage offered by an employer unless, under the terms of the HRA, the HRA is available only to employees who are covered by primary group health plan coverage that is provided by the employer and that meets the annual dollar limit prohibition.”

The guidance establishes two, alternative rules on what it means for an HRA to be “integrated.” One applies where the HRA is paired with a plan that fails to provide minimum value; the other where the plan does provide minimum value. (For an explanation of what constitutes minimum value, please see our client advisory of May 16, 2013 here). Under either method, integration does not require that the HRA and the coverage with which it is integrated share the same plan sponsor. For example, an employee of an employer that offers an HRA could apply HRA amounts to the payment of employee premiums under the group health plan of his or her spouse who works for an unrelated employer.

HRA / Non-Minimum Value Plan

An HRA is integrated with a group health plan that fails to provide minimum value if:

1. The employer offers a group health plan (other than the HRA) to the employee that does not consist solely of excepted benefits;
2. The employee receiving the HRA is actually enrolled in a group health plan (other than the HRA) that does not consist solely of excepted benefits, regardless of whether the employer sponsors the plan (non-HRA group coverage);
3. The HRA is available only to employees who are enrolled in non-HRA group coverage, regardless of whether the employer sponsors the non-HRA group coverage;
4. The HRA is limited to reimbursement of one or more of the following: co-payments, co-insurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care that does not constitute essential health benefits; and
5. Under the terms of the HRA, an 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 permitted to permanently opt out of and waive future reimbursements from the HRA.

The guidance advises that “the opt-out feature is required because the benefits provided by the HRA generally will constitute minimum essential coverage … and will therefore preclude the individual from claiming” a premium tax credit.

HRA / Minimum Value Plan

An HRA is integrated with a group health plan that provides minimum value if:

1. The employer offers a group health plan to the employee that provides minimum value;
2. The employee receiving the HRA is actually enrolled in a group health plan that provides minimum value, regardless of whether the employer sponsors the plan (non-HRA MV group coverage);
3. The HRA is available only to employees who are actually enrolled in non-HRA MV group coverage, regardless of whether the employer sponsors the non-HRA MV group coverage; and
4. Under the terms of the HRA, an 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 permitted to permanently opt out of and waive future reimbursements from the HRA.

The two integration methods differ in their treatment of coverage of medical care that constitutes essential health benefits. Under the first method described above (i.e., where an HRA is paired with a group health plan that fails to provide minimum value), HRA amounts cannot be expended on essential health benefits. To provide otherwise would effectively place an annual limit on an essential health benefit. While it is still possible for an HRA that is integrated with a self-funded or large fully insured group health plan to effectively place an annual limit on essential health benefits, the guidance nevertheless deems such a plan compliant with the annual dollar limit prohibition where the plan provides minimum value.

The guidance provides some helpful rules that apply where an employee ceases to be covered under the group health plan that is integrated with the HRA. Unused amounts may be used to reimburse medical expenses in accordance with the terms of the HRA after an employee ceases to be covered by other integrated group health plan coverage without causing the HRA to fail to comply with the Act’s market reforms.

Retiree Coverage

The Act’s insurance market reforms do not apply to an HRA that has “fewer than two participants who are current employees on the first day of the plan year” — e.g., a retiree-only HRA. Thus, a standalone HRA that provides retiree-only coverage is permitted. Such an arrangement constitutes an eligible employer-sponsored plan, however. It would therefore constitute minimum essential coverage for any month in which funds remain available in the HRA (including amounts retained in the HRA during periods of time after the employer has ceased making contributions). A retiree covered by a standalone HRA for any month will not be eligible for a premium tax credit for that month.

Impact on Minimum Value

The guidance furnishes rules on the impact of integrated HRA coverage on the determination of minimum value. Generally, amounts newly made available for the current plan year under the HRA may be considered in determining whether the arrangement satisfies either the affordability requirement or the minimum value requirement, but not both.

• Amounts newly made available for the current plan year under the HRA that an employee may use only to reduce cost-sharing for covered medical expenses under the primary employer-sponsored plan count only toward the minimum value requirement; and
• Amounts newly made available for the current plan year under the HRA that an employee may use to pay premiums or to pay both premiums and cost-sharing under the primary employer-sponsored plan count only toward the affordability requirement.

These rules apply only where the integrated HRA and the primary group health plan are maintained by the same employer. Amounts newly made available for the current plan year under an HRA count neither toward affordability nor minimum value where primary coverage is offered by another employer.

2013-2014 Transition Rule

Whether or not an HRA is integrated with other group health plan coverage, unused amounts credited before January 1, 2014 consisting of amounts credited before January 1, 2013, and amounts that are credited in 2013 under the terms of an HRA as in effect on January 1, 2013, may be used after December 31, 2013 to reimburse medical expenses in accordance with those terms without causing the HRA to fail to comply. If the HRA terms in effect on January 1, 2013 did not prescribe a set amount or amounts to be credited during 2013 or the timing for crediting such amounts, then the amounts credited may not exceed those credited for 2012 and may not be credited at a faster rate than the rate that applied during 2012.

Health Flexible Spending Arrangements

A health FSA is a benefit designed to reimburse employees for medical care expenses incurred by the employee, or the employee’s spouse, and dependents. Contributions to a health FSA do not result in gross income to the employee. While health FSAs are generally funded by salary reduction, employers may provide additional health FSA benefits in excess of the salary reduction amount. For plan years beginning after December 31, 2012, the amount of the salary reduction is limited to $2,500 (indexed).

The Act’s insurance market reforms, including the annual dollar limit prohibition and the preventative services requirement, do not apply to a group health plan that provides only excepted benefits. Excepted benefits include, among other things, accident-only coverage, disability income, certain limited-scope dental and vision benefits, certain long-term care benefits, and certain health FSAs. A health FSA provides only excepted benefits if:

• Other (non-excepted benefit) group health plan coverage is made available to employees by the employer; and
• The arrangement is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the arrangement for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election).

A health FSA that does not qualify as an excepted benefit is generally subject to the Act's market reforms, including the preventive services requirements. The Departments had previously ruled that a health FSA is not subject to the annual dollar limit prohibition, irrespective of whether the health FSA provides only excepted benefits. Because a health FSA that is not an excepted benefit is not integrated with a group health plan, it will fail to meet the preventive services requirements.

The 2010 interim final rules implementing the annual dollar limit prohibition refer to prior law and guidance under which an HRA was deemed to be a health FSA where:

“[T]he maximum amount of reimbursement which is reasonably available to a participant under an HRA is not substantially in excess of the value of coverage under the HRA.”

While the meaning of the phrases “maximum amount of reimbursement which is reasonably available to a participant” and “the value of coverage under the HRA” are less than clear, some vendors used this rule to claim that their HRA was really a health FSA that was not subject to the Act’s annual dollar limit prohibition or preventative services requirement. The guidance rejects this claim, pointing out this prior law rule “was intended to clarify the rules limiting the payment of long-term care expenses by health FSAs.” As a consequence, an HRA cannot be deemed to be a health FSA in order to avoid the application of the Act’s insurance market reforms. This rule is consistent with the common-sense view of what constitutes an HRA since an HRA is paid for solely by the employer and not provided pursuant to salary reduction election.

The guidance also indicates that the annual dollar limit prohibition exemption for health FSAs applies only to a health FSA that is offered through a cafeteria plan. Thus, a health FSA that is not part of a cafeteria plan has no basis to claim that it is not subject to that requirement. The Departments announced that they intend to amend the annual dollar limit prohibition regulations to conform to the position taken in the guidance.

The table set out below summarizes the rules governing employer payment plans.

Employee Assistance Plans as Excepted Benefits

The Departments announced their intent to amend the regulations governing excepted benefit to provide that benefits under an EAP are considered to be excepted benefits, but only if the program does not provide “significant benefits in the nature of medical care or treatment.” Pending actual rulemaking the Departments also announced that they will apply this standard.

Employer Payment Plan Type	Subject to Annual dollar limit prohibition?	Subject to preventative services requirements?	Regulatory Status
Standalone HRA (i.e., reimburses individual market premiums)	Yes	Yes	Fails to satisfy annual dollar limit prohibition and preventative services requirement
Standalone retiree HRA	No	No	A standalone retiree HRA provides minimum essential coverage (which renders participant ineligible for premium tax credits)
Excepted benefit health FSA	No	No	Not subject to the annual dollar limit prohibition and preventative services requirement, and does not provide minimum essential coverage (participant remains eligible for premium tax credits)
Non-excepted benefit health FSA funded under a 125 cafeteria plan	No	Yes	Fails to satisfy the preventative services requirement
Non-excepted benefit health FSA not funded under a 125 cafeteria plan	Not yet determined	Yes	Fails to satisfy the preventative services requirement; may also fail the annual dollar limit prohibition
After-tax employee contributions which participant may use to purchase individual market coverage	No	No	An arrangement under which after-tax employee contributions may be used to purchase individual market coverage is not an employer payment plan if structured as an employer payroll practice
Pre-tax employee contributions which participant may use to purchase individual market coverage	Yes	Yes	Fails to satisfy annual dollar limit prohibition and preventative services requirement

 

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Endnotes

¹ DOL Technical Release 2013-03 (Sept. 13, 2013), available at: http://www.dol.gov/ebsa/newsroom/tr13-03.html.

² IRS Notice 2013-54, available at: http://www.irs.gov/pub/irs-drop/n-13-54.pdf. The Department of Health and Human Services is expected to issue guidance with respect to the application of the laws under its jurisdiction consistent with Tech. Rel. 2013-03 and Notice 2013-54.

³ Rev. Rul. 61-146, 1961-2 C.B. 25.

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