New Requirements Affect HRAs, FSAs and Employer Payment Plans Beginning in 2014

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By Taylor Wedge French, Esq., James P. McElligott
Jr., Esq., and Larry R. Goldstein, Esq.
 

McGuireWoods LLP, Charlotte, NC, Richmond, VA, and Chicago, IL,
respectively

In this article, we discuss the guidance issued in September
2013 by the Internal Revenue Service (IRS) in Notice 2013-54 and by
the Department of Labor (DOL) in Technical Release 2013-03
(referred to collectively as the Guidance) under the Patient
Protection and Affordable Care Act and its companion statute, the
Health Care and Education Reconciliation Act of 2010 (referred to
collectively as the Act). As explained below:

  •   Employers will have to review their health reimbursement
    arrangements (HRAs) and health flexible spending accounts (Health
    FSAs) to determine whether these arrangements comply with the
    Guidance for plan years beginning on or after Jan. 1, 2014.
  •   Employers maintaining employer payment plans will have to
    eliminate these plans for plan years beginning on or after Jan. 1,
    2014, in order to comply with the Guidance. The term "employer
    payment plan," as used in the Guidance, is an arrangement whereby
    the employer either reimburses an employee's substantiated premiums for non-employer-sponsored hospital and medical insurance or pays such premiums directly to the insurance company; in either case, under Rev. Rul. 61-146 such amounts are excluded from the employee's gross income under §106 of the Internal Revenue Code (Code). This term does not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage.

Basic Requirements of the Guidance  

Effective with the plan year beginning on or after Jan. 1, 2014,
HRAs, Health FSAs and employer payment plans will in general be
considered group health plans, subject to the Act's "market
reforms," including:

  •   The requirement that a group health plan may not
    establish any annual dollar limit on "essential health
    benefits."
  •   The requirement that non-grandfathered group health plans
    provide certain preventive services without any cost-sharing
    requirements.

For violations of any of these market reforms, employers must
report and pay excise taxes of $100 per day per each affected
individual under Code §4980D.

For plan years on or after Jan. 1, 2014, the Guidance
establishes the following new requirements for HRAs, Health FSAs
and employer payment plans:

  •   Each such arrangement or plan must either (i) be
    integrated with a group health plan or (ii) provide only "excepted
    benefits" under the Act (such as retiree-only benefits or coverage
    for dental and vision that are not an integral part of a group
    health plan).
  •   Because these arrangements and plans are considered group
    health plans under the Act, they are treated as "minimum essential
    coverage" for employees (unless coverage consists only of excepted
    benefits) and thus prevent covered employees from obtaining premium
    subsidies for coverage purchased on the insurance exchanges
    established under the Act.
  •   A Health FSA will be considered to provide only excepted
    benefits if the employer also makes available group health plan
    coverage that is not limited to excepted benefits and the Health
    FSA is structured so that the maximum benefit payable to any
    participant cannot exceed the greater of two times the
    participant's salary reduction election for the Health FSA for the
    year or $500 plus the amount of participant's salary reduction
    election.
  •   The Act's annual dollar limit prohibition exempts Health
    FSAs that are offered through a Code §125 cafeteria plan and thus
    subject to the separate annual limitation of Code §125(i), which
    limits the amount of salary reduction to $2,500 (indexed annually
    for plan years beginning after Dec. 31, 2013).
  •   Stand-alone HRAs limited to retirees are not subject to
    the Act's market reforms but are still considered "minimum
    essential coverage" so that covered retirees will not be eligible
    for premium tax credits for insurance coverage purchased on one of
    the exchanges.

When Is an HRA Integrated With Another Group Health
Plan?
 

Generally speaking, a traditional stand-alone HRA for employees
cannot comply with the Act's requirements and can no longer be used
by employers to pay for an employee's individually purchased health
insurance premiums.

The IRS and DOL have confirmed that an HRA may comply with the
Act if it is integrated with an Act-compliant group health plan
(but may not be integrated with individual market health
insurance). Nonintegrated HRAs that do not provide only excepted
benefits must be spent down or terminated.

An HRA will be treated as integrated with a group health plan if
the HRA meets one of the two tests described below, depending on
whether the HRA provides minimum value under the Act. A group
health plan provides "minimum value" under the Act if its share of
the total allowed costs of benefits under the plan is at least 60%
of such costs. Under either test, the Guidance permits the HRA and
the group health plan to have different sponsors, such as group
health coverage offered by an individual's employer and his or her
spouse's employer. Both tests also require that an employee be able
to "opt out" of the HRA so that the employee would be able to claim
a premium tax credit for coverage purchased under an exchange. In
general, an HRA integrated with a group health plan that provides
minimum value may reimburse for a broader set of expenses than a
plan that is not so integrated.

Integration of HRA With Group Health Plan That Provides
Minimum Value
 

In order for an HRA to be integrated with a group health plan
that provides minimum value:

  •   The employer must offer a group health plan (other than
    the HRA) that does not consist solely of excepted benefits.
  •   The employee in the HRA must be enrolled in a group
    health plan providing minimum value (whether or not sponsored by
    his or her employer).
  •   The HRA may be available only to employees who are
    enrolled in a group health plan providing minimum value.
  •   The HRA must give the employee an election to opt out and
    waive future reimbursements at least annually and upon termination
    of employment. Where the above requirements are met, the HRA may
    reimburse the same type of expenses as before the Act's
    requirements took effect.

Example: Employer "A" sponsors a group
health plan that provides minimum value and an HRA for its
employees. The HRA is available only to A's employees who are
either enrolled in its group health plan or in another non-HRA,
minimum-value group health plan through a family member. Under the
HRA, an employee may permanently opt out of and waive future
reimbursements from the HRA, both upon termination of employment
and at least annually. "B," an employee of A, enrolls in a non-HRA,
minimum-value group health plan sponsored by B's spouse's employer,
"C," and attests to A that he is covered by C's plan and that such
plan provides minimum value. In these circumstances, the HRA is
integrated with C's plan.

Integration With a Group Health Plan That Does Not Provide
Minimum Value
 

In order for an HRA to be integrated with a group health plan
that does not provide minimum value:

  •   The employer's group health plan (other than the HRA)
    must not consist of only excepted benefits.
  •   The employee in the HRA must be enrolled in a group
    health plan that does not consist of only excepted benefits
    (whether or not sponsored by his or her employer).
  •   The HRA must limit reimbursement to one or more of
    copayments, coinsurance, deductibles and premiums under the non-HRA
    group coverage or for medical care other than essential health
    benefits.
  •   The HRA must give the employee an election to opt out of
    and waive future reimbursements at least annually and upon
    termination of employment.

Example : Employer "D" sponsors a group
health plan and an HRA available only to employees who are either
enrolled in its group health plan or in a non-HRA group health plan
through a family member. The HRA is limited to reimbursement of
copayments, coinsurance, deductibles and premiums in the integrated
health plan as well as medical care that does not constitute
essential health benefits. An employee may opt out of and waive
future reimbursements from the HRA both upon termination of
employment and at least annually. Employee "E" enrolls in a non-HRA
group health plan sponsored by E's spouse's employer, "F," and
attests to D that he is covered by F's plan and that the expenses
for which E seeks reimbursement from the HRA are copayments,
coinsurance, deductibles or premiums in F's health plan or medical
care that does not constitute essential health benefits. In these
circumstances, the HRA is integrated with F's plan.

The Guidance confirms that participants in integrated HRAs who
lose coverage under the underlying group health plan may continue
to spend down amounts remaining in their accounts. In addition, an
HRA integrated with an employer's group health plan is grouped
together with the underlying plan for purposes of determining
whether the plan satisfies either the Act's minimum value
requirement or the Act's affordability requirement but not both.
HRAs integrated with another employer's group health plan cannot
count toward satisfying either of these requirements.

New Design Requirements for Health FSAs  

Effective with plan years beginning on or after Jan. 1, 2014,
Health FSAs must meet one of the following designs: 

  •   The Health FSA provides only excepted benefits.

        o Dental and vision benefits that are not an integral part of a
        group health plan are excepted benefits.

        o A Health FSA is deemed to provide only excepted benefits if
        the employer also makes available group health plan coverage that
        is not limited to excepted benefits and the Health FSA is
        structured so that the maximum benefit payable to any participant
        cannot exceed two times the participant's salary reduction election
        for the Health FSA for the year (or, if greater, cannot exceed $500
        plus the amount of participant's salary reduction election).

  •   The Health FSA is offered through a Code §125 cafeteria
    plan and is thus subject to the separate annual limitation of Code
    §125(i), which limits the amount of salary reduction to $2,500
    (indexed annually for plan years beginning after Dec. 31,
    2013).

Employer Payment Plans Are Not Viable for Plan Years on
or After Jan. 1, 2014
 

Though not as common as HRAs and Health FSAs, some employers
have reimbursed employees on a pretax basis for non-employer health
coverage. Unfortunately, in the Guidance the IRS and DOL have
foreclosed these arrangements by determining that employer payment
plans are considered group health plans under the Act.

As a group health plan, an employer payment plan would need to
comply with all of the Act's market reforms, including provision of
preventive care services and prohibition on annual and lifetime
dollar limitations. By definition, these plans cannot meet these
requirements and will subject the employer to potential excise
taxes if continued for plan years beginning on or after Jan. 1,
2014.

Consequently, employers will not be able to reimburse employees
on a pretax basis for premiums to purchase coverage under an
exchange established under the Act.

For more information, in the Tax Management Portfolios, see
Cowart, 389 T.M.
, Medical Plans - COBRA, HIPAA, HRAs, HSAs and
Disability,  and in Tax Practice Series, see ¶5920, Health
and Disability Plans.

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