Will your HRA or FSA Survive the Affordable Care Act? Answering Your Questions About Technical Release 2013-03

Q&A: New Guidance on Defined Contribution Health Arrangements

The following questions and answers were originally prepared by Crowell & Moring, LLP on behalf of the American Benefits Council, to highlight some of the more significant aspects of IRS Notice 2013-54 and Department of Labor Technical Release 2013-03 (the "New Guidance") for employers and plan administrators. Our detailed analysis of the New Guidance follows below.

Q1: Can an employer sponsor a stand-alone HRA for its active employees?

A1: No. The New Guidance reiterates past guidance from the Agencies in providing that an employer cannot sponsor an HRA for its active employees, unless the HRA is "integrated" with an underlying major medical plan that does not consist solely of what are called HIPAA-excepted benefits. (HIPAA-excepted benefits are certain categories of benefits that are not subject to HIPAA's portability requirements-- for example, dental or vision benefits that are offered under a separate insurance policy or contract, or are not considered an "integral part of the plan" under law.) Thus, an HRA must be only available to employees who are enrolled in qualifying employer-sponsored major medical coverage- otherwise, it will violate PPACA's market reforms.

Q2: Can an employer sponsor a stand-alone HRA for its retirees?

A2: Yes, so long as the stand-alone HRA is offered as a retiree-only plan. Per prior Agency guidance, plans that cover only retirees are not subject to PPACA's market reforms. Thus, an employer may offer a stand-alone HRA to its retirees as part of a retiree-only plan. Employers should keep in mind that the HRA will constitute "minimum essential coverage" under PPACA. Such an arrangement will allow retirees who have not yet reached age 65 to use the coverage to satisfy the individual mandate under PPACA, but those retirees will not be eligible to receive any federal premium subsidies (and cost-sharing reductions) if they purchase individual insurance on the Exchanges.

Q3: Can an employer allow employees to pay for individual insurance purchased from a state or federally-facilitated Exchange on a pre-tax basis through the employer's cafeteria plan?

A3: No. PPACA, as well as the New Guidance, makes clear that an employee cannot pay for Exchange-based individual insurance through an employer's Internal Revenue Code (Code) Section 125 cafeteria plan.

Q4: Can an employer allow employees to utilize a cafeteria plan to pay on a pre-tax basis for individual insurance purchased outside of a state or federally-facilitated Exchange?

A4: It is not entirely clear, but we believe there may be a good argument it can. As noted above, the New Guidance makes clear that an employee cannot access an employer's cafeteria plan to pay for Exchange-based individual insurance. What is less clear is whether an employee may be permitted to pay on a pre-tax basis through a cafeteria plan for individual insurance purchased outside of an Exchange. The basis for the uncertainty stems from the New Guidance which, as discussed below, precludes the use of arrangements called "employer payment plans." While we hope that the Agencies will clarify that these type of arrangements do not include cafeteria plans if used by employees to pay for individual insurance purchased outside of an Exchange, we understand the Agencies are considering this issue.  

Q5: Can an employer pay on a tax-favored basis (either directly or through reimbursement) for some or all of an employee's cost of individual insurance where purchased from an Exchange? Or outside an Exchange?

A5: Based on the New Guidance, the answer appears to be "no." As noted above, the New Guidance confirms that stand-alone HRAs are not permitted. Thus, HRAs, which up until now have been a commonly-used tax-advantaged vehicle for reimbursing an employee's costs for qualified medical expenses (including medical insurance premiums) generally can no longer be used for this purpose.

Additionally, the New Guidance provides that "employer payment plans" also may not be utilized. The New Guidance defines an employer payment plan to be 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, or arrangements under which the employer uses its funds to directly pay the premium for an individual health insurance policy covering the employee.

In light of the New Guidance, it appears that an employer may not pay for an employee's individual insurance on a tax-favored basis – whether through direct payment or subsidy or through reimbursing an employee for his or her incurred individual insurance premium costs.

Q6: If an employer sponsors "minimum value" health coverage for its employees, what does it need to do to ensure that its HRAs are integrated with group health coverage in order to meet the PPACA requirements?

A6: An employer can use one of two tests to determine if an HRA is properly integrated with group health coverage that provides "minimum value." The first test can only be used if the group health coverage provides "minimum value," and the following criteria must be satisfied:

• The employer must offer a group health plan to the employee that provides minimum value;

• The employee receiving the HRA must actually be enrolled in group health plan coverage that provides minimum value;
  
  
• The HRA must be available only to employees who are enrolled in minimum value group health plan coverage; and
  
  
• Under the terms of the HRA, the employee must be permitted, on an annual basis, to permanently opt out of and waive future reimbursements. In addition, upon termination, the employee must be permitted to permanently opt out of and waive future reimbursements, or all amounts in the HRA must be forfeited.

Alternatively, the arrangement can meet the requirements of the New Guidance if it satisfies the criteria described in the following Q&A (which can also be used for group health coverage that does not provide "minimum value").

Q7: If an employer sponsors major medical coverage for its employees, but it is not provide corresponding "minimum value" coverage, what does it need to do to ensure that its HRAs are integrated with group health coverage in order to meet the PPACA requirements?

A7: In order for the coverage that does not provide minimum value to be deemed integrated under the New Guidance, the following criteria must be satisfied:

• The employer must offer a group health plan to the employee that cannot consist solely of excepted benefits;

• The employee receiving the HRA must actually be enrolled in group health plan coverage that does not consist solely of excepted benefits. Note that the employee does not have to be enrolled in the employer's plan; for example, the employee could be enrolled in a group health plan maintained by the employer of the employee's spouse;

• The HRA must be available only to employees enrolled in non-HRA group coverage;

• The HRA is limited to one or more of the following categories of items for reimbursement: 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

• Under the terms of the HRA, the employee must be permitted, on an annual basis, to permanently opt out of and waive future reimbursements. In addition, upon termination, the employee must be permitted to permanently opt out of and waive future reimbursements, or all amounts in the HRA must be forfeited.

Q8: Can an employer have an HRA that is integrated with coverage consisting solely of HIPAA-excepted benefits?

A8. It is not entirely clear at this time. Under the New Guidance, an HRA generally cannot be integrated with a group health plan that provides only HIPAA-excepted benefits under the integration tests set forth above. However, some employers have considered establishing HRAs that would, by their terms, be able to only reimburse claims related to HIPAA-excepted benefits, and provide those HRAs in conjunction with a group health plan that only covers HIPAA-excepted benefits. It is not clear whether this arrangement would be considered HIPAA-excepted by the Agencies and therefore not subject to the market reforms. We expect further guidance may be forthcoming on this issue.  

Q9: What happens if an employer offers a stand-alone HRA – or an HRA that is not sufficiently integrated with qualifying major medical coverage?

A9: Depending on its specific terms, the HRA would be in violation of PPACA's market reforms, including possibly the prohibitions on the use of annual and lifetime dollar limits on essential health benefits (EHBs) and the requirement to provide "first-dollar" preventive care benefits. The penalties for violating each market reform are generally $100 per day, per affected individual.

One other thing to keep in mind is that the HRA will qualify as "minimum essential coverage" for any individual who enjoys coverage under the HRA. As such, the individual will be deemed to have satisfied his individual mandate obligation under the Code by reason of the HRA coverage (at least for any month in which he has such coverage). However, the individual (including an employee's spouse and/or dependents who indirectly enjoy coverage via the employee's HRA) will be ineligible for any federal subsidies offered through the Exchange (including premium tax credits and cost-sharing reductions). The HRA coverage may also limit an individual's ability to enroll in Exchange-based coverage more generally. 

Q10: What rules apply to non-integrated HRAs with existing account balances?

A10: The Agencies had previously signaled in guidance that they would be providing special rules for HRAs with respect to account balances existing as of January 1, 2014. Unfortunately, the New Guidance does not include such rules. Moreover, such rules, if issued, would appear to only extend to amounts credited under the terms of an HRA in effect as of January 1, 2013. In the absence of special transition rules, it appears that if existing account balances in non-integrated HRAs are available to employees next year, those HRAs could be found to violate the Act's market reforms (see above), which could result in material financial penalties accruing to the employer plan sponsor. Additionally, these HRAs would seem to constitute "minimum essential coverage" for any individual covered under the HRA (including an employee's spouse and/or dependents who indirectly enjoy coverage via the employee's HRA).

We understand the Agencies are considering issuing additional guidance regarding the treatment of such existing account balances.

Q11: Can an employer continue to sponsor a stand-alone health FSA for its employees?

A11. Yes, so long as the health FSA qualifies as HIPAA-excepted. A health FSA is considered to provide only excepted benefits if other group health plan coverage not limited to excepted benefits is made available for the year to employees by the employer, and the FSA 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). 

Q12: An employer sponsors an employee assistance program (EAP) for its employees. Can the EAP satisfy the individual mandate for those employees? Can participating in the EAP disqualify an employee from eligibility for federal premium subsidies related to the purchase of Exchange-based individual insurance?

A12: Maybe. The New Guidance provides that benefits under an EAP will be considered HIPAA-excepted benefits, and thus not minimum essential coverage and not subject to the market reforms, if the EAP does not provide significant benefits in the nature of medical care or treatment. Thus, an EAP that is deemed to not provide significant benefits in the nature of medical care or treatment will not constitute minimum essential coverage, and therefore being covered by such an EAP would not satisfy the individual mandate, nor preclude an employee from being eligible for premium subsidies on an Exchange. At least through 2014, employers may use a reasonable, good faith interpretation of whether an EAP provides "significant benefits in the nature of medical care or treatment."

Following is an article also prepared by Crowell & Moring, LLP on behalf of the American Benefits Council, that provides additional analysis regarding the New Guidance. If you have questions or would like more information, please contact the professional(s) listed at the end of the article, or your regular Crowell & Moring contact. 

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Agencies Issue Much-Anticipated Guidance Regarding PPACA Market Reforms and HRAs, FSAs, and EAPs

On September 13, 2013, the Internal Revenue Service (IRS) issued Notice 2013-54 and the Department of Labor (DOL) issued Technical Release 2013-03.¹ The two pieces of guidance (collectively, the "New Guidance") are substantially identical and address many previously unanswered questions regarding how market reform and other provisions of the Patient Protection and Affordable Care Act (PPACA) apply to health reimbursement arrangements (HRAs), including HRAs integrated with group health plans; health flexible spending arrangements (health FSAs); and employee assistance programs (EAPs).

In light of the New Guidance, employers should immediately review their plan offerings and benefit strategies for 2014 to ensure compliance.

Significant issues addressed in the New Guidance include the following:

• Affirmation that a stand-alone HRA cannot satisfy PPACA's market reform requirements, and therefore is generally not a viable option for providing employer-sponsored health coverage to active employees.
  
  
• However, an HRA that is integrated with a plan which meets PPACA's market reform requirements is PPACA-complaint.There are two prescriptive tests for determining whether an HRA is integrated for purposes of the New Guidance.
  
  
• Other types of tax-favored financing vehicles, such as employer payment plans under Rev. Rul. 61-146, are considered health plans and therefore cannot be PPACA-compliant on a stand-alone basis because they would violate the market reforms.

• A stand-alone retiree-only HRA will be considered an eligible employer-sponsored plan and minimum essential coverage, and, as a result, a pre-age 65 retiree covered by such an HRA will not be eligible for premium tax credits and cost-sharing reductions with respect to Exchange-based coverage. As discussed below, strategies may be available to employers to preserve HRA account balances for retirees, while ensuring a retiree's eligibility for the premium tax credits/cost-sharing reductions for a given calendar year.
  
  
• Benefits under an employee assistance program (EAP) will generally be considered HIPAA-excepted benefits and therefore not subject to PPACA's market reforms, provided that the EAP does not provide "significant benefits in the nature of medical care or treatment."

• Except for limited relief for non-calendar year plans in existence on September 13, 2013, an employee is not permitted to pay for individual Exchange-based insurance on a pre-tax basis through his or her employer's Internal Revenue Code Section 125 cafeteria plan.

• A health FSA that provides only excepted benefits is not subject to PPACA's market reforms.

Health Reimbursement Arrangements (HRAs)

An HRA is a plan funded solely by an employer that reimburses the medical expenses of an employee and certain dependents up to a maximum amount for a year, with unused amounts in the account available to reimburse medical expenses in future years. These reimbursements are generally excludable from the employee's income.

As part of PPACA's market reforms, plans and issuers are generally prohibited from imposing lifetime or annual limits on the dollar value of essential health benefits. In June 2010, the Departments of the Treasury, Labor, and Health and Human Services (collectively, the "Agencies") released interim final rules addressing the prohibition on lifetime and annual limits, and addressed HRAs in the preamble. The Agencies distinguished between HRAs that are "integrated" with other coverage as part of a group health plan and HRAs that are not integrated (also known as "stand-alone" HRAs), noting that "[w]hen HRAs are integrated with other coverage as part of a group health plan and the other coverage alone would comply with the [annual and lifetime limit requirements], the fact that benefits under the HRA by itself are limited does not violate [those rules] because the combined benefit satisfies the requirements." However, many questions remained regarding what constitutes adequate integration for purpose of this rule.

Additionally, some employers may have been considering eliminating their employer-sponsored group health plan coverage and establishing stand-alone HRAs for their employees, with the idea being that employees could use HRA dollars to purchase individual insurance on the Exchanges. However, on January 24, 2013, the Agencies released sub-regulatory guidance in the form of a Frequently Asked Question (FAQ)² and confirmed that an employer-sponsored stand-alone HRA could not be integrated with individual market coverage, or with an employer plan that provides coverage through individual policies. The FAQ also confirmed that, for an HRA to be considered an integrated HRA, the employee must be enrolled in primary health plan coverage (not just offered the coverage). It therefore became clear, based on these prior issuances, that a stand-alone HRA would violate the prohibition on annual and lifetime limits pursuant to PPACA (unless offered as part of a retiree-only HRA, as discussed below).

The New Guidance provides the following additional guidance regarding HRAs:

Generally, stand-alone HRAs offered by employers to their active employees cannot be PPACA-compliant.

In addition to reaffirming the prior guidance that stand-alone HRAs cannot meet the annual and lifetime limit requirements, the New Guidance indicates that the Agencies' position is that a stand-alone HRA also cannot meet the preventive care requirements. This is because a stand-alone HRA cannot provide preventive services without cost-sharing in all instances.

Comment: Since stand-alone HRAs cannot meet the market reform requirements of PPACA, it appears that such HRAs will no longer be a viable means for employers to subsidize an employee's cost of individual insurance on a tax-free basis. However, since there is an exemption from the requirements of the Internal Revenue Code (Code) and the Employee Retirement Income Security Act of 1974 (ERISA) under PPACA for plans with fewer than two current employees, stand-alone HRAs can be offered to retirees (see below for further discussion regarding retiree-only stand-alone HRAs). In addition, as discussed below, if an employee participating in an integrated HRA loses group health coverage, the employee can still use the amounts remaining in what would then be a "stand-alone" HRA, and the HRA will still be considered PPACA-compliant employer-sponsored coverage.

The New Guidance confirms and expands upon prior guidance that HRAs may continue to be offered if integrated with a plan that meets PPACA's market reform requirements.

As discussed above, prior guidance clarified that an HRA that is integrated with an employer's major medical plan may be PPACA-compliant to the extent the related medical plan satisfies the annual and lifetime limit prohibition of PPACA without regard to the HRA. The New Guidance clarifies that an integrated HRA can also meet PPACA's preventive care requirements, if the group health plan that is integrated with the HRA independently meets those requirements. Most group health plans are required to meet the market reform obligations in order to be in compliance with PPACA, except for plans that only provide HIPAA-excepted benefits.³

Comment: This is welcome news for employers, as it confirms that HRAs can continue to be offered to employees, provided that such HRAs are properly integrated with other coverage. However, employers will have to review whether their integrated HRAs meet one of the tests described below, and carefully monitor that they continue to meet those tests. Otherwise, employers could be subject to material penalties for providing a health plan that is not compliant with PPACA's market reforms.

An HRA will be considered "integrated" if it meets either of two tests established by the agencies.

In order to provide additional guidance to allow employers to determine if their HRAs and group health plan arrangements are "integrated," the Agencies have established two tests as set forth in the New Guidance One test requires the employer to sponsor a group health plan that provides "minimum value" under PPACA (generally, if the plan is expected to pay at least 60 percent of the total allowed cost of benefits). The other test can be utilized by plans that do not provide "minimum value."

Comment: These tests do not appear to constitute safe harbors, such that an employer could demonstrate integration using some other means/facts. These two tests appear to be the sole means for demonstrating adequate integration.

Under the "minimum value required" test, the arrangement must meet each of the following arrangements:

• The employer offers a group health plan to the employee that provides minimum value;

• The employee receiving the HRA must actually be enrolled in group health plan coverage that provides minimum value;

• The HRA must be available only to employees who are enrolled in minimum value group health plan coverage; and

• Under the terms of the HRA, the employee must be permitted, on an annual basis, to elect to permanently opt out of and waive future reimbursements. In addition, upon termination, the employee must be permitted to permanently opt out of and waive future reimbursements, or all amounts in the HRA must be forfeited.

Under the "minimum value not required" test, the arrangement must meet each of the following requirements:

• The employer must offer a group health plan to the employee that cannot consist solely of excepted benefits;

• The employee receiving the HRA must actually be enrolled in group health plan coverage that does not consist solely of excepted benefits. Note that the employee does not have to be enrolled in the employer's plan; for example, the employee could be enrolled in a group health plan maintained by the employer of the employee's spouse;

• The HRA must be available only to employees enrolled in non-HRA group coverage;

• The HRA is limited to one or more of the following categories of items for reimbursement: 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

• Under the terms of the HRA, the employee must be permitted, on an annual basis, to elect to permanently opt out of and waive future reimbursements. In addition, upon termination, the employee must be permitted to permanently opt out of and waive future reimbursements, or all amounts in the HRA must be forfeited.

Comment: Note that under the "minimum value required" test, the items that can be reimbursed through the HRA are not limited as they are under the "minimum value not required" test. As noted above, both tests provide for a mandatory permanent "opt-out" right. It appears the regulators included this requirement because the benefits provided through the HRA will generally constitute "minimum essential coverage," as discussed below. Thus, a participant with an HRA balance generally cannot qualify for premium tax credits on the Exchange (or cost-sharing reductions), even if he or she terminates employment and becomes ineligible for group health plan coverage through an employer, to the extent he or she remains eligible to reimburse medical costs (including premiums) from the HRA. The "opt-out" feature allows the former employee to forfeit the HRA balance in order to potentially become eligible for the tax subsidies on the Exchange. One issue not addressed by the New Guidance is whether the HRA could also provide for a temporary "opt-out" right. Such a temporary opt-out right would allow an employee to choose whether to opt out of HRA coverage on an annual basis. The employee could not obtain reimbursements in the year that he or she opted out, but the HRA balance would not be forfeited. Under such a regime, the employee could then opt back in to the HRA in future years and obtain access to reimbursements through the HRA. Arguably, the employee could be eligible for the Exchange tax subsidies in any year during which he or she "opted out" of the HRA coverage. We note that, in the New Guidance's discussion of retiree-only HRAs, the Agencies took the position that HRA coverage would constitute "minimum essential coverage" (and therefore render the retiree ineligible for Exchange tax subsidies) for any month in which funds are retained in the HRA. This suggests that a temporary "opt-out" structure may not allow an employee to become eligible for the subsidies. An important aspect of these integration tests is that they do not require that the HRA and the coverage with which it is integrated share the same plan sponsor, the same plan document or governing instruments, or file a single Form 5500. It is very clear that an HRA can satisfy the integration tests provided that the employee is enrolled in any group health plan that meets the requirements of the test, not necessarily one sponsored by the employer. That allows, for example, an employee to enroll in group health plan coverage through his or her spouse and still be eligible to enroll in an integrated HRA through his or her employer. However, in order for the employer to be sure that the HRA which it sponsors continues to meet one of the integration tests and is therefore PPACA compliant, in theory it will have to monitor the other plan to make sure it satisfies the requirements of the integration test and regularly verify whether its employee continues to actually be enrolled in the other employer's plan. Tracking to confirm these requirements are met would likely be an administratively complex challenge for employers. Alternatively, an employer might be able to amend the provisions of its HRA to include terms that would prevent reimbursement of any employee's claim if the employee is not actually enrolled in group health coverage that satisfies the integration test. Under this approach, if the employee then loses coverage, the plan sponsor could then argue that any reimbursement made by the HRA should simply be treated as taxable income to the employee and not result in the HRA failing to meet the PPACA market reform requirements. Another strategy would be for the employer to require its employees to participate in its own group health plan in order to participate in the integrated HRA, and not offer HRA coverage to employees that enroll in a different group health plan. Both of these approaches appears permissible under the New Guidance.

If a participant in an integrated HRA loses group health coverage, the participant can still use the amounts remaining in the HRA, and the HRA will still be considered PPACA-compliant.

The New Guidance clarifies that, notwithstanding the above requirements that apply to integrated HRAs, unused amounts that were credited to an HRA while the HRA was integrated with other group health plan coverage may be used to reimburse medical expenses in accordance with the terms of the HRA after an employee loses coverage under the group health plan coverage, without causing the HRA to fail to comply with the market reforms.

Comment: Plan sponsors should keep in mind that because HRA coverage generally qualifies as "minimum essential coverage" for any month in which a former employee is "enrolled" (i.e., able to reimburse a medical expense), a former employee's continued access to his or her HRA balance would result in such former employee being enrolled in "minimum essential coverage" – which, in turn, would make them ineligible for premium subsidies and cost-sharing reductions with respect to Exchange-based coverage. A question left unanswered by the New Guidance is whether this rule could be used by an employer to fund individual health insurance policies for its employees through an HRA by establishing an integrated HRA, and then terminating the group health coverage. We expect further guidance may clarify whether this approach would be permissible.4

However, the New Guidance does not address how amounts credited or made available under non-integrated HRAs prior to January 1, 2014, will be treated. Additional guidance may be forthcoming on this issue.

When the Agencies released FAQ 11 in January 2013 (see Footnote 2), they specifically stated it was anticipated that future guidance would provide that, regardless of whether an HRA was integrated with other group health plan coverage, unused amounts credited before January 1, 2014 could be used after December 31, 2013 to reimburse medical expenses in accordance with those terms without causing the HRA to fail to comply with the PPACA market reforms. However, the New Guidance does not address this issue.

Comment: Many employers currently have employees with balances in their HRAs that have accumulated over the past years, and those employees were not participating in group health coverage, so they have existing non-integrated HRAs. The New Guidance provides that unused amounts that were credited to an HRA while the HRA was integrated with other group health plan coverage may be used to reimburse medical expenses after the employee loses integrated group health plan coverage, but does not address if employees can use amounts that were credited prior to